10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2006
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	(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)	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 Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated filer x      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

The number of issued and outstanding shares of the Registrant’s Common Stock, no par value, as of November 3, 2006 was 41,881,215.

DEPOMED, INC.

PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005	3
Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2006 and 2005	4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and 2005	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosure About Market Risk	27
Item 4. Controls and Procedures	27
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3. Defaults upon Senior Securities	40
Item 4. Submission of Matters to a Vote of Security Holders	40
Item 5. Other Information	40
Item 6. Exhibits	41
Signatures	42

2

PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEPOMED, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	September 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	2,748,260		$	7,565,556
Marketable securities	30,862,566			51,507,509
Accounts receivable	6,136,729			1,094,840
Unbilled accounts receivable	667,098			861,576
Inventories	2,380,797			901,348
Prepaid and other current assets	2,633,003			1,107,710
Total current assets	45,428,453			63,038,539
Marketable securities	1,998,760			—
Property and equipment, net	2,738,048			3,146,611
Other assets	197,218			228,926
	$	50,362,479		$	66,414,076
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	4,106,775		$	1,588,999
Accrued compensation	1,927,981			1,989,606
Accrued clinical trial expense	1,064,056			63,005
Other accrued liabilities	3,461,724			718,788
Royalty advances	619,454			—
Deferred revenue	9,396,488			3,654,244
Other current liabilities	55,845			93,073
Total current liabilities	20,632,323			8,107,715
Deferred revenue, non-current portion	48,741,768			51,421,263
Other long-term liabilities	100,249			124,099
Commitments
Shareholders’ (deficit) equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series A convertible preferred stock, 25,000 shares designated, 18,159 and 17,543 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively, with an aggregate liquidation preference of $18,158,848	12,015,000			12,015,000
Common stock, no par value, 100,000,000 shares authorized; 41,784,733 and 40,689,369 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively	143,662,517			139,640,599
Deferred compensation	—			(337,049		)
Accumulated deficit	(174,755,134		)	(144,451,897		)
Accumulated other comprehensive loss	(34,244		)	(105,654		)
Total shareholders’ (deficit) equity	(19,111,861		)	6,760,999
	$	50,362,479		$	66,414,076

See accompanying notes to Condensed Consolidated Financial Statements.

3

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenue:
License revenue	$	893,165		$	18,750		$	2,679,495		$	56,250
Collaborative revenue	—			776,282			74,750			1,186,000
Royalties	65,619			—			495,086			—
Product sales	—			—			1,264,977			—
Total revenue	958,784			795,032			4,514,308			1,242,250
Costs and expenses:
Cost of sales	320,417			—			1,445,606			—
Research and development	6,436,158			4,695,833			18,888,092			14,766,294
Selling, general and administrative	7,327,242			3,507,974			16,156,697			8,440,429
Total costs and expenses	14,083,817			8,203,807			36,490,395			23,206,723
Loss from operations	(13,125,033		)	(7,408,775		)	(31,976,087		)	(21,964,473		)
Other income (expenses):
Gain on extinguishment of debt	—			—			—			1,058,935
Interest and other income	491,914			441,949			1,672,850			810,920
Interest expense	—			(53		)	—			(459,737		)
Total other income	491,914			441,896			1,672,850			1,410,118
Net loss	(12,633,119		)	(6,966,879		)	(30,303,237		)	(20,554,355		)
Deemed dividend on preferred stock	(165,118		)	(218,289		)	(499,938		)	(622,229		)
Net loss applicable to common stock shareholders	$	(12,798,237	)	$	(7,185,168	)	$	(30,803,175	)	$	(21,176,584	)
Basic and diluted net loss applicable to common stock shareholders per common share	$	(0.31	)	$	(0.18	)	$	(0.74	)	$	(0.54	)
Shares used in computing basic and diluted net loss per common share	41,776,362			39,878,759			41,382,662			39,565,638

See accompanying notes to Condensed Consolidated Financial Statements.

4

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2006			2005
Operating Activities
Net loss	$	(30,303,237	)	$	(20,554,355	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,068,640			904,642
Gain on extinguishment of debt	—			(1,058,935		)
Accrued interest expense on shareholder notes	—			443,344
Employee and director stock-based compensation	1,896,285			326,516
Stock-based compensation related to consultants	—			7,360
Changes in assets and liabilities:
Accounts receivable	(4,847,411		)	(776,282		)
Inventories	(1,479,449		)	(621,988		)
Prepaid and other current assets	(1,525,293		)	(104,276		)
Other assets	31,708			151,342
Accounts payable and other accrued liabilities	6,261,763			1,205,737
Accrued compensation	(61,625		)	386,493
Royalty advances	619,454			—
Deferred revenue	3,062,749			54,943,750
Net cash (used in) provided by operating activities	(25,276,416		)	35,253,348
Investing Activities
Purchases of property and equipment	(668,996		)	(637,216		)
Purchases of marketable securities	(20,072,113		)	(43,875,834		)
Maturities of marketable securities	37,240,337			13,287,965
Sales of marketable securities	1,497,210			4,096,496
Net cash provided by (used in) investing activities	17,996,438			(27,128,589		)
Financing Activities
Payments on capital lease obligations	—			(33,186		)
Payments on equipment loans	—			(73,008		)
Payments on notes payable	—			(9,665,000		)
Proceeds from issuance of common stock	2,462,682			21,652,480
Net cash provided by financing activities	2,462,682			11,881,286
Net (decrease) increase in cash and cash equivalents	(4,817,296		)	20,006,045
Cash and cash equivalents at beginning of period	7,565,556			953,295
Cash and cash equivalents at end of period	$	2,748,260		$	20,959,340

See accompanying notes to Condensed Consolidated Financial Statements.

5

DEPOMED, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed consolidated financial statements and the related footnote information of Depomed, Inc. (the Company or Depomed) have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the interim period ended September 30, 2006 are not necessarily indicative of results to be expected for the entire year ending December 31, 2006 or future operating periods.

The balance sheet at December 31, 2005 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 U.S. generally accepted accounting principles 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, 2005 filed with the SEC.

Reclassifications

Certain reclassifications have been made to the December 31, 2005 balance sheet in order to conform to the Company’s current presentation.  The Company has removed the line item previously titled “deferred margin” which was associated with the net balance of deferred revenue and deferred costs on product sales and classified those amounts separately within deferred revenue and inventory, respectively.

Principles of Consolidation

The consolidated financial statements for the three and nine months ended September 30, 2006 and 2005 include the accounts of the Company and Depomed Development, Ltd., DDL, formerly a joint venture with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together, Elan), which became a wholly-owned subsidiary of the Company in the second quarter of 2004. For the three and nine months ended September 30, 2006, the Company consolidated selling, general and administrative expense of approximately $0 and $7,000, respectively, related to DDL. DDL does not have any fixed assets, liabilities or employees and will not perform any further product development on behalf of Depomed or any other entity. Material intercompany accounts and transactions have been eliminated. In the fourth quarter of 2005, the Company’s Board of Directors approved the dissolution of DDL.

Use of Estimates

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

6

Stock-Based Compensation

Effective January 1, 2006, Depomed implemented the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123(R)), as interpreted by SEC Staff Accounting Bulletin No. 107 (SAB 107), using the modified prospective transition method. FAS 123(R) is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123), and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). FAS 123(R) requires companies to recognize the cost of employee and director services received in exchange for awards of equity instruments, based on the grant-date fair value of those awards, in the statement of operations as pro forma disclosure is no longer an alternative. Using the modified prospective transition method of FAS 123(R), Depomed began recognizing fair-value compensation expense for stock-based awards, including stock options granted and purchase rights issued under its employee purchase plan after January 1, 2006. Compensation expense for stock-based awards granted prior to implementation that were unvested and outstanding as of January 1, 2006 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under FAS 123. The compensation expense for stock-based compensation is based on the single-option approach, includes an estimate for forfeitures and is recognized over the vesting term of the options using the straight-line method. FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Depomed estimates forfeitures based on historical experience. Prior to the adoption of FAS 123(R), pro forma disclosures required under FAS 123 included forfeitures as they occurred. Under the modified prospective transition method of implementation, no restatement of prior periods has been made. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding Depomed’s stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods.

Revenue Recognition

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable.

The Company sells Glumetza product to wholesalers and retail pharmacies that is subject to rights of return up to twelve months after product expiration.  Given the limited sales history of Glumetza and return privileges associated with the product launch, the Company currently cannot reliably estimate expected returns of the product at the time of shipment.  As a result, the Company has deferred recognition of revenue on all Glumetza product shipments and recorded $5.6 million as deferred revenue, which is net of stocking allowances, cash discounts and wholesaler fees as of September 30, 2006.  In addition, the costs of manufacturing Glumetza associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the deferred revenue is recognized.

Product sales revenue related to the Company’s supply agreement with Esprit is recognized after the expiration of a 30-day period in which Esprit may reject product that does not meet agreed-upon specifications.

Collaborative revenue recognized relates to services rendered in connection with collaborative arrangements and the achievements of milestones under such arrangements. Revenue related to collaborative agreements with corporate partners is recognized as the expenses are incurred under each contract. The Company is required to perform services as specified in each respective agreement on a best or commercially reasonable efforts basis, and the Company is reimbursed based on the costs incurred on each specific contract. Nonrefundable substantive milestone payments are recognized pursuant to collaborative agreements upon the achievement of specified milestones where no further obligation to perform exists under that milestone provision of the arrangement and when collectibility is reasonably assured.

7

Revenue from license arrangements, including license fees creditable against future royalty obligations (if any), of the licensee, is recognized when an arrangement is entered into if the Company has substantially completed its obligations under the terms of the arrangement and the Company’s remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license fees are deferred and recognized over the estimated performance period. License fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalties received under the Company’s agreement with Esprit are recognized based on Esprit’s sales, net of any estimated returns, discounts, rebates and chargebacks. Royalties received under the Company’s agreement with Biovail are recognized when the royalty payments are received. Royalty payments received in excess of amounts earned are classified as royalty advances until earned.

NOTE 2. 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, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality, U.S. financial institutions and, to date, has not experienced material losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive income (loss) within shareholders’ equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the condensed consolidated statement of operations. At September 30, 2006, the individual contractual period for all available-for-sale debt securities is less than two years.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2006:

	Less than 12 months					12 months or greater				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
U.S. Debt Securities	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
U.S. government debt securities	$	16,555,335	$	(21,451	)	$	—	$	—	$	16,555,335	$	(21,451	)
U.S. corporate debt securities	15,310,360		(15,534		)	—		—		15,310,360		(15,534		)
Total available-for-sale	$	31,865,695	$	(36,985	)	$	—	$	—	$	31,865,695	$	(36,985	)

The Company’s investment in U.S. corporate debt securities consists primarily of investments in investment grade corporate bonds and notes. The Company’s investment in U.S. government debt securities consists of low risk government agency bonds typically with a rating of A or higher. The unrealized losses on the Company’s investments in U.S. corporate debt and U.S. government debt securities were caused by interest rate increases. An impairment charge is recognized when the decline in the fair value of a security below its carrying amount basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than the carrying amount, any adverse changes in the investees’ financial condition and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company considers these unrealized losses to be temporary at September 30, 2006. To date, the Company has not recorded any impairment charges on investments related to other-than-temporary declines in market value.

8

NOTE 3. 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, which are based on the number of shares underlying outstanding stock options, warrants and other convertible securities, are not included as their effect is antidilutive. At September 30, 2006 and 2005, the total number of outstanding common stock equivalent shares excluded from the loss per share computation was 8,506,337 and 15,013,809, respectively.

NOTE 4. STOCK-BASED COMPENSATION

The Company adopted FAS 123(R) on January 1, 2006 as described in Note 1 of the Notes to Condensed Consolidated Financial Statements. The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock-based payment awards on the date of grant using an option valuation model is affected by the Company’s stock price as well as assumptions which include the Company’s expected term of the award, the expected stock price volatility, risk-free interest rate and expected dividends over the expected term of the award.

The Company has concluded that its historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term and therefore, as of January 1, 2006, estimates the expected term of options granted by taking the average of the vesting term and the contractual term of the option, as illustrated in SAB 107. The Company estimates the volatility of its common stock price by using the historical volatility over the expected term of the options. The Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model.

The Company used the following assumptions to calculate the fair value of option grants for the three and nine months ended September 30, 2006:

	Three Months Ended	Nine Months Ended
	September 30, 2006	September 30, 2006
Employee and Director Stock Options
Risk-free interest rate	4.60 – 5.03%	4.59 – 5.23%
Dividend yield	None	None
Expected option term (in years)	6.06	6.06
Expected stock price volatility	59.5 – 60.2%	59.5 – 62.2%

The Company used the following assumptions to calculate the fair value of purchase rights granted under the ESPP for the nine months ended September 30, 2006. There were no purchase rights granted under the ESPP during the three months ended September 30, 2006.

	Nine Months Ended
	September 30, 2006
Employee Stock Purchase Plan
Risk-free interest rate	5.04 – 5.06%
Dividend yield	None
Expected option term (in years)	0.5 to 2.0
Expected stock price volatility	33.5 – 56.1%

9

Stock-based compensation expense recognized under FAS 123(R) in the condensed consolidated statements of operations for the three and nine months ended September 30, 2006 related to stock options and the ESPP was $679,000 and $1,896,000, respectively.  Stock-based compensation expense for the three months ended September 30, 2006 consisted of $239,000 in research and development expense, $437,000 in selling, general and administrative expense and $3,000 in cost of sales. Stock-based compensation expense for the nine months ended September 30, 2006 consisted of $728,000 in research and development expense, $1,165,000 in selling, general and administrative expense and $3,000 in cost of sales. As a result of adopting FAS 123(R), Depomed’s net loss for the three and nine months ended September 30, 2006 was $621,000 and $1,721,000 higher, respectively, than if the Company continued to account for stock-based compensation under APB 25 as it did in comparable prior year periods. Accordingly, basic and diluted net loss applicable to common stock shareholders per share for the three and nine months ended September 30, 2006 was $0.01 and $0.04 higher, respectively, than if the Company continued to account for stock-based compensation under APB 25. The implementation of FAS 123(R) did not have an impact on the Company’s cash flow for the nine months ended September 30, 2006.

The weighted-average grant date fair value of options granted during the three and nine months ended September 30, 2006 was $2.84 and $3.75, respectively. The weighted-average grant date fair value of purchase rights granted under the ESPP during the nine months ended September 30, 2006 was $2.20. The total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was $19,000 and $139,000, respectively. The total fair value of options that vested during the three and nine months ended September 30, 2006 was $632,000 and $1,677,000, respectively. At September 30, 2006, Depomed had $5.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over an average vesting period of 2.1 years. Cash received from stock option exercises was $29,000 and $208,000 during the three and nine months ended September 30, 2006.

Prior to January 1, 2006, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method under APB No. 25. Under APB No. 25, no stock-based compensation was recognized for the ESPP or for option grants when the exercise price of the options granted was equal to or greater than the fair value market price of the stock on the grant date. In accordance with the provisions of FAS 123(R), we eliminated the balance of the deferred compensation calculated under APB No. 25 to the common stock account on January 1, 2006. For the three and nine months ended September 30, 2005, the Company recognized approximately $63,000 and $327,000, respectively, of stock-based compensation expense under APB No. 25.

Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006

Prior to January 1, 2006, Depomed followed the disclosure provisions of FAS 123. The following table illustrates the effect on net loss and net loss per share for the three and nine months ended September 30, 2005 if the fair value recognition provisions of FAS 123 had been applied to options granted and ESPP shares purchased under Depomed’s equity-based compensation plans. For purposes of this pro forma disclosure, the estimated value of the awards is recognized over the vesting periods.

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Net loss applicable to common stock shareholders—as reported	$	(7,185,168	)	$	(21,176,584	)
Add: Total stock-based employee and director compensation expense, included in the determination of net loss as reported	63,427			326,516
Deduct: Total stock-based employee and director compensation expense determined under the fair value based method for all awards	(506,434		)	(1,609,141		)
Net loss applicable to common stock shareholders—pro forma	$	(7,628,175	)	$	(22,459,209	)
Net loss per common share—as reported	$	(0.18	)	$	(0.54	)
Net loss per common share—pro forma	$	(0.19	)	$	(0.57	)

10

For purposes of the weighted average estimated fair value calculations, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model and the following assumptions:

	Three Months Ended	Nine Months Ended
	September 30, 2005	September 30, 2005
Employee and Director Stock Options
Risk-free interest rate	4.03 – 4.12%	3.77 – 4.17%
Dividend yield	None	None
Expected option term (in years)	4.0	4.0
Expected stock price volatility	65.7%	65.4 – 67.0%

Based on the Black-Scholes option valuation model, the weighted-average estimated fair value of options granted was $2.99 and $2.47 for the three and nine months ended September 30, 2005.

The Company used the following assumptions to calculate the fair value of purchase rights granted under the ESPP for the nine months ended September 30, 2005. There were no purchase rights granted under the ESPP during the three months ended September 30, 2005.

	Nine Months Ended
	September 30, 2005
Employee Stock Purchase Plan
Risk-free interest rate	3.22 – 4.33%
Dividend yield	None
Expected option term (in years)	0.5
Expected stock price volatility	43.3 – 47.0%

Based on the Black-Scholes option valuation model, the weighted-average estimated fair value of purchase rights granted under the ESPP was $1.75 for the nine months ended September 30, 2005.

1995 Stock Option Plan

The Company’s 1995 Stock Option Plan (the 1995 Plan) was adopted by the Board of Directors and approved by the shareholders in September 1995, and has been subsequently amended. The 1995 Plan provided for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 1995 Plan is 4,700,000 shares, of which zero are available for future issuance at September 30, 2006. In May 2004, the 1995 Plan was terminated with respect to grants of new stock options and all options which expire or are forfeited will be retired from the pool.

Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 1995 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

11

The following table summarizes the activity for the nine months ended September 30, 2006 under the 1995 Plan:

					Weighted-
			Weighted-		Average
			Average		Remaining
			Exercise		Contractual	Aggregate
	Shares		Price		Term (Years)	Intrinsic Value
Options outstanding at December 31, 2005	3,405,554		$	4.22
Options granted	—		—
Options exercised	(49,800	)	3.40
Options forfeited	(32,974	)	6.02
Options expired	—		—
Options outstanding at September 30, 2006	3,322,780		$	4.22	4.11	$	2,423,791
Options exercisable and expected to become exercisable at September 30, 2006	3,320,812		$	4.22	4.11	$	2,423,458
Options exercisable at September 30, 2006	3,174,452		$	4.16	3.98	$	2,338,401

Information regarding the stock options outstanding under the 1995 Plan is summarized below:

Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Term (Years)	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$0.90 - $1.95	650,478	5.39	$	1.63	614,878	$	1.62
$2.70 - $3.75	1,194,389	2.58	3.39		1,192,764	3.39
$4.19 - $5.80	755,127	4.57	4.97		755,127	4.97
$6.10 - $7.75	692,786	5.16	7.02		581,683	7.07
$9.50 - $10.25	30,000	1.58	9.70		30,000	9.70
	3,322,780	4.11	$	4.22	3,174,452	$	4.16

2004 Equity Incentive Plan

The Company’s 2004 Equity Incentive Plan (the 2004 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2004. The 2004 Plan provides for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 2004 Plan at September 30, 2006 was 3,500,000 shares, of which 1,435,775 were available for future issuance.

Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 2004 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

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The following table summarizes the activity for the nine months ended September 30, 2006 under the 2004 Plan:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2005	966,410		$	5.18
Options granted	1,121,250		6.11
Options exercised	(7,561	)	5.09
Options forfeited	(36,465	)	6.11
Options expired	—		—
Options outstanding at September 30, 2006	2,043,634		$	5.67	8.97	$	1,362
Options exercisable and expected to become exercisable at September 30, 2006	1,948,324		$	5.67	8.96	$	1,338
Options exercisable at September 30, 2006	557,191		$	5.52	8.42	$	582

Information regarding the stock options outstanding under the 2004 Plan is summarized below:

Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Term (Years)	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$4.04 - $4.91	341,977	8.98	$	4.43	85,682	$	4.35
$5.03 - $5.63	505,293	8.33	5.09		229,594	5.07
$5.73 - $6.20	360,139	9.10	6.12		102,191	6.12
$6.29 - $7.78	836,225	9.29	6.35		139,724	6.52
	2,043,634	8.97	$	5.67	557,191	$	5.52

Employee Stock Purchase Plan

In May 2004, the ESPP was approved by the shareholders. The ESPP is qualified under Section 423 of the Internal Revenue Code. The ESPP is designed to allow eligible employees to purchase shares of the Company’s common stock through periodic payroll deductions. The price of the common stock purchased under the ESPP must be equal to at least 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The number of shares authorized for issuance under the ESPP as of September 30, 2006 was 500,000, of which 292,719 shares were available for future issuance.

NOTE 5. COMPREHENSIVE LOSS

Total comprehensive loss for the three and nine months ended September 30, 2006 and 2005 approximates net loss and includes unrealized losses on marketable securities.

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NOTE 6.  COLLABORATIVE ARRANGEMENTS AND CONTRACTS

King Pharmaceuticals, Inc.

In June 2006, the Company entered into a promotion agreement with King Pharmaceuticals, Inc. (King), pursuant to which King was granted the co-exclusive right to promote Glumetza in the United States. Under the agreement, King is required to promote Glumetza to physicians in the United States through its sales force, to deliver a minimum number of annual detail calls to potential Glumetza prescribers, and to maintain a sales force of a minimum size. In consideration for King’s promotion of Glumetza, the Company is required to pay King a promotion fee equal to fifty percent of gross margin, which is defined in the agreement as sales of Glumetza, net of actual returns, estimated discounts, estimated rebates and estimated chargebacks, minus cost of goods sold and certain adjustments, including the one percent royalty due to Biovail Laboratories International with respect to sales of the 500mg Glumetza tablet in the United States.  In September 2006, the Company launched the 500mg Glumetza in the United States and for the quarter ended September 30, 2006, the Company recognized approximately $26,000 of promotion fee expense, which is classified in selling, general & administrative expense.  Out-of-pocket marketing expenses are shared by the Company and King at an agreed-upon ratio.

Under the promotion agreement, the Company is entitled to promote Glumetza to physicians to whom King does not make detail calls, or does not make detail calls with sufficient regularity.  Incremental sales generated by physicians called on by the Company, over a baseline established prior to promotion by the Company, are excluded from net sales for purposes of calculating the promotion fee due to King.

The 1000mg formulation of Glumetza to which the Company has rights from Biovail Laboratories International will also be subject to the agreement with King, if that formulation is approved for sale in the United States. The agreement also provides for a six-month option in favor of King to negotiate with the Company the terms of an exclusive license in the United States to the Company’s AcuForm drug delivery technology in combination with metformin hydrochloride and any other active pharmaceutical ingredient. The term of the promotion agreement is five years, with additional one year renewal periods if agreed upon by the parties.

