10-Q

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 JUNE 30, 2003
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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  o   No  ý

The number of issued and outstanding shares of the Registrant’s Common Stock, no par value, as of August 11, 2003 was 25,719,825.

DEPOMED, INC.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
	Balance Sheets at June 30, 2003 and December 31, 2002
	Statements of Operations for the three-month and six-month periods ended June 30, 2003 and 2002, and for the period from inception (August 7, 1995) to June 30, 2003
	Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002, and for the period from inception (August 7, 1995) to June 30, 2003
	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 4. Submission of Matters to a Vote of Security Holders
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

	June 30, 2003			December 31, 2002
	(Unaudited)			(See Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	9,372,605		$	11,533,326
Marketable securities	13,061,159			8,684,647
Accounts receivable	340,314			301,869
Prepaid and other current assets	621,977			534,351
Total current assets	23,396,055			21,054,193
Property and equipment, net	1,853,261			1,833,208
Other assets	326,136			291,876
	$	25,575,452		$	23,179,277
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	3,501,350		$	4,803,672
Accrued compensation	533,727			429,491
Accrued clinical trial expense	873,142			2,381,609
Other accrued liabilities	155,467			218,548
Capital lease obligation, current portion	20,030			14,870
Long-term debt, current portion	384,726			420,850
Other current liabilities	38,731			305,166
Total current liabilities	5,507,173			8,574,206
Capital lease obligation, non-current portion	21,575			22,653
Long-term debt, non-current portion	183,194			362,567
Promissory note to related party	9,004,913			8,618,717
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 June 30, 2003 and December 31, 2002	12,015,000			12,015,000
Commitments
Shareholders’ deficit:
Common stock, no par value, 100,000,000 shares authorized;
25,719,725 and 16,460,566 shares issued and outstanding at June 30, 2003 and December 31, 2002	76,390,458			56,679,288
Deferred compensation	(990,765		)	—
Deficit accumulated during the development stage	(76,566,257		)	(63,095,890		)
Accumulated other comprehensive income	10,161			2,736
Total shareholders’ deficit	(1,156,403		)	(6,413,866		)
	$	25,575,452		$	23,179,277

See accompanying notes to Financial Statements.

3

DEPOMED, INC.
(A Development Stage Company)

STATEMENTS OF OPERATIONS
(Unaudited)

													Period From Inception (August 7, 1995) to June 30,2003
	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenue:
Collaborative agreements	$	118,640		$	14,004		$	505,626		$	151,513		$	4,316,649
Collaborative agreements with affiliates	—			596,563			—			1,080,771			5,101,019
Total revenue	118,640			610,567			505,626			1,232,284			9,417,668
Operating expenses:
Research and development	6,295,284			4,948,975			12,060,364			9,536,580			66,902,453
General and administrative	839,144			1,320,125			1,609,169			1,950,097			16,890,433
Purchase of in-process research and development	—			—			—			—			298,154
Total operating expenses	7,134,428			6,269,100			13,669,533			11,486,677			84,091,040
Loss from operations	(7,015,788		)	(5,658,533		)	(13,163,907		)	(10,254,393		)	(74,673,372		)
Other income (expenses):
Equity in loss of joint venture	(135		)	(1,194,972		)	(5,359		)	(2,007,374		)	(19,817,062		)
Gain from Bristol-Myers legal settlement	—			—			—			—			18,000,000
Interest and other income	77,818			13,597			152,693			40,140			1,759,316
Interest expense	(229,679		)	(160,207		)	(453,794		)	(332,381		)	(1,835,139		)
Total other income (expenses)	(151,996		)	(1,341,582		)	(306,460		)	(2,299,615		)	(1,892,885		)
Net loss	$	(7,167,784	)	$	(7,000,115	)	$	(13,470,367	)	$	(12,554,008	)	$	(76,566,257	)
Basic and diluted net loss per share	$	(0.30	)	$	(0.50	)	$	(0.67	)	$	(0.97	)
Shares used in computing basic and diluted net loss per share	23,684,823			13,973,309			20,092,651			12,920,243

See accompanying notes to Financial Statements.

4

DEPOMED, INC.
(A Development Stage Company)

STATEMENTS OF CASH FLOWS
(Unaudited)

							Period From Inception (August 7, 1995) to June 30, 2003
	Six Months Ended June 30,
	2003			2002
Operating Activities
Net loss	$	(13,470,367	)	$	(12,554,008	)	$	(76,566,257	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of joint venture	5,359			2,007,374			19,817,062
Depreciation and amortization	360,031			354,812			2,709,891
Accrued interest expense on notes	386,196			241,029			1,221,828
Amortization of deferred compensation	24,378			—			971,628
Value of stock options issued for services	16,134			11,035			257,579
Purchase of in-process research and development	—			—			298,154
Changes in assets and liabilities:
Accounts receivable	(38,445		)	327,479			(340,314		)
Accounts receivable from joint venture	—			(437,978		)	—
Other current assets	(87,626		)	98,866			(621,977		)
Other assets	(34,260		)	2,158			(326,294		)
Accounts payable and other accrued liabilities	(2,873,870		)	357,967			4,529,959
Accrued compensation	104,236			(42,309		)	466,251
Other current liabilities	(266,435		)	(102,902		)	38,731
Net cash used in operating activities	(15,874,669		)	(9,736,477		)	(47,543,759		)
Investing Activities
Investment in joint venture	(5,359		)	(856,976		)	(19,817,062		)
Expenditures for property and equipment	(213,018		)	(249,475		)	(4,031,106		)
Purchases of marketable securities	(17,088,163		)	—			(40,996,551		)
Maturities of marketable securities	12,564,887			—			27,778,996
Net cash used in investing activities	(4,741,653		)	(1,106,451		)	(37,065,723		)
Financing Activities
Payments on capital lease obligations	(8,795		)	(14,327		)	(323,784		)
Proceeds on equipment loan	—			—			1,947,006
Payments on equipment loan	(215,497		)	(242,610		)	(1,266,686		)
Proceeds from issuance of promissory notes to related parties	—			856,976			8,846,703
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	18,679,893			8,305,504			74,058,086
Net cash provided by financing activities	18,455,601			8,905,543			93,982,087
Net increase (decrease) in cash and cash equivalents	(2,160,721		)	(1,937,385		)	9,372,605
Cash and cash equivalents at beginning of period	11,533,326			5,150,088			—
Cash and cash equivalents at end of period	$	9,372,605		$	3,212,703		$	9,372,605
Supplemental Schedule of Noncash Financing and Investing Activities
Deferred compensation related to options granted to employees	$	1,015,144		—			$	1,475,143

See accompanying notes to Financial Statements.

5

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” or “Depomed”) 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 June 30, 2003 are not necessarily indicative of results to be expected for the entire year ending December 31, 2003 or future operating periods.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.  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 for the year ended December 31, 2002 filed with the Securities and Exchange Commission.

As of June 30, 2003, the Company had approximately $22,434,000 in cash, cash equivalents and marketable securities, working capital of $17,889,000 and accumulated net losses of $76,566,000.  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 will permit it to meet its capital and operational requirements through at least April 2004.

2. SIGNIFICANT ACCOUNTING POLICIES

Stock-Based Compensation

As permitted under Statement of Financial Accounting Standards No. 123 (or “FAS 123”), Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion No. 25 (or “APB No. 25”), Accounting for Stock Issued to Employees in accounting for stock-based awards to its employees.  Accordingly, the Company accounts for grants of stock options and common stock purchase rights to its employees according to the intrinsic value method and, thus, recognizes no stock-based compensation expense for options granted with exercise prices equal to or greater than fair value of the Company’s common stock on the date of grant.  The Company records deferred stock-based compensation when the deemed fair value of the Company’s common stock for financial accounting purposes exceeds the exercise price of the stock options or purchase rights on the date of grant.  Any such deferred stock-based compensation is amortized ratably over the vesting period of the individual options.

6

The following table illustrates the effect on reported income and earnings per share if the Company had applied the recognition provisions of FAS 123 to stock-based employee compensation:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net loss—as reported	$	(7,167,784	)	$	(7,000,115	)	$	(13,470,367	)	$	(12,554,008	)
Add: Total stock-based employee compensation expense, included in the determination of net loss as reported	24,378			—			24,378			—
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards	(511,609		)	(347,877		)	(830,771		)	(695,755		)
Net loss—pro forma	$	(7,655,015	)	$	(7,347,992	)	$	(14,276,760	)	$	(13,249,763	)
Net loss per share—as reported	$	(0.30	)	$	(0.50	)	$	(0.67	)	$	(0.97	)
Net loss per share—pro forma	$	(0.32	)	$	(0.53	)	$	(0.71	)	$	(1.03	)

Options granted to non-employees are accounted for at fair value using the Black-Scholes Option Valuation Model in accordance with FAS 123 and Emerging Issues Task Force Consensus No. 96-18, and may be subject to periodic revaluation over their vesting terms.  The resulting stock-based compensation expense is recorded over the service period in which the non-employee provides services to the Company.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principals in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (or “FIN 46”), Consolidation of Variable Interest Entities.  FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  A variable interest entity often holds financial assets, including loans or receivables, real estate or other property.  A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company.  The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003.  The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.  Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.  The Company’s adoption of FIN 46 is not expected to have a material impact on its results of operations and financial position.

7

Recently Issued Accounting Standards (continued)

In November 2002, the FASB issued Interpretation No. 45 (or “FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end.  The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company does not have any guarantees nor does it provide any guarantees for others.  The adoption of FIN 45 did not have an effect on the Company’s financial condition or results of operations.

In November 2002, the FASB issued Emerging Issues Task Force Issue No. 00-21 (or “Issue No. 00-21”), Revenue Arrangements with Multiple Deliverables.  Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities.  Issue No 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of account.  Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting.  Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company.  Finally, Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement.  The provisions of Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  The Company does not expect that the adoption of Issue No. 00-21 will have a material effect on its financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (or “SFAS 150”), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.  SFAS 150 establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003.  The adoption of SFAS 150 has not had an effect on the Company’s financial condition or results of operations.

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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.  The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities.  At June 30, 2003, the contractual period for all available-for-sale debt securities is within one year.  All marketable securities are classified as available-for-sale.  These securities are carried at market value with unrealized gains and losses included in accumulated other comprehensive income (loss) in shareholders’ equity (net capital deficiency).

Securities classified as available-for-sale as of June 30, 2003 and December 31, 2002 are summarized below.  Estimated fair value is based on quoted market prices for these investments.

June 30, 2003:	Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
U.S. corporate securities:
Total included in cash and cash equivalents	$	6,986,588	$	—	$	6,986,588
Total included in marketable securities	13,050,998		10,161		13,061,159
Total available-for-sale	$	20,037,586	$	10,161	$	20,047,747
December 31, 2002:
U.S. corporate securities:
Total included in cash and cash equivalents	$	7,090,020	$	—	$	7,090,020
Total included in marketable securities	8,681,912		2,736		8,684,648
Total available-for-sale	$	15,771,932	$	2,736	$	15,774,668

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 six months ended June 30, 2003 and 2002 approximates net loss and includes unrealized gains and losses on marketable securities.

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6. COLLABORATIVE ARRANGEMENTS AND CONTRACTS

Elan Corporation, plc

In 1999, the Company entered into an agreement with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together “Elan”) to form a joint venture to develop products using drug delivery technologies of Elan and Depomed, Inc.  In January 2000, the definitive agreements were signed to form this joint venture, Depomed Development, Ltd. (“DDL”), a Bermuda limited liability company, which is owned 80.1% by Depomed and 19.9% by Elan.  In August 2002, DDL discontinued subcontracting research and development services to Depomed, Elan and others.  Depomed is currently in discussions with Elan relating to the future of DDL. Historically, DDL has funded its research through capital contributions from its partners based on the partners’ ownership percentage.  Depomed was responsible, at its sole discretion, for funding 80.1% of DDL’s cash requirements up to a maximum of $8,010,000 and Elan was responsible, at its sole discretion, for funding 19.9% of DDL’s cash requirements up to a maximum of $1,990,000 through September 2002.  On a quarterly basis, the Elan and Depomed directors of DDL reviewed and mutually agreed on the next quarter’s funding of DDL’s cash needs.  DDL does not have any fixed assets or employees and its primary focus was to conduct research and development for potential products using the intellectual property of Elan and Depomed.

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 six months ended June 30, 2003 and for the period from inception (January 7, 2000) to June 30, 2003, DDL recognized a net loss of approximately $100, $7,000 and $24,740,000, respectively.   The net loss from inception to June 30, 2003 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.  For the three and six months ended June 30, 2002, DDL recognized a net loss of approximately $1,492,000 and $2,506,000, respectively.  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 approximately 80.1% of DDL’s loss, or approximately $100, $5,000 and $19,817,000 for the three and six months ended June 30, 2003 and for the period from inceptionto June 30, 2003, respectively.  For the three and six months ended June 30, 2002, Depomed recognized approximately $1,195,000 and $2,007,000, respectively.

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7. 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, due in January 2006, 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, 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 in November 2002.  As of June 30, 2003, a total of $9,005,000 was outstanding on the note, including $1,208,000 of accrued interest.

Lease and Loan Agreements

In May 2003, the Company entered into an agreement to lease a 25,000 square foot facility adjacent to its current facility in Menlo Park.  The new facility is leased under a non-cancelable agreement that expires in April 2008, with an option to extend the lease term for an additional five years.  The Company also renegotiated certain terms of its current lease including the lease term, which will now expire in April 2008, with an option to extend the lease for an additional five years.

Future minimum payments under the operating leases, including the new facility lease and the renegotiated terms of the Company’s current lease signed in May 2003, capital leases and long-term debt at June 30, 2003, together with the present value of long-term debt payments, are as follows:

	Operating Leases		Capital Leases			Long-term Debt
Year ending December 31,
2003	$	465,300	$	15,354		$	249,726
2004	1,042,983		26,945			343,352
2005	965,936		11,227			88,652
2006	963,251		—			—
2007	992,148		—			—
Thereafter	333,958		—			—
	$	4,763,576	53,526			681,730
Less amount representing interest			(11,921		)	(60,918		)
Present value of future payments			41,605			620,812
Less current portion			(20,030		)	(411,174		)
Non-current portion			$	21,575		$	209,638

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8. REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

Private Placement

In April 2003, the Company sold 9,259,259 shares of common stock and warrants to purchase 3,240,745 shares of common stock with net proceeds of approximately $18,714,000.  The warrants are exercisable from July 2003 until April 2008 at an exercise price of $2.16.  The fair value of the warrants on the date of issuance, using the Black-Scholes Option Valuation Model, was approximately $4.6 million.  The value of the warrants has been recorded with offsetting entries in stockholders’ equity as the warrant value is also considered an issuance cost of the financing.

Stock-Based Compensation

In December 2002, the Board of Directors authorized an increase in the number of shares authorized for issuance under the 1995 Stock Option Plan (the “Plan”) by 1,306,811 shares.  On May 29, 2003 at the 2003 Annual Meeting of Shareholders, the Company’s shareholders approved this increase to the Plan.  In December 2002 and March 2003, the Company granted options to purchase approximately 585,000 shares of common stock out of the 1,306,811 share increase at exercise prices of $1.71 and $2.70, respectively, which represented the fair market values of the Company’s common stock on the respective dates of grant.  However, as the options were not deemed authorized for grant until the shareholders approved the increase in the number of shares authorized under the Plan, the applicable measurement date for accounting purposes was on the date such approval was obtained.  Since the fair market value of the underlying common stock on May 29, 2003 was $3.50, which was greater than the exercise prices of the stock options granted, the Company was required to record the difference of approximately $1,015,000 as deferred stock-based compensation expense to be recognized ratably over the vesting period of the related stock options.  In the second quarter of 2003, the Company recognized approximately $24,000 in stock-based compensation expense related to these stock options.

9. SUBSEQUENT EVENT

Amendment to Director Stock Option Agreements

In July 2003, the Board of Directors approved an amendment to all stock options granted to the Company’s non-employee members of the Company's Board of Directors.  In the case of the death of a non-employee director, the amendment provides for the director’s beneficiary to exercise the director’s stock options at anytime over the remaining life of the stock option.  A non-cash compensation expense related to the amended stock options will be recognized if and when a director benefits from this modified provision.  As of June 30, 2003, the maximum stock-based compensation expense would be $369,000 if all non-employee directors benefited from this provision with respect to outstanding options.

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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™, Ciprofloxacin GR™ and Furosemide GR™ trials and publication of those results;

•our ability to raise additional capital;

•our ability to obtain a marketing partner for Ciprofloxacin GR or other of our products; 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.  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 pharmaceutical products based on our proprietary oral drug delivery technologies.  Our primary oral drug delivery system is the patented Gastric Retention System (GR™ System).  The GR System is a tablet 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, some drugs currently taken two or three times a day may be administered only once a day.  At present, several products containing different drug compounds incorporated in the GR System are in 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 six issued patents and fourteen patent applications pending in the United States.

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 the 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 typically fund development at least 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.