Esprit Pharma, Inc.

In July 2006, the Company entered into a co-promotion agreement and amended its July 2005 license agreement with Esprit Pharma, Inc. (Esprit), for the marketing of ProQuin XR in the United States. Under the terms of the co-promotion agreement with Esprit, the Company has been granted rights to co-promote ProQuin XR in the United States to certain physicians not called upon by Esprit.  The agreement does not obligate the Company to promote ProQuin XR and permits Depomed to co-promote ProQuin XR directly or through third parties. If the Company exercises its co-promotion rights, it will receive a co-promotion fee of 18% on net sales generated by physicians called upon by the Company.  The co-promotion agreement has a four-year term.

Under the terms of the original license agreement, Esprit is required to pay the Company $50 million in license fees, of which $30 million has been paid to date and the remaining amount is to be paid in two $10 million installments. The amended license agreement has extended the due date on the first $10 million payment from July 2006 to December 2006.  The second $10 million payment remains due in July 2007. The amended license agreement also provides for royalties paid to the Company for ProQuin XR sales in the fourth quarter of 2005 to be credited towards Esprit’s $4.6 million minimum royalty obligation to the Company for 2006. Esprit’s minimum royalty obligation in subsequent years remains at $5 million per year, subject to annual increases based on increases in the consumer price index beginning in 2008.

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Patheon, Inc.

In August 2006, the Company entered into a collaboration agreement with Patheon, Inc. (Patheon), related to Depomed’s proprietary AcuForm drug delivery technology.  Under the agreement, Depomed has granted Patheon access to Depomed’s AcuForm drug delivery technology for the purpose of formulating, developing and improving pharmaceutical products outside of Depomed’s own internal programs for Patheon’s clients and collaborative partners. A joint committee with representatives from Depomed and Patheon will review compounds prior to initiating work to ensure there are no conflicts with Depomed’s own internal programs.  Patheon will assume primary responsibility for initial feasibility work with technical assistance from Depomed.  For product candidates that advance beyond feasibility, Depomed, Patheon and any third party will negotiate a license agreement, and Depomed and Patheon would share any license fees, milestone payments and royalties.

Supernus Pharmaceuticals, Inc.

In September 2006, the Company entered into a collaboration agreement with Supernus Pharmaceuticals, Inc. (Supernus) to develop through a Phase 1 study a product candidate leveraging the Company’s AcuForm drug delivery technology.  The cost and ownership of the program will be shared between the parties equally. The collaboration agreement includes provisions pursuant to which the parties may negotiate and enter into a definitive agreement for the further development and for commercialization, by either or both parties, of the product candidate. Costs associated with the program were not material for the quarter ended September 30, 2006.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Lease Agreements

In August 2006, the Company renegotiated certain terms of its existing non-cancelable leases of laboratory and office facilities in Menlo Park, California, including the lease terms, which will now expire in June 2009 and include options to extend the leases for an additional five years. The Company also entered into a non-cancelable lease agreement to lease an additional 9,000 square feet in a facility adjacent to its existing facilities in Menlo Park, with a lease term through June 2009 and an option to extend the lease for an additional five years.

Indemnification Agreements

In September 2006, the Company entered into indemnification agreements with each of its officers and directors.  As permitted under California law and in accordance with its Bylaws, the Company indemnifies its officers and directors for certain events or occurrences.  The Company’s director and officer insurance policy limits its our exposure and may enable the Company to recover a portion of any future amounts paid, if any.  Accordingly, the Company believes the fair value of these indemnification agreements is minimal and has not recorded any liabilities for these agreements as of September 30, 2006.

NOTE 8. INVENTORIES

Inventories relate to the manufacture of the Company’s ProQuin XR and Glumetza products. Inventories are stated at the lower of cost or market and consist of the following:

	September 30, 2006		December 31, 2005
Raw materials	$	851,001	$	446,397
Work-in-process	363,567		418,389
Finished goods	270,412		—
Deferred costs	895,817		36,562
Total	$	2,380,797	$	901,348

Deferred costs represent the costs of product shipped for which recognition of revenue has been deferred.

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NOTE 9. SHAREHOLDERS’ EQUITY

Series A Preferred Stock

The Series A Preferred Stock accrued a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock was convertible at anytime between January 2002 and January 2006 into the Company’s common stock. The original conversion price of the Series A Preferred Stock was $12.00; however, as a result of the Company’s March 2002 and October 2003 financings, the conversion price had been adjusted to $9.51 per share. In December 2004, the Company entered into an agreement with the Series A Preferred stockholder to resolve a misunderstanding between the Company and the stockholder relating primarily to prior adjustments to the conversion price of the Series A Preferred Stock. Pursuant to the agreement, among other matters, the Company agreed to adjust the conversion price to $7.50 per share. The Company and the stockholder also agreed to binding interpretations of certain other terms related to the Series A Preferred Stock conversion price.

Prior to December 2004, the amounts calculated as Series A Preferred stock dividends were accounted for as an adjustment to the conversion price following EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (Issue No. 98-5). As a result of the modifications to the preferred stock agreement in December 2004, the Company determined that a “significant modification” of the agreement had been made, and, therefore, a new “commitment date” for accounting purposes had been established on December 10, 2004. The Company measured the difference between the carrying value of the preferred stock and the fair value of the modified preferred stock pursuant to EITF Topic No. D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock and determined that the fair value of the modified security was less than the carrying value of the security prior to the modification. The Company also evaluated the effective conversion rate, after considering the reset rate of $7.50 per share in addition to the common stock issuable upon conversion of the unpaid, accumulated dividends. The fair value of the underlying common stock on December 10, 2004 was $5.06 per share. The Company determined that the conversion rate, after including the effect of the unpaid dividends, did not result in a beneficial conversion feature, which could have had the effect of also providing a deemed dividend to the preferred stockholder. However, an anti-dilution provision of the Series A Preferred Stock was triggered by the Company’s January 2005 financing, which adjusted the conversion price of the Series A Preferred Stock to $7.12. As a result of the adjusted conversion price and an increase in the amount of common stock issuable upon conversion of the Series A Preferred Stock due to additional accumulated dividends, the Series A Preferred Stock now contains a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5.

In conjunction with the modification of the agreement, the Company issued a warrant to the Series A Preferred stockholder. The value of the warrant was considered in determining the value of the modified security. The warrant is convertible into shares of the Company’s common stock during the period between January 2006 and January 2009. The conversion price of the warrant initially was $7.12, which was equal to the Series A Preferred Stock conversion price in effect as of January 20, 2006. The conversion price of the warrant decreases by approximately 4.8% per year during the conversion period, such that the number of shares of the Company’s common stock issuable upon conversion of the warrant will increase by approximately 5.1% per year. The conversion of the warrant will be satisfied only by surrender of the outstanding shares of Series A Preferred Stock.

The Series A Preferred Stock accrued dividends through January 20, 2006, which is the date the warrant initially became exercisable. As a result of the issuance of the warrant, the preferred stock may be surrendered in exchange for common stock for an additional three years through January 20, 2009. As long as the Series A Preferred Stock remains outstanding, the number of shares into which the warrant can be converted increases as the conversion price of the warrant decreases resulting in additional deemed dividends on the Series A Preferred Stock. For the three and nine months ended September 30, 2006, the Company recognized Series A Preferred Stock deemed dividends of approximately $165,000 and $500,000, respectively, attributable to the beneficial conversion feature from the accrued dividends and decreasing warrant price. The Company will continue to recognize Series A Preferred Stock deemed dividends until the earlier of, the time the Series A Preferred Stock is surrendered or until January 2009.

As of September 30, 2006, there were 18,159 shares of Series A Preferred Stock outstanding with an aggregate liquidation preference of approximately $18,159,000. The warrant was convertible into 2,639,751 shares of the Company’s common stock at a conversion price of $6.88 as of September 30, 2006.

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Warrant and Option Exercises

During the nine months ended September 30, 2006, the Company issued 980,813 shares of common stock to warrant holders with net proceeds to the Company of approximately $2,045,000.  Warrants to purchase an additional 526,285 shares of our common stock were surrendered in connection with a cashless exercise feature of the exercised warrants during the nine months ended September 30, 2006. The weighted average exercise price of the warrants exercised during the nine months ended September 30, 2006 was $3.48.  There were no warrant exercises during the three months ended September 30, 2006.

 Employees and consultants exercised options to purchase 10,306 and 57,361 shares of the Company’s common stock with net proceeds to the Company of $29,000 and $208,000 during the three and nine months ended September 30, 2006, respectively.

Employee Stock Purchase Plan

 In May 2006, the Company sold 57,190 shares of the Company’s common stock under the Employee Stock Purchase Plan. The shares were purchased at a weighted average purchase price of $3.74 with proceeds of approximately $214,000.

NOTE 10. SUBSEQUENT EVENTS

PharmaNova, Inc

In October 2006, the Company entered into a sublicense agreement with PharmaNova, Inc. (PharmaNova).  Pursuant to the agreement, PharmaNova has granted the Company an exclusive sublicense, under a patent in the United States held by the University of Rochester, to develop and commercialize a product in the United States containing the compound gabapentin as its active pharmaceutical ingredient which is indicated for the treatment of hot flashes associated with menopause in women.

The Company paid PharmaNova an upfront license fee of $500,000 under the agreement, and is required to pay PharmaNova an additional $500,000 upon dosing of the first patient in any Phase 3 trial for the product, $1,000,000 upon submission to the FDA of a New Drug Application (NDA) for the product, and $2,000,000 upon FDA approval of an NDA. The agreement provides for royalty payments to PharmaNova on net sales of the product, and for milestone payments upon achievement of annual net sales in excess of certain thresholds.  The Company is also required to pay PharmaNova consultancy fees of $300,000 over approximately ten months beginning in November 2006.

LG Life Sciences, Ltd.

In November 2006, the Company amended its license and distribution agreement with LG Life Sciences, Ltd. (LG) related to LG’s exclusive license of the 500mg Glumetza in the Republic of Korea.  The amendment provides for a $500,000 milestone payment from LG in respect of LG’s approval to market Glumetza in the Republic of Korea, rather than a $700,000 payment, as reflected in the original agreement.  Depomed received the $500,000 payment in November 2006, net of applicable Korean withholding taxes.  The product, known as Novamet GR, was launched in Korea earlier this year.  The parties are currently in negotiations to further amend the license and distribution agreement to formally grant LG a license to manufacture the 500mg Glumetza in exchange for royalties on net sales of Glumetza in the Republic of Korea, and to remove the provisions of the original agreement providing for the supply of 500mg Glumetza tablets by Depomed to LG.

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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:

·the success of Glumetza™ in the United States;

·the success of our collaborative arrangement with King Pharmaceuticals with respect to Glumetza;

·market acceptance of ProQuin® XR and Glumetza;

·the efforts of Esprit Pharma with respect to the marketing of ProQuin XR;

·the efforts of Biovail with respect to the marketing of Glumetza in Canada;

·our collaborative partners’ compliance or non-compliance with their obligations under our agreements with them;

·results and timing of our clinical trials, including the results of Gabapentin GR™ trials and publication of those results;

·our ability to raise additional capital;

·our ability to obtain marketing partners for our product candidates; 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 “RISK FACTORS” section and elsewhere in this Quarterly Report on Form 10-Q. We disclaim any intent to update or revise these forward-looking statements to reflect new events or circumstances.

ABOUT DEPOMED

We are a specialty pharmaceutical company engaged in the development of pharmaceutical products based on our proprietary oral drug delivery technology. The United States Food and Drug Administration, or FDA, has approved two products we have developed, Glumetza and ProQuin XR. Glumetza is once-daily metformin product for the treatment of Type 2 diabetes.  We began marketing Glumetza with a co-promotion partner in the United States in September 2006 and have out-licensed the commercial rights to Glumetza in Canada, where it is also approved and currently being sold. We have out-licensed certain commercial rights to ProQuin XR, a once-daily ciprofloxacin product for the treatment of uncomplicated urinary tract infections, which is now being sold in the United States. We currently have an ongoing Phase 3 clinical trial for Gabapentin GR, an extended release form of gabapentin, for the treatment of postherpetic neuralgia and a Phase 2 clinical trial for Gabapentin GR for the treatment of diabetic peripheral neuropathy. We have also obtained an exclusive license covering the use of gabapentin for the treatment of menopausal hot flashes. In August 2006, we completed a Phase 1 clinical trial of a product candidate for the treatment of gastroesophageal reflux disease (GERD).  Our primary oral drug delivery system is our patented AcuForm™ drug delivery technology. The AcuForm technology is a proprietary polymer-based drug delivery platform developed by Depomed that provides targeted drug delivery solutions for a wide range of compounds. The technology embraces diffusional, erosional, bilayer and multi-drug systems that can optimize oral drug delivery for both soluble and insoluble drugs. One application of the technology allows standard-sized tablets to be retained in the stomach for 6 to 8 hours after administration, thereby extending the time of drug delivery to the small intestine. The AcuForm delivery system can provide controlled and prolonged release of drug, which enables reduced frequency of dosing and reduced risk of adverse side effects with equivalent efficacy relative to immediate release drugs.

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

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We are developing our own proprietary products and are also developing products utilizing our AcuForm technology in collaboration with other pharmaceutical and biotechnology companies. In our collaborative programs, we generally apply our proprietary technology to the partner’s compound in exchange for 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 2 clinical trials. Upon the completion of Phase 2 clinical trials, we evaluate, on a case-by-case basis, the feasibility of retaining marketing or co-marketing rights to our product candidates in the United States, taking into account such factors as the marketing and sales efforts required for each of the product candidates, potential collaborative partners and the proposed terms of any such collaboration. If we fund development through Phase 3, we will again evaluate the feasibility of retaining marketing or co-marketing rights. When we license marketing rights to a collaborative partner, we generally expect the partner to fund the completion of the clinical trials, as appropriate, and to pay us license fees, milestones and royalties on sales of the product.

Our intellectual property position includes nine issued patents and seventeen patent applications pending in the United States.

Highlights for the Quarter Ended September 30, 2006

·In September 2006, we launched Glumetza in the United States for the treatment of Type 2 diabetes;

·In August 2006, we announced the completion of a Phase 1 clinical trial of a product candidate for the treatment of gastroesophageal reflux disease (GERD);

·In September 2006, we entered into a collaboration agreement with Supernus Pharmaceuticals, Inc. (formerly Shire Laboratories, Inc.) to develop a product candidate leveraging our AcuForm drug delivery technology through a Phase 1 study in which we share in the costs and commercial opportunities equally;

·Revenue for the three months ended September 30, 2006 was $959,000 compared to $795,000 for the three months ended September 30, 2005;

·Operating expenses for the three months ended September 30, 2006 were $13.8 million compared to $8.2 million for the three months ended September 30, 2005;

·Cash, cash equivalents and marketable securities were $35.6 million as of September 30, 2006, compared to $59.1 million as of December 31, 2005.

Our primary current products, product candidates, collaborative relationships, and research and development programs include the following:

Glumetza™

In May 2005, our collaborative partner, Biovail Laboratories International, or Biovail, received a Notice of Compliance for the 500mg strength of Glumetza from the Therapeutic Products Directorate Canada, or TPD. The 500mg Glumetza is our internally developed once-daily metformin product for Type 2 diabetes. In June 2005, the FDA approved the NDA to market the 500mg Glumetza in the United States, and in July 2005, in accordance with our license agreement, Biovail paid us a $25.0 million license payment. The TPD and the FDA also approved a 1000mg strength of Glumetza utilizing a Biovail drug delivery technology. Biovail does not intend to commercialize the original formulation of the 1000mg Glumetza, and is in the process of reformulating it. If approved, the new formulation may be commercially available in 2007.

In June 2006, we entered into a promotion agreement with King Pharmaceuticals, Inc., or King, pursuant to which King was granted the co-exclusive right to promote Glumetza in the United States. Under the agreement, King is required to promote Glumetza to physicians in the United States through its sales force, to deliver a minimum number of annual detail calls to potential Glumetza prescribers, and to maintain a sales force of a minimum size. In consideration for its promotion of Glumetza, King receives a promotion fee equal to fifty percent of gross margin, which is defined in the agreement as sales of Glumetza, net of returns, discounts, rebates and chargebacks, minus cost of goods sold and certain adjustments, including the one percent royalty due to Biovail Laboratories International with respect to the 500mg Glumetza tablet. We are entitled to promote Glumetza to physicians to whom King does not make detail calls, or does not make detail calls with sufficient regularity. Incremental sales generated by physicians called upon by us, over a baseline established prior to our promotion, are excluded from net sales for purposes of calculating the promotion fee. We share out-of-pocket marketing expenses with King at an agreed-upon ratio. The 1000mg formulation of Glumetza to which we have rights to in the United States from Biovail Laboratories International will also be subject to the agreement, if that formulation is approved for sale. The agreement also provides for a six-month option in favor of King to negotiate with us the terms of an exclusive license in the United States to our AcuForm drug delivery technology in combination with metformin hydrochloride and any other active pharmaceutical ingredient. The term of the promotion agreement is five years, with additional one year renewal periods if agreed upon by the parties.In September 2006, we launched the 500mg Glumetza in the United States.

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Pursuant to our December 2005 agreements with Biovail related to Glumetza, Biovail’s exclusive license to the 500mg Glumetza is limited to Canada. In December 2005, Biovail launched the 500mg Glumetza in Canada.

We also have a supply agreement and a manufacturing transfer agreement with Biovail related to the new formulation of the 1000mg Glumetza. Under the agreements, we have an exclusive license to market the 1000mg Glumetza in the United States, Biovail will be our exclusive supplier of the 1000mg Glumetza, Biovail has agreed to perform development and certain other tasks associated with the completion of the development of the new formulation of the 1000mg Glumetza, and will assist us with the preparation and submission of a supplement to the Glumetza NDA covering the new formulation of the 1000mg Glumetza. Biovail also agreed to perform certain additional limited development if the supplemental NDA related to this product is not approved by the FDA.

ProQuin® XR

In May 2005, we received FDA approval to market ProQuin XR, our internally developed once-daily formulation of the antibiotic drug ciprofloxacin, for uncomplicated urinary tract infections. In July 2005, we exclusively licensed to Esprit Pharma, Inc. marketing and distribution rights to ProQuin XR in the United States. We amended the license agreement in July 2006. The agreement obligates Esprit to pay us $50 million in license fees, of which $30 million has been paid. An additional $10 million is due in December 2006, and the remaining $10 million is due in July 2007. The agreement also provides for royalty payments to us of 15 percent to 25 percent of ProQuin XR net sales, based on escalating net sales. In November 2005, Esprit launched ProQuin XR in the United States.

In July 2006, we entered into a co-promotion agreement with Esprit in which we obtained co-promotion rights to market ProQuin XR. Under the terms of the co-promotion agreement, we have the right, but not the obligation, to promote ProQuin XR in the United States to up to 40,000 physicians, other than urologists and obstetricians/gynecologists, not called upon by Esprit. The agreement permits us to co-promote ProQuin XR directly or through third parties. If we exercise our co-promotion rights, we will receive a co-promotion fee of 18% on net sales generated by physicians called upon by us. The co-promotion agreement has a four-year term.

In November 2005, we entered into a distribution and supply agreement for ProQuin XR in Europe with a privately owned specialty pharmaceutical company, Madaus S.r.l. Under the terms of the agreement, we granted an exclusive right to Madaus for the commercialization of ProQuin XR in Europe and agreed to supply Madaus with commercial quantities of ProQuin XR tablets in bulk form. In March 2006, Madaus filed a Marketing Authorization Application (MAA) for ProQuin XR with the Medical Products Agency in Sweden, which is currently still pending.

Gabapentin GR™

We have developed Gabapentin GR, an extended release form of gabapentin. Gabapentin is marketed by Pfizer Inc. for adjunctive therapy for epileptic seizures and postherpetic pain under the trade name Neurontin®. It is also marketed by a number of other companies as a generic, immediate release drug.

We initiated a Phase 2 double-blind, placebo-controlled clinical trial of Gabapentin GR in the first quarter of 2005 for the treatment of postherpetic neuralgia, a long-lasting pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. In January 2006, we announced statistically significant safety and efficacy benefits of twice-daily Gabapentin GR based on the Phase 2 trial data, which measured average daily pain scores from week two to the end of treatment based on the Likert pain scale. Once-daily Gabapentin GR also showed a trend in pain improvement. In May 2006, we initiated a Phase 3 clinical trial for Gabapentin GR for the treatment of postherpetic neuralgia.

In October 2006, we completed enrollment in a Phase 2 double-blind, placebo-controlled clinical trial of Gabapentin GR for the treatment of diabetic peripheral neuropathy, a peripheral nerve disorder caused by diabetes.

We entered into a sublicense agreement with PharmaNova, Inc. in October 2006 pursuant to the which PharmaNova has granted us an exclusive sublicense under a patent in the United States held by the University of Rochester, to develop and commercialize a product in the United States containing the compound gabapentin as its active pharmaceutical ingredient that is indicated for the treatment of hot flashes associated with menopause in women.

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Other Research and Development Activities

We are applying our AcuForm technology to other compounds in an effort to enhance the safety, efficacy and/or dosing compliance of the innovator product. For example, we have completed preclinical studies of a combination product comprising our 500mg Glumetza once-daily formulation of metformin with a once-daily sulfonylurea for the treatment of Type 2 diabetes. We expect that a Phase 1 clinical trial for this product will commence only if our ongoing commercial assessment warrants further development or if we enter into a licensing agreement related to the product with a third party.  The AcuForm technology can also be applied to address drug dosing and absorption challenges that companies face as they develop New Chemical Entities, or NCEs.

In June 2005, we entered into a development and license agreement with New River Pharmaceuticals, Inc. to apply the AcuForm technology to up to three proprietary New River compounds. New River will fund research and development under the agreement, and New River may acquire worldwide rights to use the AcuForm technology in the product candidates for agreed-upon milestone payments and royalties. New River has proposed an initial product candidate for development, and we are collaborating with New River on the work plan for the feasibility program.

In August 2006, we entered into a collaboration agreement with Patheon, Inc., or Patheon, related to our proprietary AcuForm drug delivery technology.  Under the agreement, we have granted Patheon access to our AcuForm drug delivery technology for the purpose of formulating, developing and improving pharmaceutical products outside of our own internal programs for Patheon’s clients and collaborative partners. A joint committee with representatives from Depomed and Patheon will review compounds prior to initiating work to ensure there are no conflicts with our own internal programs.  Patheon will assume primary responsibility for initial feasibility work with technical assistance from us.  For product candidates that advance beyond feasibility, Depomed, Patheon and any third party will negotiate a license agreement, and Depomed and Patheon would share any license fees, milestone payments and royalties.

In September 2006, we entered into a collaboration agreement with Supernus Pharmaceuticals, Inc. to develop through a Phase 1 study a product candidate leveraging our AcuForm drug delivery technology.  The cost and ownership of the program will be shared between the parties equally. The collaboration agreement includes provisions pursuant to which the parties may negotiate and enter into a definitive agreement for the further development and for commercialization, by either or both parties, of the product candidate.