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In May 2003, we received a State of California Drug Manufacturing License for our pharmaceutical laboratories and manufacturing facilities.  The license allows us to manufacture Gastric Retention (GR™) clinical supplies for our Phase I and Phase II clinical trials, as well as to provide quality control and quality assurance testing in our laboratories for our Phase I through Phase III GR clinical supplies.

Metformin GR™

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 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 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 those expenses.  In that event, our future payments from Biovail under the agreement will be materially reduced.

In December 2002, our first Phase III clinical trial of Metformin GR was completed.  The trial compared Metformin GR with Bristol-Myers Squibb Company’s immediate release metformin product currently marketed as Glucophage®.  Metformin GR produced successful results in the trial with clinically meaningful and statistically significant reductions in hemoglobin A1C and other measures of glycemic control.  The second Phase III trial of Metformin GR is fully enrolled and scheduled to be completed by December 2003.

Ciprofloxacin GR™

In 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.  In June 2003, we initiated Phase III clinical trials for Ciprofloxacin GR, which we expect to be completed in the first quarter of 2004.  We are currently in discussions with potential marketing partners for this product.

Furosemide GR™

In 2002, we successfully completed a Phase I clinical trial of Furosemide GR.  Furosemide is a widely prescribed diuretic currently marketed as an immediate release formulation and sold by Aventis as Lasix® and also sold as a generic by a number of other pharmaceutical companies.  We expect to begin Phase II clinical trials with Furosemide GR in the second half of 2003.

Other Research and Development Activities

In October 2002, we signed an agreement with ActivBiotics, Inc. to begin feasibility studies to develop a controlled-release oral tablet to deliver ActivBiotics’ broad-spectrum antibiotic, Rifalazil™, to the stomach and upper gastrointestinal tract.  The target indication is the eradication of H. pylori, the causative agent of most cases of ulcers.  Under the agreement, ActivBiotics will fund our research and development expenses related to the feasibility studies with Rifalazil.  We continue to perform development work on this project.

In addition, we are developing other product candidates expected to benefit from incorporation into our drug delivery systems.  For example, we have completed preclinical studies of a combination product comprising our Metformin GR once-daily formulation of metformin with a once-daily sulfonylurea for Type II diabetes.  Under our agreement with Biovail, Biovail has an exclusive option to license this product from us.  We expect that Phase I clinical trials for this product will commence if we enter into a development and licensing agreement with Biovail or another third party.

In January 2000, we formed 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.  This joint venture, Depomed Development, Ltd. (DDL), a Bermuda limited liability company, is 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

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the first quarter of 2001.  DDL’s second product candidate, Gabapentin GR™, successfully completed Phase I clinical trials in the first quarter of 2002 and DDL’s third product candidate had been in preclinical testing.  Patent applications have been filed for these products and the product rights are available to potential marketing partners for further development.  However, as a result of a major change in Elan’s business strategy, the development and funding of these products was stopped as of August 2002.  We are currently in discussions with Elan relating to the future of DDL.  If we fail to reach mutually agreeable terms with Elan regarding the joint venture, we may not have rights to develop these products.

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” and 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 GR System.  We will need to make additional capital investments in laboratories and related facilities.  As additional personnel are hired in 2003 and our potential products proceed through the development process, expenses can be expected to continue to increase from their 2002 levels.  As Phase III clinical trials for Metformin GR are concluded by the end of 2003 and Ciprofloxacin GR trials are concluded in early 2004, research and development expense is expected to decrease later in 2004.

We have generated a cumulative net loss of approximately $76,566,000 for the period from inception through June 30, 2003.  Of this loss, $19,817,000 is attributable to our share of the equity in the net loss of DDL.

Critical Accounting Policies

Critical accounting policies are those that require significant judgment and/or estimates by management at the time that the financial statements are prepared such that materially different results might have been reported if other assumptions had been made.  We consider certain accounting policies related to revenue recognition, use of estimates and the valuation of the exchange option of our Series A Preferred Stock to be critical policies.  Our critical accounting policies have not changed since we filed our 2002 Annual Report on Form 10-K with the Securities and Exchange Commission on March 31, 2003.  For a description of our critical accounting policies, please refer to our 2002 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2003 and 2002

Revenues

Revenue for the three and six months ended June 30, 2003 was $119,000 and $506,000, respectively, compared to $611,000 and $1,232,000 in the same periods of 2002,respectively.  In the three-month periods ended June 30, 2003 and 2002, revenue from collaborative agreements increased to $119,000 from $14,000 in 2002.  In the six-month periods ended June 30, 2003 and 2002, revenue from collaborative agreements increased to $506,000 from $152,000 in 2002.  The increase from year to year, in both periods was due to work performed for ActivBiotics under the feasibility agreement we signed in October 2002.  We are continuing to perform research and development services for ActivBiotics in the third quarter of 2003.  Revenue from affiliates for the three- and six-month periods ended June 30, 2002 was $597,000 and $1,081,000, respectively and none in 2003.  As of August 2002, research and development services for DDL, our joint venture, were discontinued.  We do not expect to perform development work for DDL in the future.

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Research and Development Expense

Research and development expense increased to $6,295,000 and $12,060,000 for the three and six months ended June 30, 2003, from $4,949,000 and $9,537,000 for the same periods of 2002.  In the three-month periods ending June 30, 2003 and 2002, the increase was primarily due to expense of $888,000 for clinical trials with Depomed’s proprietary products, including Phase III trials with Metformin GR.  Other increases included $379,000 related to the hiring of additional employees and increased salaries and $52,000 for recruiting fees.  In the six months ended June 30, 2003 and 2002, the increase was primarily due to $1,574,000 for clinical trial expense and $743,000 relating to the hiring of additional employees.   As Phase III clinical trials for Metformin GR are concluded by the end of 2003 and Ciprofloxacin GR trials are concluded in early 2004, research and development expense is anticipated to decline from its present level.  In May 2003, we entered into a non-cancelable lease agreement to lease a 25,000 square foot facility adjacent to our current facility in Menlo Park.  The lease agreement expires in April 2008 with an option to extend the lease for an additional five years.  We also renegotiated certain terms of our current lease agreement including the lease term, which will now expire in April 2008 with an option to extend the lease for an additional five years.  We expect to recognize additional rent expense of approximately $140,000 in the last half of 2003 related to the new facility.

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 as of June 30, 2003, the costs to complete the related clinical trials and studies will not exceed $8.0 million, including costs for internal project management and support.  We expect to complete the Phase III clinical trials of Metformin GR by December 2003.  If these trials are successfully completed, we intend to file a New Drug Application in the first half of 2004 seeking approval from the FDA to market Metformin GR.

General and Administrative Expense

General and administrative expense for the second quarter of 2003 and 2002 was $839,000 and $1,320,000, respectively.  General and administrative expense for the six months ended June 30, 2003 was $1,609,000 compared to $1,950,000 in the same period of 2002.  In the three-month periods ended June 30, 2003 and 2002, the decrease was due to decreased legal expense of $725,000.  The decrease was offset by increased salary expense of $74,000, marketing expense of $77,000 and insurance expense of $54,000.  In the six-month periods ended June 30, 2003 and 2002, the decrease was due to decreased legal expense of $773,000, which was offset by increased salary expense of $124,000, insurance expense of $101,000 and marketing expense of $94,000.  During the periods, legal expense decreased due to the November 2002 settlement of our patent infringement lawsuit against Bristol-Myers.  Legal fees related to the lawsuit were incurred throughout 2002.  Salary expense increased primarily due to hiring of a Vice President of Business Development and salary increases for our administrative staff.  Insurance expense increased primarily due to higher rates for directors’ and officers’ insurance and marketing expense increased due to attendance at an increased number of investor conferences and additional activities conducted by our Vice President of Business Development.  We expect that general and administrative expense will increase moderately in the future.

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

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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 $100 and $1,492,000 for the three months ended June 30, 2003 and 2002, respectively.  For the six months ended June 30, 2003 and 2002, the net loss was $7,000 and $2,506,000, respectively.  As of August 2002, DDL discontinued subcontracting research and development services to Depomed, Elan and others, which accounts for the decrease in DDL’s net loss from period over period. We are currently in discussions with Elan relating to the future of DDL.  In 2003 and thereafter until DDL is dissolved, we expect DDL will recognize annual general and administrative expense of approximately $10,000 related to legal fees.  Historically, DDL has funded its research through capital contributions from its partners based on the partners’ ownership percentage.  Depomed was responsible, at its sole discretion, for funding 80.1% of DDL’s cash requirements up to a maximum of $8,010,000 and Elan was responsible, at its sole discretion, for funding 19.9% of DDL’s cash requirements up to a maximum of $1,990,000 through September 2002.  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 $100and $1,195,000 for the three months ended June 30, 2003 and 2002, respectively.  For the six months ended June 30, 2003 and 2002, our share of DDL’s loss was $5,000 and $2,007,000, respectively.  In 2003 and thereafter until DDL is dissolved, we expect we will recognize approximately $8,000 per year related to our share of DDL’s loss.

Elan made available to us a convertible loan facility to assist us in funding our portion of the joint venture’s losses up to a maximum of $8,010,000.  The funding term of the loan expired in September 2002.

Interest Income and Expense

Interest expense was approximately $230,000 and $160,000 for the three months ended June 30, 2003 and 2002, respectively.  For the six months ended June 30, 2003 and 2002, interest expense increased year over year to $454,000 from $332,000.  The increase in interest expense was primarily due to an increase of $70,000 and $145,000, respectively, accrued on the Elan convertible loan facility.  Interest on the Elan loan facility increased due to additional amounts borrowed under the facility in the third quarter of 2002. Interest income was approximately $78,000 for the three months ended June 30, 2003 compared to $14,000 in the same period of 2002.  For the six months ended June 30, 2003, interest income increased to $153,000 from $40,000 in the same period of 2002.  The increase was due to higher investment balances in 2003 as a result of an $18,000,000 payment we received in December 2002 related to the settlement of a patent infringement lawsuit against Bristol-Myers and net proceeds of $18,714,000 we received from an equity private placement in April 2003.  In 2003, interest income also included immaterial gains realized on some of our marketable securities.

Stock-based Compensation Expense

In December 2002, the Board of Directors authorized an increase in the number of shares authorized for issuance under the 1995 Stock Option Plan (the “Plan”) by 1,306,811 shares.  On May 29, 2003 at the 2003 Annual Meeting of Shareholders, our shareholders approved the increase to the Plan.  In December 2002 and March 2003, we granted options to purchase approximately 585,000 shares of common stock out of the 1,306,811 share increase of common stock at exercise prices of $1.71 and $2.70, respectively, which represented the fair market values of our common stock on the respective dates of grant.  However, as the options were not deemed authorized for grant until the shareholders approved the increase in the number of shares authorized under the Plan, the applicable measurement date for accounting purposes was on the date such approval was obtained.  Since the fair market value of the underlying common stock on May 29, 2003 was $3.50, which was greater than the exercise prices of the stock options granted, we were required to record the difference of approximately $1,015,000 as deferred stock-based compensation expense to be recognized ratably over the vesting period of the related stock options.  In the second quarter of 2003, we recognized approximately $24,000 in stock-based compensation expense related to the stock options.  We expect to recognize approximately $63,000 per quarter for the next four years.

In July 2003, the Board of Directors approved an amendment to all stock options granted to non-employee members of our Board of Directors.  In the case of the death of a non-employee director, the amendment provides for the director’s beneficiary to exercise the director’s stock options at anytime over the remaining life of the stock option.  A non-cash compensation expense related to the amended stock options will be recognized if and

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when a director benefits from this modified provision.  As of June 30, 2003, the maximum stock-based compensation expense would be $369,000 if all non-employee directors benefit from this provision with respect to outstanding options.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities in the six months ended June 30, 2003 was approximately $15,875,000, compared to approximately $9,736,000 for the six months ended June 30, 2002. During the six months ended June 30, 2003, the cash used in operations was due primarily to the net loss, and decreases in accounts payable due to the completion of our first Phase III trial of Metformin GR during the fourth quarter of 2002.  In 2002, the cash used in operations was due 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 decreases in accounts receivable.

Investing Activities

Cash used in investing activities in the six months ended June 30, 2003 totaled approximately $4,742,000 and consisted of a $4,443,000 net decrease in marketable securities and $213,000 in purchases of lab equipment and computers.  Net cash used in investing activities in the six months ended June 30, 2002 totaled approximately $1,106,000 and consisted of an $857,000 investment in DDL and $249,000 in purchases of lab equipment and office equipment.  We expect that future capital expenditures will include leasehold improvements for the build out of our newly leased facility and additional product development and quality control laboratory equipment to maintain current Good Manufacturing Practices in our laboratories.

Financing Activities

Cash provided by financing activities in the six months ended June 30, 2003 was approximately $18,456,000 compared to $8,906,000 for the same period of 2002.  In 2003, the amount consisted of $18,714,000 of net proceeds from our April 2003 private placement of 9,259,259 shares of common stock and warrants to purchase 3,240,745 shares of common stock and was offset by $34,000 of costs related to our March 2002 private placement and $224,000 in payments on equipment loans and lease obligations.  In 2002, the amount provided by financing activities consisted primarily of net proceeds of approximately $8,118,000 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.  In 2002, the amount also included $857,000 from a credit facility provided by Elan to fund our portion of our joint venture expense.  The cash provided by financing activities in 2002 was offset by $257,000 of payments on equipment loans and capital lease obligations.

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Contractual Obligations

As of June 30, 2003, there was $9,005,000 outstanding related to the loan facility provided by Elan.  The outstanding amounts include accrued interest of $1,208,000 at June 30, 2003.  The funding term of the loan expired on September 30, 2002.  The loan and accrued interest are payable in January 2006 in cash or our common stock, at Elan’s option.

Future minimum payments under the operating leases, including the new facility lease and the renegotiated terms of our current lease signed in May 2003, capital leases and long-term debt at June 30, 2003, together with the present value of long-term debt payments, are as follows:

	Operating Leases		Capital Leases			Long-term Debt
Year ending December 31,
2003	$	465,300	$	15,354		$	249,726
2004	1,042,983		26,945			343,352
2005	965,936		11,227			88,652
2006	963,251		—			—
2007	992,148		—			—
Thereafter	333,958		—			—
	$	4,763,576	53,526			681,730
Less amount representing interest			(11,921		)	(60,918		)
Present value of future payments			41,605			620,812
Less current portion			(20,030		)	(411,174		)
Non-current portion			$	21,575		$	209,638

Financial Condition

As of June 30, 2003, we had approximately $22,434,000 in cash, cash equivalents and marketable securities, working capital of $17,889,000, and accumulated net losses of $76,566,000.  We expect to continue to incur operating losses over the next several years.  We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least April 2004.  However, we base this expectation on our current operating plan, which may change as a result of many factors.  Our cash needs may also vary materially from our current expectations because of numerous factors, including:

•results of research and development;

•results of license negotiations;

•relationships with collaborative partners;

•changes in the focus and direction of our research and development programs;

•technological advances; and

•results of clinical testing, requirements of the FDA and comparable foreign regulatory agencies.

We will need substantial funds of our own or from third parties to:

•conduct research and development programs;

•conduct preclinical and clinical testing; and

•manufacture (or have manufactured) and market (or have marketed) potential products using the GR System.

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Our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations.  We have limited credit facilities and no other committed source of capital.  To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds through the sale of our equity securities or from development and licensing arrangements 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:

•delay, postpone or terminate clinical trials;

•curtail other operations significantly; and/or

•obtain funds through entering into collaboration agreements on unattractive terms.

The inability to raise capital would have a material adverse effect on our company.

Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (or “FIN 46”), Consolidation of Variable Interest Entities.  FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  A variable interest entity often holds financial assets, including loans or receivables, real estate or other property.  A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company.  The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003.  The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.  Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.  Our adoption of FIN 46 is not expected to have a material impact on our results of operations and financial position.

In November 2002, the FASB issued Emerging Issues Task Force Issue No. 00-21 (or “Issue No. 00-21”), Revenue Arrangements with Multiple Deliverables.  Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities.  Issue No 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of account.  Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting.  Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company.  Finally, Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement.  The provisions of Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  We do not expect that the adoption of Issue No. 00-21 will have a material effect on our financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (or “SFAS 150”), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.  SFAS 150 establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003.  The adoption of SFAS 150 has not had an effect on our financial condition or results of operations.

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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to other information in this report, the following factors should be considered carefully in evaluating Depomed.  We believe the following are the material risks and uncertainties we face at the present time.  If any of the following risks or uncertainties actually occurs, our business, financial condition or results of operations could be materially adversely affected.  See also “Forward-Looking Statements.”

We will need additional capital to support our operations, which may be unavailable or costly.

As of June 30, 2003, our capital resources consisted of approximately $22.4 million in cash, cash equivalents and marketable securities.  We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least April 2004.  We base this expectation on our current operating plan, which may change as a result of many factors, including the following:

•Greater than expected clinical development costs associated with our Ciprofloxacin GR or with our exclusive license with Biovail described below under “We will receive future payments from Biovail related to the development of Metformin GR only after Metformin GR is approved by the FDA.”

•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.

•Results of our product licensing activities.

Further, our existing capital resources will 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 through the sale of our equity securities or from development and licensing agreements 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 significant dilution of our shareholders’ equity positions, especially if we are required to sell additional securities at the currently low trading price of our common stock.  If adequate funds are not available, we may have to curtail operations significantly, or obtain funds through entering into collaboration agreements on unattractive terms.

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, 2001 and 2002, we had total revenues of $1.8 million in 2000, $3.7 million in 2001 and $1.7 million in 2002.  For the years ended December 31, 2000, 2001 and 2002 we incurred losses of $21.7 million in 2000, $17.6 million in 2001 and $13.5 million in 2002.  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 will receive future payments from Biovail related to the development of Metformin GR only after Metformin GR is approved by the FDA.

In May 2002, we entered into an exclusive license agreement with Biovail 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 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 first half of 2005, if at all.  Only upon FDA approval of Metformin GR will Biovail be required to make a $25.0 million payment to us.  As of June 30, 2003, we expect that the total remaining development costs for Metformin GR will be approximately $8.0 million.  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.

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

We have generated all of our revenues through collaborative arrangements with pharmaceutical and biotechnology companies.  In January 2000, we formed a joint venture with Elan to develop products using drug delivery technologies and expertise of both Elan and Depomed.  For the years ended December 31, 2000, 2001 and 2002, 99%, 58% and 74% 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 and we are currently in discussions with Elan relating to the future of the joint venture.  We do not expect to generate any future revenue from the joint venture, nor can we be certain of when its future status will be resolved.

Our quarterly operating results may fluctuate and affect our stock price.

The following factors will affect our quarterly operating results and may result in a material adverse effect on 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 of any future product introductions by us or our collaborative partners;

•market acceptance of the GR System;

•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 GR System requires that we enter into additional collaborative arrangements.  Collaborative agreements are generally complex and contain provisions that 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 GR System 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 GR System.

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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 collaborative arrangements or otherwise decide not to proceed with development of our products.  For example, in 2002, one of our undisclosed collaborative partners elected to suspend indefinitely further development of a potential product we had developed for that partner.

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 six issued United States patents and fourteen United States patent applications are pending. Additionally, we are currently preparing a series of patent applications representing our expanding technology 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 the future 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. 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 and failures.  Before we or others make commercial sales of products using the GR System, 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 GR System proves to have unintended or undesirable side effects; or

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•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 Phase III human clinical trials, which is expected in December 2003.  However, the earliest we expect to be able to obtain FDA approval to market Metformin GR is in the first half of 2005.

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 infection.  In June 2003, we initiated a Phase III clinical trial for this product, called Ciprofloxacin GR, which we expect to complete in the first quarter of 2004.

The regulatory process is expensive and time consuming.  Even after investing significant time and expenditures on clinical trials, we may not obtain regulatory approval of 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

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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 GR System include Bristol-Myers Squibb, ALZA Corporation, (a subsidiary of Johnson & Johnson), Elan Corporation plc, SkyePharma plc, Biovail Corporation, 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 limited license that Bristol-Myers obtained from us under our November 2002 settlement agreement extends to certain current and internally-developed 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 and Andrx Corporation both have metformin products in trials and Bayer Corporation recently began marketing a once-daily ciprofloxacin product for the treatment of uncomplicated urinary tract infection.  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 to the GR System or products using the GR System, either generally or in particular market segments.  These developments could make the GR System 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.

Although we have established internal manufacturing facilities to manufacture supplies for Phase I and Phase II clinical trials, we do not have and we do not intend to establish in the foreseeable future internal commercial scale manufacturing, marketing or sales capabilities.  Rather, we intend to use the facilities of third parties to manufacture products for Phase III clinical trials and commercialization.  Our dependence on third parties for the manufacture of products using the GR System may adversely affect our ability to deliver such products on a timely and competitive basis.  Although we have made arrangements for the third party manufacture of Metformin GR, there may not be sufficient manufacturing capacity available to us when, if ever, we are ready to seek commercial sales of other products using the GR System.  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 GR System. We will depend on the manufacturers of products using the GR System to comply with cGMP and applicable foreign standards. Any failure by a manufacturer of products using the GR System to maintain cGMP or comply with applicable foreign standards could delay or prevent their commercial sale.

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In addition, we expect to rely on our collaborative partners or to development distributor arrangements to market and sell products using the GR System.  We may not be able to enter into manufacturing, marketing or sales agreements on reasonable commercial terms, or at all, with third parties.

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 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 the GR System 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 were to bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liability limits, our business, financial condition and results of operations could 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, 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 shareholders’ equity of less than $2,000,000, and (b) sustained losses in three of its four most recent fiscal years and has shareholders’ equity of less than $4,000,000. In June 2002, the AMEX notified us that we did 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.

Since we submitted our plan, we have decreased our shareholders’ deficit as set forth in the plan.  However, we still do not meet the AMEX’s minimum shareholders’ equity criterion.  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 August 11, 2003 our common stock was trading at $5.04.  If our common stock were to be delisted from trading on the AMEX and the trading price of the common stock were

26

to fall below $5.00 per share 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, or the Exchange Act.  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, Ph.D., our President and Chief Executive Officer, and other members of our executive management team, 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 us and at our direction, 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 as of the end of the period covered by 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.

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.

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PART II - OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual meeting of shareholders on May 29, 2002 to consider and vote on the following proposals:  (i) election of directors until the next annual meeting of shareholders (Proposal 1); (ii) amendment of the Company’s Amended and Restated 1995 Stock Option Plan to increase the number of shares available for issuance by 1,800,000 shares from 2,900,000 shares to 4,700,000 shares (Proposal 2) and (iii) ratification of Ernst & Young LLP as the Company’s independent auditors (Proposal 3).

Proposal 1  Drs. John W. Fara, John W. Shell and W. Leigh Thompson and Messrs. John N. Shell, G. Steven Burrill, Julian N. Stern and Michael J. Callaghan, each of whom was a director of Depomed prior to the annual meeting, were elected as directors of the Company to serve until the next annual meeting of the shareholders of Depomed.  Of the 13,757,052 shares voted at the annual meeting, 13,353,038 shares were voted for the election of Dr. Fara, with 404,014 shares voting against Dr. Fara; 13,354,038 shares were voted for the election of Dr. Shell and Mr. Shell, with 403,014 shares voting against Dr. Shell and Mr. Shell; 13,352,938 shares were voted for the election of Dr. Thompson and Messrs. Burrill and Callaghan, with 404,114 shares voting against Dr. Thompson and Messrs. Burrill and Callaghan; and 13,320,938 shares were voted for the election of Mr. Stern, with 436,114 voting against Mr. Stern.

Proposal 2  The shareholders of Depomed approved Proposal 2 with a vote of 6,318,753 for, 2,442,828 shares against, with 3,012 shares abstaining and 4,992,459 shares not voted.

Proposal 3  The shareholders of Depomed approved Proposal 3 with a vote of 11,289,474 for, 1,700 shares against, with 2,465,878 shares abstaining.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)Exhibits

10.1Lease extension agreement dated April 30, 2003 between the Company and Menlo Business Park LLC

10.2Lease agreement dated April 30, 2003 between the Company and Menlo Business Park LLC

31.1Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John W. Fara, Ph.D.

31.2Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John F. Hamilton

32.1Certification pursuant to 18 U.S.C. Section 1350 of John W. Fara, Ph.D.

32.2Certification pursuant to 18 U.S.C. Section 1350 of John F. Hamilton

(b)Reports on Form 8-K

On April 1, 2003, we furnished the SEC with a Current Report on Form 8-K to report the issuance of a press release regarding final results for the fiscal year ended December 31, 2002.  In accordance with SEC Release No. 33-8216, such information, which was intended to be furnished under Item 12 of Form 8-K, “Results of Operation and Financial Condition,” was instead furnished under Item 9, “Regulation FD Disclosure.”

On April 25, 2003, we filed a Current Report on Form 8-K with respect to a private placement completed April 21, 2003.

On May 16, 2003, we filed a Current Report on Form 8-K to report the issuance of a press release regarding final results for the quarter ended March 31, 2003.  In accordance with SEC Release No. 33-8216, such information, which was intended to be furnished under Item 12 of Form 8-K, “Results of Operations and Financial Condition,” was instead furnished under Item 9, “Regulation FD Disclosure.”

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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: August 14, 2003	DEPOMED, INC.
	By: /s/ John F. Hamilton
	John F. Hamilton
	Vice President and Chief Financial Officer (Authorized Officer and Principal Accounting and Financial Officer)
	By: /s/ John W. Fara, Ph.D.
	John W. Fara, Ph.D.
	President, Chairman and Chief Executive Officer

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INDEX TO EXHIBITS

10.1	Lease extension agreement dated April 30, 2003 between the company and Menlo Business Park, LLC
10.2	Lease agreement dated April 30, 2003 between the company and Menlo Business Park, LLC
31.1	Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John W. Fara, Ph.D.
31.2	Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John F. Hamilton
32.1	Certifications pursuant to 18 U.S.C. Section 1350 of John W. Fara, Ph.D.
32.2	Certifications pursuant to 18 U.S.C. Section 1350 of John F. Hamilton

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EX-10.1

Exhibit 10.1

LEASE

BY AND BETWEEN

MENLO BUSINESS PARK, LLC, LESSOR

AND

DEPOMED, INC., LESSEE

Menlo Business Park

1330 O’Brien Drive

Menlo Park, California

April 30, 2003

LEASE EXTENSION AGREEMENT

Building #6

1360 O’Brien Drive

Menlo Park, California 94025

THIS LEASE EXTENSION AGREEMENT (this “Agreement”) is made and entered into on April 30, 2003 by and between MENLO BUSINESS PARK, LLC, a California limited liability company (“Lessor”), and DEPOMED, INC., a California corporation (“Lessee”).

RECITALS

A.Lessor and Lessee entered into a Lease dated February 4, 2000 (the “Lease”) of the premises referred to as Building #6 located at 1360 O’Brien Drive, Menlo Park, California 94025, more particularly described on Exhibit “A” attached to the Lease and incorporated by reference herein (the “Premises”).  The Premises contain approximately 20,624 rentable square feet of space.

B.The expiration date of the initial term of the Lease is March 14, 2005.  Lessor and Lessee wish to extend the initial term of the Lease, subject to the terms and conditions set forth herein.

AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:

1.Defined Terms.  All capitalized terms and phrases used but not defined in this Agreement shall have the meanings given to them in the Lease.

2.Extension of Initial Term.

(a)The initial term of the Lease is hereby extended for a period of thirty-six (36) calendar months and seventeen (17) days commencing on March 15, 2005 and ending on April 30, 2008 (the “Extension Term”).  The Extension Term shall be upon all of the same terms and conditions of the Lease, except that the Monthly Base Rent payable by Lessee to Lessor during the Extension Term shall be as set forth in Paragraph 3 hereof.

(b)The option to extend provided for in Paragraph 3 of the Lease shall be for a term of sixty (60) calendar months immediately following the expiration of the Extension Term and shall otherwise be upon the same terms and conditions as set forth in Paragraph 3 of the Lease.

3.Monthly Base Rent.  Lessee shall pay to Lessor Monthly Base Rent during the Extension Term, in monthly installments in advance on a triple net basis in lawful money of the United States, as follows:

(a)Commencing on March 15, 2005 and continuing through April 30, 2006, the sum of Forty-six Thousand Four Hundred Four Dollars ($46,404) per month ($2.25/square foot/NNN).

(b)Commencing on May 1, 2006 and continuing on each anniversary of the commencement date of the Extension Term thereafter during the Extension Term (the “Rental Adjustment Date”), the Monthly Base Rent shall be adjusted to reflect any increases in the cost of living.  The adjustment shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index, all items, for all Urban Consumers - San Francisco-Oakland-San Jose (1982-84=100), hereafter referred to as the “Index.”  The Index for said subgroup published most recently as of the end of the calendar month immediately preceding the month in which the commencement date of the Extension Term occurs shall be considered the “base Index.”

(c)The Monthly Base Rent shall be adjusted as of each Rental Adjustment Date to an amount equal to the product obtained by multiplying Forty-six Thousand Four Hundred Four Dollars ($46,404) (the Monthly Base Rent for the Premises commencing on March 15, 2005 referred to in Paragraph 3(a) above), by a fraction, the numerator of which is the Index most recently published as of the end of the calendar month immediately preceding each Rental Adjustment Date and the denominator of which is the base Index; provided that in no event shall the Monthly Base Rent be increased on any Rental Adjustment Date to an amount less than three percent (3%) per annum or more than six percent (6%) per annum, calculated for each individual year from the previous Rental Adjustment Date, of the Monthly Base Rent payable before such Rental Adjustment Date.

(d)When the new Monthly Base Rent is determined for each Rental Adjustment Date, Lessor shall give Lessee written notice of the amount of the new Monthly Base Rent and how the new Monthly Base Rent figure was computed in accordance with subparagraphs 3(b) and 3(c) above.  Lessee shall pay to Lessor retroactively any unpaid increase in Monthly Base Rent due from and after the Rental Adjustment Date.  If the Index does not exist on any Rental Adjustment Date in the same format as referred to in subparagraph 3(b) above, Lessor shall substitute in lieu thereof an index reasonably comparable to the Index referred to above which is acceptable to Lessee and which is then published by the Bureau of Labor Statistics, or successor or similar governmental agency, or if no governmental agency then publishes an index, Lessor shall substitute therefor any index commonly accepted which is published by a reputable private organization.

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(e)Monthly Base Rent for any partial month shall be prorated on the basis of the number of calendar days in such month.

4.Additional Rent; Operating Expenses and Taxes.  In addition to the Monthly Base Rent payable by Lessee pursuant to Paragraph 3 above, Lessee shall pay to Lessor during the Extension Term, as Additional Rent, Operating Expenses and Taxes pursuant to Paragraph 5 of the Lease.

5.Tenant Improvement Work.

(a)Concurrently with the execution and delivery of this Agreement, Lessor shall provide Lessee with a tenant improvement allowance of One Hundred Three Thousand One Hundred Twenty Dollars ($103,120) ($5.00 per rentable square foot) (the “Tenant Improvement Allowance”) to defray a portion of the cost of the improvements to the Premises which shall be mutually approved in writing by Lessor and Lessee (“Tenant Improvement Work”).  The entire cost of the Tenant Improvement Work in excess of the Tenant Improvement Allowance, if any, shall be paid by Lessee.  The cost of obtaining approval by of the City of Menlo Park of a merger of the Building #5 Land (1330 O’Brien Drive) and the Building #6 Land (1360 O’Brien Drive) to be occupied by Lessee pursuant to the new Lease dated March 26, 2003 between Lessor and Lessee, and the cost of connecting Building #6 and Building #5 pursuant to plans approved by Lessor and Lessee shall be included in the cost of the Tenant Improvement Work.  Subject to Lessor’s prior written approval of the plans and specifications for the Tenant Improvement Work for both Building #6 and Building #5, Lessee may combine the Tenant Improvement Allowance for the Premises (Building #6) and the Tenant Improvement Allowance for 1330 O’Brien Drive (Building #5) and apply the combined Tenant Improvement Allowance to either Building #6 or Building #5 in its entirety, provided that Lessor shall not be obligated to approve the plans and specifications for any of such Tenant Improvement Work if, in Lessor’s judgment, such plans and specifications provide for the performance of any of such Tenant Improvement Work in a manner that could adversely affect the leasing of either Building #6 or Building #5 to a future tenant.

(b)Lessor shall enter into a contract with a licensed general contractor for the construction of the Tenant Improvement Work.  The general contractor shall be selected jointly by Lessor and Lessee from a list of approved contractors prepared by the Lessor.  The Tenant Improvement Work shall be performed pursuant to the plans and specifications approved in writing by Lessor and Lessee.

(c)The Tenant Improvement Work shall be constructed under the direct supervision of Tarlton Properties, Inc., as construction manager, at a fee of five percent (5%) of hard construction costs (i.e., the amounts paid to the general contractor, subcontractors, vendors, and suppliers for labor and materials for the construction of the Tenant Improvements) as a cost of the Tenant Improvement Work.  The general contractor shall perform the work pursuant to a negotiated fixed fee guaranteed maximum price

3

contract.  The work shall be performed on an “open book” basis with a post-job audit of all costs by a representative from both Lessee and Tarlton Properties, Inc.

6.Security Deposit.

(a)Lessor acknowledges that Lessor has received from Lessee and is currently holding the sum of Two Hundred Ninety Thousand Seven Hundred Ninety-eight and Forty Hundredths Dollars ($290,798.40) in cash (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under this Lease.