In addition to internal and partnered research and development programs, our activities since inception on August 7, 1995 have included establishing our offices and research facilities, recruiting personnel, filing patent applications, developing a business strategy, establishing collaborations and raising capital. In the fourth quarter of 2005, we transitioned from a development-stage organization to a commercial entity, following our receipt of $30 million in payments from Esprit for the license of ProQuin XR, receipt of a $25 million license payment from Biovail based on the FDA’s approval of Glumetza and recognition of royalty revenue on sales of ProQuin XR by Esprit. The license payments will be recognized as revenue over time. Substantially all of our prior revenue, which was received from collaborative research and feasibility arrangements, has been limited. We intend to continue investing in the further development of our drug delivery technologies and the AcuForm technology.

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, accrued liabilities and stock-based compensation to be critical policies. There have been no changes to our critical accounting policies, other than our policies regarding revenue recognition and stock-based compensation described below, since we filed our 2005 Annual Report on Form 10-K with the Securities and Exchange Commission on March 16, 2006. For a description of our critical accounting policies other than revenue recognition or stock-based compensation, please refer to our 2005 Annual Report on Form 10-K.

Revenue Recognition

Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units.

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Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and we are reasonably assured of collecting the resulting receivable.

We sell Glumetza product to wholesalers and retail pharmacies that is subject to rights of return up to twelve months after product expiration.  Given the limited sales history of Glumetza and return privileges associated with the product launch, we currently cannot reliably estimate expected returns of the product at the time of shipment.  As a result, we have deferred recognition of revenue on all Glumetza product shipments and recorded $5.6 million as deferred revenue, which is net of stocking allowances, cash discounts and wholesaler fees as of September 30, 2006.  In addition, the costs of manufacturing Glumetza associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the deferred revenue is recognized.

Product sales revenue related to our supply agreement with Esprit is recognized after the expiration of a 30-day period in which Esprit may reject product that does not meet agreed-upon specifications.

Revenue related to collaborative agreements with corporate partners is recognized as the expenses are incurred for each contract. We are required to perform services as specified in each respective agreement on a best efforts basis, and we are reimbursed based on the costs incurred on each specific contract. Our business strategy includes performing additional development work for our partners, which we expect will generate milestone payments and license fees. We will recognize nonrefundable substantive milestone payments pursuant to collaborative agreements upon the achievement of specified milestones where no further obligation to perform exists under that provision of the arrangement and when collectibility is reasonable assured. Non-refundable license fees are recognized over the period of continuing involvement of a specific contract or, if no continuing involvement exists, such license fees are recognized upon receipt. Management has made assumptions relating to the period of continuing involvement, which are subject to change. Changes in these estimates and assumptions could affect the amount of revenues from licenses recorded in any given period.

Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalties received under our agreement with Esprit are recognized based on Esprit’s sales, net of estimated returns, discounts, rebates and chargebacks.  We rely on information from Esprit to assist us in determining these estimates, which takes into consideration industry and historical return patterns of this product and Esprit’s other products and product specific information provided by customers. We believe this information provides a reasonable and reliable basis regarding estimates of returns, discounts, rebates and chargebacks. Royalties received in excess of amounts earned are classified as royalty advances until earned. Royalties received under our agreement with Biovail are recognized when the royalty payments are received.

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Stock-Based Compensation

Beginning January 1, 2006, we began accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS123(R)), using the modified prospective transition method. We use the Black-Scholes option valuation model to estimate the fair value of stock options and Employee Stock Purchase Plan (ESPP) shares. The Black-Scholes model requires the input of highly subjective assumptions. The most significant assumptions are our estimates of the expected volatility and the expected term of the award. There is limited historical information available to support our estimate of certain assumptions required to value stock options. For our volatility assumption, we use the historical volatility of our common stock over the expected term of the options. We have concluded that our historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term and therefore, as of January 1, 2006, we estimate the expected term of options granted by taking the average of the vesting term and the contractual term of the option, as illustrated in SEC Staff Accounting Bulletin No. 107 (SAB 107). As required, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. FAS 123(R) requires that employee and director stock-based compensation costs be recognized over the vesting period of the award, and we have elected to use the straight-line attribution method. Stock-based compensation expense recognized under FAS 123(R) in the condensed consolidated statements of operations for the three and nine months ended September 30, 2006 related to stock options and the ESPP was $679,000 and $1,896,000, respectively. For the three months ended September 30, 2006, stock-based compensation expense consisted of $437,000 in selling, general and administrative expense, $239,000 in research and development expense and $3,000 in cost of sales. For the nine months ended September 30, 2006, stock-based compensation expense consisted of $1,165,000 in selling, general and administrative expense, $728,000 in research and development expense and $3,000 in cost of sales. As a result of adopting FAS 123(R), our net loss for the three and nine months ended September 30, 2006 was $621,000 and $1,721,000 higher, respectively, than if we continued to account for stock-based compensation under APB 25 as we did in comparable prior year periods. Accordingly, basic and diluted net loss applicable to common stock shareholders per share for the three and nine months ended September 30, 2006 was $0.01 and $0.04 higher, respectively, than if we continued to account for stock-based compensation under APB 25. The implementation of FAS 123(R) did not have an impact on our cash flows for the nine months ended September 30, 2006.

Prior to the implementation of FAS 123(R), we accounted for stock options and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and made pro forma footnote disclosures as required by FAS 123, Accounting for Stock-Based Compensation (FAS 123). Under APB No. 25, no stock-based compensation was recognized for the ESPP or for option grants when the exercise price of the options granted was equal to or greater than the fair value market price of the stock on the grant date. For the three and nine months ended September 30, 2005, we recognized $63,000 and $327,000 of stock-based compensation, respectively, under APB No. 25.

FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimated forfeitures based on historical experience. Prior to the adoption of FAS 123(R), pro forma information required under FAS 123 included forfeitures as they occurred.

At September 30, 2006, we had $5.3 million of total unrecognized compensation expense, net of estimated forfeitures, which will be recognized over the weighted-average vesting period of 2.1 years.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2006 and 2005

Revenue

Revenue for the three and nine months ended September 30, 2006 was $959,000 and $4,514,000 compared to $795,000 and $1,242,000 for the three and nine months ended September 30, 2005, respectively. In 2006, the increase in revenue is primarily due to revenue recognized under our license agreements with Esprit and Biovail and product sales related to our supply agreement with Esprit for ProQuin XR.

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License revenue in the three and nine months ended September 30, 2006 increased to $893,000 and $2,679,000, respectively, from $19,000 and $56,000 in the same periods of 2005 due to revenue recognized under our license agreements with Esprit and Biovail.  Product revenue related to our supply agreement with Esprit was zero and $1,265,000 for the three and nine months ended September 30, 2006, respectively, compared to zero in the same periods of 2005. Royalty revenue included Esprit’s sales of ProQuin XR in the United States and Biovail’s sales of Glumetza in Canada and for the three and nine months ended September 30, 2006 was $66,000 and $495,000, respectively, compared to zero in the same periods of 2005. Revenue from collaborative agreements decreased to zero and $75,000 for the three and nine months ended September 30, 2006 from $776,000 and $1,186,000 for the three and nine months ended September 30, 2005, respectively.  The decrease in collaborative revenue was a result of services performed in 2005 under our agreement with Boehringer Ingelheim Pharmaceuticals which were completed in December 2005.

Cost of Sales

Cost of sales for the three and nine months ended September 30, 2006 was $320,000 and $1,446,000, respectively. However, cost of sales did not include the costs of certain material previously expensed. Prior to commercialization, materials that were purchased were expensed to research and development. If we would have accounted for this material in cost of sales, our cost of sales would have been approximately $42,000 greater for the nine months ended September 30, 2006. Cost of sales consists of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs, product quality testing, internal employee costs related to the manufacturing process, distribution costs and shipping costs.

Research and Development Expense

Research and development expense increased to $6,436,000 and $18,888,000 in the three and nine months ended September 30, 2006, respectively, from $4,696,000 and $14,766,000 for the same periods of 2005.  In the three and nine months ended September 30, 2006, the increases of $1,740,000 and $4,122,000, respectively, were primarily related to the completion of our Phase 2 and commencement of our Phase 3 clinical trials for Gabapentin GR for the treatment of postherpetic neuralgia and Phase 2 clinical trial for the treatment of diabetic peripheral neuropathy.  Our research and development expense may increase in the fourth quarter of 2006 as a result of our ongoing clinical trials for Gabapentin GR.

Our research and development expenses currently include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities, consultants, depreciation, facilities and utilities. 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 until actual product launch. 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.

Selling, General and Administrative Expense

Selling, general and administrative expense increased to $7,327,000 and $16,157,000 in the three and nine months ended September 30, 2006, respectively, from $3,508,000 and $8,440,000 for the same periods in 2005. In the three and nine months ended September 30, 2006, the increases of $3,819,000 and $7,717,000 were primarily due to marketing costs for Glumetza, the hiring of additional employees to support our commercialization efforts, legal costs related to defending our intellectual property, costs relating to the planning and organization of commercial manufacturing activities at our contract manufacturer, and costs related to transition of the rights of Glumetza in the United States from Biovail to us. We expect our selling, general and administrative expense to decrease in the fourth quarter of 2006 as we anticipate our share of marketing costs under our promotion agreement with King to decrease for the quarter.

Interest and Other Income and Interest Expense

Interest and other income was approximately $492,000 and $1,673,000 for the three and nine months ended September 30, 2006, respectively, compared to $442,000 and $811,000 for the same periods in 2005. The increase, year over year, was due to higher investment balances in 2006 as a result of our receipt of license fees from Esprit and Biovail in 2005 and also due to higher interest rates earned on our investment portfolio.

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Interest expense was zero for the three and nine months ended September 30, 2006 and zero and $460,000 for the three and nine months ended September 30, 2005, respectively. The interest expense in 2005 was mainly due to interest on the Elan promissory note, which was fully repaid in June 2005.

Series A Preferred Stock and Deemed Dividends

In January 2000, we issued 12,015 shares of Series A Preferred Stock at a price of $1,000 per share. The Series A Preferred Stock accrued a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock was convertible at anytime between January 2002 and January 2006 into our common stock. The original conversion price of the Series A Preferred Stock was $12.00. However, as a result of our March 2002 and October 2003 financings, the conversion price was adjusted to $9.51 per share. In December 2004, we entered into an agreement with the Series A Preferred stockholder to resolve a misunderstanding between us and the stockholder relating primarily to prior adjustments to the conversion price of the Series A Preferred Stock (the December 2004 Agreement). Pursuant to the December 2004 Agreement, among other matters, we agreed to adjust the conversion price to $7.50 per share. We and the stockholder also agreed to binding interpretations of certain other terms related to the Series A conversion price.

Prior to December 2004, the amounts calculated as Series A Preferred stock dividends were accounted for as an adjustment to the conversion price following EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (Issue No. 98-5). As a result of the December 2004 Agreement, we determined that a significant modification of the preferred stock agreement had occurred, and, therefore, a new commitment date was established for the Series A Preferred Stock. Further, we determined that the fair value of the modified preferred stock was below the carrying value of such securities as of the date of the modification, therefore, no deemed dividend resulted from this modification. Also, we determined that although a new commitment date had been established, this change did not result in a beneficial conversion feature subject to recognition pursuant to Emerging Issues Task Force Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. However, an anti-dilution provision of the Series A Preferred Stock was triggered by the Company’s January 2005 financing, which adjusted the conversion price of the Series A Preferred Stock to $7.12. As a result of the adjusted conversion price and an increase in the amount of common stock issuable upon conversion of the Series A Preferred Stock due to additional accumulated dividends, the Series A Preferred Stock now contains a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5.

In conjunction with the modification of the agreement, we issued a warrant to the Series A Preferred stockholder. The value of the warrant was considered in determining the value of the modified security. The warrant is convertible into shares of our common stock during the period between January 2006 and January 2009. The conversion price of the warrant initially was $7.12, which was equal to the Series A Preferred Stock conversion price in effect as of January 20, 2006. The conversion price of the warrant decreases by approximately 4.8% per year during the conversion period, such that the number of shares of our common stock issuable upon conversion of the warrant will increase by approximately 5.1% per year. The conversion of the warrant may be satisfied only by surrender of the outstanding shares of Series A Preferred Stock.

The Series A Preferred Stock accrued dividends through January 20, 2006, the date the warrant initially became exercisable. As a result of the issuance of the warrant, the preferred stock may be surrendered in exchange for common stock for an additional three years through January 20, 2009. As long as the Series A Preferred Stock remains outstanding, the number of shares into which the warrant can be converted increases as the conversion price of the warrant decreases resulting in additional deemed dividends on the Series A Preferred Stock. For the three and nine months ended September 30, 2006, we recognized Series A Preferred Stock deemed dividends of approximately $165,000 and $500,000, respectively, attributable to the beneficial conversion feature from the accrued dividends and decreasing warrant price. We will continue to recognize Series A Preferred Stock deemed dividends until the earlier of, the time the Series A Preferred Stock is surrendered or until January 2009.

As of September 30, 2006, there were 18,159 shares of Series A Preferred Stock outstanding with an aggregate liquidation preference of approximately $18,159,000. The warrant was convertible into 2,639,751 shares of our common stock at a conversion price of $6.88 as of September 30, 2006.

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LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities for the nine months ended September 30, 2006 was approximately $25,276,000, compared to cash provided by operating activities of approximately $35,253,000 for the nine months ended September 30, 2005. During the nine months ended September 30, 2006, cash used in operating activities was primarily due to our net loss for the quarter adjusted for stock-based compensation, depreciation expense and movements in working capital. During the nine months ended September 30, 2005, cash provided by operating activities was primarily due to the receipt of $30 million in license fees from Esprit and $25 million in license fees from Biovail, offset by the net loss for the period.

Investing Activities

Cash provided by investing activities in the nine months ended September 30, 2006 totaled approximately $17,996,000 and consisted of an $18,665,000 net decrease in marketable securities partially offset by $669,000 in purchases of laboratory and office equipment. Net cash used in investing activities in the nine months ended September 30, 2005 totaled approximately $27,129,000 and consisted of a $26,492,000 net increase in marketable securities and $637,000 in purchases of laboratory and office equipment. We expect that future capital expenditures will include 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 nine months ended September 30, 2006 was approximately $2,463,000 compared to cash provided by financing activities of approximately $11,881,000 for the same period in 2005. In 2006, the amount consisted of cash proceeds from exercises of warrants, exercises of stock options and purchase of shares under the ESPP. In 2005, the amount consisted primarily of $21,053,000 of net proceeds from our registered direct public offering of 5,036,000 shares of common stock for $4.50 per share in January 2005 and $791,000 of cash proceeds from exercises of warrants, exercises of stock options and purchase of shares under the ESPP, which was partially offset by a $9,665,000 payment upon extinguishment of the Elan promissory note.

Contractual Obligations

As of September 30, 2006, our aggregate contractual obligations are as shown in the following table.

			Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 to 3 years		Greater than 3 years
Operating leases	$	3,735,167	$	1,220,753	$	2,492,893	$	21,521

In August 2006, we renegotiated certain terms of our existing non-cancelable leases of laboratory and office facilities in Menlo Park, California, including the lease terms, which will now expire in June 2009 and include options to extend the leases for an additional five years. We also entered into a non-cancelable lease agreement to lease an additional 9,000 square feet in a facility adjacent to our existing facilities in Menlo Park, with a lease term through June 2009 and an option to extend the lease for an additional five years.

Financial Condition

As of September 30, 2006, we had approximately $35,610,000 in cash, cash equivalents and marketable securities, working capital of $24,796,000, and accumulated net losses of $174,755,000. In July 2005, we received a $25.0 million payment from Biovail upon FDA approval of Glumetza and $30.0 million from Esprit as upfront license fees for ProQuin XR. Esprit is required to pay us additional license fees totaling $20 million, in equal installments, in December 2006 and July 2007. We expect to continue to incur operating losses for at least the next year. We anticipate that our existing capital resources and contractual amounts due to us will permit us to meet our capital and operational requirements through at least December 2007. 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:

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·expenditures related to our commercialization effort;

·results of research and development efforts;

·financial terms of definitive license agreements or other commercial agreements we enter into, if any;

·receipt of payments due to us under our contracts with collaborative partners;

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

·technological advances;

·results of clinical testing, requirements of the FDA and comparable foreign regulatory agencies; and

·acquisitions or investment in complimentary businesses, products or technologies.

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 AcuForm technology.

Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. We have limited credit facilities and no other committed sources 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 additional capital would have a material adverse effect on our company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 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.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in legal proceedings relating to some of our intellectual property rights. In January 2006, we filed a complaint against IVAX Corporation in the U.S. District Court for the Northern District of California for infringement of U.S. Patent Nos. 6,340,475 and 6,635,280, both of which are owned by us. The patents relate to our AcuForm delivery technology. The complaint alleges infringement of our patents by IVAX’s extended release metformin hydrochloride tablet.

ITEM 1A. RISK FACTORS

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. The following risk factors set forth below contain material changes to the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005:

·We depend heavily on King Pharmaceuticals for the successful commercialization of Glumetza in the United States.;

·We are responsible for the distribution of Glumetza, and we have limited experience with distribution of pharmaceutical products.;

·We have limited in-house sales and marketing resources, which we will require in order to successfully co-promote Glumetza and ProQuin XR through our own sales force.;

·We depend on Esprit Pharma for the successful commercialization of ProQuin XR in the United States, and on Biovail for the successful commercialization of Glumetza in Canada.;

·Our licensed patent covering the use of gabapentin to treat hot flashes associated with menopause is a method of use patent rather than a composition of matter patent, which increases the risk that physicians will prescribe, or pharmacists will dispense, another manufacturer’s gabapentin for the treatment of hot flashes associated with menopause rather than Gabapentin GR.;

·We depend on third parties who are single source suppliers to manufacture ProQuin XR, Glumetza and our later stage product candidates. If these suppliers are unable to manufacture ProQuin XR, Glumetza or our product candidates, our business will be harmed.;

·We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays outside of our control.; and

·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.

See also “Forward-Looking Information.”

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We depend heavily on King Pharmaceuticals for the successful commercialization of Glumetza in the United States.

In June 2006, we entered into a promotion agreement with King Pharmaceuticals pursuant to which King promotes Glumetza in the United States through its sales force.  Under the agreement, in exchange for promotion fees, King is required to promote Glumetza to physicians in the United States, to deliver a minimum number of annual detail calls to potential Glumetza prescribers, and to maintain a sales force of a minimum size.  Although we have retained rights to promote Glumetza to certain physicians and to retain revenues from incremental sales generated by physicians we call upon, we have not yet established a sales force, or contracted with a third party to act as our sales force, and we do not have immediate plans to do so.  Accordingly, the success of the initial commercialization of Glumetza will depend in large part on the efforts of King’s sales force in the promotion of the product.  Factors that may affect the success of our promotion arrangement with King include the following:

·King may acquire or develop alternative products;

·King may pursue higher-priority programs, or change the focus of its marketing programs;

·King may in the future choose to devote fewer resources to Glumetza;

·Glumetza may fail to achieve market acceptance; and

·King may fail to comply with its obligations under our promotion agreement.

Any of the preceding factors could affect King’s commitment to the collaboration, which, in turn, could adversely affect the commercial success of Glumetza.  Any failure to successfully commercialize Glumetza could have a material adverse effect on our business, financial conditions, results of operations and cash flows.

We are responsible for the distribution of Glumetza, and we have limited experience with distribution of pharmaceutical products.

We are responsible for the distribution of Glumetza, which is the first product that we have distributed ourselves.  Although we have enhanced our in-house commercial operations and distribution capabilities in connection with the commercial launch of Glumetza, our internal resources remain limited.  In addition, we have entered into distribution arrangements with third parties related to Glumetza, including Cardinal Health, AmeriSourceBergen and McKesson, and we will depend on them to ensure that Glumetza is widely available to support its commercial availability.  To continue to support our commercialization effort related to Glumetza and any other product we choose to market and distribute, we must continue to enhance our internal commercial infrastructure, and continue to contract with capable third parties to assist us in our commercialization efforts.  The development of that infrastructure will also require substantial resources, which may divert the attention of our management and key personnel.  The efforts of third parties with whom we contract for distribution of our products may not be successful.  Any failure on our part to successfully develop distribution capabilities could cause delays in product sales and incur increased costs.

We have limited in-house sales and marketing resources, which we will require in order to successfully co-promote Glumetza and ProQuin XR through our own sales force.

Although we have the right to co-promote Glumetza and ProQuin XR through our own sales force, or through third parties, we have no sales force and limited marketing and sales staff.  The success of our own promotion efforts for Glumetza, ProQuin XR and any other product candidates that receive regulatory approval that we choose to market or co-market will require that we substantially enhance our in-house marketing and sales force with technical expertise, or make arrangements with third parties to perform these services for us.  The development of the infrastructure associated with these activities involves substantial resources, and considerable attention of our management and key personnel. To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others.  These efforts may not be successful.  If we fail to fully develop marketing and sales capabilities, or enter into arrangements with third parties, our revenues may suffer.

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We depend on Esprit Pharma for the successful commercialization of ProQuin XR in the United States, and on Biovail for the successful commercialization of Glumetza in Canada.

Esprit has certain exclusive marketing rights to ProQuin XR in the United States. Esprit launched ProQuin XR in November 2005.  Esprit is a private company with a limited operating history and has not yet established a proven track record of successfully commercializing its products.  In addition, although Esprit announced in March 2006 that it had secured a $50 million debt facility, and in August 2006 announced that it completed an equity financing in excess of $90 million, Esprit has limited financial resources relative to many other pharmaceutical companies.  Any financial difficulties experienced by Esprit, or complications in the promotion of ProQuin XR or Esprit’s other products, or execution of its business plan, may adversely affect the ProQuin XR commercialization effort and Esprit’s ability to comply with its obligations to us under our license agreement.  If Esprit fails to successfully commercialize ProQuin XR, or to comply with its obligations under our license agreement, including its license fee and minimum royalty obligations, our business, financial condition and results of operations may be materially and adversely affected.

We have licensed exclusive marketing rights to the 500mg Glumetza in Canada to Biovail. Biovail launched the 500mg Glumetza in Canada in November 2005. If Biovail fails to successfully commercialize Glumetza in Canada, our business and future revenues may be adversely affected.

Our product candidates are at early stages of development and may not be successful or achieve market acceptance.