(b)Provided that (1) no default by Lessee under the Lease of the Premises (Building #6, 1360 O’Brien Drive) or under the new Lease between Lessor and Lessee dated March 26, 2003 of Building #5, 1330 O’Brien Drive, remains uncured as of any of the refund dates referred to in clause (3) below, (2) Lessee shall not have been late by more than five (5) days in the payment of rent under either the Building #6 Lease or the Building #5 Lease at any time during the twelve (12) months immediately preceding any of the refund dates referred to in clause (3) below, and (3) Lessee’s audited balance sheet (or Lessee’s balance sheet certified by Lessee’s chief financial officer if Lessee is not then issuing audited statements) as of December 31, 2003, December 31, 2004, December 31, 2005, and December 31, 2006 shows that Lessee has cash and marketable securities (at current market value) of at least Six Million Dollars ($6,000,000), Lessor shall reduce the Security Deposit by refunding to Lessee Forty-eight Thousand Four Hundred Sixty-six Dollars ($48,466) of the Security Deposit on March 15 following each such year-end date (i.e., on March 15, 2004, March 15, 2005, March 15, 2006, and March 15, 2007).  The foregoing condition shall apply separately as to each such year (December 31, 2003, 2004, 2005, and 2006) so that if the amount of cash and marketable securities is less than the required amount as shown on Lessee’s audited balance sheet for any year end and therefore Lessee is not entitled to receive the reduction in the Security Deposit on the following March 15, Lessee shall nevertheless be entitled to the reduction in the Security Deposit if the condition to such reduction is satisfied in any subsequent year.

7.Holding Over.  Paragraph 19, Holding Over, of the Lease is hereby deleted in its entirety and the following is substituted therefore:

“7.Holding Over.  Lessee shall vacate the Premises and deliver the same to Lessor upon the expiration or sooner termination of this Lease.  In the event of holding over by Lessee after the expiration or termination of this Lease without Lessor’s prior written consent, such holding over shall be on a month-to-month tenancy and all of the terms and provisions of this Lease shall be applicable during such period, except that Lessee shall pay Lessor as Monthly Base Rent during such holdover an amount equal to the greater of (i) one hundred fifty percent (150%) of the Monthly Base Rent in effect at the expiration of the term, or (ii) the then market rent for

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comparable research and development/office space; provided, that if such holdover is with Lessor’s written consent given by Lessor prior to the expiration or sooner termination of this Lease, the Monthly Base Rent during such holdover shall be equal to one hundred twenty-five percent (125%) of the then market rent for comparable research and development/office space, as reasonably determined by Lessor.  If such holdover is without Lessor’s written consent, Lessee shall be liable to Lessor for all costs, expenses, and consequential damages incurred by Lessor as a result of such holdover.  The rental payable during such holdover period shall be payable to Lessor on demand.”

8.Damage or Destruction.  Paragraph 20(a), Damage or Destruction, of the Lease is hereby deleted in its entirety and the following substituted therefore:

“(a)In the event of a total destruction during the lease term from any cause, of (1) the Building and Improvements, or (2) the Building and Improvements referred to as Building #5, 1330 O’Brien Drive, Menlo Park, California (the “1330 O’Brien Drive Premises”) during the term of Lessee’s Lease of said Premises, either party may elect to terminate this Lease by giving written notice of termination to the other party within thirty (30) days after the casualty occurs.  A total destruction shall be deemed to have occurred for this purpose if the Building and Improvements which are the subject of this Lease or the Building and Improvements consisting of the 1330 O’Brien Drive Premises are destroyed to the extent of seventy-five percent (75%) or more of the replacement cost thereof.  If the Lease is not terminated, Lessor shall repair and restore the Premises and the 1330 O’Brien Drive Premises (if applicable) in a diligent manner and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent of the Premises which are the subject of this Lease shall be abated in accordance with Paragraph 20(d) below.

9.Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., Lessor’s broker, in connection with this Agreement pursuant to a separate agreement between Lessor and said broker.  Each party represents and warrants to the other party that it has not had any dealings with any real estate broker, finder, or other person with respect to this Agreement other than Tarlton Properties, Inc. who has acted as exclusive leasing agent for Lessor, and BT Commercial and Technology Commercial, Inc., who have acted as Lessee’s agents, and each party shall hold harmless the other party from all damages, expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, finder, or other person with whom the other party has or purportedly has dealt, other than the above named brokers.

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10.Continuing Effect.  The parties acknowledge that the Lease remains in full force and effect as amended hereby, and with the initial term extended as provided herein.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above.

“Lessor”
MENLO BUSINESS PARK, LLC
a California limited liability company
By:	/s/ J.O. Oltmans, II
	J. O. Oltmans, II, Manager
By:	/s/ James R. Swartz
	James R. Swartz, Manager
“Lessee”
DEPOMED, INC.,
a California corporation
By:	/s/ John F. Hamilton
	Its
By:	/s/ John N. Shell
	Its

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EX-10.2

Exhibit 10.2

LEASE SUMMARY

Date of Lease	April 30, 2003
Lessor:	Menlo Business Park, LLC,
	a California limited liability company
Lessee:	DepoMed, Inc., a California corporation
Premises:	Building #5, 1330 O’Brien Drive, Menlo Park, California 94025
Floor Area:	25,366 rentable square feet
Parcel Size:	1.36 acres
Lessee’s Pro Rata  Share of Operating  Expenses:	2.39%
Commencement  Date:	May 1, 2003
Initial Term:	Sixty (60) months
Option to Extend:	One (1) option to extend – sixty (60) months
Monthly Base Rent:	5/1/03 – 7/31/03	$10,800 ($1.20 x 9,000 sf)
	8/1/03 – 10/31/03	$21,600 ($1.20 x 18,000 sf)
	11/1/03 – 4/30/04	$30,439.20 ($1.20 x 25,366 sf)
	Annual CPI Adjustment commencing 5/1/04	(3% minimum – 6% maximum)
Security Deposit:	$34,259.58
Tenant Improvement
Allowance:	$253,660 ($10 per sq. ft.)
Addresses for Notice:
Lessor:	Menlo Business Park, LLC
	c/o Tarlton Properties, Inc.
	955 Alma Street
	Palo Alto, California 94301
	Attention:  John C. Tarlton, President
	Telephone:  (650) 330-3600
Lessee:	DepoMed, Inc.
	1360 O’Brien Drive
	Menlo Park, California 94025
	Attention:
	Telephone:

TABLE OF CONTENTS

Paragraph
1.	Lease
2.	Initial Term
3.	Option to Extend
4	Monthly Base Rent
5	Additional Rent; Operating Expenses and Taxes
6	Payment of Rent
7	Security Deposit
8	Use
9	Hazardous Materials
10.	Taxes on Lessee’s Property
11.	Insurance
12.	Indemnification
13.	Tenant Improvement Work
14.	Maintenance and Repairs; Alterations; Surrender and Restoration
15.	Utilities and Services.
16.	Liens
17.	Assignment and Subletting
18.	Non-Waiver
19.	Holding Over
20.	Damage or Destruction
21.	Eminent Domain
22.	Remedies
23.	Lessee’s Personal Property
24.	Notices
25.	Estoppel Certificate
26.	Signage
27.	Real Estate Brokers
28.	Subordination; Attornment
29.	No Termination Right
30.	Lessor’s Entry
31.	Attorneys’ Fees
32.	Compliance with CC&Rs
33.	Quiet Enjoyment
34.	General Provisions

SCHEDULE OF EXHIBITS
	EXHIBIT “A”	Legal Description
	EXHIBIT “B”	Menlo Business Park Master Plan
	EXHIBIT “C”	Floor Plan
	EXHIBIT “D”	Commencement Memorandum
	EXHIBIT “E”	Tenant Improvement Work
	EXHIBIT “F”	Estoppel Certificate

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L E A S E

Building #5

Menlo Business Park

1330 O’Brien Drive

Menlo Park, California

THIS LEASE, referred to herein as “this Lease,” is made and entered into as of April 30, 2003 by and between MENLO BUSINESS PARK, LLC, a California limited liability company, hereafter referred to as “Lessor,” and DEPOMED, INC., a California corporation, hereafter referred to as “Lessee” or “DepoMed.”

RECITALS:

A.Lessor is the owner of the real property located in Menlo Business Park, Menlo Park, California, commonly referred to as 1330 O’Brien Drive, Menlo Park, California, more particularly described on Exhibit “A” attached hereto and incorporated by reference herein, consisting of a parcel of land containing approximately 1.36 acres, together with all easements and appurtenances thereto (the “Land”) and the existing building thereon, referred to as Building #5, 1330 O’Brien Drive, containing approximately 25,366 rentable square feet, and all other improvements located thereon, including 78 on-site parking spaces (collectively, the “Improvements”).  The Land and Improvements are referred to herein collectively as the “Premises.”  The Premises are shown on the Menlo Business Park Master Plan attached hereto as Exhibit “B.”  Building #5 is sometimes referred to herein as “the Building.”  The floor plan of Building #5 is attached hereto as Exhibit ”C.”

B.Lessor and Lessee wish to enter into this Lease of the Premises upon the terms and conditions set forth herein.

NOW, THEREFORE, the parties agree as follows:

1.Lease.  Lessor hereby leases to Lessee, and Lessee leases from Lessor the Premises at the rental and upon all of the terms and conditions set forth herein.

2.Initial Term.

(a)The initial term of this Lease (the “initial term”) shall commence on May 1, 2003 (the “Commencement Date”).  The Commencement Date shall be confirmed in writing by Lessor and Lessee by the execution and delivery of the Commencement Memorandum in the form attached hereto as “Exhibit “D.”

(b)The initial term of this Lease shall expire, unless sooner terminated in accordance with the provisions hereof, on April 30, 2008.

3.Option to Extend.

(a)Lessor hereby grants to Lessee one (1) option to extend the term of this Lease for one period of sixty (60) calendar months immediately following the expiration of the initial term.  Lessee may exercise the foregoing option to extend by giving written notice of exercise to Lessor at least six (6) months, but not more than twelve (12) months, prior to the expiration of the initial term of this Lease, time being of the essence; provided that if Lessee is currently in a state of uncured default after the expiration of notice and cure periods, if applicable (referred to herein as “in default”) under this Lease at the time of exercise of the option or on the commencement date of the option extension period, such notice shall be void and of no force or effect.  Such option extension period, if exercised, shall be upon the same terms and conditions as the initial term of this Lease, including the payment by Lessee of the Operating Expenses pursuant to Paragraph 5, except that (i) the Monthly Base Rent during the option period shall be determined as set forth in Paragraph 3(c) hereof, (ii) there shall be no additional option to extend, and (iii) Lessee shall accept the Premises in their then “as is” condition and Paragraph 13, Tenant Improvement Work, shall not apply to the option period.  If Lessee does not exercise the option in a timely manner the option shall lapse, time being of the essence.

(b)The option to extend granted to Lessee by this Paragraph 3 is granted for the personal benefit of DepoMed only, and shall be exercisable only by DepoMed or by a “permitted affiliate” under Paragraph 17(f) below.  Said option may not be assigned or transferred by said entity to any assignee or sublessee other than a permitted affiliate.

(c)The initial Monthly Base Rent for the Premises during the option extension period shall be determined pursuant to the provisions of this subparagraph (c) and, subject to subparagraph (e) below, shall equal ninety-five percent (95%) of the then current fair market rental for the Premises on the commencement date of the option extension period as determined by agreement between the Lessor and Lessee, if possible, and by the process of appraisal if the parties cannot reach agreement.

If Lessor and Lessee are unable to agree upon the amount equal to ninety-five percent (95%) of the then current fair market rent for the Premises, said amount shall be determined by appraisal.  The appraisal shall be performed by one appraiser if the parties are able to agree upon one appraiser.  If the parties are unable to agree upon one appraiser, each party shall appoint an appraiser and the two appraisers shall select a third appraiser.  Each appraiser selected shall be a member of the American Institute of Real Estate Appraisers (AIREA) with at least five (5) years of full-time commercial real estate appraisal experience in the Menlo Park office market.

If only one appraiser is selected, that appraiser shall notify the parties in simple letter form of its determination of the amount equal to ninety-five percent (95%) of the fair market Monthly Base Rent for the Premises on the commencement date of the option extension period within fifteen (15) days following its selection.  Said appraisal

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shall be binding on the parties as the appraised current ninety-five percent (95%) of the “fair market rental” for the Premises which shall be based upon the then current rental paid by tenants for premises in the vicinity of the Premises of similar age, size, quality of construction and specifications. If multiple appraisers are selected, each appraiser shall within ten (10) days of being selected make its determination of the amount equal to ninety-five percent (95%) of the current fair market Monthly Base Rent for the Premises in simple letter form.  If two (2) or more of the appraisers agree on said amount, such agreement shall be binding upon the parties.  If multiple appraisers are selected and two (2) appraisers are unable to agree on said amount, the amount equal to ninety-five percent (95%) of the fair market Monthly Base Rent for the Premises shall be determined by taking the mean average of the appraisals; provided, that any high or low appraisal, differing from the middle appraisal by more than ten percent (10%) of the middle appraisal, shall be disregarded in calculating the average.  Said initial Monthly Base Rent shall be adjusted annually on the anniversary of the commencement of the option term in the manner determined by the appraisers to be consistent with the then prevailing market practice for comparable space.

If only one appraiser is selected, then each party shall pay one-half of the fees and expenses of that appraiser.  If three appraisers are selected, each party shall bear the fees and expenses of the appraiser it selects and one-half of the fees and expenses of the third appraiser.

(d)Thereafter, provided that Lessee has previously given timely notice to Lessor of the exercise by Lessee of the option to extend the term, Lessor and Lessee shall execute an amendment to this Lease stating that the initial Monthly Base Rent for the Premises during the option extension period shall be equal to the determination by appraisal.

(e)Notwithstanding anything to the contrary contained in subparagraph (c) above, in no event shall the Monthly Base Rent at the commencement of the option extension period be less than the Monthly Base Rent in effect immediately prior to the commencement of the option extension period.

4.Monthly Base Rent.

(a)Commencing on the Commencement Date and continuing on the first day of each calendar month thereafter during the initial term, Lessee shall pay to Lessor in monthly installments in advance Monthly Base Rent in lawful money of the United States as follows:

(1)Commencing on May 1, 2003 and continuing through July 31, 2003, the sum of Ten Thousand Eight Hundred Dollars ($10,800) (9,000 rentable square feet x $1.20/rentable square foot/month).

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(2)Commencing on August 1, 2003 and continuing through October 31, 2003, the sum of Twenty-one Thousand Six Hundred Dollars ($21,600) (18,000 rentable square feet x $1.20/rentable square foot/month).

(3)Commencing on November 1, 2003 and continuing through April 30, 2004, the sum of Thirty Thousand Four Hundred Thirty-nine and Twenty Hundredths Dollars ($30,439.20) (25,366 rentable square feet x $1.20/rentable square foot/month).  Commencing on November 1, 2003 and continuing for the remainder of the initial term, Monthly Base Rent shall be calculated based on the entire 25,366 rentable square feet of the Premises.

(b)Upon the execution and delivery of this Lease by Lessor and Lessee, Lessee shall pay to Lessor the sum of Ten Thousand Eight Hundred Dollars ($10,800) representing the initial Monthly Base Rent for the entire Premises.

(c)The Monthly Base Rent shall be adjusted as of each anniversary of the Commencement Date during the initial term, commencing with the first anniversary of the Commencement Date and continuing on each anniversary of the Commencement Date thereafter during the initial lease term (the “Rental Adjustment Date”) to reflect any increases in the cost of living.  The adjustment shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index, all items,  for all Urban Consumers - San Francisco-Oakland-San Jose (1982-84=100), hereafter referred to as the “Index.”  The Index for said subgroup published most recently as of the end of the calendar month immediately preceding the month in which the Commencement Date occurs shall be considered the “base Index.”

(d)The Monthly Base Rent shall be adjusted as of each Rental Adjustment Date to an amount equal to the product obtained by multiplying $30,439.20 (the Monthly Base Rent for the Premises commencing on November 1, 2003 referred to in Paragraph 4(a)(3)) by a fraction, the numerator of which is the Index most recently published as of the end of the calendar month immediately preceding each Rental Adjustment Date and the denominator of which is the base Index; provided that in no event shall the Monthly Base Rent be increased on any Rental Adjustment Date to an amount less than three percent (3%) per annum or more than six percent (6%) per annum, calculated for each individual year from the previous Rental Adjustment Date, of the Monthly Base Rent payable before such Rental Adjustment Date.

(e)When the new Monthly Base Rent is determined for each Rental Adjustment Date, Lessor shall give Lessee written notice of the amount of the new Monthly Base Rent and how the new Monthly Base Rent figure was computed in accordance with subparagraphs 4(c) and 4(d) above.  Lessee shall pay to Lessor retroactively any unpaid increase in Monthly Base Rent due from and after the Rental Adjustment Date.  If the Index does not exist on any Rental Adjustment Date in the same format as referred to in subparagraph (b), Lessor shall substitute in lieu thereof an index reasonably comparable to the Index referred to above which is acceptable to Lessee and

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which is then published by the Bureau of Labor Statistics, or successor or similar governmental agency, or if no governmental agency then publishes an index, Lessor shall substitute therefor any index commonly accepted which is published by a reputable private organization.

5.Additional Rent; Operating Expenses and Taxes.

(a)In addition to the Monthly Base Rent payable by Lessee pursuant to Paragraph 4, Lessee shall pay to Lessor, as “Additional Rent,” (i) the operating expenses of the Premises, and (ii) Lessee’s pro rata share of the operating expenses of Menlo Business Park of which the Premises are a part, in accordance with Paragraph 5(b) hereof, and (iii) real property taxes and assessments levied or assessed against the Premises in accordance with Paragraph 5(c) hereof.  Lessee’s pro rata share of the operating expenses of Menlo Business Park is 2.39% based upon the ratio of the number of square feet of the Land to the total number of square feet of land in Menlo Business Park.  The operating expenses of Menlo Business Park currently include maintenance of the common areas of Menlo Business Park, parking lot lighting (cost of electricity and maintenance of the fixtures), maintenance of the network conduit, all landscape maintenance and irrigation of Menlo Business Park, Lessor’s insurance coverages of Menlo Business Park, and security patrol.  The operating expenses of Menlo Business Park may include other items from time to time during the term of this Lease.  Monthly Base Rent and Additional Rent are referred to herein collectively as “rent.”

(b)“Operating Expenses,” as used herein, shall include all direct costs incurred by Lessor in the of management, operation, maintenance, repair and replacement of the Premises, including the cost of all maintenance, repairs, and restoration of the Premises performed by Lessor pursuant to Paragraphs 14(b) and 14(c) hereof, as determined by generally accepted accounting principles (unless excluded by this Lease), including, but not limited to:

Personal property taxes related to the Premises; any parking taxes or parking levies imposed on the Premises in the future by any governmental agency; a pro rata portion of the management fee charged for the management and operation of Menlo Business Park, in an amount equal to three percent (3%) of the total gross income received by Lessor from the operation of Menlo Business Park (including Monthly Base Rent and Additional Rent received from tenants); water and sewer charges; waste disposal; insurance premiums for insurance coverages maintained by Lessor pursuant to Paragraph 11(b) hereof; license, permit, and inspection fees; charges for electricity, heating, air conditioning, gas, and any other utilities (including, without limitation, any temporary or permanent utility surcharge or other exaction); security; maintenance, repair, and replacement of the roof membrane; painting and repairing, interior and exterior; maintenance and replacement of floor and window coverings; repair, maintenance, and replacement of air-conditioning, heating, mechanical and electrical systems, elevators, plumbing and sewage systems; janitorial service; landscaping, gardening, and tree trimming; glazing; repair, maintenance, cleaning, sweeping, striping, and resurfacing of

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the parking area; exterior Building lighting and parking lot lighting; supplies, materials, equipment and tools in the maintenance of the Premises; costs for accounting services incurred in the calculation of Operating Expenses and Taxes as defined herein; and the cost of any other capital expenditures for any improvements or changes to the Building which are required by laws, ordinances, or other governmental regulations adopted after the Commencement Date, or for any items or capital expenditures voluntarily made by Lessor which are intended to and have the effect of reducing Operating Expenses; provided, however, that except for capital improvements required because of Lessee’s specific use of the Premises, if Lessor is required to or voluntarily makes such capital improvements, Lessor shall amortize the cost of said improvements over the useful life of said improvements (together with interest on the unamortized balance at the rate equal to the effective rate of interest on Lessor’s bank line of credit at the time of completion of said improvements, but in no event in excess of twelve percent (12%) per annum) as an Operating Expense in accordance with generally accepted accounting principles, except that with respect to capital improvements made to save Operating Expenses such amortization shall not be at a rate greater than the actual savings in Operating Expenses.  Operating Expenses shall also include any other expense or charge, whether or not described herein not specifically excluded by other provisions of this Lease, which in accordance with generally accepted accounting principles would be considered an expense of managing, operating, maintaining, and repairing the Premises.

(c)Real property taxes and assessments upon the Premises, during each lease year or partial lease year during the term of this Lease are referred to herein as “Taxes.”

As used herein, “Taxes” shall mean:

(1)all real estate taxes, assessments and any other taxes levied or assessed against the Premises including the Land, the Building, and all improvements located thereon, including any increase in Taxes resulting from a reassessment following any transfer of ownership of the Premises or any interest therein or following any improvements to the Premises after the Commencement Date; and

(2)all other taxes which may be levied in lieu of real estate taxes, assessments, and other fees, charges, and levies, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature by any authority having the direct or indirect power to tax, including without limitation any governmental authority or any improvement or other district or division thereof, for public improvements, services, or benefits which are assessed, levied, confirmed, imposed, or become a lien (i) upon the Premises, and/or any legal or equitable interest of Lessor in any part thereof; or (ii) upon this transaction or any document to which Lessee is a party creating or transferring any interest in the Premises; and (iii) any tax or excise, however described, imposed in addition to, or in substitution partially or totally of, any tax previously included within the definition of “Taxes” or any tax the nature of which was previously included in the definition “Taxes.”

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Not included within the definition of “Taxes” are any net income, profits, transfer, franchise, estate or inheritance taxes imposed by any governmental authority.  “Taxes” also shall not include penalties or interest charges assessed on delinquent Taxes so long as Lessee is not in default in the payment of Monthly Base Rent or Additional Rent.

With respect to any assessments which may be levied against or upon the Premises, or the Land, which under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, only the amount of such annual installment (with appropriate proration of any partial year) and statutory interest shall be included within the computation of the annual Taxes levied against the Premises, the Building and Improvements thereon, and the Land.

(d)The following costs (“Costs”) shall be excluded from the definition of Operating Expenses:

(1)Costs occasioned by the act, omission or violation of law by Lessor, or its respective agents, employees or contractors;

(2)Costs for which Lessor receives reimbursement from others, including reimbursement from insurance;

(3)Interest, charges and fees incurred on debt or payments on any deed of trust or ground lease on the Premises;

(4)Advertising or promotional costs or other costs incurred by Lessor in procuring tenants for the Premises or other portions of Menlo Business Park;

(5)Costs incurred in repairing, maintaining or replacing any structural elements of the Building for which Lessor is responsible pursuant to Paragraph 14(a) hereof;

(6)Any wages, bonuses or other compensation of employees above the grade of building manager and any executive salary of any officer or employee of Lessor, including fringe benefits other than insurance plans and tax-qualified benefit plans, or any fee, profit or compensation retained by Lessor or its affiliates for management and administration of the Premises in excess of the management fee referred to in Paragraph 5(b) of this Lease;

(7)General office overhead and general and administrative expenses of Lessor, except as specifically provided in Paragraph 5(b); and

(8)Leasing expenses and broker commissions payable by Lessor.

Lessor shall at all times use its best efforts to operate the Premises in an economically reasonable manner at costs not disproportionately higher than those

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experienced by other comparable premises in the market area in which the Premises are located (Menlo Park).

(e)At the Commencement Date, and as close as reasonably possible to the end of each calendar year thereafter, Lessor shall notify Lessee of the Operating Expenses estimated by Lessor for the calendar year 2003, and for each following calendar year.  Concurrent with such notice, Lessor shall provide a description of such Operating Expenses and Taxes.  Commencing on the Commencement Date, and on the first (1^st) day of each calendar month thereafter, Lessee shall pay to Lessor, as Additional Rent, one-twelfth (1/12th) of the estimated Operating Expenses and Taxes.  If at any time during any such calendar year, it appears to Lessor that the Operating Expenses or Taxes for such year will vary from Lessor’s estimate, Lessor may, by written notice to Lessee, revise Lessor’s estimate for such year and the Additional Rent and Taxes payments by Lessee for such year shall thereafter be based upon such revised estimate.  Lessor shall furnish to Lessee with such revised estimate written verification showing that the actual Operating Expenses or Taxes are greater than Lessor’s estimate.  The increase in the monthly installments of Additional Rent and Taxes resulting from Lessor’s revised estimate shall not be retroactive, but the Additional Rent and Taxes for each calendar year shall be subject to adjustment between Lessor and Lessee after the close of the calendar year, as provided below.

Within approximately ninety (90) days after the expiration of each calendar year of the term, Lessor shall furnish Lessee a statement certified by a responsible employee or agent of Lessor (the “Operating Statement”) with respect to such year, prepared by an employee or agent of Lessor, showing Operating Expenses and Taxes broken down by component expenses, Base Taxes and Base Operating Expenses of the Premises broken down by component expenses, and the total payments made by Lessee on the basis of any previous estimate of such Operating Expenses and Taxes, all in sufficient detail for verification by Lessee.  Unless Lessee raises any objections to the Operating Statement within ninety (90) days after receipt of the same, such statement shall conclusively be deemed correct and Lessee shall have no right thereafter to dispute such statement or any item therein or the computation of Operating Expenses and/or Taxes.  Lessee or its accountants shall have the right to inspect and audit Lessor’s books and records with respect to this Lease once each Lease Year to verify actual Operating Expenses and/or Taxes.  Lessor’s books and records shall be kept in accord with generally accepted accounting principles.  If Lessee’s audit of the Operating Expenses and/or Taxes for any year reveals a net overcharge of more than five percent (5%), Lessor promptly shall reimburse Lessee for the cost of the audit; otherwise, Lessee shall bear the cost of Lessee’s audit.  If Lessee objects to Lessor’s Operating Statement, Lessee shall continue to pay on a monthly basis the Operating Expenses and/or Taxes based upon the prior year’s Operating Statement until the dispute is resolved.

If the Operating Expenses and Taxes for the year as finally determined exceeds the total payments made by Lessee based on Lessor’s estimates, Lessee shall pay to Lessor the deficiency, within thirty (30) days after the receipt of Lessor’s Operating

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Statement.  If the total payments made by Lessee based on Lessor’s estimate of the Operating Expenses and/or Taxes exceed the Operating Expenses and/or Taxes, Lessee’s extra payment, plus the cost of the audit if charged to Lessor, shall be credited against payments of Monthly Base Rent and Additional Rent next due hereunder.

Notwithstanding the termination of this Lease, within thirty (30) days after Lessee’s receipt of Lessor’s Operating Statement or the completion of Lessee’s audit regarding the Operating Expenses and/or Taxes for the calendar year in which this Lease terminates, Lessee shall pay to Lessor or shall receive from Lessor, as the case may be, an amount equal to the difference between the Operating Expenses and/or Taxes for such year, as finally determined, and the amount previously paid by Lessee on account thereof (prorated to the expiration date or the termination date of this Lease).

6.Payment of Rent.

(a)All rent shall be due and payable in lawful money of the United States of America at the address of Lessor set forth in Paragraph 24, “Notices,” without deduction or offset and without prior demand or notice, unless otherwise specified herein.  Monthly Base Rent and Additional Rent shall be payable monthly, in advance, on the first day of each calendar month.  Lessee’s obligation to pay rent for any partial month at the commencement of the initial term, for the partial month immediately prior to the Rental Adjustment Date (if the Rental Adjustment Date is other than the first day of the calendar month), and for any partial month at the expiration or termination of the lease term shall be prorated on the basis of a thirty (30) day month.

(b)If any installment of Monthly Base Rent, Additional Rent or any other sum due from Lessee is not received by Lessor within five (5) days after the same is due, Lessee shall pay to Lessor an additional sum equal to five percent (5%) of the amount overdue as a late charge.  The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of the late payment by Lessee.  Acceptance of any late charge shall not constitute a waiver of Lessee’s default with respect to the overdue amount.  Any amount not paid within ten (10) days after Lessee’s receipt of written notice that such amount is due shall bear interest from the date due until paid at the lesser rate of (1) the prime rate of interest as published in the “Wall Street Journal,” plus five percent (5%) or (2) the maximum rate allowed by law (the “Interest Rate”), in addition to the late payment charge.

Initials:  Lessor                   Lessee

7.Security Deposit.

(a)Lessee shall deposit with Lessor upon execution hereof the sum of Thirty-four Thousand Two Hundred Fifty-nine and Fifty-eight Hundredths Dollars ($34,259.58) (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under this Lease.  If Lessee fails to pay Monthly Base Rent or

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Additional Rent or charges due hereunder, or otherwise defaults under this Lease (as defined in Paragraph 22), Lessor may use, apply or retain all or any portion of said Security Deposit to the extent reasonably necessary to cure the default, for the payment of any amount due Lessor, and to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys’ fees) which Lessor may suffer or incur by reason thereof.  If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore the Security Deposit to the original amount required by this Lease.  Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts.

(b)Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor’s option, to the last assignee, if any, of Lessee’s interest herein), that portion of the Security Deposit not used or applied by Lessor, provided that there is then no uncured event of default by Lessee hereunder and there is then no unsatisfied claim by Lessor against Lessee for damages in the event this Lease has been terminated.  No part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease.

8.Use.  Lessee shall use and occupy the Premises for general office uses, bio-pharmaceutical research and development and manufacturing, warehousing, and for such other uses which are permitted by applicable zoning ordinances and the covenants, conditions, and restrictions for Menlo Business Park and which are reasonably approved by Lessor in writing, and for no other use or purpose without Lessor’s prior written consent.  Use of the Premises for the manufacture of integrated circuits or the manufacture of other electronic components is expressly prohibited.  Any use of the Premises by Lessee or by any sublessee or assignee approved by Lessor pursuant to Paragraph 17 shall comply with the provisions of this Paragraph 8.

9.Hazardous Materials.

(a)The term “Hazardous Materials” as used in this Lease shall include any substance defined as a “hazardous substance,” “toxic substance,” “industrial process waste,” or “special waste” in any Environmental Laws as hereafter defined. Hazardous Materials shall include, but not be limited to, petroleum, gasoline, natural gas, natural gas liquids, liquified natural gas, synthetic gas, and/or crude oil or any products, by-products or fractions thereof.

(b)Lessor represents and warrants that to the best of John C. Tarlton’s current actual knowledge as of the date of this Lease (i) no Hazardous Materials are currently present in the Building or at the Premises or the soil, surface water, or groundwater thereof, (ii) no underground storage tanks are present at the Premises, and (iii) no action, proceeding or claim is pending or threatened regarding the Building or the Premises concerning any Hazardous Materials or pursuant to any Environmental Law. 

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Lessor further represents and warrants that Lessor has delivered to Lessee prior to the date of this Lease true, correct and complete copies of all studies, audits, reports, investigations, inspections, and correspondence in Lessor’s possession regarding the presence or absence of Hazardous Materials in, on, under or about the Premises or the Building and/or the compliance or non-compliance of the Premises or the Building with Environmental Laws.

(c)Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Materials without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Environmental Laws.  “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of Hazardous Materials that require a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of Hazardous Materials with respect to which any Environmental Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties.  Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of Lessee’s agreed use of the Premises, so long as such use is in compliance with all Environmental Laws, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor.  In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(d)“Environmental Laws” shall mean and include any Federal, State, or local statute, law, ordinance, code, rule, regulation, order, or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic, or dangerous waste, substance, element, compound, mixture or material, as now or at any time hereafter in effect including, without limitation, California Health and Safety Code §§25100 et seq., §§25300 et seq., Sections 25281(f) and 25501 of the California Health and Safety Code, Section 13050 of the Water Code, the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. §§9601 et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act, 42 U.S.C. §§9601 et seq., the Federal Toxic Substances Control Act, 15 U.S.C. §§2601 et seq., the Federal Resource Conservation and Recovery Act as amended, 42 U.S.C. §§6901 et seq., the Federal Hazardous Material Transportation Act, 49 U.S.C. §§1801 et seq., the Federal Clean Air Act, 42 U.S.C. §7401 et seq., the Federal Water Pollution Control Act, 33 U.S.C. §1251 et seq., the River and Harbors Act of 1899, 33 U.S.C. §§401 et seq., and all rules and regulations of the EPA, the California Environmental Protection Agency, or any other state or federal department, board or any other agency or governmental board or entity having

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jurisdiction over the environment, as any of the foregoing have been, or are hereafter amended.

(e)If Lessee knows, or has reasonable cause to believe, that Hazardous Materials have come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Materials.

(f)Lessee and Lessee’s agents, employees, and contractors shall not cause any Hazardous Materials to be discharged into the plumbing or sewage system of the Building or into or onto the Land underlying or adjacent to the Building in violation of any Environmental Laws.  Lessee shall promptly, at Lessee’s expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination caused by Lessee or caused by any of Lessee’s employees, agents, or contractors, and for the maintenance, security and/or monitoring of the Premises or neighboring properties if such contamination is caused by a release or emission of any Hazardous Materials by Lessee or by any of Lessee’s employees, agents, or contractors.

(g)Lessee shall indemnify, defend and hold Lessor harmless from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, any and all sums paid for settlement of claims, attorneys’ fees, consultant and expert fees) arising during or after the term (as such may be extended) from or in connection with the presence of Hazardous Materials in or on the Premises, the Building or Menlo Business Park as a result of Lessee’s breach of the foregoing covenant, or as a result of the negligence, willful misconduct or other acts of Lessee, Lessee’s employees, agents, contractors or invitees.  Without limitation of the foregoing, this indemnification shall include any and all costs incurred due to any investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision.  The foregoing indemnity shall survive the expiration or earlier termination of this Lease.

(h)Lessor shall indemnify, defend and hold Lessee harmless from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, any and all sums paid for settlement of claims, attorneys’ fees, consultant and expert fees) arising before, during or after the term (as such may be extended) from or in connection with the presence of Hazardous Materials in or on the Premises, the Building or Menlo Business Park, unless the (1) Hazardous Materials are present in whole or in part as a result of the breach of this Lease by Lessee, or the negligence, willful misconduct, or other acts of Lessee, Lessee’s employees, agents, contractors or invitees; or (2) such Hazardous Materials have flowed, diffused, migrated, or percolated into, onto, or under the Premises, the Building, or Menlo Business Park from other property after the Commencement Date.  Without limitation of the foregoing, this indemnification shall include any and all costs incurred due to any investigation of the site

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or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision, except to the extent the Hazardous Materials are present as a result of the negligence, willful misconduct or other acts of Lessee, Lessee’s agents, employees, contractors or invitees. The foregoing indemnity shall survive the expiration or earlier termination of this Lease.