We have initiated a Phase 3 clinical trial of Gabapentin GR for the treatment of postherpetic neuralgia, and a Phase 2 trial of Gabapentin GR for diabetic neuropathy, and we expect to initiate a clinical development program for Gabapentin GR for the treatment of hot flashes associated with menopause in 2007.  Biovail is assisting us with the preparation of a supplemental NDA filing for the new 1000mg formulation of Glumetza for which we have an exclusive license in the United States.  We have other product candidates in earlier stages of development.  Our own product candidates and those of our collaborative partners are subject to the risk that any or all of them are found to be ineffective or unsafe, or otherwise may fail to receive necessary regulatory clearances.  We are unable to predict whether any of these other product candidates will receive regulatory clearances or be successfully manufactured or marketed.  Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the time frames for commercialization of any products are long and uncertain.  Even if these other product candidates receive regulatory clearance, our products may not achieve or maintain market acceptance. Also, all of our product candidates, other than the 1000mg formulation of Glumetza, use the AcuForm technology.  If it is discovered that the AcuForm technology could have adverse effects or other characteristics that indicate it is unlikely to be effective as a delivery system for drugs or therapeutics, our product development efforts and our business would be significantly harmed.

We are expecting operating losses in the future.

To date, we have recorded limited revenues from license fees, royalties, product sales, collaborative research and development arrangements and feasibility studies.  For the nine months ended September 30, 2006, we recorded total revenues of $4.5 million, and for the years ended December 31, 2005, 2004 and 2003, we recorded total revenue of $4.4 million, $200,000 and $1.0 million, respectively. For the nine months ended September 30, 2006, we incurred a net loss of $30.8 million, and for the years ended December 31, 2005, 2004 and 2003 we incurred net losses of $24.5 million, $26.9 million and $30.0 million, respectively. As we incur expenses related to the commercialization of Glumetza, continue our research and development efforts, preclinical testing and clinical trial activities, and expand our sales and marketing organization, we anticipate that we will continue to incur substantial operating losses for at least the next year. Therefore, we expect our cumulative losses to increase. These losses, among other things, have had, and we expect that they will continue to have, an adverse impact on our total assets, shareholders’ equity and working capital.

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

The following factors among others, are expected to affect our quarterly operating results and may result in a material adverse effect on our stock price:

·the degree of commercial success of ProQuin XR and Glumetza;

·our collaborative partners’ compliance or non-compliance with their obligations under our agreements with them;

·results of clinical trials for our product candidates;

·results of litigation;

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

·decisions by collaborative partners to proceed or not to proceed with subsequent phases of a collaboration or program;

·market acceptance of the AcuForm technology;

·regulatory actions;

·adoption of new technologies by us or our competitors;

·developments concerning proprietary rights, including patents, infringement allegations and litigation matters, including our pending litigation against IVAX Corporation;

·the introduction of new products by our competitors;

·manufacturing costs and difficulties;

·changes in government funding;

·third-party reimbursement policies; and

·the status of our compliance with the provisions of the Sarbanes-Oxley Act of 2002.

Our collaborative arrangements may give rise to disputes over commercial terms, contract interpretation and ownership of our intellectual property and may adversely affect the commercial success of our products.

We currently have a collaboration agreement for development of product candidates through the feasibility phase with New River Pharmaceuticals, and we have a collaboration arrangement with Patheon, Inc. related to the potential development of product candidates for third parties.  We also have a collaboration agreement with Supernus, Inc. providing for the development of a product candidate through feasibility, with the possibility to enter into a definitive agreement providing for the further development of the product candidate, by either or both parties.  In addition, we have in the past and may in the future enter into other collaborative arrangements, some of which have been based on less definitive agreements, such as memoranda of understanding, material transfer agreements, options or feasibility agreements.  We may not execute definitive agreements formalizing these arrangements.  Collaborative relationships are generally complex and may give rise to disputes regarding the relative rights, obligations and revenues of the parties, including the ownership of intellectual property and associated rights and obligations, especially when the applicable collaborative provisions have not been fully negotiated and documented. Such disputes can delay collaborative research, development or commercialization of potential products, and can lead to lengthy, expensive litigation or arbitration. The terms of collaborative arrangements may also limit or preclude us from developing products or technologies developed pursuant to such collaborations. Additionally, the collaborators under these arrangements might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Moreover, negotiating collaborative arrangements often takes 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.

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We may not be able to enter into future collaborative arrangements on acceptable terms, which would harm our ability to develop and commercialize our current and potential future products. Further, even if we do enter into collaboration arrangements, it is possible that our collaborative partners may not choose to develop and commercialize products using the AcuForm technology. 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 AcuForm technology.

Generally, our collaborative arrangements do not restrict our collaborative partners from competing with us or restrict their ability to market or sell competitive products. 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 their collaborative relationships with us or otherwise decide not to proceed with development and commercialization of our products.

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 seek to protect our proprietary rights, by among other methods, filing patent applications in the United States and foreign jurisdictions to cover certain aspects of our technology. We currently hold nine issued patents and twelve patent applications are pending in the United States. In addition, we are preparing patent applications relating to our expanding technology for filing in the United States and abroad. 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, which could limit our ability to stop competitors from marketing related products or may not provide us with competitive advantages against competing products.

We also rely on trade secrets and proprietary know-how, which are difficult to protect. We seek to protect such 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 or other intellectual property rights. We are not aware of any intellectual property claims against us. However, the pharmaceutical industry has experienced extensive litigation regarding patents and other intellectual property rights. For example, Pfizer has initiated several suits against companies marketing generic gabapentin products, claiming that these products infringe Pfizer’s patents. The results of this litigation could adversely impact the commercialization of any generic gabapentin product. Also, we are aware that patents issued to third parties relating to sustained release drug formulations or particular pharmaceutical compounds could in the future be asserted against us, although we believe that we do not infringe any valid claim of any patents. If claims concerning any of our products were to arise and it was determined that these products infringe a third party’s proprietary rights, we could be subject to substantial damages for past infringement or be forced to stop or delay our activities with respect to any infringing product, unless we can obtain a license, or we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time. Such a license may not be available on acceptable terms, or at all. Even if we, our collaborators or our licensors were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. In addition, any public announcements related to litigation or interference proceedings initiated or threatened against us, even if such claims are without merit, could cause our stock price to decline.

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From time to time, we may become aware of activities by third parties that may infringe our patents. For example, in January 2006, we filed a complaint against IVAX Corporation in federal court for infringement of two of our U.S. patents related to the AcuForm delivery technology. Infringement by others of our patents may reduce our market shares (if a related product is approved) and, consequently, our potential future revenues and adversely affect our patent rights if we do not take appropriate enforcement action. 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. If we need but cannot obtain a license, we may be prevented from marketing the affected product.

Our licensed patent covering the use of gabapentin to treat hot flashes associated with menopause is a method of use patent, which increases the risk that prescriptions for gabapentin to treat hot flashes in menopausal women could be written for, or filled with, generic gabapentin.

We have an exclusive sublicense from PharmaNova, Inc. to a patent held by the University of Rochester to develop and commercialize in the United States a gabapentin product for the treatment of hot flashes associated with menopause in women.  Because a method of use patent, such as the patent we have sublicensed from PharmaNova, covers only a specified use of a particular compound, not a particular composition of matter, we cannot prevent others from commercializing gabapentin.  Accordingly, physicians could prescribe another manufacturer’s gabapentin to treat hot flashes in menopausal women rather than Gabapentin GR, or pharmacists could seek to fill prescriptions for Gabapentin GR with another manufacturer’s gabapentin.  Although any such “off-label” use would violate our licensed patent, effectively monitoring compliance with our licensed patent may be difficult and costly.

If PharmaNova were to terminate our sublicense due to a breach of the sublicense on our part, we would not be able to commercialize Gabapentin GR for the treatment of hot flashes associated with menopause.

It is difficult to develop a successful product. If we do not develop a successful product we may 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 AcuForm technology, other than Glumetza and ProQuin XR, we, our current and any future collaborative partners will need to:

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

·obtain regulatory approval from the FDA or foreign regulatory authorities.

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

·the AcuForm technology has unintended or undesirable side effects; or

·product candidates that appear promising in preclinical or early-stage clinical studies do not demonstrate efficacy in later-stage, larger scale clinical trials.

Even when or if our products obtain regulatory approval, successful commercialization requires:

·market acceptance;

·cost-effective commercial scale production; and

·reimbursement under private or governmental health plans.

Any material delay or failure in the governmental approval process and/or the successful commercialization of our potential products, particularly Glumetza or ProQuin XR, would adversely impact our financial position and liquidity and would make it difficult for us to raise financing on favorable terms, if at all.

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If we do not achieve our projected development and commercialization goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed and our business will be harmed.

For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development and commercialization goals. These milestones may include our expectations regarding the commercial launch of our products by us or our licensees, and the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we may publicly announce the expected timing of some of these milestones, such as the completion of our ongoing Phase 3 trial for Gabapentin GR.  All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary considerably from our estimates depending on numerous factors, some of which are beyond our control, including:

·our available capital resources;

·the efforts of our marketing partners with respect to the commercialization of our products;

·the rate of progress, costs and results of our clinical trial and research and development activities, including the extent of scheduling conflicts with participating clinicians and clinical institutions and our ability to identify and enroll patients who meet clinical trial eligibility criteria;

·our receipt of approvals by the FDA and other regulatory agencies and the timing thereof;

·other actions by regulators;

·our ability to access sufficient, reliable and affordable supplies needed for the manufacture of our products and product candidates, including insulin and materials for our AcuForm technology; and

·the costs of ramping up and maintaining manufacturing operations, as necessary.

If we fail to achieve our announced milestones in the timeframes we announce and expect, our business and results of operations may be harmed and the price of our stock may decline.

We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays outside of our control.

We rely on clinical investigators and clinical sites to enroll patients and other third parties to manage our trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that the clinical sites that conduct the clinical testing may devote to our clinical trials.  If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them on our planned schedule, we will be unable to complete these trials or to complete them as planned, which could delay or prevent us from obtaining regulatory approvals for our product candidates.

Our agreements with clinical investigators and clinical sites for clinical testing and for trial management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our Phase 3 clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.

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.

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 product candidates. Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Significant clinical trial delays would impair our ability to commercialize our products and could allow our competitors to bring products to market before we do. 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.

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Further, with respect to our approved products, 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 (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.

Pharmaceutical marketing is subject to substantial regulation in the United States.

All marketing activities associated with ProQuin XR and Glumetza, as well as marketing activities related to any other products for which we obtain regulatory approval, will be subject to numerous federal and state laws governing the marketing and promotion of pharmaceutical products. The FDA regulates post-approval promotional labeling and advertising to ensure that they conform to statutory and regulatory requirements. In addition to FDA restrictions, the marketing of prescription drugs is subject to laws and regulations prohibiting fraud and abuse under government healthcare programs. For example, the federal healthcare program antikickback statute prohibits giving things of value to induce the prescribing or purchase of products that are reimbursed by federal healthcare programs, such as Medicare and Medicaid. In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Under this law, the federal government in recent years has brought claims against drug manufacturers alleging that certain marketing activities caused false claims for prescription drugs to be submitted to federal programs. Many states have similar statutes or regulations, which apply to items and services reimbursed under Medicaid and other state programs, or, in some states, regardless of the payer. If we, or our collaborative partners, fail to comply with applicable FDA regulations or other laws or regulations relating to the marketing of our products, we could be subject to criminal prosecution, civil penalties, seizure of products, injunction, and exclusion of our products from reimbursement under government programs, as well as other regulatory actions against our product candidates, our collaborative partners or us.

The approval process outside the United States is uncertain and may limit our ability to develop, manufacture and sell our products internationally.

To market any of our products outside of the United States, we and our collaborative partners, including Madaus, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for drug products. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA.

If we or our marketing partners are unable to obtain acceptable prices or adequate reimbursement for our products from third-party payers, 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 of adequate reimbursement from third-party payers 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 products or product candidates, demand for these products may be limited. Further, any delay in receiving approval for reimbursement from third-party payers would have an adverse effect on our future revenues. Third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, including pharmaceuticals. Our products may not be considered cost effective, and adequate third-party reimbursement may be unavailable to enable us to maintain price levels sufficient to realize an acceptable return on our investment.

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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 many of our product candidates are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we may develop.

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 AcuForm technology include Bristol-Myers Squibb, IVAX Corporation, ALZA Corporation (a subsidiary of Johnson & Johnson), SkyePharma plc, Biovail Corporation, Flamel Technologies S.A., Ranbaxy Laboratories, Ltd., Kos Pharmaceuticals, Inc., Intec Pharma and Alpharma, Inc., all of which develop 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 Squibb is currently marketing a sustained release formulation of metformin, Glucophage XR, with which Glumetza competes. The limited license that Bristol-Myers Squibb obtained from us under our November 2002 settlement agreement extends to certain current and internally-developed future compounds, which may increase the likelihood that we will face competition from Bristol-Myers Squibb in the future on products in addition to Glumetza. Several other companies, including Barr Pharmaceuticals, Inc., Mylan Laboratories, Inc. and Teva Pharmaceutical Industries, Ltd. have received FDA approval for and are selling a controlled-release metformin product. Flamel Technologies has a controlled-release microparticle-based formulation of metformin product in Phase 2 clinical trials.

Bayer Corporation developed a once-daily ciprofloxacin product for the treatment of urinary tract infections, which is currently marketed by Schering-Plough Corporation. There may be other companies developing products competitive with Glumetza and ProQuin XR of which we are unaware.

To our knowledge, we are the only company currently in late stage clinical trials with a sustained release formulation of gabapentin for the U.S. market.

Gabapentin is currently marketed by Pfizer as Neurontin for adjunctive therapy for epileptic seizures and for postherpetic pain. Pfizer’s basic U.S. patents relating to Neurontin have expired, and at least seven companies have received approval to market generic versions of the immediate release product. In addition, Pfizer has developed a new product, Lyrica™ (pregabalin), which has been approved for marketing in the U.S. and the European Union (EU).

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 AcuForm technology or products using the AcuForm technology, either generally or in particular market segments. These developments could make the AcuForm technology or products using the AcuForm technology noncompetitive or obsolete.

Most of our principal competitors have substantially greater financial, sales, 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 who are single source suppliers to manufacture ProQuin XR, Glumetza and our later stage product candidates. If these suppliers are unable to manufacture ProQuin XR, Glumetza or our product candidates, our business will be harmed.

We are responsible for supplying commercial quantities of ProQuin XR to Esprit. For the manufacture of ProQuin XR tablets, we have entered into an agreement with MOVA Pharmaceuticals, a subsidiary of Patheon, Inc., as our sole supplier. Uquifa Mexico, S.A., our supplier of the active pharmaceutical ingredient to ProQuin XR, is also a sole supplier to us. We obtain the active pharmaceutical ingredient to ProQuin XR on a purchase order basis only. If we are unable, for whatever reason, to obtain the active pharmaceutical ingredient or ProQuin XR tablets from our contract manufacturers, we may not be able to manufacture ProQuin XR in a timely manner, if at all.

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We are also responsible for the supply and distribution of Glumetza, and MOVA Pharmaceuticals is also our sole supplier for tablets of the 500mg strength of Glumetza. We currently purchase the active ingredient for the 500mg strength of Glumetza on a purchase order basis from Farmhispania, S.A., a sole supplier of to us.  If the new formulation of 1000mg Glumetza is approved, we will rely on Biovail as our sole supplier. We will be unable to manufacture Glumetza in a timely manner if we are unable to obtain Glumetza 500mg tablets from our contract manufacturer or active pharmaceutical ingredient from suppliers, or Glumetza 1000mg tablets from Biovail.

Although we have obtained clinical batches of Gabapentin GR from a contract manufacturer, we currently have no long-term supply arrangement with respect to Gabapentin GR.  Any failure to obtain clinical supplies of Gabapentin GR could adversely affect our Gabapentin GR clinical development program.

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 and forecasted 2006 sales of our products, but:

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

·we may not be able to obtain product liability insurance for future products;

·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 AcuForm technology 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.

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 Chairman, President and Chief Executive Officer, Carl A. Pelzel, our Executive Vice President and Chief Operating 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, Mr. Pelzel 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.  For instance, in November 2006, our Chief Scientific Officer resigned to take a position at a newly-formed pharmaceutical company, and we have not yet replaced him.  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 products and potential product candidates.

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If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate them in a cost effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies. Accordingly, we may in the future pursue the acquisition of complementary businesses, products or technologies instead of developing them ourselves. We have no current commitments with respect to any acquisition or such investment. We do not know if we would be able to successfully complete any acquisitions, or whether we would be able to successfully integrate any acquired business, product or technology or retain any key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we were to be unable to integrate any acquired businesses, products or technologies effectively, our business would suffer. In addition, any amortization or charges resulting from the costs of acquisitions could harm our operating results.

We have implemented certain anti-takeover provisions.

Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock. We are also subject to the provisions of Section 1203 of the California General Corporation Law which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction.

We have adopted a shareholder rights plan, commonly known as a “poison pill”. The provisions described above, our poison pill and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us.

Increased costs associated with corporate governance compliance may significantly impact our results of operations.

Changing laws, regulations and standards relating to corporate governance, public disclosure and compliance practices, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Global Market rules, are creating uncertainty for companies such as ours in understanding and complying with these laws, regulations and standards. As a result of this uncertainty and other factors, devoting the necessary resources to comply with evolving corporate governance and public disclosure standards has resulted in and may in the future result in increased general and administrative expenses and a diversion of management time and attention to compliance activities. We also expect these developments to increase our legal compliance and financial reporting costs. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Moreover, we may not be able to comply with these new rules and regulations on a timely basis.

These developments could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.

If we are unable to satisfy regulatory requirements relating to internal controls, our stock price could suffer.

Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. At the end of each fiscal year, we must perform an evaluation of our internal control over financial reporting, include in our annual report the results of the evaluation, and have our external auditors publicly attest to such evaluation. If material weaknesses were found in our internal controls in the future, if we fail to complete future evaluations on time, or if our external auditors cannot attest to our future evaluations, we could fail to meet our regulatory reporting requirements and be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our stock price.

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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, along with the rest of our operations, are located in a single facility in the San Francisco Bay area, which has a history of 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.

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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the nine months ended September 30, 2006, the Company issued 980,813 shares of common stock to warrant holders with net proceeds to the Company of approximately $2,045,000.  Warrants to purchase an additional 526,285 of our common stock were surrendered in connection with a cashless exercise feature of the exercised warrants during the nine months ended September 30, 2006. The weighted average exercise price of the warrants exercised during the nine months ended September 30, 2006 was $3.48.  There were no warrant exercises during the three months ended September 30, 2006. The warrants were issued to accredited investors in June 2001, March 2002 and April 2003 in previously disclosed private placement transactions exempt from registration under the provisions of Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The resale of the shares issued upon exercise of the warrants has been registered on effective Form S-3 registration statements we have filed with the SEC.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

In September 2006, the Company entered into an indemnification agreement in the form attached to this Report as Exhibit 10.6 (the Indemnification Agreement) with each of its officers and directors.  The Indemnification Agreement is substantially in the form filed as an exhibit to the Company’s Registration Statement on Form SB-2 related to the Company’s initial public offering.  The Company had not previously entered into indemnification agreements with its officers and directors.

Effective November 2, 2006, Bret Berner, Ph.D., our Vice President, Product Development and Chief Scientific Officer resigned to take a position at a newly-formed pharmaceutical company.  We have entered into a six-month consulting arrangement with Dr. Berner and are currently in the process of seeking Dr. Berner’s replacement. Dr. Berner’s options to purchase our common stock will continue to vest during the consulting period, in accordance with their terms.

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ITEM 6. EXHIBITS

(a)	Exhibits
	10.1*	Amendment No. 1 to the Exclusive License and Marketing Agreement dated July 24, 2006 between the Company and Esprit Pharma
	10.2*	Co-Promotion Agreement dated July 24, 2006 between the Company and Esprit Pharma
	10.3	Lease Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	10.4	Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	10.5	Second Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	10.6	Form of Indemnification Agreement between the Company and the Company’s officers and directors.
	31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John W. Fara, Ph.D.
	31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John F. Hamilton
	32.1	Certification pursuant to 18 U.S.C. Section 1350 of John W. Fara, Ph.D.
	32.2	Certification pursuant to 18 U.S.C. Section 1350 of John F. Hamilton

* Confidential treatment requested

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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: November 9, 2006	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*	Amendment No. 1 to the Exclusive License and Marketing Agreement dated July 24, 2006 between the Company and Esprit Pharma
10.2*	Co-Promotion Agreement dated July 24, 2006 between the Company and Esprit Pharma
10.3	Lease Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
10.4	Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
10.5	Second Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
10.6	Form of Indemnification Agreement between the Company and the Company’s officers and directors.
31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John W. Fara, Ph.D.
31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John F. Hamilton
32.1	Certification pursuant to 18 U.S.C. Section 1350 of John W. Fara, Ph.D.
32.2	Certification pursuant to 18 U.S.C. Section 1350 of John F. Hamilton

* Confidential treatment requested

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EX-10.1

Exhibit 10.1

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH "***".   A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE EXCHANGE ACT OF 1934.

AMENDMENT NO. 1 TO
EXCLUSIVE LICENSE AND MARKETING AGREEMENT

This Amendment No. 1 (the “Amendment”) to Exclusive License and Marketing Agreement is made as of July 24, 2006 by and between Depomed, Inc., a California corporation (“Depomed”), and Esprit Pharma, Inc., a Delaware corporation (“Esprit”).

BACKGROUND

A.            Depomed and Esprit are parties to that certain Exclusive License and Marketing Agreement is made as of July 21, 2005 (the “Agreement”).  Capitalized terms used here without definition have the meanings given to them in the Agreement.

B.            Depomed and Esprit desire to amend the Agreement as set forth herein.

Accordingly, the parties agree as follows:

1.Amendments.

1.1           Section 2.3(b).  Section 2.3(b) is hereby amended and restated to read in its entirety as follows:

(b)           Notwithstanding the foregoing provisions of Section 2.3(a), Depomed will be entitled to the minimum royalty payments set forth on Exhibit B (each, a “Minimum Annual Royalty Amount”) for each calendar year of the term of this Agreement beginning on or after January 1, 2006; provided, however royalties paid by Esprit for Net Sales recorded in the fourth Fiscal Quarter of 2005 shall be credited against any Minimum Royalty Amount payable in respect of Net Sales recorded in 2006; provided, however, that (i) “Depomed Net Sales”, as defined in that certain Co-Promotion Agreement, dated as of July 24, 2006, between Depomed and Esprit (the “Co-Promotion Agreement”), shall be excluded from Net Sales for purposes of determining the Minimum Annual Royalty Amount, and (ii) any Minimum Annual Royalty Amount payable pursuant to this Section 2.3(b) shall be pro-rated for any portion of any calendar year of the term of this Agreement during which Depomed fails to meet its supply obligations to Esprit pursuant to the Supply Agreement.  The Parties acknowledge that the credit against any Minimum Royalty Amount Payable in respect of the Net Sales recorded in 2006 is being made due to the Parties’ understanding that Net Sales recorded in 2005 were primarily related to the initial stocking of the Licensed Product in the Territory in connection with the commercial launch of the Product.