10.Taxes on Lessee’s Property.  Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed and which become payable during the initial lease term and any extension thereof upon Lessee’s equipment, fixtures, furniture, and personal property installed or located in the Premises.

11.Insurance.

(a)Lessee shall, at Lessee’s sole cost and expense, provide and keep in force commencing with the Commencement Date of the initial lease term and continuing during the initial lease term and the option extension period if exercised, a general commercial liability insurance policy with a recognized casualty insurance company qualified to do business in California, insuring against any and all liability occasioned by any occurrence in, on, about, or related to the Premises, or arising out of the condition, use, occupancy, alteration or maintenance of the Premises, and covering the contractual liability referred to in Paragraph 12(a) of this Lease, having a combined single limit for both bodily injury and property damage in an amount not less than Five Million Dollars ($5,000,000).  All such insurance carried by Lessee shall be in a form reasonably satisfactory to Lessor and its mortgage lender and shall be carried with companies that have a general policyholder’s rating of not less than “A” and a financial rating of not less than Class “X” in the most current edition of Best’s Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days’ prior written notice to Lessor; and shall be primary as to Lessor.  Prior to the Commencement Date and upon renewal of such policies not less than fifteen (15) days prior to the expiration of the term of such coverage, Lessee shall deliver to Lessor certificates of insurance confirming such coverage, together with evidence of the payment of the premium therefor, naming Lessor and Lessor’s property manager as additional insureds.  If Lessee fails to procure and maintain the insurance required hereunder, Lessor may, but shall not be required to, order such insurance at Lessee’s expense and Lessee shall reimburse Lessor for all costs incurred by Lessor with respect thereto.  Lessee’s reimbursement to Lessor for such amounts shall be deemed Additional Rent, and shall include all sums disbursed, incurred or deposited by Lessor, including Lessor’s costs, expenses and reasonable attorneys’ fees with interest thereon at the Interest Rate.

(b)Lessor shall obtain and carry in Lessor’s name, as insured, as an Operating Expense of the Premises as provided in Paragraph 5(b), during the lease term, “all risk” property insurance coverage (with rental loss insurance coverage for a period of one year), flood insurance, public liability and property damage insurance, and insurance against such other risks or casualties as Lessor shall determine, including, but not limited to, insurance coverages required of Lessor by the beneficiary of any deed of trust which

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encumbers the Property, including earthquake insurance coverage insuring Lessor’s interest in the Premises (including the Tenant Improvement Work performed pursuant to Paragraph 13 and any other leasehold improvements to the Premises constructed by Lessor or by Lessee with Lessor’s prior written approval) in an amount not less than the full replacement cost of the Building and all other Improvements from time to time.  The proceeds of any such insurance shall be payable solely to Lessor and Lessee shall have no right or interest therein.  Lessor shall have no obligation to insure against loss by Lessee to Lessee’s leasehold improvements installed at Lessee’s expense, or Lessee’s equipment, fixtures, furniture, or other personal property of Lessee in or about the Premises occurring from any cause whatsoever.  Lessor’s public liability insurance shall provide for contractual liability referred to in Paragraph 12(b) of this Lease.

(c)Notwithstanding anything to the contrary contained in this Lease, the parties release each other, and their respective authorized representatives, employees, officers, directors, shareholders, managers, members, assignees, subtenants, and property managers, from any claims for damage to any person or to the Premises and to the fixtures, personal property, leasehold improvements and alterations of either Lessor or Lessee in or on the Premises that are caused by or result from risks required by this Lease to be insured against or actually insured against under any property insurance policies carried by the parties and in force at the time of any such damage, whichever is greater. This waiver applies whether or not the loss is due to the negligent acts or omissions of Lessor or Lessee or their respective officers, directors, employees, agents, contractors, or invitees.

(d)Each party shall cause each property insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with the above waiver and any damage covered by any policy; provided, however, that such provision or endorsement shall not be required if the applicable policy of insurance permits the named insured to waive rights of subrogation on a blanket basis, in which case the blanket waiver shall be acceptable.  Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this Lease.

12.Indemnification.

(a)Lessee waives all claims against Lessor for damages to property, or to goods, wares, and merchandise stored in, upon, or about the Premises, and for injuries to persons in, upon, or about the Premises from any cause arising at any time, except as may be caused by the negligence or willful misconduct of Lessor or its employees, agents or contractors.  Lessee shall indemnify, defend, and hold harmless Lessor from claims, suits, actions, or liabilities for personal injury, death or for loss or damage to property that arise from (1) any activity, work, or thing done or permitted by Lessee in or about the Premises, (2) for bodily injury or damage to property which arises in or about the Land, the Building, or the Improvements to the extent the injury or damage to property results from the negligent acts or omissions of Lessee, its employees, agents or contractors, and (3)

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based on any event of default by Lessee in the performance of any obligation on Lessee’s part to be performed under this Lease.

(b)Lessor shall indemnify, defend, and hold harmless Lessee from claims, suits, actions, or liabilities for personal injury, death or for loss or damage to property that arise from (1) any activity, work, or thing done, permitted or suffered by Lessor in or about the Premises, (2) for bodily injury or damage to property which arises in or about the Land, the Building or the Improvements to the extent the injury or damage to property results from the negligent acts or omissions of Lessor, its employees, agents or contractors, and (3) based on any breach or default by Lessor in the performance of any obligation on Lessor’s part to be performed under this Lease.

(c)In the absence of comparative or concurrent negligence on the part of Lessee or Lessor, their respective agents, affiliates, and subsidiaries, or their respective officers, directors, members, employees or contractors, the foregoing indemnities by Lessee and Lessor shall also include reasonable costs, expenses and attorneys’ fees incurred in connection with any indemnified claim or incurred by the indemnitee in successfully establishing the right to indemnity.  The indemnitor shall have the right to assume the defense of any claim subject to the foregoing indemnities with counsel reasonably satisfactory to the indemnitee.  The indemnitee agrees to cooperate fully with the indemnitor and its counsel in any matter where the indemnitor elects to defend, provided the indemnitor shall promptly reimburse the indemnitee for reasonable costs and expenses incurred in connection with its duty to cooperate.

The foregoing indemnities are conditioned upon the indemnitee providing prompt notice to the indemnitor of any claim or occurrence that is likely to give rise to a claim, suit, action or liability that will fall within the scope of the foregoing indemnities, along with sufficient details that will enable the indemnitor to make a reasonable investigation of the claim.

When the claim is caused by the joint negligence or willful misconduct of Lessee and Lessor or by the indemnitor party and a third party unrelated to the indemnitor party (except indemnitor’s agents, officers, employees or invitees), the indemnitor’s duty to indemnify and defend shall be proportionate to the indemnitor’s allocable share of joint negligence or willful misconduct.

(d)Lessor shall not be liable to Lessee for any damage because of any act or negligence of any other owner or occupant of adjoining or contiguous property, nor for overflow, breakage, or leakage of water, steam, gas, or electricity from pipes, wires, or otherwise in the Premises or the Building, except to the extent caused by negligence or willful misconduct of Lessor or Lessor’s employees, agents, or contractors.  Except as otherwise herein provided, Lessee will pay for damage to the

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Premises caused by the misuse or neglect of the Premises by Lessee or its employees, agents, or contractors, including, but not limited to, the breakage of glass in the Premises.  Any damage to the Premises caused by other tenants of Menlo Business Park shall be paid for by such other tenants or by Lessor.

13.Tenant Improvement Work.

(a)Lessor shall provide Lessee with a tenant improvement allowance of Two Hundred Fifty-Three Thousand Six Hundred Sixty Dollars ($253,660) ($10.00 per rentable square foot) (the “Tenant Improvement Allowance”) to defray a portion of the cost of the improvements to the Premises which shall be mutually approved in writing by Lessor and Lessee (“Tenant Improvement Work”).  The entire cost of the Tenant Improvement Work in excess of the Tenant Improvement Allowance, if any, shall be paid by Lessee.  The cost of obtaining approval by of the City of Menlo Park of a merger of the Building #5 Land (1330 O’Brien Drive) and the Building #6 Land (1360 O’Brien Drive) occupied by Lessee pursuant to the existing Lease dated February 4, 2000 between Lessor and Lessee, and the cost of connecting Building #5 and Building #6 pursuant to plans approved by Lessor and Lessee shall be included in the cost of the Tenant Improvement Work.  Subject to Lessor’s prior written approval of the plans and specifications for the Tenant Improvement Work for both Building #5 and Building #6, Lessee may combine the Tenant Improvement Allowance for the Premises (Building #5) and the Tenant Improvement Allowance for 1360 O’Brien Drive (Building #6) and apply the combined Tenant Improvement Allowance to either Building #5 or Building #6 in its entirety, provided that Lessor shall not be obligated to approve the plans and specifications for any of such Tenant Improvement Work if, in Lessor’s judgment, such plans and specifications provide for the performance of any of such Tenant Improvement Work in a manner that could adversely affect the leasing of either Building #5 or Building #6 to a future tenant.

(b)Lessor shall enter into a contract with a licensed general contractor for the construction of the Tenant Improvement Work.  The general contractor shall be selected jointly by Lessor and Lessee from a list of approved contractors prepared by the Lessor.  The Tenant Improvement Work shall be performed pursuant to the plans and specifications approved in writing by Lessor and Lessee.

(c)The Tenant Improvement Work shall be constructed under the direct supervision of Tarlton Properties, Inc., as construction manager, at a fee of five percent (5%) of hard construction costs (i.e., the amounts paid to the general contractor, subcontractors, vendors, and suppliers for labor and materials for the construction of the Tenant Improvements) as a cost of the Tenant Improvement Work.  The general contractor shall perform the work pursuant to a negotiated fixed fee guaranteed maximum price contract.  The work shall be performed on an “open book” basis with a post-job audit of all costs by a representative from both Lessee and Tarlton Properties, Inc.

(d)Lessor shall deliver the Premises to Lessee on the Commencement Date with all Building systems and subsystems in good working condition.

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(e)Subject to completion of the Tenant Improvement Work, Lessee waives all right to make repairs at the expense of Lessor, or to deduct the costs thereof from the rent, and Lessee waives all rights under Section 1941 and 1942 of the Civil Code of the State of California.  At the termination of this Lease, Lessee shall surrender the Premises in a clean and good condition, except for ordinary wear and tear and except for damage caused by casualty, the elements, acts of God, a taking by eminent domain, alterations or other improvements made by Lessee with Lessor’s prior written consent which Lessee is not required to remove as a condition to Lessor’s approval of such alterations or improvements.

14.Maintenance and Repairs; Alterations; Surrender and Restoration.

(a)Lessor shall, at Lessor’s sole expense, keep in good order, condition, and repair and replace when necessary, the structural elements of the roof (excluding the roof membrane), and the structural elements of the foundation and exterior walls (except the interior faces thereof), of the Building, and other structural elements of the Building and the Premises as “structural elements” are defined in building codes applicable to the Building, excluding any alterations, structural or otherwise, made by Lessee to the Building which are not approved in writing by Lessor prior to the construction or installation thereof by Lessee.  Lessor shall perform and construct, and Lessee shall not be responsible for performing or constructing, any repairs, maintenance, or improvements (1) required as a result of any casualty damage (not caused by the willful or negligent acts or omissions of Lessee) or as a result of any taking pursuant to the exercise of the power of eminent domain, or (2) for which Lessor has a right of reimbursement from third parties based on construction or other warranties, contractor guarantees, or insurance claims.

(b)Lessor shall provide or cause to be provided and shall supervise the performance of, as an Operating Expense of the Premises pursuant to Paragraph 5(b) hereof, all services and work relating to the operation, maintenance, repair, and replacement, as needed, of the Premises, including the HVAC, mechanical, electrical, and plumbing systems in the Building; the interior of the Building; the roof membrane; the outside areas of the Premises; the janitorial service for the Building; landscaping, tree trimming, resurfacing and restriping of the parking lot, repairing and maintaining the walkways; exterior building painting, exterior building lighting, parking lot lighting, and exterior security patrol.  In the event Lessee provides Lessor with written notice of the need for any repairs, Lessor shall commence any such repairs promptly following receipt by Lessor of such notice and Lessor shall diligently prosecute such repairs to completion.  Notwithstanding the foregoing, Lessee shall have the option, at its discretion, to operate, maintain, and repair, as needed, the HVAC systems in the Building and to provide janitorial services to the Premises, all at its expense and under its discretion.  Lessee shall engage contractors for the maintenance, repair and replacement of the HVAC systems from a list of not less than three contractors that shall have been reasonably approved by Lessor.

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(c)Subject to the foregoing and except as provided elsewhere in this Lease, Lessee shall at all times use and occupy the Premises in a manner which keeps the Premises in good and safe order, condition, and repair.  Lessor shall execute and maintain in full force and effect throughout the term as an Operating Expense of the Premises pursuant to Paragraph 5(b) a service contract with a recognized air conditioning service company.  Lessor may, if Lessor determines that it is necessary to do so, obtain on a semi-annual basis an inspection report of the HVAC system from a separate HVAC service firm designated by Lessor for the purpose of monitoring the performance of the HVAC maintenance and repair work performed by the HVAC service firm which performs the regular repair and maintenance.  The cost of such inspection report shall be an Operating Expense pursuant to Paragraph 5.  Subject to the release of claims and waiver of subrogation contained in Paragraphs 11(c) and 11(d), if Lessor is required to make any repairs to the Premises by reason of Lessee’s negligent acts or omissions, Lessor may add the cost of such repairs to the next installment of rent which shall thereafter become due, and Lessee shall promptly pay the same upon receipt of an invoice therefor.

(d)Lessee may, from time to time, at its own cost and expense and without the consent of Lessor make nonstructural alterations to the interior of the Premises the cost of which in any one instance is Ten Thousand Dollars ($10,000) or less, and the aggregate cost of all such work during the term of this Lease does not exceed Fifty Thousand Dollars ($50,000), provided Lessee first notifies Lessor in writing of any such nonstructural alterations.  Otherwise, Lessee shall not make any additional alterations, improvements, or additions to the Premises without delivering to Lessor a complete set of plans and specifications for such work and obtaining Lessor’s prior written consent thereto.  If any nonstructural alterations to the interior of the Premises exceed Ten Thousand Dollars ($10,000) in cost in any one instance, or exceed the aggregate cost of Fifty Thousand Dollars ($50,000) during the term of this Lease, Lessee shall employ, at Lessee’s expense, Tarlton Properties, Inc. as construction manager for such alterations at a fee equal to five percent (5%) of hard construction costs.  Lessor may condition its consent to Lessee agreeing in writing to remove any such alterations prior to the expiration of the lease term and Lessee agreeing to restore the Premises to its condition prior to such alterations at Lessee’s expense.  Lessor shall advise Lessee in writing at the time consent is granted whether Lessor reserves the right to require Lessee to remove any alterations from the Premises prior to the termination of this Lease.

All alterations, trade fixtures and personal property installed in the Premises solely at Lessee’s expense (“Lessee’s Property) shall during the term of this Lease remain Lessee’s property and Lessee shall be entitled to all depreciation, amortization and other tax benefits with respect thereto.  Upon the expiration or sooner termination of this Lease all alterations, fixtures and improvements to the Premises, whether made by Lessor or installed by Lessee at Lessee’s expense, shall be surrendered by Lessee with the Premises and shall become the property of Lessor.

(e)Lessee, at Lessee’s sole cost and expense, shall promptly and properly observe and comply with all present and future orders, regulations, rules, laws,

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and ordinances of all governmental agencies or authorities, and the Board of Fire Underwriters.  Any structural changes or repairs or other repairs or changes of any nature which would be considered a capital expenditure under generally accepted accounting principles to the Premises shall be made by Lessor at Lessee’s expense if such structural repairs or changes are required by reason of the specific nature of the use of the Premises by Lessee.  If such structural changes or repairs are not required by reason of the specific nature of Lessee’s use of the Premises, the cost of such structural changes or repairs shall be treated as an Operating Expense and amortized in accordance with the provisions of Paragraph 5(b).

(f)Lessee shall surrender the Premises by the last day of the lease term or any earlier termination date in accordance with Paragraph 13(h) and this Paragraph 14(f), with all of the improvements to the Premises, parts, and surfaces thereof clean and free of debris and in good operating order, condition, and state of repair, ordinary wear and tear excepted.  “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease.  The obligations of Lessee shall include the repair of any damage occasioned by the installation, maintenance, or removal of Lessee’s trade fixtures, furnishings, equipment, and alterations, and the restoration by Lessee of the Premises to its condition upon completion of the Tenant Improvement Work (1) if Lessor’s consent thereto was conditioned upon such removal and restoration upon expiration or sooner termination of the Lease term pursuant to Paragraph 14(d), or (2) if Lessee made any such alterations, additions, or improvements without obtaining Lessor’s prior written consent in breach of Paragraph 14(d) and within a reasonable time after the expiration or sooner termination of the Lease term Lessor gives written notice to Lessee requiring Lessee to perform such removal and restoration.  Prior to the expiration of the term of the this Lease or any earlier termination date, Lessee shall, at Lessee’s expense, obtain a closure report from the San Mateo County Health Department with respect to any Hazardous Materials used, stored, or released by Lessee on or about the Premises.  Any removal and remediation of Hazardous Materials by Lessee shall be certified by the San Mateo County Health Department and a copy of such certification shall be delivered to Lessor.