1.2           Article 3.  Article 3 of the Agreement is amended and restated in its entirety to read as follows (it being understood that Esprit has made the license fee payments set forth in Sections 3(a) and 3(b) below):

“3.           License Fees.

Esprit shall make the following license fee payments to Depomed:

(a)Five Million Dollars ($5,000,000) on the Effective Date;

(b)Twenty-Five Million Dollars ($25,000,000) on or before the fifteenth day after the Effective Date;

(c)Ten Million Dollars ($10,000,000) on or before December 15, 2006; and

(d)Ten Million Dollars ($10,000,000) on the second anniversary of the Effective Date.”

1.3           Sections 5.5, 5.6, 5.7 and 5.8.  The following Sections 5.5, 5.6, 5.7 and 5.8 are hereby added to the Agreement:

“5.5         Details.  Notwithstanding the foregoing provisions of Section 5.4, during the period beginning on August 1, 2006 and ending on December 31, 2006, Esprit shall conduct detail calls with respect to the Licensed Product ***.

5.6           Joint Marketing Team.  A Joint Marketing Team (“JMT”) shall be established by the Parties and shall be comprised of four (4) members.  The Parties have identified their respective initial appointments to the JMT.  A Party may change any of its representatives at any time if a new person (with appropriate expertise to replace the outgoing member) is appointed to any of the foregoing positions by giving written notice to the other Party.  The total number of JMT members may be changed by unanimous vote of the JMT from time to time as appropriate; provided, that the JMT shall in all cases be comprised of an equal number of members from each of Esprit and Depomed.  One representative of Depomed and one representative of Esprit shall serve as co-chairs of the JMT (the “Co-Chairs”).  The members appointed to the JMT by each Party shall be vested with appropriate decision-making authority and power by such Party.

5.7           JMT Responsibilities.  The JMT shall review and discuss all Promotional and marketing activities related to the Licensed Product, including, at a minimum, Esprit’s commercialization plans and strategies related to the Licensed Product, which shall include, among other matters, the following:

(a)actual (during the six-month period prior to each JMT meeting) and anticipated (during the six-month period following each JMT meeting) number of Calls (by position) of Esprit’s sales force;

(b)Esprit’s list of physicians who receive Calls (with ME number);

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(c)Licensed Product positioning, strategy and tactics with supporting advertising and promotional activity to be undertaken;

(d)any training and/or sampling programs to be conducted;

(e)medical education programs to be conducted;

(f)planned public relations activities;

(g)Licensed Product sampling plans and strategies;

(h)pricing and contracting strategies to the extent permitted by law;

(i)sales, marketing and educational materials;

(j)managed health care strategies and tactics;

(k)advertising placement and market responses;

(l)sales incentive compensation for Esprit’s sales force;

(m)customer targets;

(n)post-marketing clinical studies; and

(o)budgeting for costs and expenses associated with Licensed Product commercialization.

5.8           Meetings of the JMT.  Meetings of the JMT may be called by either Co-Chair from time to time on at least five (5) business days’ notice; provided, however, that meetings of the JMT shall be held on at least a monthly basis, on the first business day of each month through 2006 and then quarterly thereafter, unless the Parties otherwise agree in writing.  If possible, the meetings shall be held in person or where appropriate, by video or telephone conference.  Unless otherwise agreed, the location of any in-person meetings of the JMT shall alternate between the principal corporate offices of the Parties.  The Parties shall determine the form of the meeting.  Either Party may invite up to five (5) additional participants to any meeting of the JMT.  Each Party shall bear its own travel and related costs incurred in connection with participation in the JMT and the JMT.”

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1.4           Section 9.10.  The following Section 9.10 is hereby added to the Agreement:

“9.10       Clinical Studies.  Notwithstanding any provision of this Agreement to the contrary, Depomed shall be entitled to conduct clinical studies or trials utilizing the Licensed Product (“Clinical Studies”) at its sole expense (a) for the purpose of supporting Regulatory Approval of one or more additional indications for the Licensed Product, or (b) that otherwise could enhance or support the Marketing of the Licensed Product.  The JMT shall review and approve the design of, and any protocol related to and the dissemination of, any Clinical Study conducted by or on behalf of Depomed.  Esprit hereby grants a non-exclusive license under the Patent Rights solely for the purpose of conducting, or having conducted, Clinical Studies.  All Regulatory Data generated in any such Clinical Study conducted by or on behalf of Depomed shall be owned by Depomed. However Depomed shall allow Esprit, at no additional cost, to utilize such data in connection with its promotional activities. Depomed shall be permitted to publish the results of any such Clinical Study conducted by or on behalf of Depomed, after affording Esprit at least twenty (20) days to review and comment on any such publication, and considering in good faith any comments provided by Esprit.  If requested by Depomed, Esprit shall cooperate with Depomed in facilitating any necessary filings or approvals with the FDA.”

1.5           Section 20.2.  Section 20.2 is hereby amended and restated to read in its entirety as follows:

“20.2  Entire Agreement.  This Agreement, the Supply Agreement and the Co-Promotion Agreement represent the entire agreement between the Parties concerning the subject matter herein (except as specifically noted herein) and supersedes all prior or contemporaneous oral or written agreements of the Parties; except that information disclosed pursuant to the confidentiality agreement between the Parties dated June 22, 2005 shall continue to be subject to the terms of that agreement until the effective date of this Agreement, from which date it will be treated as Proprietary Information pursuant to Article 8 of this Agreement.  This agreement may be modified, amended or changed only by a written instrument signed and delivered by the Parties, with clear intent to modify, amend or change the provisions hereof.”

2.Miscellaneous.

2.1           Full Force and Effect.  Except as expressly amended hereby, the Agreement will continue in full force and effect in accordance with the provisions thereof on the date hereof.

2.2           No Waiver.  Depomed’s agreement to enter into this Amendment does not constitute a waiver by Depomed of any default or breach or succession of defaults or breaches by Esprit under the License Agreement, and shall not deprive Depomed of any right under the License Agreement or controlling law in respect of any breach or default thereof by Esprit.

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2.3           Counterparts.  This Amendment may be signed in one or more counterparts, all of which will be considered one and the same instrument.

2.4           Consent to Grant of Security Interest.  Depomed does hereby consent to the granting of a security interest in this Amendment in favor of any Fortress Credit Corp. pursuant to that certain Loan Agreement, dated as of March 9, 2006, among Esprit, Fortress Credit Corp. and the lenders identified therein.   Depomed agrees to execute such other documentation may be reasonably requested by Fortress Credit Corp. to evidence such consent.

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IN WITNESS WHEREOF, Depomed and Esprit have caused this Amendment to be duly executed as of the day and year first above written.

DEPOMED, INC.:		ESPRIT PHARMA, INC.:
By:	/s/ Carl A. Pelzel	By:	/s/ Steven M. Bosacki
Name: Carl A. Pelzel		Name: Steven M. Bosacki
Title: Executive Vice President & COO		Title: VP, General Counsel & Assistant Secretary

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EX-10.2

Exhibit 10.2

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH "***".   A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE EXCHANGE ACT OF 1934.

CO-PROMOTION AGREEMENT

This Co-Promotion Agreement (this “Agreement”) is entered into this 24th day of July, 2006 by and between Depomed, Inc., a California corporation (“Depomed”), and Esprit Pharma, Inc., a Delaware corporation (“Esprit”).

BACKGROUND

A.            Esprit has exclusive marketing rights to the extended release ciprofloxacin hydrochloride pharmaceutical product known as ProQuin® XR, which product is the subject of NDA #021744 (as such NDA may be amended or supplemented subsequent to the Effective Date) (the “Product”).

B.            Esprit and Depomed desire to enhance the marketing of the Product in the Territory (as hereinafter defined) by enlisting the support and participation of Depomed and the Depomed Sales Force (as defined below) in the Product marketing effort.

AGREEMENT

Now, therefore, in consideration of the foregoing and the mutual promises herein contained, Esprit and Depomed hereby agree as follows:

1.             Definitions

1.1.          “Affiliate” means a corporation or business entity that, directly or indirectly, is controlled by, controls, or is under common control with any entity.  For this purpose, “control” means the direct or indirect ownership of more than fifty percent of the voting or income interest in such corporation or business entity, or such other relationship as, in fact, constitutes actual control.

1.2.          “Call” means an in-person, face-to-face sales presentation of the Product made by a sales representative, which presentation is for the purpose of promoting the sale of the Product.

1.3.          “Depomed Net Sales” means, for a particular period, the amount calculated by multiplying (a) Net Sales for such period by (b) the Depomed Percentage.

1.4.          “Depomed Percentage” means, for a particular period, the percentage determined by dividing (a) the total number of Units of prescriptions for Product written during such period by Prescribers on the Depomed Physician List (not including any Prescriber who is an Excluded Depomed Physician as of the end of any calendar month included within such period), by (b) the total number of Units of prescriptions for Product written during such period, in each case based on Prescriber Data for the applicable period.

1.5.          “Depomed Physician List” means the list of Prescribers to whom, pursuant to the terms of this Agreement, the Depomed Sales Force conducts Calls, as such list may be amended from time to time either (i) by mutual agreement of Esprit and Depomed, or (ii) otherwise in accordance with this Agreement.  Notwithstanding the foregoing, the Depomed Physician List will not include urologists, ob/gyns or Prescribers on the Esprit Target Physician List, and will not include more than 40,000 Prescribers.

1.6.          “Early Termination Detail Amount” is an amount equal to ***.

1.7.          “Early Termination Fee” is an amount equal to ***.

1.8.          “Effective Date” means the date first set forth above.

1.9.          “Esprit Target Physician List” means those Prescribers identified by Esprit with whom the Esprit Sales Force conducts Calls, which includes all ob/gyns, urologists and certain high prescribing primary care physicians, as such list may modified from time to time upon timely notice to Depomed.  Notwithstanding the foregoing, the Esprit Target Physician List will not include any Prescribers on the Depomed Physician List.

1.10.        “Excluded Depomed Physicians” means any Prescriber on the Depomed Physician List who, following the Promotion Commencement Date ***.

1.11.        “FDA” means the United States Food and Drug Administration.

1.12.        “First Position Detail Call” means a Call in which a full Product presentation is made,  during which key Product attributes are verbally presented, the Product is the first Product presented and (c) on which the most time is spent during the Call.  No more than one presentation in any Call shall be considered a First Position Detail Call.

1.13.        “Fiscal Quarter” means the three-month periods ending on March 31, June 30, September 30 and December 31 of each year, except for the first “Fiscal Quarter” hereof, which shall begin on the Promotion Commencement Date and end on the earliest to occur of the dates set forth in this sentence.  These periods (other than the first “Fiscal Quarter” referred to above) correspond to the quarters in the Esprit fiscal year, which ends on December 31 of each year.

1.14.        “License Agreement” means that certain Exclusive Marketing and Supply Agreement, dated as of July 21, 2005, by and between Depomed and Esprit as amended by Amendment No.1 thereto of even date herewith.

1.15.        “Marketing Plan” means a plan for the marketing and detailing of the Product in the Territory to Prescribers, and may include provisions related to promotional strategies, detailing plans, pricing, advertising plans and budgets for promotional and advertising activities.

1.16.        “NDA” means a New Drug Application filed with the FDA.

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1.17.        “Net Sales” means the actual gross amount invoiced on sales of the Product in the Territory by Esprit, its Affiliates, sublicensees and assigns to independent, unrelated third parties during a calendar year in bona fide arms length transactions, less the following deductions allowed and taken by third parties and not otherwise recovered by or reimbursed to Esprit, its Affiliates, sublicensees or assigns: (a) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such on the total amount invoiced; (b) any sales, use, value-added, excise taxes and/or duties or allowances on the selling price of the Product which fall due and are paid as a consequence of such sale; (c) chargebacks, trade, quantity and cash discounts and rebates actually allowed and taken to the extent customary in the trade, including, without limitation, governmental rebates; (d) allowances or credits, including but not limited to, allowances or credits to customers on account of rejection, defects or returns of the Product or because of a retroactive price reduction, and such other deductions (including without limitation shortage deductions) actually taken by customers that are customary in the trade; and (e) bad debt.  Net Sales shall not include a sale or transfer to an Affiliate, sublicensee and assign or if done for clinical, regulatory or governmental purposes where no consideration is received but the resale by such Affiliate, sublicensee, or assign shall be considered a sale of the Product.

1.18.        “Prescribers” means physicians and other health care practitioners who are permitted by law to prescribe Product in the Territory.

1.19.        “Prescriber Data” means data provided by a third party which measures prescriptions written for Product (by individual Prescriber) in the Territory during a specified time period, from a source mutually agreed in writing by the parties.

1.20.        “Promotion Commencement Date” means the first date upon which the Product is promoted within the Territory by the Depomed Sales Force in the Territory to Prescribers.

1.21.        “Proprietary Information” means any and all scientific, clinical, regulatory, marketing, financial and commercial information or data, whether communicated in writing, orally or by any other means, which is owned and under the protection of one party and is provided by that party to the other party in connection with this Agreement.

1.22.        “Sales Force” means the sales representatives employed by or on behalf of Depomed or Esprit, as the case may be, for the detailing of the Product in the Territory to Prescribers.  A party’s Sales Force includes, without limitation, any sales representatives engaged by the party during through an arrangement with a contract sales organization or other third party (in the case of Depomed, engaged in accordance with Section 2.5).

1.23.        “Second Position Detail Call” means any Call other than a First Position Detail Call.

1.24.        “Supply Agreement” means that certain Supply Agreement, dated as of July 21, 2005, by and between Depomed and Esprit.

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1.25.        “Term” of this Agreement means the period of time defined in Section 13.1 of this Agreement.

1.26.        “Territory” means the United States of America.

1.27.        “Unit” means a single tablet of the Product.

2.             Grants And Obligations

2.1.          Grant of Co-Promotion Right.  Pursuant to its rights under the License Agreement, Esprit hereby grants to Depomed, during the Term of this Agreement, the non-exclusive right to promote and detail the Product in the Territory to Prescribers jointly with Esprit, subject to the terms and conditions of this Agreement.

2.2.          Limitation on Marketing Diligence.  Subject to the provisions of this Agreement, including those related to termination and compensation and those related to the Prescribers on whom Depomed is entitled to call, Depomed shall have no specific minimum marketing diligence obligations with respect to the Product with regard to minimum Calls or minimum First Position Details or Second Position Details.

2.3.          Proprietary Interest in the Product.  Nothing contained in this Agreement shall be deemed to grant Depomed, either expressly or by implication, a license or other right or interest in any patent, trademark or other similar property of Esprit or its affiliates except as may be necessary for Depomed to promote and detail the Product pursuant to this Agreement; provided, however, that except for the grant by Esprit to Depomed of the license to market the Product in the Territory in the License Agreement, nothing in this Agreement shall supersede or modify the provisions of the License Agreement relating to intellectual property matters.

2.4.          Establishment of Depomed Physician List.  At Depomed’s option, it may, but is not obligated to, have the Depomed Sales Force promote and detail the Product directly to Prescribers who are not on the Esprit Target Physician List.  Depomed will inform Esprit at least forty-five (45) days in advance of the commencement of Calls by the Depomed Sales Force and provide Esprit with the Depomed Physician List.  During such fifteen (15) day period following its receipt of the Depomed Physician List, Esprit will be entitled to review the Depomed Physician List and confirm that such list does not contain any Prescribers who are, as of the end of the most recently completed month, on the Esprit Target Physician List.  Following creation of the initial Depomed Physician List, from time to time but not more than three (3) times per calendar year, Depomed may have the Depomed Sales Force promote and detail the Product to Prescribers on the Esprit Target Physician List, but such Prescribers will not be added to the Depomed Physician List for purposes of calculating promotion fees payable to Depomed hereunder.

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2.5.          Depomed Sales Force.  Depomed shall be entitled to perform Calls through its own sales force, or through a contract sales organization engaged by Depomed to perform Calls on Depomed’s behalf.  Depomed’s engagement of any third party, other than members of Depomed’s sales force or a contract sales organization, to perform Calls on Depomed’s behalf shall be subject to Esprit’s prior written consent, which shall not be unreasonably withheld, delayed or conditioned.  Prior to engaging any such third party to perform Calls on its behalf, Depomed shall identify such third party in writing to Esprit (such communication, a “Sales Force Notice”), and Esprit shall approve or reject in writing Depomed’s engagement of such third party within fifteen (15) business days after receipt from Depomed of the Sales Force Notice.  Esprit’s failure to respond in writing to a Sales Force Notice within such fifteen (15) business day period shall be deemed to be an approval of Depomed’s engagement of the third party identified in the Sales Force Notice.

3.             Marketing Committee

3.1.          Coordinators.  Esprit and Depomed shall each appoint an authorized representative (“Coordinator”) between whom communications will be directed.  Each party will notify the other as to the name of the individual so appointed.  The Coordinators shall meet periodically in person or by video or telephone conference, but not less frequently than monthly through 2006 and thereafter on a quarterly basis, to monitor the call plan of the Depomed Sales Force and the Esprit Sales Force to ensure coordination between the parties’ respective call plans.  Each party may replace its Coordinator at any time, upon written notice to the other party.

3.2.          Marketing Committee.  If requested by Esprit, Depomed’s Coordinator shall appoint a qualified representative of Depomed with expertise in the marketing of specialty pharmaceutical products to any marketing or commercialization committee established by Esprit for the purpose of coordinating and/or directing the marketing effort with respect to the Product (such committee, the “Marketing Committee”).  The Marketing Committee may perform such coordination and oversight functions as determined by Esprit.  Such functions may include, among others:  (i) meeting from time to time, at mutually agreeable times and locations, to discuss and coordinate the promotion and detailing of the Product in the Territory and the strategies and programs that should be developed to maximize Net Sales of the Product; and (ii) coordinating marketing activities with respect to the Product.  Esprit will have the final responsibility for developing promotional materials with respect to the Product in the Territory.  The parties acknowledge that Depomed’s participation on the Marketing Committee is not expected to require more than ten (10) working days annually of the time of the Depomed representative appointed to the Marketing Committee.

3.3.          Expenses.  Each party shall bear its own costs associated with its participation in the Marketing Committee, including but not limited to the costs of travel and expenses directly associated with participation in the Marketing Committee.

3.4.          Dispute Resolution.  Esprit shall have the right to resolve any disagreement among the members of the Marketing Committee in its sole and absolute discretion.

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4.             Product Promotion

4.1.          Depomed Physician List.  Depomed shall be primarily responsible for, and shall bear all costs and expenses associated with, the detailing of the Product in the Territory to the Prescribers on the Depomed Physician List.  Depomed will not compensate Esprit for services performed by the Esprit Sales Force or for other costs of promotion incurred by Esprit.

4.2.          Promotional Materials.  Esprit shall create and develop sales and promotional materials relating to the Product.  Depomed will not, without Esprit’s prior review and approval, publish or distribute any sales or promotional material with respect to the Product developed or created by or on behalf of Depomed.  Esprit shall provide Depomed with copies of promotional materials relating to the Product at ***% of Esprit’s out-of-pocket cost for such materials.

4.3.          Adverse Reaction Reports.  During the Term of this Agreement, each party shall promptly notify the other party of all information required to be reported to the FDA coming into its possession concerning side effects, injury, toxicity or sensitivity reaction including unexpected increased incidence and severity thereof associated with commercial or clinical uses, studies, investigations or tests with the Product (animal or human), throughout the world, whether or not determined to be attributable to the Product (“Adverse Reaction Reports”).  In the case of Adverse Reaction Reports within the scope of 21 CFR 314.80(c)(iii), Depomed shall transmit such adverse reaction reports so that they are received by Esprit within three (3) business days after receipt by Depomed, or such earlier reporting period as may be required by law.  Esprit shall transmit adverse reaction reports to Depomed on a periodic basis, but no less often than once every six (6) months; provided, however, that Esprit shall promptly notify Depomed of any Adverse Reaction Report requiring the cessation or substantial alteration of detailing activities by the Depomed Sales Force.  All such communications shall be held in the strictest confidence by Depomed and shall be subject to the terms of Article 11 hereof.

4.4.          Regulatory Compliance.  Depomed’s detailing and promotional activities with respect to the Product shall be conducted (a) only in a manner which is consistent with FDA and all other applicable regulatory approvals or requirements which are then in effect with respect to the Product and (b) in compliance with all applicable laws, restrictions and regulations of the FDA, the Department of Commerce and any other United States, state, local, or applicable agency or authority.  Depomed shall (a) limit its claims of efficacy and safety for the Product to those that are consistent with approved promotional materials and FDA-approved prescribing information for the Product in the Territory, (b) not add, delete or modify claims of efficacy and safety in the marketing of the Product under this Agreement from those claims of efficacy and safety that are consistent with the FDA-approved prescribing information and applicable law and (c) detail and promote the Product in adherence to applicable laws and in compliance with the then current Pharmaceutical Research and Manufacturers of America Code on Interactions with Healthcare Professionals.

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4.5.          Samples.  Esprit will provide Depomed with samples (such as starter or trial kits) of Product for distribution to health care personnel and the trade in connection with Depomed’s promotion of the Product hereunder at ***% Esprit’s out-of-pocket cost for such samples;provided, however, that during the term of the Supply Agreement, Depomed may obtain samples directly from its contract manufacturer(provided that Depomed shall supply Esprit’s requirements of samples pursuant to the terms of the Supply Agreement prior to supplying its own sample requirements).  With respect to Depomed’s purchase of samples through either of the foregoing options, Depomed shall only order full lots of samples.  Depomed shall maintain records concerning its trial kit or sample distribution as required by the Prescription Drug Marketing Act of 1987 (the “Act”) and relevant state laws.  Depomed shall take such steps as necessary to ensure that its representatives comply with all requirements of the Act, including but not limited to obtaining requests and receipts signed by licensed prescribers for all trial kits or samples delivered.  If requested by Esprit, Depomed shall provide to Esprit copies of such records as the manufacturer is required by the Act to retain.  Otherwise, Esprit shall have access to such records in accordance with Section 12.1 of this Agreement.  Depomed shall indemnify Esprit and hold Esprit harmless from any liability that Esprit may incur, whether civil, criminal or otherwise, by reason of a violation of the Act by Depomed or by any member of the Depomed Sales Force.

4.6.          Trademarks.  This Agreement shall not confer upon Depomed any interest in any trademark or trade name associated with the Product in the Territory, including those used in promotional materials.

4.7.          Ownership of Promotional Materials.  Esprit shall own all copyrights to all advertising, promotional and training materials as well as all other written materials, audiotapes, videotapes, or other copyrightable materials that are created by or on behalf of Esprit during the Term of this Agreement in connection with the marketing of the Product.  Depomed shall use commercially reasonable efforts consistent with accepted business practices to obtain such assignments from the authors and creators of such materials as may be necessary to vest ownership of the copyright in Esprit.  Esprit shall, and does hereby, grant to Depomed a royalty-free license to use and reproduce such materials solely in conjunction with its performance of services pursuant to this Agreement, which license shall not be assignable or transferable by Depomed.