15.Utilities and Services.

(a)Lessor shall contract for and pay for, and Lessee shall reimburse Lessor therefor pursuant to Paragraph 5(e) as an Operating Expense, all electricity, gas, water, heat and air conditioning service, janitorial service, refuse pick-up, sewer charges, and all other utilities or services supplied to or consumed by Lessee, its agents, employees, contractors, and invitees on or about the Premises, excluding telephone service to the Building for which Lessee shall contract and pay directly.  Furthermore, Lessee shall have the option to contract directly for janitorial services to the Premises pursuant to Paragraph 14(b).

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(b)Lessor shall not be liable to Lessee for any interruption or failure of any utility services to the Building or the Premises which is not caused by the negligence or willful acts of Lessor, or Lessor’s employees, agents, or contractors. Lessee shall not be relieved from the performance of any covenant or agreement in this Lease because of any such failure.  Unless such failure is caused by the negligence or willful acts or omissions of Lessor or Lessor’s employees, agents, or contractors, or by Lessor’s breach in the performance of Lessor’s express obligations hereunder, Lessor shall make all repairs to the Premises required to restore such services to the Premises and the cost thereof shall be payable by Lessee pursuant to Paragraph 5(e) as a current Operating Expense, or as a capital improvement which is amortized over its useful life (together with interest thereon) as an Operating Expense in accordance with generally accepted accounting principles as described in Paragraph 5(b).

16.Liens.  Lessee agrees to keep the Premises free from all liens arising out of any work performed, materials furnished, or obligations incurred by Lessee.  Lessee shall give Lessor at least ten (10) days prior written notice before commencing any work of improvement on the Premises, the contract price for which exceeds Ten Thousand Dollars ($10,000).  Lessor shall have the right to post notices of non-responsibility with respect to any such work.  If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same, and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises.  If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim.

17.Assignment and Subletting.

(a)Except as otherwise provided in this Paragraph 17, Lessee shall not assign this Lease, or any interest, voluntarily or involuntarily, and shall not sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person (the agents and servants of Lessee excepted) to occupy or use the Premises, or any portion thereof, without the prior written consent of Lessor in each instance pursuant to the terms and conditions set forth below, which consent shall not be unreasonably withheld, subject to the following provisions.

(b)Prior to any assignment or sublease which Lessee desires to make, Lessee shall provide to Lessor the name and address of the proposed assignee or sublessee, and true and complete copies of all documents relating to Lessee’s prospective agreement to assign or sublease, a copy of a current financial statement for such proposed assignee or sublessee, and Lessee shall specify all consideration to be received by Lessee for such assignment or sublease in the form of lump sum payments, installments of rent, or otherwise.  For purposes of this Paragraph 17, the term “consideration” shall include all money or other consideration to be received by Lessee for such assignment or sublease. 

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Within ten (10) days after the receipt of such documentation and other information, Lessor shall (1) notify Lessee in writing that Lessor elects to consent to the proposed assignment or sublease subject to the terms and conditions hereinafter set forth; or (2) notify Lessee in writing that Lessor refuses such consent, specifying reasonable grounds for such refusal.

In deciding whether to consent to any proposed assignment or sublease, Lessor may take into account reasonable conditions, including, but not limited to, the following, have been satisfied:

(1)In Lessor’s reasonable judgment, the proposed assignee or subtenant is engaged in such a business, that the Premises, or the relevant part thereof, will be used in such a manner which complies with Paragraph 8 hereof entitled “Use” and Lessee or the proposed assignee or sublessee submits to Lessor documentary evidence reasonably satisfactory to Lessor that such proposed use constitutes a permitted use of the Premises pursuant to the ordinances and regulations of the City of Menlo Park;

(2)The proposed assignee or subtenant is a reputable entity or individual with sufficient financial net worth so as to reasonably indicate that it will be able to meet its obligations under this Lease or the sublease in a timely manner; and

(3)The proposed assignment or sublease is approved by Lessor’s mortgage lender if such lender has the right to approve or disapprove proposed assignments or subleases.  Lessor shall use its good faith efforts to obtain such approval from its lender within ten (10) days after Lessor is requested to do so.

(c)As a condition to Lessor’s granting its consent to any assignment or sublease, (1) Lessor may require that Lessee pay to Lessor, as and when received by Lessee, fifty percent (50%) of the amount of any excess of the consideration to be received by Lessee in connection with said assignment or sublease over and above the rental amount fixed by this Lease and payable by Lessee to Lessor, after deducting only (i) the unamortized cost of the Tenant Improvement Work paid for by Lessee which remains on the Premises at the effective date of the assignment or on the commencement date of the sublease which are then in a serviceable condition and useable by the assignee or sublessee and not demolished or removed by the assignee or sublessee, (ii) a standard leasing commission payable by Lessee in consummating such assignment or sublease, and (iii) reasonable attorneys’ fees incurred by Lessee and Lessor in negotiating and reviewing the assignment or sublease documentation, all of which costs shall be subject to Lessor’s reasonable approval; and (2) Lessee and the proposed assignee or sublessee shall demonstrate to Lessor’s reasonable satisfaction that each of the criteria referred to in subparagraph (b) above is satisfied.

(d)Each assignment or sublease agreement to which Lessor has consented shall be an instrument in writing in form satisfactory to Lessor, and shall be executed by both Lessee and the assignee or sublessee, as the case may be.  Each such assignment or sublease agreement shall recite that it is and shall be subject and

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subordinate to the provisions of this Lease, that the assignee or sublessee accepts such assignment or sublease, that Lessor’s consent thereto shall not constitute a consent to any subsequent assignment or subletting by Lessee or the assignee or sublessee, and, except as otherwise set forth in a sublease approved by Lessor, agrees to perform all of the obligations of Lessee hereunder (to the extent such obligations relate to the portion of the Premises assigned or subleased), and that the termination of this Lease shall, at Lessor’s sole election, constitute a termination of every such assignment or sublease.

(e)In the event Lessor shall consent to an assignment or sublease, Lessee shall nonetheless remain primarily liable for all obligations and liabilities of Lessee under this Lease, including but not limited to the payment of rent.

(f)Notwithstanding the foregoing, Lessee may, without Lessor’s prior written consent and without any participation by Lessor in assignment and subletting proceeds, sublet a portion or the entire Premises or assign this Lease to a subsidiary, affiliate, division or corporation controlled or under common control with Lessee (“affiliate”), or to a successor corporation related to Lessee by merger, consolidation or reorganization, or to a purchaser of Lessee’s entire business operations conducted on the Premises, provided that any such assignee or sublessee shall have a current verifiable net worth at least equal to that of Lessee as of the date of the execution of this Lease.  Lessee’s foregoing rights to assign this Lease shall be subject to the following conditions:  (1) Lessee shall not be in default hereunder past any applicable cure period; (2) in the case of an assignment or subletting to an affiliate, Lessee shall remain liable to Lessor hereunder; and (3) the transferee or successor entity shall expressly assume in writing Lessee’s obligations hereunder.

(g)Neither the sale nor transfer of Lessee’s capital stock in any private financing raising equity capital or in a public offering pursuant to an effective registration statement filed by Lessee with the Securities and Exchange Commission, or the sale or transfer of Lessee’s securities at any time after Lessee’s securities are publicly traded, shall be deemed an assignment, subletting, or other transfer of this Lease or the Premises, provided, that in the event of the sale, transfer or issuance of Lessee’s securities in connection with a merger, consolidation, or reorganization, the conditions set forth in Paragraph 17(f) shall apply.

(h)Subject to the provisions of this Paragraph 17 any assignment or sublease without Lessor’s prior written consent shall at Lessor’s election be void.  The consent by Lessor to any assignment or sublease shall not constitute a waiver of the provisions of this Paragraph 17, including the requirement of Lessor’s prior written consent, with respect to any subsequent assignment or sublease.  If Lessee shall purport to assign this Lease, or sublease all or any portion of the Premises, or permit any person or persons other than Lessee to occupy the Premises, without Lessor’s prior written consent (if such consent is required hereunder), Lessor may collect rent from the person or persons then or thereafter occupying the Premises and apply the net amount collected to the rent reserved herein, but no such collection shall be deemed a waiver of Lessor’s rights and

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remedies under this Paragraph 17, or the acceptance of any such purported assignee, sublessee, or occupant, or a release of Lessee from the further performance by Lessee of covenants on the part of Lessee herein contained.

(i)Lessee shall not hypothecate or encumber its interest under this Lease or any rights of Lessee hereunder, or enter into any license or concession agreement respecting all or any portion of the Premises, without Lessor’s prior written consent which consent Lessor may grant or withhold in Lessor’s absolute discretion without any liability to Lessee.  Lessee’s granting of any such encumbrance, license, or concession agreement shall constitute an assignment for purposes of this Paragraph 17.

(j)In the event of any sale or exchange of the Premises by Lessor and assignment of this Lease by Lessor, Lessor shall, upon providing Lessee with written confirmation that Lessor has delivered any Security Deposit held by Lessor to Lessor’s successor in interest, be and hereby is entirely relieved of all liability under any and all of Lessor’s covenants and obligations contained in or derived from this Lease with respect to the period commencing with the consummation of the sale or exchange and assignment.

(k)Lessee hereby acknowledges that the foregoing terms and conditions are reasonable and, therefore, that Lessor has the remedy described in California Civil Code Section 1951.4 (Lessor may continue the Lease in effect after Lessee’s breach and abandonment and recover rent as it becomes due, if Lessee has the right to sublet or assign, subject only to reasonable limitations).

18.Non-Waiver.

(a)No waiver of any provision of this Lease shall be implied by any failure of Lessor to enforce any remedy for the violation of that provision, even if that violation continues or is repeated.  Any waiver by Lessor of any provision of this Lease must be in writing.

(b)No receipt of Lessor of a lesser payment than the rent required under this Lease shall be considered to be other than on account of the earliest rent due, and no endorsement or statement on any check or letter accompanying a payment or check shall be considered an accord and satisfaction.  Lessor may accept checks or payments without prejudice to Lessor’s right to recover all amounts due and pursue all other remedies provided for in this Lease.

Lessor’s receipt of monies from Lessee after giving notice to Lessee terminating this Lease shall in no way reinstate, continue, or extend the Lease term or affect the termination notice given by Lessor before the receipt of those monies.  After serving notice terminating this Lease, filing an action, or obtaining final judgment for possession of the Premises, Lessor may receive and collect any rent, and the payment of that rent shall not waive or affect such prior notice, action, or judgment.

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19.Holding Over.  Lessee shall vacate the Premises and deliver the same to Lessor upon the expiration or sooner termination of this Lease.  In the event of holding over by Lessee after the expiration or termination of this Lease without Lessor’s prior written consent, such holding over shall be on a month-to-month tenancy and all of the terms and provisions of this Lease shall be applicable during such period, except that Lessee shall pay Lessor as Monthly Base Rent during such holdover an amount equal to the greater of (i) one hundred fifty percent (150%) of the Monthly Base Rent in effect at the expiration of the term, or (ii) the then market rent for comparable research and development/office space; provided, that if such holdover is with Lessor’s written consent given by Lessor prior to the expiration or sooner termination of this Lease, the Monthly Base Rent during such holdover shall be equal to one hundred twenty-five percent (125%) of the then market rent for comparable research and development/office space, as reasonably determined by Lessor.  If such holdover is without Lessor’s written consent, Lessee shall be liable to Lessor for all costs, expenses, and consequential damages incurred by Lessor as a result of such holdover.  The rental payable during such holdover period shall be payable to Lessor on demand.

20.Damage or Destruction.

(a)In the event of a total destruction during the lease term from any cause, of (1) the Building and Improvements, or (2) the Building and Improvements referred to as Building #6, 1360 O’Brien Drive, Menlo Park, California (the “1360 O’Brien Drive Premises”) during the term of Lessee’s Lease of said Premises, either party may elect to terminate this Lease by giving written notice of termination to the other party within thirty (30) days after the casualty occurs.  A total destruction shall be deemed to have occurred for this purpose if the Building and the Improvements which are the subject of this Lease or the Building and Improvements consisting of the 1360 O’Brien Drive Premises are destroyed to the extent of seventy-five percent (75%) or more of the replacement cost thereof.  If the Lease is not terminated, Lessor shall repair and restore the Premises and the 1360 O’Brien Drive Premises (if applicable) in a diligent manner and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent of the Premises which are the subject of this Lease shall be abated in accordance with Paragraph 20(d) below.

(b)In the event of a partial destruction of the Building or the Premises to an extent not exceeding fifty percent (50%) of the replacement cost thereof and if the damage thereto can be repaired, reconstructed, or restored within a period of one hundred twenty (120) days from the date of such casualty, and if the casualty is from a cause which is insured under Lessor’s “all risk” property insurance, or is insured under any other coverage then carried by Lessor, Lessor shall forthwith repair the same, and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent shall be abated in accordance with Paragraph 20(d) below.  If any of the foregoing conditions is not met, Lessor shall have the option of either repairing and restoring the Building and Improvements, or terminating this Lease by giving written notice of termination to Lessee within thirty (30) days after the casualty, subject to the provisions of

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Paragraph 20(c).  Notwithstanding the foregoing, Lessor shall not have the right to terminate this Lease if the cost to repair the damage to the Building or to restore the Premises would cost less than five percent (5%) of the replacement cost of the Building, regardless of whether or not the casualty is insured.  Notwithstanding the foregoing, if the casualty is uninsured, the cost to restore the Premises exceeds five percent (5%) of the replacement cost, and Lessor elects to terminate this Lease, Lessee may nullify the effect of such termination by giving Lessor written notice within ten (10) days after receipt by Lessee of Lessor’s notice of termination that Lessee elects to restore the Premises at Lessee’s sole cost, in which event this Lease shall remain in effect, provided that Rent abatement shall not extend beyond the date that the restoration is completed, or one hundred twenty (120) days after the casualty, whichever occurs first.

(c)In the event of a partial destruction of the Building and Improvements of the Premises to an extent equal to or exceeding twenty-five percent (25%) but less than seventy-five percent (75%) of the replacement cost thereof, or if the damage thereto cannot be repaired, reconstructed, or restored within a period of one hundred twenty (120) days from the date of such casualty, either Lessor or Lessee may terminate this Lease (but not the Lease of the 1360 O’Brien Drive Premises) by giving written notice of termination to the other within thirty (30) days after the casualty.

Furthermore, if such casualty is from a cause which is not insured under Lessor’s “all risk” property insurance, or is not insured under any other insurance carried by Lessor, Lessor may elect to repair and restore the Building and Improvements (provided that Lessee has not elected to terminate this Lease pursuant to the first sentence of this Paragraph 20(c)), or Lessor may terminate this Lease by giving written notice of termination to Lessee.  Lessor’s election to repair and restore the Building and Improvements or to terminate this Lease, shall be made and written notice thereof shall be given to Lessee within thirty (30) days after the casualty.  Notwithstanding the foregoing, (1) if Lessor has not obtained all necessary governmental permits for the restoration and commenced construction of the restoration within one hundred twenty (120) days after the casualty, Lessee may terminate this Lease by written notice to Lessor given at any time prior to the actual commencement of construction of the restoration; or (2) if Lessor elects to repair and restore the Building and Improvements under subparagraph (b) or (c) above, but the repairs and restoration are not substantially completed within one hundred eighty (180) days after the casualty, Lessee may terminate this Lease by written notice to Lessor given within thirty (30) days after the expiration of said period of one hundred eighty (180) days after the casualty.

If this Lease is not terminated by Lessor or Lessee pursuant to the foregoing provisions, Lessor shall complete the repairs in a diligent manner and this Lease shall continue in full force and effect, except that Monthly Base Rent and Additional Rent shall be abated in accordance with Paragraph 20(d) below.

(d)Subject to the limitation in Paragraph 20(b) above which applies if Lessee elects to restore the Premises at Lessee’s expense, in the event of repair,

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reconstruction, or restoration as provided herein, the Monthly Base Rent and Additional Rent shall be abated proportionally in the ratio which the Lessee’s use of the Premises is impaired during the period of such repair, reconstruction, or restoration, from the date of the casualty until such repair, reconstruction or restoration is completed.

(e)With respect to any destruction of the Premises which Lessor is obligated to repair, or may elect to repair, under the terms of this Paragraph 20, the provisions of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by the parties.  Lessor’s obligation to repair and restore the Premises shall include the Tenant Improvement Work referred to in Paragraph 13 and any other leasehold improvements constructed thereafter by Lessor or by Lessee with Lessor’s prior written consent.  Lessor’s time for completion of the repairs and restoration of the Premises shall be extended by a period equal to any delays caused by strikes, labor disputes, unavailability of materials, inclement weather, acts of God, or other causes beyond Lessor’s control.