4.8.          Prescriber Data.  Depomed shall reimburse Esprit quarterly for the portion of Esprit’s out-of-pocket costs incurred in procuring the Prescriber Data that is equal to the cost of such Prescriber Data multiplied by the Depomed Percentage for the applicable Fiscal Quarter.  Esprit shall make all Prescriber Data available to Depomed promptly, but in no event more than twenty-one (21) days following, Esprit’s receipt thereof.

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5.             Detailing Effort; Depomed Physician List

5.1.          Reports.  Following the Promotion Commencement Date, within thirty (30) days following the end of each calendar month during the Term, Depomed shall provide Esprit with a status report, which report will summarize Depomed’s detailing efforts pursuant to this Agreement for such prior month and on a rolling 12 month basis, including:  (a) the number of Calls made, including detail as to the Prescribers who received Calls, dates of Calls and the relative emphasis of the Calls (i.e., First Position Detail Call or Second Position Detail Call); (b) information pertaining to the Depomed Sales Force, including the number of sales representatives and the number of days in the field per sales representative; (c) a list of Prescribers on the Depomed Physician List who, as of the date such report, are Excluded Depomed Physicians.  Depomed warrants and represents that it maintains records of Calls made by its Sales Force and that these records accurately represent the number of Calls made and the relative emphasis given to each Product during a Call.  Esprit shall be entitled to audit the source data and documents used to compile such reports pursuant to the provisions of Section 12.1 of this Agreement.

5.2.          Modification of Depomed Physician List.  Esprit may, in its sole discretion, remove from the Depomed Physician List any Prescriber identified as an Excluded Depomed Physician in the most recent report received by Esprit pursuant to Section 5.1, or who otherwise qualifies as an Excluded Depomed Physician.

5.3.          Esprit Reports.  Within thirty (30) days following the end of each calendar month during the Term, Esprit shall provide Depomed with a status report, which report will summarize, on a monthly and rolling three and 12 month basis, including:  (a) the number of Calls made, including detail as to the Prescribers who received Calls, dates of Calls and the relative emphasis of the Calls (i.e., First Position Detail Call or Second Position Detail Call); (b) information pertaining to the Esprit Sales Force, including the number of sales representatives and the number of days in the field per sales representative; and (c) a list of all Prescribers on the Esprit Target Physician List (which list shall specifically identify those Prescribers who are Esprit Provisional Prescribers).  Esprit warrants and represents that it maintains records of Calls made by its Sales Force and that these records accurately represent the number of Calls made and the relative emphasis given to each Product during a Call.  Depomed shall be entitled to audit the source data and documents used to compile such reports pursuant to the provisions of Section 12.1 of this Agreement.

6.             Compensation

6.1.          Compensation.  During the Term, for each Fiscal Quarter of the Term in which Depomed conducts detailing and promotional activities pursuant to this Agreement, Esprit shall pay Depomed compensation at a rate equal to eighteen (18) percent of the amount of Depomed Net Sales in such Fiscal Quarter.  Compensation payable for any partial Fiscal Quarter during the Term shall be pro-rated based on the number of days within such Fiscal Quarter that occur during the Term relative to the total number of days within such Fiscal Quarter.

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6.2.          Payment.  (a)  Within fifteen (15) days after receipt of the Prescriber Data, but in no event later than sixty (60) days after the close of each Fiscal Quarter during the Term, Esprit shall submit to Depomed an accounting reporting the Depomed Net Sales and itemizing all deductions under Section 1.17 for such Fiscal Quarter and calculating the compensation due Depomed for said Fiscal Quarter under Section 6.1 above.  At the time of submitting each accounting report, Esprit shall remit to Depomed all payments accruing under this Agreement during such Fiscal Quarter.  All payments to Depomed under this Agreement shall be made in U.S. Dollars.

(b)           During the Term of this Agreement, any returns, recalls, credits or other reductions to Net Sales allowed by this Agreement shall be recognized in the Fiscal Quarter in which they arise.  If any such reduction results in negative Depomed Net Sales for the current Fiscal Quarter, the negative amount shall be treated as a reduction to Depomed Net Sales for the Fiscal Quarter(s) in which the sales giving rise to such return, recall, credit or other reduction occurred (the “Relevant Fiscal Quarter”) solely for purposes of calculating the compensation that should have been paid to Depomed for the Relevant Fiscal Quarter(s).

(c)           Likewise, if, after the Term of this Agreement, actual Depomed Net Sales are reduced due to returns, recalls, credits, or other reductions allowed by this Agreement relating to Products sold during the Term of this Agreement, then the Net Sales for the Relevant Fiscal Quarter(s) shall be reduced accordingly, solely for purposes of calculating the compensation that should have been paid to Depomed for the Relevant Fiscal Quarter(s).

(d)           Whenever Depomed Net Sales for a Relevant Fiscal Quarter are reduced, whether during or after the Term of this Agreement, Esprit shall give Depomed a report detailing the compensation paid to Depomed in respect of Depomed Net Sales during such Relevant Fiscal Quarter that is in excess of the compensation that should have been paid to Depomed based on the reduced Depomed Net Sales, and Depomed shall return to Esprit such excess compensation within sixty days after receipt of such report.

(e)           For the purposes of calculating any reduction in Depomed Net Sales and any compensation that should have been paid to Depomed under Sections 6.2(b) or 6.2(c), or the excess compensation that is to be returned to Esprit by Depomed under Section 6.2(d), it shall be assumed that the last Product sold in any Relevant Fiscal Quarter is the first Product to come back or be returned, recalled, etc., thus, in effect, causing the above calculations to be determined at the lowest compensation rate that was used in any such Relevant Fiscal Quarter, gradually working toward the highest compensation rate, if more than one compensation rate was used in such Relevant Fiscal Quarter, and, if further calculation is needed, continuing this process in prior Relevant Fiscal Quarter(s).

(f)            Depomed shall not be obligated to reimburse Esprit with respect to any compensation paid by Esprit to Depomed under Section 6.1 on Depomed Net Sales made before the date of termination of this Agreement that were subsequently reduced by retroactive pricing reductions made after such date of termination.

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6.3.          Net Sales.  The parties acknowledge and agree that “Net Sales” during any particular period under this Agreement is intended to correspond to “Net Sales” calculated under the License Agreement during the same period, and that any modification of License Agreement to the definition or calculation of “Net Sales”, unless otherwise agreed in writing by the parties, is intended to apply to the definition and calculation of “Net Sales” for purposes of this Agreement.

7.             Regulatory Affairs and Medical Inquiry

7.1.          Ownership of NDA.  Esprit will maintain ownership of the NDA to market the Product and any supplements thereto.  Any future regulatory submissions pertaining to the Product shall be filed by Esprit and maintained in its name, and Esprit shall own any regulatory approvals that may be issued with respect to the Product.

7.2.          Regulatory Affairs.  Esprit shall have the sole right and responsibility, and shall bear all costs related thereto, to take such actions as may be necessary, in accordance with accepted business practices and legal requirements, to maintain the authorization and/or ability to market the Product in the Territory to Prescribers, including, without limitation, the following:

(a)           Responding to customer and medical complaints relating to the quality, strength or purity of the Product.  Depomed agrees that it shall promptly refer any such complaints that it receives to Esprit;

(b)           Handling all returns of the Product.  If the Product is returned to Depomed, it shall be shipped to Esprit’s nearest distribution center, with any reasonable or authorized shipping or other documented out-of-pocket cost to be paid by Depomed.  Depomed and Esprit shall each advise their customers generally that they should make returns to Esprit;

(c)           Handling all recalls of the Product.  At Esprit’s request, Depomed will assist Esprit in receiving the recalled Product, and any direct documented out-of-pocket costs incurred by Depomed with respect to participating in such recall shall be reimbursed by Esprit.

7.3.          Communications with Regulatory Authorities.  Esprit shall have the sole right and responsibility and shall bear all costs related to communications with any government agencies to satisfy their requirements regarding the authorization and/or continued authorization to market the Product in commercial quantities in the Territory to Prescribers.  Depomed shall promptly notify Esprit of any inquiry or other communication that it receives from the FDA concerning the Product.  Esprit shall handle all communications with the FDA concerning the Product, including but not limited to reporting adverse reactions and responding to any inquiries concerning advertising or promotional materials, and shall provide copies of all such communication to Depomed.  Depomed, however shall be able to communicate with such governmental agency regarding the Product if:

(a)           Such communication is necessary to comply with the terms of this Agreement or the requirements of any law, governmental order or regulation; or

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(b)           Depomed, if practical, made a request of such agency to communicate with Esprit instead, and such agency refused such request;

provided, however, that before making any communication under (a) or (b) of this Section, Depomed shall give Esprit notice as soon as possible of Depomed’s intention to make such communication, and Esprit shall be permitted to accompany Depomed, take part in any such communications and receive copies of all such communications.

7.4.          Medical Inquiries.  Esprit shall respond to medical questions or inquiries relating to the Product directed to Depomed.  Depomed shall instruct its Sales Force to direct medical inquiries either to Esprit’s medical personnel or to the toll-free number referred to in the following sentence.  Esprit shall maintain a toll-free telephone number to provide information in response to inquiries from health care professionals and consumers.  This number shall be noted in all appropriate advertising and promotional materials.

7.5.          License Agreement.  In the event of any inconsistency between the provisions of this Article 7 and Article 9 of the License Agreement, the License Agreement shall control.

8.             Supply and Distribution

8.1.          Supply.  During the term of the Supply Agreement, the Product shall be supplied to Esprit pursuant to the terms and conditions thereof.  As between Depomed and Esprit, solely for purposes of this Agreement, Esprit shall have sole responsibility and obligation for ensuring that the Product is manufactured, either directly or through a contractor (whether pursuant to the Supply Agreement or otherwise), receiving and processing orders, distributing the Product to customers, and handling Product inventory and receivables, and Esprit shall bear all costs of such activities.  Esprit shall use reasonable efforts to insure that sufficient stock of the Product will be available in its inventory to promptly fill orders from the trade based on its reasonable forecasts of the commercial quantity of product reasonably necessary to ensure the consistent availability of the Product throughout the Territory.  Esprit shall also use reasonable efforts to have FDA-approved manufacturing facilities available to it or its manufacturer (which facilities may be located outside of the Territory) that can produce an amount of the Product in any fiscal year that is equal to or greater than the amount of Product reasonably necessary to ensure the consistent availability of the Product throughout the Territory, based on Esprit’s reasonable forecast.

8.2.          Distribution.  Esprit will supply and distribute the Product to its customers in accordance with the specifications and requirements set forth in the NDA approved by the FDA for sale of the Product in the Territory.  Esprit will be responsible and obligated to supply the Product to customers in accordance with purchase orders received by Esprit from customers for the Product, which supply of the Product shall meet FDA requirements as set forth above.

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8.3.          Direct Sales.  Esprit will generally deliver the Product only to wholesalers and to direct buying customers who have accounts with Esprit or its distributor.  If Depomed desires to arrange for Esprit to make direct sales of the Product to any customers who do not have accounts with Esprit or its distributor, Depomed will provide the documentation required by Esprit to determine whether to open an account for such customer.  Depomed is not authorized to open an account with any customer or accept any order on behalf of Esprit.  All orders are subject to acceptance by Esprit.

8.4.          Orders Received by Depomed.  If, for any reason, Depomed should receive orders for the Product other than pursuant to the Supply Agreement, Depomed shall promptly forward such orders to Esprit.

8.5.          Inability to Supply.  In the event that Esprit is at any time unable to supply the Product for any reason whatsoever, whether due to the failure of Esprit or its contract manufacturers to meet their obligations to supply Product or otherwise, such failure will be treated as a force majeure condition under Article 14, and Depomed’s sole and exclusive remedy in respect of such supply failure shall be termination of this Agreement pursuant to Article 14.  In furtherance and not in limitation of the foregoing, in no event shall Esprit be responsible under this Agreement for an inability to supply Product resulting from a breach by Depomed of the Supply Agreement.

9.             Representations and Warranties.

Each party hereby represents and warrants to the other party as follows:

(a)           It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation.  It has all requisite power and authority to carry on its business and to own and operate its properties and assets.  The execution, delivery and performance of this Agreement have been duly authorized by its Board of Directors.  Such party has obtained all authorizations, consents and approvals, governmental or otherwise, necessary for the execution and delivery of this Agreement, and to otherwise perform such party’s obligations under this Agreement.

(b)           There is no pending or, to its knowledge, threatened litigation involving it which would have any material adverse effect on this Agreement or on its ability to perform its obligations hereunder.

(c)           There is no indenture, contract, or agreement to which it is a party or by which it is bound which prohibits or would prohibit the execution and delivery by it of this Agreement or the performance or observance by it of any material term or condition of this Agreement.

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10.           Indemnification.

10.1.        Indemnification.  Each party will defend, at its own expense, indemnify and hold harmless the other party and its Affiliates from and against any and all damages, liabilities, losses, costs, and expenses, including attorneys fees, arising out of any claim, suit or proceeding brought against the other party to the extent such claim, suit, or proceeding is based upon a claim arising out of or relating to (i) any breach or violation of, or failure to perform, any covenant or agreement made by such indemnifying party in this Agreement, unless waived in writing by the indemnified party; (ii) any breach of the representations or warranties made by such indemnifying party in this Agreement; or (iii) the negligence or willful misconduct of the indemnifying party, except (under any of (i) and (ii)) to the extent arising out of the breach, violation, failure, negligence or willful misconduct of the indemnified party.  Each party agrees that it shall promptly notify the other in writing of any such claim or action and give the indemnifying party full information and assistance in connection therewith.  The indemnifying party shall have the sole right to control the defense if any such claim or action and the sole right to settle or compromise any such claim or action, except that the prior written consent of the other party shall be required in connection with any settlement or compromise which could (i) place any obligation on or require any action of such other party; (ii) admit or imply any liability or wrongdoing of such other party; or (iii) adversely affect the goodwill or public image of such other party.  Notwithstanding the foregoing, the indemnified party may participate therein through counsel of its choice, but the cost of such counsel shall be borne solely by the indemnified party.

10.2.        Survival.  The provisions of this Article 10 shall survive termination of this Agreement and shall remain in effect until a date seven (7) years after the Term of this Agreement.

11.           Confidentiality

11.1.        Confidentiality Obligation.  Except as specifically authorized by this Agreement, each party shall, for the Term and for five (5) years after the expiration or termination of this Agreement, keep confidential, not disclose to others and use only for the purposes authorized herein all Proprietary Information provided by the other under this Agreement; provided, however, that the foregoing obligations of confidentiality shall not apply to the extent that any such information is (i) already known to the recipient at the time of disclosure as evidenced by its prior written records; (ii) published or publicly known prior to or after disclosure other than through unauthorized acts or omissions of the recipient; (iii) disclosed in good faith to the recipient by a third party entitled to make such disclosure; or (iv) independently developed by or on behalf of the recipient without recourse to the disclosure herein as documented in writing.  Notwithstanding the aforesaid, the recipient may disclose Proprietary Information to governmental agencies as required by law, and to vendors and clinical investigators having a need to know and as may be necessary for the recipient to perform its obligations hereunder, but only if such disclosure to vendors and, where practicable, to clinical investigators is in accordance with a written agreement imposing essentially the same obligation of confidentiality on such party as is imposed upon the recipient hereunder.

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11.2.        Survival.  The provisions of this Article 11 shall survive termination of this Agreement and shall remain in effect until a date seven (7) years after the Term of this Agreement.

12.           Audits

12.1.        Maintenance of Records.  Each party agrees to keep, for a period of at least three (3) years after the date of entry (or such longer period as may be required by law, or regulation) full and accurate records maintained in accordance with such party’s accounting practices in sufficient detail to enable a third party to accurately calculate Calls completed (in the case of Depomed), and Net Sales and Depomed Net Sales reported and payments to be made under this Agreement (in the case of Esprit).  Such records shall be made available by the audited party for audit by an independent certified public accounting firm designated by the other party and reasonably acceptable to the party whose records are to be examined.  The auditor will only examine such books and records during business hours but not more than twice each fiscal year while this Agreement remains in effect and for two (2) years thereafter in order to verify the calculation of Calls completed (in the case of Depomed), or Net Sales and Depomed Net Sales reported and payments to be made under this Agreement (in the case of Esprit).  The fees and expenses of the auditor performing such verification examination shall be borne by the party conducting the verification; provided, however, that if any verification reveals that the examined party has reported incorrectly, and the amount of such discrepancy is at least five (5) percent of the aggregate amount that should have been reported for the period examined, then the examined party shall pay the entire amount of the fees and expenses for such verification.

12.2.        Audits Conclusive.  All audits and reports and all information contained therein provided to a party pursuant to this article shall be deemed conclusive and binding upon such party unless written objection shall be lodged with the other party within one year from the date of such audit or report, except that objections discoverable only upon audit shall be reserved for a period of one year after completion of an audit in which the facts giving rise to the objection are discovered.

12.3.        Calculation of Costs.  Whenever in this Agreement a party is required to report its costs, or is entitled to receive or obligated to make a payment based on its costs, such costs shall be determined in accordance with generally accepted accounting principles as applied in the United States, consistent with the terms of this Agreement.  The term “out-of-pocket” costs means costs paid to third parties and shall not include any fixed costs, personnel costs, overhead costs, or other costs of a similar nature.

13.Term and Termination

13.1.        Term.  The Term of this Agreement shall commence on the Effective Date and shall continue, unless terminated sooner in accordance with Section 8.5 or the subsequent provisions of this article, until July 24, 2010.  The Term of this Agreement may be extended for subsequent two year periods upon the mutual agreement of the parties, which agreement shall be set forth in writing.  Notwithstanding the foregoing, the Term of this Agreement shall immediately expire upon any termination or expiration of the License Agreement.

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13.2.        Termination for Cause.  Either party may terminate this Agreement for Good Cause (as defined in Section 13.4 below), effective at any time after providing sixty (60) days written notice and an opportunity to cure during such sixty (60) day period (if such cure is effected, such notice with respect to such good cause shall be null and void).  If the agreement is so terminated by Depomed for Good Cause, Esprit shall pay to Depomed all of the compensation due to Depomed under Section 6.1 up to and including the calendar month in which effective termination occurs, including sums which have accrued but have not yet been paid as of the effective date of termination.

13.3.        Termination for Change in Control. Esprit may terminate this Agreement upon an Esprit Change in Control (as defined in the License Agreement) upon ninety (90) days’ prior written notice, or one hundred eighty (180) days’ prior written notice if the Promotion Commencement Date has occurred, to Depomed delivered within ninety (90) days’ following the consummation of such Change of Control; provided, however, that if the Promotion Commencement Date occurs prior to Depomed’s receipt of such notice of termination, or if Depomed provides to Esprit a notice of its intention to commence Calls by the Depomed Sales Force pursuant to Section 2.4 prior to Depomed’s receipt of such notice of termination, then such termination shall be effective only if Esprit pays Depomed an Early Termination Fee not later than thirty (30) days after the date on which Depomed receives a notice of termination pursuant to this Section 13.3.

13.4.        Definition of Good Cause.  “Good Cause” which entitles a party to terminate this Agreement under Section 13.2 means:

(a)           The material failure of the other party to comply with its material obligations contained in this Agreement.  These material obligations include, but are not limited to, (i) the failure of Esprit to make the payments required by Sections 6.1, (ii) Esprit being considered as unable to supply the Product in accordance with Section 8.2, and (iii) Depomed’s material breach of its obligations under Section 4.4;

(b)           The entry of an order for relief under the United States Bankruptcy Code (or any corresponding remedy under successor laws) against the other party; the filing of a petition by or against the other party under any bankruptcy, insolvency or similar law (which petition is not dismissed within sixty days after filing), except Chapter 11 of the United States Bankruptcy Code or any successor statute that permits a corporation to continue its operation while protecting it from creditors; the appointment of a receiver for the other party’s business or property; or the other party’s making of a general assignment for the benefit of its creditors; or

(c)           Any force majeure as defined in Article 14 affecting the other party beyond the other party’s control which lasts for a period of at least six (6) months and which is of sufficient intensity to interrupt or prevent the carrying out of such other party’s material obligations under this Agreement during such period.

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13.5.        Force Majeure.  Any force majeure of the type described in Article 14 affecting a party hereunder shall provide the other party hereto, at any time after the expiry of the period of six months specified therein and upon sixty days written notice given after such six month period (such notice being, null and void if the force majeure is discontinued during such sixty day period), in addition to the right to terminate this Agreement for good cause under Section 13.2, the right to (i) extend this Agreement for a period equal to the duration of the force majeure which occasioned the delay, interruption or prevention (subject to the maximum term of six months) or (ii) continue the agreement in full force and effect without modification.  In no circumstances will either party be liable to the other for its inability to perform under this Agreement due to any such force majeure.

13.6.        Recall.  Either party shall have the right to terminate this Agreement in the event of a large scale recall or withdrawal of the Product from the Territory resulting from a significant safety risk inherent in the Product and not due to tampering, a remediable manufacturing problem, or other defect that can be cured with respect to Products manufactured after such risk is discovered.

13.7.        Remedies.  Except as indicated in Sections 8.5 and 18.4, termination of this Agreement shall be without prejudice to (a) any remedies which any party may then or thereafter have hereunder or at law; and (b) a party’s right to receive any payment accrued under the agreement prior to the termination date but which became payable thereafter; and (c) either party’s right to obtain performance of any obligations provided for in this Agreement which survive termination by their terms or by a fair interpretation of this Agreement.

13.8.        Post-Termination Obligations.  No additional payment obligations arising under Article 6 hereof shall accrue after the date of expiration or termination of this Agreement; provided, however, that expiration or termination of this Agreement shall not relieve either party of any obligations accruing prior to such expiration or termination.  Certain provisions of this Agreement by their terms continue after the expiration or termination of this Agreement.  In addition, any other provisions required to interpret and enforce the parties’ rights and obligations under this Agreement shall also survive, but only to the extent required for the full observation and performance of this Agreement.  Any expiration or termination of this Agreement shall be without prejudice to the rights of any party against the other accrued or accruing under this Agreement prior to expiration or termination.  Except as expressly set forth herein, the rights to terminate as set forth herein shall be in addition to all other rights and remedies available under this Agreement, at law, or in equity or otherwise.  Upon the expiration or termination of this Agreement pursuant to this Article 13, each party shall promptly transfer and return to the other party all Proprietary Information of the other party (provided that each party may keep one copy of such Proprietary Information of for archival purposes only).

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14.           Force Majeure

14.1.        Force Majeure Event.  In the event of any failure or delay in the performance by a party of any provision of this Agreement due to acts beyond the reasonable control of such party (such as, for example, fire, explosion, strike or other difficulty with workmen, shortage of transportation equipment, accident, act of God, or compliance with or other action taken to carry out the intent or purpose of any law or regulation), then such party shall have such additional time to perform as shall be reasonably necessary under the circumstances.  In the event of such failure or delay, the affected party will use its diligent efforts, consistent with sound business judgment and to the extent permitted by law, to correct such failure or delay as expeditiously as possible.