(f)In the event of termination of this Lease pursuant to any of the provisions of this Paragraph 20, the monthly rent shall be apportioned on a per diem basis and shall be paid to the date of the casualty.  In no event shall Lessor be liable to Lessee for any damages resulting to Lessee from the occurrence of such casualty, or from the repairing or restoration of the Building and Improvements, or from the termination of this Lease as provided herein, nor shall Lessee be relieved thereby from any of Lessee’s obligations hereunder, except to the extent and upon the conditions expressly set forth in this Paragraph 20.

21.Eminent Domain.

(a)If the whole or any substantial part of the Building or the Premises shall be taken or condemned by any competent public authority for any public use or purpose, the term of this Lease shall end upon the earlier to occur of the date when the possession of the part so taken shall be required for such use or purpose or the vesting of title in such public authority.  Rent shall be apportioned as of the date of such termination.  Lessee shall be entitled to receive any damages awarded by the court for (i) leasehold improvements installed at Lessee’s expense or other property owned by Lessee, and (ii) reasonable costs of moving by Lessee to another location in San Mateo County or surrounding areas within the San Francisco Bay Area.  The entire balance of the award shall be the property of Lessor.

(b)If there is a partial taking of the Premises by eminent domain which is not a substantial part of the Building and the balance of the Premises remains reasonably suitable for continued use and occupancy by Lessee in Lessee’s reasonable judgment for the purposes referred to in Paragraph 8, Lessor shall complete any necessary repairs in a diligent manner and this Lease shall remain in full force and effect with a just and proportionate abatement of the Monthly Base Rent and Additional Rent, to reflect the number of square feet of the Premises taken and the number of square feet remaining.  If

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after a partial taking, the Premises and parking are not reasonably suitable for Lessee’s continued use and occupancy for the uses permitted herein, Lessee may terminate this Lease effective on the earlier of the date title vests in the public authority or the date possession is taken.  Subject to the provisions of Paragraph 21(a), the entire award for such taking shall be the property of Lessor.

22.Remedies.  If Lessee fails to make any payment of rent or any other sum due under this Lease for ten (10) days after receipt by Lessee of written notice from Lessor; or if Lessee fails to deliver to Lessor a renewal Letter of Credit which complies with Paragraph 7(b) within the time period referred to in Paragraph 7(b); or if Lessee breaches any other term of this Lease for thirty (30) days after receipt by Lessee of written notice from Lessor (unless such default is incapable of cure within thirty (30) days and Lessee commences cure within thirty (30) days and diligently prosecutes the cure to completion within a reasonable time); or if Lessee’s interest herein, or any part thereof, is assigned or transferred, either voluntarily or by operation of law (except as expressly permitted by other provisions of this Lease); or if Lessee makes a general assignment for the benefit of its creditors; or if this Lease is rejected (i) by a bankruptcy trustee for Lessee, (ii) by Lessee as debtor in possession, or (iii) by failure of Lessee as a bankrupt debtor to act timely in assuming or rejecting this Lease; then any of such events shall constitute an event of default and breach of this Lease by Lessee and Lessor may, at its option, elect the remedies specified in either subparagraph (a) or (b) below.  Any such rejection of this Lease referred to above shall not cause an automatic termination of this Lease.  Whenever in this Lease reference is made to a default by Lessee, such reference shall refer to an event of default as defined in this Paragraph 22.

(a)Lessor may repossess the Premises and remove all persons and property therefrom.  If Lessor repossesses the Premises because of a breach of this Lease, this Lease shall terminate and Lessor may recover from Lessee:

(1)the worth at the time of award of the unpaid rent which had been earned at the time of termination including interest thereon at a rate equal to the discount rate established by the Federal Reserve Bank of San Francisco for member banks, plus one percent (1%), or the maximum legal rate of interest, whichever is less, from the time of termination until paid;

(2)the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided, including interest thereon at a rate equal to the Federal discount rate plus one percent (1%) per annum, or the maximum legal rate of interest, whichever is less, from the time of termination until paid;

(3)the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided discounted

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at the discount rate established by the Federal Reserve Bank of San Francisco for member banks at the time of the award plus one percent (1%); and

(4)any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee’s breach or by Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom.

(b)If Lessor does not repossess the Premises, then this Lease shall continue in effect for so long as Lessor does not terminate Lessee’s right to possession and Lessor may enforce all of its rights and remedies under this Lease, including the right to recover the rent and other sums due from Lessee hereunder.  For the purposes of this Paragraph 22, the following do not constitute a repossession of the Premises by Lessor or a termination of the Lease by Lessor:

(1)Acts of maintenance or preservation by Lessor or efforts by Lessor to relet the Premises; or

(2)The appointment of a receiver by Lessor to protect Lessor’s interests under this Lease.

(c)Lessor’s failure to perform or observe any of its obligations under this Lease or to correct a breach of any warranty or representation made in this Lease within thirty (30) days after receipt of written notice from Lessee setting forth in reasonable detail the nature and extent of the failure referencing pertinent Lease provisions or if more than thirty (30) days is required to cure the breach, Lessor’s failure to begin curing within the thirty (30) day period and diligently prosecute the cure to completion, shall constitute a default.  If Lessor commits a default, Lessee’s remedy shall be to institute an action against Lessor for damages or for equitable relief, but Lessee shall not have the right to rent abatement, to offset against rent, or to terminate this Lease in the event of any default by Lessor.

(d)Lessor shall have no security interest or lien on any item of Lessee’s furniture, equipment and other personal property which is not affixed to the Building (“Lessee’s Personal Property”).  Within ten (10) days following Lessee’s request, Lessor shall execute documents reasonably acceptable to Lessee to evidence Lessor’s waiver of any right, title, lien or interest in Lessee’s Personal Property and giving any lender holding a security interest or lien on Lessee’s Personal Property reasonable rights of access to the Premises to remove such Lessee’s Personal Property, provided that such lender expressly agrees in such document for the benefit of Lessor to repair at such lender’s expense any damage caused by such removal.

23.Lessee’s Personal Property.  If any personal property of Lessee remains on the Premises after (1) Lessor terminates this Lease pursuant to Paragraph 22 above following an event of default by Lessee, or (2) after the expiration of the Lease term or after

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the termination of this Lease pursuant to any other provisions hereof, Lessor shall give written notice thereof to Lessee pursuant to applicable law.  Lessor shall thereafter release, store, and dispose of any such personal property of Lessee in accordance with the provisions of applicable law.

24.Notices.  All notices, statements, demands, requests, or consents given hereunder by either party to the other shall be in writing and shall be personally delivered or sent by United States mail, registered or certified, return receipt requested, postage prepaid, and addressed to the parties as follows:

Lessor:	Menlo Business Park, LLC
	c/o Tarlton Properties, Inc.
	955 Alma Street
	Palo Alto, California 94301
Lessee:	DepoMed, Inc.
	1360 O’Brien Drive
	Menlo Park, California  94025
	Attention:

or to such other address as either party may have furnished to the other as a place for the service of notice.  Notices shall be deemed given upon receipt or attempted delivery where delivery is not accepted.  As of the Commencement Date of this Lease, Lessee’s address for purposes of notice shall be the Premises.

25.Estoppel Certificate.  Lessee and Lessor shall within fifteen (15) days following request by the other party (the “Requesting Party”), execute and deliver to the Requesting Party an Estoppel Certificate substantially in the form attached hereto as Exhibit “F” (1) certifying that this Lease has not been modified and certifying that this Lease is in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect; (2) stating the date to which the rent and other charges are paid in advance, if at all; (3) stating the amount of any Security Deposit held by Lessor; and (4) acknowledging that there are not, to the responding party’s knowledge, any uncured defaults on the part of the Requesting Party hereunder, or if there are uncured defaults on the part of the Requesting Party, stating the nature of such uncured defaults.

26.Signage.  Lessor shall provide to Lessee space for Lessee’s sign on the monument sign for the Building located in the landscaped median in front of the Building.  Lessee may also place Lessee’s vinyl lettering signage at the glass door entrances to the Building.  All of Lessee’s signage shall comply with the Menlo Park sign ordinances and regulations and shall be subject to Lessor’s approval as to the location, size and design thereof.  The cost of the installation of the vinyl lettering on the monument sign and at the

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glass door entrance shall be paid by Lessee.  Any additional signage shall be subject to Lessor’s prior approval and, if approved, shall be installed at Lessee’s expense.

27.Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., Lessor’s broker, pursuant to a separate agreement between Lessor and said broker.  Each party represents and warrants to the other party that it has not had any dealings with any real estate broker, finder, or other person with respect to this Lease other than Tarlton Properties, Inc. who has acted as exclusive leasing agent for Lessor, and BT Commercial and Technology Commercial, Inc., who have acted as Lessee’s agents, and each party shall hold harmless the other party from all damages, expenses, and liabilities resulting from any claims that may be asserted against the other party by any broker, finder, or other person with whom the other party has or purportedly has dealt, other than the above named brokers.

28.Subordination; Attornment.

(a)This Lease, without any further instrument, shall at all times be subject and subordinate to any and all mortgages and deeds of trust which may now or hereafter affect Lessor’s estate in the real property of which the Premises form a part, and to all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof.  Lessor shall use reasonable efforts to cause the beneficiary of any deed of trust executed by Lessor as trustor after the date hereof to execute a recognition and non-disturbance agreement in a form reasonably satisfactory to Lessor, Lessee and such beneficiary which (i) provides that this Lease shall not be terminated so long as Lessee is not in default under this Lease, and (ii) that upon acquiring title to the Premises by foreclosure or otherwise such holder shall recognize all of Lessee’s rights hereunder which accrue thereafter.

(b)In confirmation of such subordination, Lessee shall promptly execute any certificate or other instrument which Lessor may deem proper to evidence such subordination, without expense to Lessor; provided, however, that if any person or persons purchasing or otherwise acquiring the real property of which the Premises form a part by any sale, sales and/or other proceedings under such mortgages and/or deeds of trust, shall elect to continue this Lease in full force and effect in the same manner and with like effect as if such person or persons had been named as Lessor herein, then this Lease shall continue in full force and effect as aforesaid, and Lessee hereby attorns and agrees to attorn to such person or persons.

(c)If Lessee is notified in writing of Lessor’s default under any deed of trust affecting the Premises and if Lessee is instructed in writing by the party giving notice to make Lessee’s rental payments to beneficiary Lessee shall comply with such request without liability to Lessor until Lessee receives written confirmation that such default has been cured by Lessor and that the deed of trust has been reinstated.

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29.No Termination Right.  Lessee shall not have the right to terminate this Lease as a result of any default by Lessor and Lessee’s remedies in the event of a default by Lessor shall be limited to the remedy set forth in Paragraph 22(c).  Lessee expressly waives the defense of constructive eviction.

30.Lessor’s Entry.  Except in the case of an emergency and except for permitted entry during Lessee’s normal working hours, Lessor and Lessor’s agents shall provide Lessee with at least twenty-four (24) hours’ notice prior to entry of the Premises.  Such entry by Lessor and Lessor’s agents shall not impair Lessee’s operations more than reasonably necessary.  Lessor and Lessor’s agents shall at all times be accompanied by Lessee during any such entry except in case of emergency and except for janitorial work.  Lessor may enter the Premises without prior notice to Lessee if Lessee has vacated the Premises.

31.Attorneys’ Fees.  If any action at law or in equity shall be brought to recover any rent under this Lease, or for or on account of any breach of or to enforce or interpret any of the provisions of this Lease or for recovery of the possession of the Premises, the prevailing party shall be entitled to recover from the other party costs of suit and reasonable attorneys’ fees, the amount of which shall be fixed by the court and shall be made a part of any judgment rendered.

32.Compliance with CC&Rs.  During the term of this Lease and any option extension period, Lessee shall comply, at Lessee’s expense, with all of the covenants, conditions, and restrictions affecting the Premises which are recorded in the Official Records of San Mateo County, California, and which are in effect as of the date of this Lease.

33.Quiet Enjoyment.  Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions, and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet enjoyment and possession of the Premises for the entire term hereof subject to all of the provisions of this Lease.

34.General Provisions.

(a)Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third person to create the relationship of principal and agent or of partnership or of joint venture of any association between Lessor and Lessee, and neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship between Lessor and Lessee other than the relationship of landlord and tenant.

(b)Each and all of the provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto, and except as otherwise specifically provided elsewhere in this Lease, their respective heirs, executors, administrators, successors, and

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assigns, subject at all times, nevertheless, to all agreements and restrictions contained elsewhere in this Lease with respect to the assignment, transfer, encumbering, or subletting of all or any part of Lessee’s interest in this Lease.

(c)The captions of the paragraphs of this Lease are for convenience only and shall not be considered or referred to in resolving questions of interpretation or construction.

(d)This Lease is and shall be considered to be the only agreement between the parties hereto and their representatives and agents.  All negotiations and oral agreements acceptable to both parties have been merged into and are included herein.  There are no other representations or warranties between the parties and all reliance with respect to representations is solely upon the representations and agreements contained in this instrument.

(e)The laws of the State of California shall govern the validity, performance, and enforcement of this Lease.  Notwithstanding which of the parties may be deemed to have prepared this Lease, this Lease shall not be interpreted either for or against Lessor or Lessee, but this Lease shall be interpreted in accordance with the general tenor of the language in an effort to reach an equitable result.

(f)Time is of the essence with respect to the performance of each of the covenants and agreements contained in this Lease.

(g)Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future law in the event of Lessee being evicted or dispossessed for any cause, or in the event of Lessor obtaining possession of the Premises by reason of the breach by Lessee of any of the covenants and conditions of the Lease or otherwise.  The rights given to Lessor herein are in addition to any rights that may be given to Lessor by any statute or otherwise.

(h)Recourse by Lessee for breach of this Lease by Lessor shall be expressly limited to Lessor’s interest in the Premises and the rents, issues and profits therefrom, and in the event of any such breach or default by Lessor Lessee hereby waives the right to proceed against any other assets of Lessor or against any other assets of any manager or member of Lessor.

(i)Any provision or provisions of this Lease which shall be found to be invalid, void or illegal by a court of competent jurisdiction, shall in no way affect, impair, or invalidate any other provisions hereof, and the remaining provisions hereof shall nevertheless remain in full force and effect.

(j)This Lease may be modified in writing only, signed by the parties in interest at the time of such modification.

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(k)Each party represents to the other that the person signing this Lease on its behalf is properly authorized to do so, and in the event this Lease is signed by an agent or other third party on behalf of either Lessor or Lessee, written authority to sign on behalf of such party in favor of the agent or third party shall be provided to the other party hereto either prior to or simultaneously with the return to such other party of a fully executed copy of this Lease.

(l)No binding agreement between the parties with respect to the Premises shall arise or become effective until this Lease has been duly executed by both Lessee and Lessor and a fully executed copy of this Lease has been delivered to both Lessee and Lessor.

(m)Lessor and Lessee acknowledge that the terms and conditions of this Lease constitute confidential information of Lessor and Lessee.  Neither party shall disseminate orally or in written form a copy of this Lease, lease proposals, lease drafts, or other documentation containing the terms, details or conditions contained herein to any third party without obtaining the prior written consent of the other party, except to the attorneys, accountants, or other authorized business representatives or agents of the parties, or except to the extent required to comply with applicable laws.  Neither Lessor nor Lessee shall make any public announcement of the consummation of this Lease transaction without the prior approval of the other party.

(n)The rights and remedies that either party may have under this Lease or at law or in equity, upon any breach, are distinct, separate and cumulative and shall not be deemed inconsistent with each other, and no one of them shall be deemed to be exclusive of any other.

(o)Except as provided in Paragraph 19, Lessor and Lessee waive any claim for consequential damages which one may have against the other for breach of or failure to perform or observe the requirements and obligations created by this Lease.

(p)Lessor and Lessee each agree to and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Lessor and Lessee, Lessee’s use or occupancy of the Premises and/or any claim of injury or damage, and any statutory remedy.

(q)This Lease shall not be recorded.

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IN WITNESS WHEREOF, the Lessor and Lessee have duly executed this Lease as of the date first set forth herein.

“Lessor”
MENLO BUSINESS PARK, LLC
a California limited liability company
By:	/s/ J.O. Oltmans, II
	J. O. Oltmans, II, Manager
By:	/s/ James R. Swartz
	James R. Swartz, Manager
“Lessee”
DEPOMED, INC.,
a California corporation
By:	/s/ John F. Hamilton
	Its
By:	/s/ John N. Shell
	Its

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, John W. Fara, certify that:

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

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 14, 2003

/s/ John W. Fara, Ph.D.

John W. Fara, Ph.D.

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John F. Hamilton, certify that:

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

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 14, 2003

/s/ John F. Hamilton

John F. Hamilton

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Depomed, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John W. Fara, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 14, 2003

/s/ John W. Fara, Ph.D.

John W. Fara, Ph.D.

President, Chairman and

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Depomed, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John F. Hamilton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 14, 2003

/s/ John F. Hamilton

John F. Hamilton

Vice President and

Chief Financial Officer