14.2.        Performance.  In the event that a party is unable to perform by a reason described in Section 14.1 above, its obligation to perform under the affected provision of this Agreement shall be suspended during such time of nonperformance.

14.3.        Effect.  If the delay resulting from the force majeure exceeds six months, the injured party may elect to treat such delay as a default and may terminate this Agreement pursuant to the provisions of Section 13.2.  If no notice of such election is given prior to termination of the force majeure, the agreement will continue in effect without modification.

15.           Publicity

Neither party will originate any publicity, news release, public comment or other public announcement, written or oral, whether to the press, to stockholders, or otherwise, relating to this Agreement, without the consent of the other party, except for such announcement which, in accordance with the advice of legal counsel to the party making such announcement, is required by law; provided, however, that each party shall be entitled to refer publicly to the relationship of the parties reflected in this Agreement (i.e., Esprit as the marketer of the Product and Depomed as the co-promoter of the Product in the Territory) in a manner that is not damaging to the business or reputation of the other party.  Except as otherwise permitted pursuant to the immediately preceding sentence, any party making any announcement which is required by law will, unless prohibited by law, give the other party an opportunity to review the form and content of such announcement and comment before it is made.  Either party shall have the right to make such filings with governmental agencies, including without limitation the United States Securities and Exchange Commission, as to the contents and existence of this Agreement as it shall reasonably deem necessary or appropriate.  The parties have agreed upon the form and content of a joint press release to be issued by the parties promptly following the execution of this Agreement. The provisions of this Article 15 shall survive termination of the agreement and shall remain in effect until a date seven (7) years after the Term of this Agreement.

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16.                           Notices

16.1.        Notices.  All notifications, demands, approvals and communications required to be made under this Agreement shall be given in writing and shall be effective when either personally delivered or sent by facsimile if followed by prepaid air express addressed as set forth below.  The parties hereto shall have the right to notify each other of changes of address during the life of this Agreement.

DEPOMED, INC.

1360 O’Brien Drive

Menlo Park, California  94025

Attention:  President

Facsimile:  650-462-9991

With a copy to:

Heller Ehrman LLP

275 Middlefield Road

Menlo Park, California  94025

Attention:  Julian N. Stern

Facsimile:  650-324-0638

ESPRIT PHARMA, INC.

2 Tower Center Boulevard
East Brunswick, NJ  08816
Attn:  Steve Bosacki, General Counsel
Facsimile:  (732) 828-9954

16.2.        Receipt.  Any such notice mailed as aforesaid shall be deemed to have been received by and given to the addressee on the date specified on the notice of receipt and delivery evidenced to the sender.

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17.           Arbitration

Any and all disputes between the parties relating in any way to the entering into of this Agreement and/or the validity, construction, meaning, enforceability, or performance of this Agreement or any of its provisions, or the intent of the parties in entering into this Agreement, or any of its provisions, or any dispute relating to patent validity or infringement arising under this Agreement shall be settled by arbitration.  Such arbitration shall be conducted in San Francisco, California (if brought by Depomed) or Newark, New Jersey (if brought by Esprit) in accordance with the rules then pertaining of the American Arbitration Association with a single arbitrator selected by the American Arbitration Association from the National Panel of Arbitrators.  Reasonable discovery as determined by the arbitrator shall apply to the arbitration proceeding.  The law of the State of California shall apply to the arbitration proceedings.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  The successful party in such arbitration, in addition to all other relief provided, shall be entitled to an award of all its reasonable costs and expenses including attorney costs.

18.           Miscellaneous

18.1.        Assignment.  This Agreement may be assigned by either party without the consent of the other party to (i) an Affiliate, or (ii) a third party in connection with the acquisition of a party (whether by merger, asset sale or otherwise) or the business of a party associated with the Product.  This Agreement may not otherwise be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed.  Each party shall provide the other with at least thirty (30) days’ prior written notice of any assignment of this Agreement.  No assignment permitted by this Section 18.1 to an Affiliate shall serve to release either party from liability for the performance of its obligations hereunder.

18.2.        Independent Contractors.  Nothing herein contained shall be construed to constitute the parties hereto as partners or as joint venturers, or either as agent for the other.  No employee or representative of a party shall have any authority to bind or obligate the other party to this Agreement for any sum in any manner whatsoever, or to create or impose any contractual or other liability on the other party without said party’s authorized written approval.  For all purposes, and notwithstanding any other provision of this Agreement to the contrary, Depomed’s legal relationship under this Agreement to Esprit shall be that of independent contractor.

18.3.        Entire Agreement.  This Agreement, the License Agreement and the Supply Agreement represent the entire agreement between the parties concerning the subject matter hereof and thereof and supersedes all prior or contemporaneous oral or written agreements of the parties.  This Agreement may be modified, amended or changed only by a written instrument signed and delivered by the parties, with clear intent to modify, amend or change the provisions hereof.

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18.4.        No Consequential Damages.  Neither Esprit nor Depomed (which for the purposes of this Section 18.4 shall include their respective Affiliates, directors, officers, employees and agents) shall have any liability to the other for any punitive damages, special, incidental, consequential or indirect damages, relating to or arising from this Agreement, even if such damages may have been foreseeable; provided that such limitation shall not apply in the case of fraud or willful misconduct.

18.5.        Counterparts.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original.

18.6.        Governing Law.  This Agreement, including without limitation any arbitration, shall be construed, regulated and administered and governed in all aspects under and in accordance with the law of the State of California (excluding its or any other jurisdiction’s choice of law principles).

18.7.        Waiver.  Except to the extent that a party may have otherwise agreed in writing, no waiver by such party of any breach by any other party of any of the other party’s obligations, agreements or covenants hereunder shall be deemed to be a waiver by such first party of any subsequent or other breach of the same or any other obligation, agreement or covenant; nor shall any forbearance by a party to seek a remedy for any breach by the other be deemed a waiver by said party of its rights or remedies with respect to such breach or of any subsequent or other breach of the same or any other obligation, agreement or covenant.

18.8.        Binding Effect.  Except as provided in Section 18.1, this Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors.

18.9.        Headings.  Headings as used in this Agreement are for convenience only and are not to be construed as having any substantive effect by way of limitation or otherwise.  References to Sections herein are, unless otherwise indicated, references to the designated Sections of this Agreement, unless the content requires otherwise.

18.10.      Severability.  If one or more of the provisions of this Agreement shall, by any court or under any provision of law, be found to be void or unenforceable, the agreement as a whole shall not be affected thereby, and the provisions in question shall be replaced by an interpretation in conformity with law which comes closer to effecting the parties’ original intention.

18.11       Consent to Grant of Security Interest.  Depomed does hereby consent to the granting of a security interest in this Agreement in favor of any Fortress Credit Corp. pursuant to that certain Loan Agreement, dated as of March 9, 2006, among Esprit, Fortress Credit Corp. and the lenders identified therein.   Depomed agrees to execute such other documentation may be reasonably requested by Fortress Credit Corp. to evidence such security interest.

[signature page follows]

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Wherefore the parties have caused this Agreement to be executed and delivered by their undersigned duly authorized representatives.

DEPOMED, INC.		ESPRIT PHARMA, INC.
By:	/s/ Carl A. Pelzel	By:	/s/ Steven M. Bosacki
Name: Carl A. Pelzel		Name: Steven M. Bosacki
Title: Executive Vice President & COO		Title: VP, General Counsel & Assistant Secretary

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Schedule 1.6
Per Detail Amount

	Number of complete months following the Promotion Commencement Date		Per Detail Amount
***		***

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EX-10.3

Exhibit 10.3

LEASE

BY AND BETWEEN

MENLO BUSINESS PARK, LLC, LESSOR

AND

DEPOMED, INC., LESSEE

Menlo Business Park
1430 O’Brien Drive
Menlo Park, California

July 28, 2006

LEASE SUMMARY

Date of Lease:	July 28, 2006
Lessor:	Menlo Business Park, LLC, a California limited liability company
Lessee:	DepoMed, Inc., a California corporation
Premises:	Suite H, Building #7, 1430 O’Brien Drive, Menlo Park, California 94025
Floor Area:	9,255 rentable square feet
Parcel Size:	3.530 acres
Lessee’s Pro Rata Share of Building 7 Operating Expenses:	14.25%
Lessee’s Pro Rata Share of Menlo Business Park Operating Expenses:	1.06%
Commencement Date:	August 1, 2006
Initial Term:	Thirty-six (36) months
Option to Extend:	One (1) option to extend – sixty (60) months
Monthly Base Rent:	8/1/06 – 7/31/07 $15,733.50 ($1.70 x 9,255 sf) Annual CPI Adjustment (3% minimum – 6% maximum) commencing 8/1/07
Security Deposit:	$15,733.50
Tenant Improvement Allowance:	$92,550.00 ($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.
	1330 O’Brien Drive Menlo Park, California 94025
	Attention:
	Telephone:

TABLE OF CONTENTS

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

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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
Suite H, Building #7
Menlo Business Park
1430 O’Brien Drive
Menlo Park, California

THIS LEASE, referred to herein as “this Lease,” is made and entered into as of July 28, 2006 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 1430 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 3.530 acres, together with all easements and appurtenances thereto (the “Land”) and the existing building thereon, referred to as Building #7, 1430 O’Brien Drive, City of Menlo Park, County of San Mateo, State of California, containing approximately 64,951 rentable square feet, and all other improvements located thereon (collectively, the “Improvements”).  The Land and Improvements are referred to herein collectively as the “Property.”  The Property is shown on the Menlo Business Park Master Plan attached hereto as Exhibit “B.”  Building #7 is sometimes referred to herein as “the Building.”  The floor plan of Building #7 is attached hereto as Exhibit ”C” and incorporated by reference herein.

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, at the rental rate and upon the terms and conditions set forth herein, the portion of the Building consisting of a total of approximately 9,255 rentable square feet referred to as Suite H as shown on the floor plan of the Building attached hereto as Exhibit ”C.”  Suite H, together with Lessee’s share of the on-site parking spaces on the Land which Lessee has the right to use pursuant to Paragraph 28, and the non-exclusive right to use the common areas of the Building and the other Improvements on the Property intended for use in common by the tenants of the Building, are referred to herein collectively as the “Premises.”  “Lessee’s Share” of the Building is 14.25% (9,255/64,951).

2.             Initial Term.

(a)           The initial term of this Lease (the “initial term”) shall commence on August 1, 2006 (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)           Lessor shall deliver the Premises to Lessee on the Commencement Date with the Premises in broom clean condition and with all Building systems and subsystems in good working condition.  The Commencement Date shall not be delayed by the fact that the Tenant Improvement Work referred to in Paragraph 13(a) is not completed as of the Commencement Date.

(c)           The initial term of this Lease shall expire, unless sooner terminated in accordance with the provisions hereof, on July 31, 2009.

(d)           As used in this Lease, “term” or “term of this Lease” shall include the initial term and the option extension period, if exercised.

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 Paragraphs 13(a), (b), and (c), 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 an “affiliate” of DepoMed under Paragraph 17(f) below.  Said option may not be assigned or transferred by DepoMed to any assignee or sublessee other than an  affiliate.

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(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/R&D/manufacturing rental 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 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 Property 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

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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 through July 31, 2007, Lessee shall pay to Lessor in monthly installments in advance Monthly Base Rent in the sum of Fifteen Thousand Seven Hundred Thirty-three and Fifty Hundredths Dollars ($15,733.50) (9,255 rentable square feet x $1.70/rentable square foot/month).

(b)           Upon the execution and delivery of this Lease by Lessor and Lessee, Lessee shall pay to Lessor the sum of Fifteen Thousand Seven Hundred Thirty-three and Fifty Hundredths Dollars ($15,733.50) representing the Monthly Base Rent for the month of July 2006, plus the additional sum of Fifteen Thousand Seven Hundred Thirty-three and Fifty Hundredths Dollars ($15,733.50) representing the Security Deposit.

(c)           The Monthly Base Rent shall be adjusted as of the first anniversary of the Commencement Date and as of the second anniversary of the Commencement Date (each, a “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.”

(d)           The Monthly Base Rent shall be adjusted as of each Rental Adjustment Date to an amount equal to the product obtained by multiplying the Monthly Base Rent for the Premises for the preceding twelve (12) months 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 Index published most recently prior to the date which is twelve (12) months prior to the applicable Rental Adjustment Date; 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 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

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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 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, commencing on the Commencement Date Lessee shall pay to Lessor, as “Additional Rent,” (1) Lessee’s pro rata share of the operating expenses of the Property (14.25%), and (2) Lessee’s pro rata share of the operating expenses of Menlo Business Park of which the Property is a part, in accordance with Paragraph 5(b) hereof, and (3) Lessee’s pro rata share of the real property taxes and assessments levied or assessed against the Property in accordance with Paragraph 5(c) hereof.  Lessee’s pro rata share of the operating expenses of Menlo Business Park is 1.06% based upon the ratio of the number of square feet of the Land allocable to the Property 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 Property, including the cost of all maintenance, repairs, and restoration of the Property 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

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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 the parking area; exterior Building lighting and parking lot lighting; supplies, materials, equipment and tools in the maintenance of the Property; 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 Property, 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 Property.

(c)           Real property taxes and assessments upon the Property, 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 Property 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 Property 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

6

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 Property, 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 Property; 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.”

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 Property, 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 Property.

(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 Property, or Menlo Business Park;

(4)           Advertising or promotional costs or other costs incurred by Lessor in procuring tenants for the Property 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

7

management and administration of the Property 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 Property in an economically reasonable manner at costs not disproportionately higher than those experienced by other comparable premises in the market area in which the Property is 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 2006, 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 (1st) 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 the actual Operating Expenses and Taxes for such year broken down by component expenses and the total payments made by Lessee for such year 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 accordance

8

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 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

9

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 Fifteen Thousand Seven Hundred Thirty-three and Fifty Hundredths Dollars ($15,733.50) (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 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.

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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)           Lessee shall not engage in any activity in or on the Premises or the Property 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 or the Property of Hazardous Materials with respect to which any Environmental Law requires that a notice be given to persons entering or occupying the Premises, the Property, or neighboring properties.  Notwithstanding the foregoing, Lessee may use in the Premises 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, the Property, 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, the Property, 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.

(c)           “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.

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

(d)           If Lessee knows, or has reasonable cause to believe, that Hazardous Materials have come to be located in, on, under or about the Premises or the Property, 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.

(e)           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, the Property, 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.

(f)            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 Property, 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.  No termination, cancellation or release agreement  entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Materials, unless specifically so agreed by Lessor in writing at the time of such agreement.

(g)           To the current actual knowledge of John C. Tarlton, President of Tarlton Properties, Inc., Lessor’s property manager, except as disclosed to Lessee in writing by Lessor or as contained in any environmental site assessment report delivered by Lessor to Lessee prior to the execution of this Lease, (1) no Hazardous Materials are present on the Property or the soil, surface water or groundwater thereof, (2) no

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underground storage tanks are present on the Property, and (3) no action, proceeding or claim is pending or threatened regarding the Property concerning any Hazardous Materials or pursuant to any environmental law.  Lessor shall be responsible (at no cost to Lessee) for Hazardous Materials present on the Property prior to the Commencement Date, and for Hazardous Materials present at any time on the Menlo Business Park due to Lessor or its employees, agents, and contractors.  Lessee shall not be responsible under this Lease, and Lessor hereby releases Lessee for any Hazardous Materials present on the Menlo Business Park that were not released by Lessee or its agents, contractors, or employees.

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 the Property, or arising out of the condition, use, occupancy, alteration or maintenance of the Premises or the Property, 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.

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(b)           Lessor shall obtain and carry in Lessor’s name, as insured, as an Operating Expense of the Property 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 encumbers the Property, including earthquake insurance coverage insuring Lessor’s interest in the Property (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 or the Property, and to the fixtures, personal property, leasehold improvements and alterations of either Lessor or Lessee in or on the Premises or the Property 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 or the Property from any cause arising at any

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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 or the Property, (2) for bodily injury or damage to property which arises in or about the Property 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) 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 or the Property, (2) for bodily injury or damage to property which arises in or about the Property 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.

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(d)           Lessor shall not be liable to Lessee for any damage because of any act or negligence of any other occupant of the Building or 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 the gross 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 Premises or the Property caused by the misuse or neglect of the Premises or the Property by Lessee or its employees, agents, or contractors, including, but not limited to, the breakage of glass in the Building.  Any damage to the Building 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 Ninety-two Thousand Five Hundred Fifty Dollars ($92,550.00) ($10.00 per rentable square foot) (the “Tenant Improvement Allowance”) to defray a portion of the cost of the improvements to the Premises (“Tenant Improvement Work”) as shown on the mark-up of the floor plan of Suite H attached hereto as Exhibit “E” and incorporated herein by reference.  The entire cost of the Tenant Improvement Work in excess of the Tenant Improvement Allowance, if any, shall be paid by Lessee.   Lessor’s approval of the Tenant Improvement Work shown on Exhibit “E” is given on the condition that Lessee shall, at Lessee’s expense, restore the Premises to its condition and layout as of the date of this Lease upon the expiration or sooner termination of this Lease.  Lessee confirms its agreement to do so by initialing this provision.

Lessee                    

(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.

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(d)           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 Property 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 Property pursuant to Paragraph 5(b) hereof, all services and work relating to the operation, maintenance, repair, and replacement, as needed, of the Property, including the HVAC, mechanical, electrical, and plumbing systems in the Building; the interior of the Building; the roof membrane; the outside areas of the Property; 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.

(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 Property 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

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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 Property 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, and ordinances of all governmental agencies or authorities, and the Board of Fire Underwriters.  Any structural changes or repairs or other repairs or changes to the Premises of any nature which would be considered a capital expenditure under generally accepted accounting principles 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

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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.

Notwithstanding anything contained in this Paragraph 14 to the contrary, upon the conversion by Lessee of any laboratory space in the Premises to offices (with or without Lessor’s prior consent) including, without limitation, the conversion of laboratory space to offices pursuant to the Tenant Improvement Work approved by Lessor and Lessee shown on Exhibit “E” attached hereto.  Lessee shall, at Lessee’s expense, restore such space to laboratory space, pursuant to plans and specifications approved by Lessor in writing, promptly following the expiration or sooner termination of this Lease.

(g)           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.

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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 Property 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 Property 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 Property 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 Property.  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 Property 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

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money or other consideration to be received by Lessee for such assignment or sublease.  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; (2) notify Lessee in writing that Lessor refuses such consent, specifying reasonable grounds for such refusal; or (3) except with respect to a transfer to an affiliate pursuant to Paragraph 17(f) if at the time Lessee requests that Lessor consent to an assignment of sublease Lessee has vacated the Premises and is not conducting on-going operations in the Building, Lessor may notify Lessee that Lessor elects to terminate this Lease, provided that with respect to a proposed sublease of a portion of the Premises Lessor’s termination right shall apply only to the proposed sublease space, and specifying the effective date of termination which shall be the same as the commencement date of the proposed sublease.  If Lessor elects to terminate this Lease pursuant to the foregoing provision, upon the effective date of termination, Lessor and Lessee shall each be released and discharged from any liability or obligation to the other under this Lease accruing thereafter with respect to the Premises or the portion thereof to which the termination applies, except for any obligations then outstanding and except for any indemnity obligations which survive the expiration or termination of this Lease by the express terms hereof, and Lessee agrees that Lessor may enter into a direct lease with such proposed assignee or sublessee without any obligation or liability to Lessee.

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

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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 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, the assignee or sublessee 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.

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(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 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).

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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.

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

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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 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 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 eighty (180) days from the date of such casualty plus the period of any force majeure delays, Lessee may terminate this Lease effective as of the date of the casualty by giving written notice of termination to Lessor within thirty (30) days after the casualty.  The foregoing shall not affect Lessor’s termination rights under subparagraph (b) above.

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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 effective as of the date of the casualty by giving written notice of termination to Lessee, subject to the limitations of Paragraph 20(b).  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.

(d)           Subject to the limitation in Paragraph 20(b) above which applies if Lessee elects to restore the Building and Improvements at Lessee’s expense, in the event of repair, 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 Building and Improvements 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 Building and Improvements shall include the Tenant Improvement Work referred to in Paragraph 13.  Lessor shall also repair and restore 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 Building and Improvements referred to above shall be extended by a period equal to any delays (“force majeure delays”) caused by strikes, labor disputes, unavailability of materials, inclement weather, or acts of God.

(f)            In the event of termination of this Lease pursuant to any of the provisions of this Paragraph 20, the Monthly Base Rent and Additional 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

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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 Property is 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 Property by eminent domain which is not a substantial part of the Property and the Premises remain reasonably suitable for continued use and occupancy by Lessee 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, based on the extent to which Lessee’s use of the Premises is impaired thereafter.  If after a partial taking, the Premises 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 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.

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(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 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

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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 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
	Attention: John C. Tarlton
	Telephone: (650) 330-3600
Lessee:	DepoMed, Inc.
	1330 O’Brien Drive
	Menlo Park, California 94025
	Attention:
	Telephone:

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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 in the proportion that the number of rentable square feet in the Premises bears to the total rentable square feet of the Building.  Lessee may also place Lessee’s vinyl lettering signage on the glass near the front door entrance 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 Lessee’s sign on the monument sign and on the glass at the front 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., who has acted as exclusive leasing agent for Lessor in connection with this Agreement, pursuant to a separate agreement between Lessor and said broker.  Lessor shall also pay leasing commissions to NAI BT Commercial and Technology Commercial, Inc., who have acted as leasing agents for Lessee in connection with this Agreement, pursuant to an agreement between Lessor and said brokers.  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 the above named brokers.  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.           Parking.  Lessee shall have the right to use twenty-eight (28) unreserved on-site vehicular parking spaces on the Land at no additional cost to Lessee in the parking area for the Building, subject to such rules and regulations for such parking facilities which may be established or altered by Lessor at any time from time to time during the

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Lease term, provided that such rules and regulations shall not unreasonably interfere with Lessee’s parking rights.  Vehicles of Lessee or its employees shall not park in driveways or occupy parking spaces or other areas reserved for  deliveries, or loading or unloading.

29.           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 in writing upon request.

(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.

30.           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.

31.           Lessor’s Entry.  Except in the case of an emergency and except for permitted entry during Lessee’s normal working hours, both of which may occur without prior notice to Lessee, Lessor and Lessor’s agents shall provide Lessee with at least twenty-four (24) hours’ notice prior to entry of the Premises.  Lessor may enter the Premises for any reasonable purpose related to Lessor’s ownership of the Property.  Such entry by Lessor

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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.

32.           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.

33.           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.

34.           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.

35.           Lessee’s Right of First Offer.  During the initial term, Lessor hereby grants to Lessee the continuing right of first offer to lease the space in the Building referred to as “Suite G,” consisting of approximately 9,255 rentable square feet (“Suite G”).  Said right of first offer shall be upon the following terms and conditions:

(a)           Provided that no current default after the expiration of applicable notice and cure periods by Lessee hereunder then remains uncured, and provided that Lessee or any permitted transferee is then occupying the Premises described in Paragraph 1 hereof pursuant to the terms of this Lease, prior to entering into a lease of Suite G with any other tenant during the initial term of this Lease, Lessor shall deliver to Lessee a written offer (“First Offer”) to lease Suite G to Lessee containing the terms upon which Lessor is willing to lease such space.  Such space shall be offered to Lessee for lease at the then market rent for such space, as determined by Lessor in Lessor’s good faith judgment, and upon the same terms and conditions under which Lessor is then offering the space for lease generally.  Lessee shall have five (5) business days after receipt of written notice from Lessor of the availability of such space and the applicable rental and lease terms, within which to exercise in writing said right of first offer to lease such space by giving written notice to Lessor of Lessee’s acceptance of Lessor’s offer to lease such space upon the terms and conditions specified by Lessor.  Failure of Lessee to deliver such written acceptance within said period of five (5) business days

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shall be deemed a rejection of the first offer.  If Lessee rejects the first offer, Lessor shall have the right to lease the space offered to Lessee to a third party tenant for such term and on the same terms and conditions as set forth in Lessor’s offer notice to Lessee.  If Lessee accepts Lessor’s First Offer, Lessor and Lessee shall execute and deliver an amendment to this Lease to add to the Premises the space offered, which shall be leased by Lessee at the Monthly Base Rent and on the other terms and conditions specified by Lessor in the First Offer.  If Lessor does not lease such space within ninety (90) days after the expiration of said five (5) business day period, any further transaction shall be deemed a new determination by Lessor to lease such space and the provisions of this paragraph shall again be applicable.

(b)           If Lessee leases the space offered to Lessee (1) Lessee’s share of the Additional Rent (Operating Expenses and Taxes) provided for in Paragraph 5, shall be adjusted to include such space; (2)  such space shall be leased by Lessee for a term which is co-terminus with the then remaining term of this Lease of Suite H; (3) such space shall be leased to Lessee subject to all of the other terms and provisions of this Lease, except as otherwise specified in Lessor’s First Offer; and (4) if Lessee exercises the option to extend contained in Paragraph 3 of this Lease, the Premises shall include the Suite H space.

36.           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 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

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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.

(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.

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(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
	John F. Hamilton, Vice President      and Chief Financial Officer
By:	/s/ Matthew M. Gosling
	Matthew M. Gosling, Vice      President and General Counsel

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COMMENCEMENT MEMORANDUM

Date:  July 28, 2006

Re:Lease dated July 28, 2006 between MENLO BUSINESS PARK, LLC, a California limited liability company, Lessor, and DEPOMED, INC., a California corporation, Lessee, concerning the Premises consisting of Suite H, in the building commonly known as Building #7, 1430 O’Brien Drive, Menlo Park, California.

Gentlemen:

In accordance with the subject Lease, we hereby confirm the following:

1.             That the Premises have been accepted by Lessee.

2.             That Lessee has possession of the Premises and acknowledges that pursuant to the Lease, the initial term of the Lease commenced on August 1, 2006 (the “Commencement Date”), and shall expire on the last day of the thirty-sixth (36th) full calendar month after the Commencement Date.

3.             That in accordance with the provisions of the Lease, Monthly Base Rent and Additional Rent commenced to accrue on August 1, 2006, which is the Commencement Date.

4.             Thereafter, rent is due and payable in advance on the first day of each month during the term of the Lease.  Rent checks should be made payable to Menlo Business Park, LLC, c/o Tarlton Properties, Inc., 955 Alma Street, Palo Alto, California 94301.

AGREED AND ACCEPTED

LESSEE:		LESSOR:
DEPOMED, INC.,		MENLO BUSINESS PARK, LLC,
a California corporation		a California limited liability company
By:	/s/ John F. Hamilton	By:		/s/ J. O. Oltmans, II
	John F. Hamilton, Vice President			J. O. Oltmans, II, Manager
	and Chief Financial Officer
		By:	/s/ James R. Swartz
			James R. Swartz, Manager

EXHIBIT “D”

EX-10.4

Exhibit 10.4

LEASE EXTENSION AGREEMENT

Building #5
1330 O’Brien Drive
Menlo Park, California 94025

THIS LEASE EXTENSION AGREEMENT (this “Agreement”) is made and entered into on June 23, 2006 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 April 30, 2003 (the “Lease”) of the premises referred to as Building #5 located at 1330 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 25,366 rentable square feet of space.

B.            The expiration date of the initial term of the Lease is April 30, 2008.  Lessor and Lessee wish to extend the expiration date of 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.  Terms defined in the Lease and used in this Agreement shall have the meaning ascribed to them in the Lease.

2.             Extension of Initial Term.

(a)           The initial term of the Lease is hereby extended for a period of fourteen (14) calendar months commencing on May 1, 2008 and ending on June 30, 2009 (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 one period 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 May 1, 2008 and continuing through April 30, 2009, the sum of Fifty Thousand Seven Hundred Thirty-two Dollars ($50,732.00) per month ($2.00/square foot/NNN).

(b)           Commencing on May 1, 2009 (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 the Rental Adjustment Date to an amount equal to the product obtained by multiplying Fifty Thousand Seven Hundred Thirty-two Dollars ($50,732.00) (the Monthly Base Rent for the Premises commencing on May 1, 2008 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 the 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 the Rental Adjustment Date to an amount less than three percent (3%) per annum or more than six percent (6%) per annum of the Monthly Base Rent immediately payable before the Rental Adjustment Date.  The Monthly Base Rent as so adjusted shall continue through June 30, 2009, the expiration date of the Extension Term.

(d)           When the new Monthly Base Rent is determined for the 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 the 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

2

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.

(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.             Condition of the Premises.  Lessee is currently in possession of the Premises and is conducting business thereon pursuant to the Lease.  Lessee agrees to accept the Premises in its “as is” condition at the commencement of the Extension Term, subject to the performance by Lessor of Lessor’s obligations under Paragraph 14(a) of the Lease.

6.             Security Deposit.  Lessor acknowledges that Lessor has received from Lessee and is currently holding the sum of Thirty-four Thousand Two Hundred Fifty-nine and Fifty-eight Hundredths Dollars ($34,259.58) in cash (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under the Lease.  Lessor shall continue to hold the Security Deposit during the remainder of the initial term and during the Extension Term pursuant to Paragraph 7 of the Lease.

7.             Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., who has acted as exclusive leasing agent for Lessor in connection with this Agreement, pursuant to a separate agreement between Lessor and said broker.  Lessor shall also pay leasing commissions to NAI BT Commercial and Technology Commercial, Inc., who have acted as leasing agents for Lessee in connection with this Agreement, pursuant to an agreement between Lessor and said brokers.  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 the above named brokers.  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.

8.             Notices.  Paragraph 24, Notices, of the Lease is amended to read as follows:

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“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
	Attention: John C. Tarlton
	Telephone: (650) 330-3600
Lessee:	DepoMed, Inc.
	1330 O’Brien Drive
	Menlo Park, California 94025
	Attention:
	Telephone:

All such notices or other communications given hereunder shall be addressed to the parties 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.”

9.             Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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.

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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
	John F. Hamilton, Vice President and Chief Financial Officer
By:	/s/ Matthew M. Gosling
	Matthew M. Gosling, Vice President and General Counsel

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EX-10.5

Exhibit 10.5

SECOND LEASE EXTENSION AGREEMENT

Building #6
1360 O’Brien Drive
Menlo Park, California 94025

THIS SECOND LEASE EXTENSION AGREEMENT (this “Agreement”) is made and entered into on June 23, 2006 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 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.  Lessor and Lessee entered into a Lease Extension Agreement on April 30, 2003 (the “First Lease Extension Agreement”) extending the expiration date of the initial term of the Lease from March 14, 2005 to April 30, 2008.  The Lease dated February 4, 2000, as amended by the First Lease Extension Agreement, is hereafter referred to collectively as the “Lease.”

B.            Lessor and Lessee wish to extend further the expiration date of the initial term as previously extended by the First Lease Extension Agreement, 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.  Terms defined in the Lease and used in this Agreement shall have the meaning ascribed to them in the Lease.

2.             Extension of Initial Term.

(a)           The initial term of the Lease is hereby extended for a period of fourteen (14) calendar months commencing on May 1, 2008 and ending on June 30, 2009 (the “Second Extension Term”).  The Second 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 Second 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 Second 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 Second Extension Term, in monthly installments in advance on a triple net basis in lawful money of the United States, as follows:

(a)           Commencing on May 1, 2008 and continuing through April 30, 2009, the sum of Fifty-four Thousand Six Hundred Fifty-three and Sixty Hundredths Dollars ($54,653.60) per month ($2.65/square foot/NNN).

(b)           Commencing on May 1, 2009 (the “Rental Adjustment Date”), the Monthly Base Rent shall be adjusted to reflect any increase 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 Second Extension Term occurs shall be considered the “base Index.”

(c)           The Monthly Base Rent shall be adjusted as of the Rental Adjustment Date to an amount equal to the product obtained by multiplying Fifty-four Thousand Six Hundred Fifty-three and Sixty Hundredths Dollars ($54,653.60) (the Monthly Base Rent for the Premises commencing on May 1, 2008 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 the 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 the Rental Adjustment Date to an amount less than three percent (3%) per annum or more than six percent (6%) per annum of the Monthly Base Rent payable immediately before the Rental Adjustment Date.  The Monthly Base Rent as so adjusted shall continue through June 30, 2009, the expiration date of the Second Extension Term.

(d)           When the new Monthly Base Rent is determined for the 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

2

Adjustment Date.  If the Index does not exist on the 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.

(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 Second Extension Term, as Additional Rent, Operating Expenses and Taxes pursuant to Paragraph 5 of the Lease.

5.             Condition of the Premises.  Lessee is currently in possession of the Premises and is conducting business thereon pursuant to the Lease.  Lessee agrees to accept the Premises in its “as is” condition at the commencement of the Second Extension Term, subject to the performance by Lessor of Lessor’s obligations under Paragraph 14(a) of the Lease.

6.             Security Deposit.  Lessor acknowledges that Lessor has received from Lessee and is currently holding the sum of One Hundred Forty-five Thousand Four Hundred and Forty Hundredths Dollars ($145,400.40) in cash (the “Security Deposit”), as security for Lessee’s faithful performance of Lessee’s obligations under the Lease.  Lessor shall continue to hold the Security Deposit during the remainder of the initial term and during the Second Extension Term pursuant to Paragraph 7 of the Lease.

Subject to the satisfaction of the conditions set forth in Paragraph 6(b) of the First Lease Extension Agreement, Lessor shall refund to Lessee Forty-eight Thousand Four Hundred Sixty-six Dollars ($48,466.00) of the Security Deposit on March 15, 2007.

7.             Real Estate Brokers.  Lessor shall pay a leasing commission to Tarlton Properties, Inc., who has acted as exclusive leasing agent for Lessor in connection with this Agreement, pursuant to a separate agreement between Lessor and said broker.  Lessor shall also pay leasing commissions to NAI BT Commercial and Technology Commercial, Inc., who have acted as leasing agents for Lessee in connection with this Agreement, pursuant to an agreement between Lessor and said brokers.  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 the above named brokers.  Each party shall hold harmless the other party from all damages, expenses, and

3

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.

8.             Notices.  Paragraph 24, Notices, of the Lease is amended to read as follows:

“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
	Attention: John C. Tarlton
	Telephone: (650) 330-3600
Lessee:	DepoMed, Inc.
	1330 O’Brien Drive
	Menlo Park, California 94025
	Attention:
	Telephone:

All such notices or other communications given hereunder shall be addressed to the parties 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.”

9.             Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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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 further 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
	John F. Hamilton, Vice President and Chief Financial Officer
By:	/s/ Matthew M. Gosling
	Matthew M. Gosling, Vice President and General Counsel

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EX-10.6

Exhibit 10.6

FORM OF INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (the “Agreement”) is entered into as of this            day of                       , 200  , by and between Depomed, Inc., a California corporation (the “Company”), and                                     , an individual (“Indemnitee”).

BACKGROUND

A.            Indemnitee is a member of the Board of Directors or an officer of the Company and, in that capacity, performs a valuable service for the Company.  For a variety of reasons, including the frequency, magnitude and often baseless nature of claims and actions brought against corporate directors and officers generally, it is difficult for corporations to attract and retain highly competent persons as directors and officers.  In addition, there exists uncertainty, both as to matters of “substance” and “procedure,” about the protection against such claims provided by statutory, charter and bylaw provisions and through “director and officer” insurance.

B.            The Company’s Bylaws also provide for indemnification of, and advancement of expenses to, the directors and officers of the Company to the fullest extent permissible under California law, and permit, by their nonexclusive nature, the establishment of indemnification agreements between the Company and its directors and officers.

C.            In order to induce Indemnitee to continue to serve as a member of the Board of Directors or as an officer of the Company and to clarify the specific procedure for addressing indemnification matters if and as they arise, the Company and the Indemnitee hereby agree to contractual indemnification arrangements on the terms set forth in this Agreement.

THE PARTIES AGREE AS FOLLOWS:

1.             Definitions.  For purposes of this Agreement, the following terms have the following meanings:

(a)           “Disinterested Director” means a director of the Company who neither is nor was a party to the Proceeding in respect of which indemnification is sought under this Agreement or otherwise.

(b)           “Expenses” includes any and all direct and indirect costs (including, without limitation, attorneys’ fees and disbursements, court costs, fees and expenses of witnesses, experts, professional advisers and private investigators, arbitration expenses, costs of attachment, appeal or similar bonds, travel expenses, duplicating, printing and binding costs, telephone charges, postage, delivery service fees, and any and all other disbursements or out-of-pocket expenses) actually and reasonably incurred by or on behalf of Indemnitee in connection with either (i) the investigation, defense, settlement or appeal of, or being a witness or participant in, a Proceeding (including preparing for any of the foregoing) or (ii) the establishment or enforcement of any right to indemnification under this Agreement or otherwise or any right to recovery under any liability insurance policy maintained by the Company; provided, however,

that “Expenses” shall not include any judgments, fines or amounts paid in settlement.

(c)           “Independent Counsel” means a law firm or attorney that neither is presently nor in the past two years has been retained to represent:  (i) the Company or Indemnitee in any matter material to the Company or Indemnitee, or (ii) any other party to the Proceeding in respect of which indemnification is sought under this Agreement or otherwise.  In addition, the term “Independent Counsel” does not include any law firm or attorney who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s right to indemnification under this Agreement or otherwise.

(d)           “Liabilities” means liabilities and losses of any type whatsoever, including, without limitation, judgments, fines, excise taxes and penalties (including ERISA excise taxes and penalties) and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such liabilities and losses), actually incurred by Indemnitee in connection with or as a result of a Proceeding.

(e)           “Proceeding” means any threatened, pending or completed action, suit or proceeding (including any inquiry, hearing, arbitration proceeding or alternative dispute resolution mechanism), whether civil, criminal, administrative or investigative (including any action by or in the right of the Company), to which Indemnitee is or was a party, witness or other participant, or is threatened to be made a party, witness or other participant, by reason of the fact that Indemnitee is or was a director or officer of the Company, or by reason of anything done or not done by Indemnitee in that capacity or in any other capacity while serving as a director or officer of the Company, whether before or after the date of this Agreement. “Proceeding” shall not include any Proceeding initiated by Indemnitee (other than as contemplated by Sections 3(d) or 6 of this Agreement) unless such Proceeding was authorized or consented to by the Board of Directors of the Company.

2.             Agreement to Indemnify.  Subject to the terms and conditions of, and in accordance with the procedures set forth in, this Agreement, the Company shall hold Indemnitee harmless and indemnify Indemnitee (and Indemnitee’s spouse as provided below), to the fullest extent permitted by the provisions of California law and other applicable law, from and against all Expenses and Liabilities, including, without limitation, Expenses and Liabilities arising from any Proceeding brought by or in the right of the Company or its shareholders.  The Company and Indemnitee intend that this Agreement shall provide for indemnification in excess of that expressly granted by statute or provided by the Company’s Articles of Incorporation, Bylaws or by vote of its shareholders.  If, after the date hereof, California law or any other applicable law is amended to permit or authorize indemnification of, or advancement of defense expenses to, Indemnitee to a greater extent than is permitted on the date hereof, references in this Agreement to California law or any other applicable law shall be deemed to refer to California law or such applicable law as so amended.

3.             Procedural Matters.

(a)           Initial Request.  Whenever Indemnitee believes that, in a specific case,

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Indemnitee is then entitled to indemnification under this Agreement or under the Company’s Articles of Incorporation or Bylaws, California law or otherwise, Indemnitee shall submit a written notice to the Company requesting an authorization and determination by the Company to that effect.  The notice shall describe the matter giving rise to the request and be accompanied by all appropriate supporting documentation reasonably available to Indemnitee.

(b)           Determination and Payment.  The Company shall make a determination about Indemnitee’s entitlement to indemnification in the specific case no later than 90 days after receipt of Indemnitee’s request.  In making that determination, the person or persons making the determination shall presume that Indemnitee met any applicable standard of conduct required for indemnification, unless the person or persons making the determination shall have reasonably determined, after consultation with counsel, that Indemnitee did not meet that standard.  The determination shall be made by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors.  If such a quorum is not obtainable, or, even if obtainable, a quorum of Disinterested Directors so directs, the determination shall be made by Independent Counsel in a written opinion obtained at the Company’s expense.  If the person or persons empowered to make the determination either:  (i) affirmatively makes a determination of Indemnitee’s entitlement to indemnification or (ii) fails to make any determination at all within the 90-day period, indemnification shall be considered as authorized and proper in the circumstances, and Indemnitee shall be absolutely entitled to such indemnification, and shall receive payment as promptly as practicable, in the absence of any misrepresentation of a material fact by Indemnitee in the request for indemnification, or a specific determination by a court of competent jurisdiction that all or any part of such indemnification is prohibited by applicable law.  If the person or persons empowered to make the determination find that the Indemnitee is not entitled to indemnification, the Indemnitee shall have the right to apply to a court of competent jurisdiction for the purpose of enforcing Indemnitee’s right to indemnification pursuant to this Agreement.  The termination of any Proceeding by judgment, order, settlement, arbitration award, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in the best interests of the Company.

(c)           Advancement of Expenses.  If so requested in a writing by Indemnitee accompanied by appropriate supporting documentation, the Company shall, within ten days after receipt of the request, advance funds for the payment of Expenses, whether that request is made before or after the final disposition of a Proceeding (including, without limitation, any criminal Proceeding or any Proceeding brought by or in the right of the Company or its shareholders), unless there has been a final determination that Indemnitee is not entitled to indemnification for those Expenses.  If required by law at the time of the advance, the payment of the advance shall be conditioned upon the receipt from Indemnitee of an undertaking (which need not be secured) to repay the advance to the extent that it is ultimately determined that Indemnitee is not entitled to such indemnification by the Company.  Any dispute concerning the advancement of Expenses may, at the election of the Indemnitee, be resolved by arbitration before an arbitrator selected by Indemnitee and approved by the Company.  If the parties cannot agree on a single arbitrator, then the claim shall be heard by a panel of three arbitrators, with one selected by Indemnitee, one selected by the Company and one selected jointly by the foregoing two arbitrators.  Each of the arbitrators shall be a litigation or corporate attorney with experience in the field of officer and

3

director indemnification.  The arbitrators shall be selected within fifteen (15) days after demand for arbitration and shall render a decision within forty-five (45) days after selection, unless good cause is shown for requiring a longer decision period.  The Company shall act in utmost good faith to provide timely information to the arbitrators and to insure Indemnitee a full opportunity to defend against the Company’s claim that Indemnitee is not entitled to an advance of Expenses.  The Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee under the dispute resolutions proceedings set forth in this Subsection 3(c), unless a court of competent jurisdiction finds that each of the claims and/or defenses by Indemnitee in the action or proceeding for which an advance is sought was frivolous or made in bad faith.

(d)           Enforcement.  If Indemnitee has not received a determination of entitlement to indemnification or an advance, as the case may be, within the applicable time periods for such actions specified in this Agreement, or if it has been determined that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall be entitled to commence an action in any court of competent jurisdiction (including the court in which the Proceeding (as to which Indemnitee seeks indemnification) is or was pending) (i) in the former case, seeking enforcement of Indemnitee’s rights under this Agreement or otherwise, or seeking an initial determination by the court, or (ii) in the latter case, challenging any such determination or any aspect thereof, including the legal or factual bases therefor.  The Company hereby consents to service of process and to appear generally in any such proceeding.  It shall be a defense to any such action that applicable law does not permit the Company to indemnify Indemnitee for the amount claimed.  In any such action, the Company shall have the burden of proving that indemnification or advances are not proper in the circumstances of the specific case.  Neither the failure of the Company to have made a determination prior to the commencement of such action that indemnification is proper under the circumstances because Indemnitee has met the standard of conduct under applicable law, nor an actual determination by the Company that Indemnitee has not met such standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met that standard of conduct.  The Company shall indemnify Indemnitee for Expenses incurred by Indemnitee in connection with the successful establishment or enforcement, in whole or in part, by Indemnitee of his right to indemnification or advances.

(e)           Notice by Indemnitee and Defense of Proceedings.  Indemnitee shall promptly notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may give rise to a claim for indemnification under this Agreement or otherwise; provided, however, that a failure of Indemnitee to provide that notice shall relieve the Company from liability only if and to the extent that the failure materially prejudices the Company’s ability to adequately defend Indemnitee in the Proceeding.  With respect to any Proceeding as to which Indemnitee so notifies the Company:

(i)            The Company shall be entitled to participate at its own expense.

(ii)           Except as otherwise provided below, the Company, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense of such Proceeding, with counsel reasonably satisfactory to Indemnitee.  After notice from the Company

4

to Indemnitee of the Company’s election to assume the defense, the Company shall not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee, other than as provided below.  Indemnitee shall have the right to employ his own counsel in that Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its election so to assume the defense shall be borne by Indemnitee, except to the extent that (x) the employment of counsel by Indemnitee has been authorized by the Company, (y) Indemnitee has reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such Proceeding or that counsel selected by the Company may not be adequately representing Indemnitee, or (z) the Company has not in fact employed counsel to assume the defense of such Proceeding.  In those cases, the fees and expenses of Indemnitee’s own counsel shall be paid by the Company.

(iii)          Neither the Company nor Indemnitee shall unreasonably withhold its or his consent to any proposed settlement.  The Company has no obligation to indemnify and hold Indemnitee harmless under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent.  The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent.

4.             Nonexclusivity.  The indemnification provided by this Agreement is not exclusive of or inconsistent with any rights to which Indemnitee may be entitled under the Company’s Articles of Incorporation or Bylaws, any other agreement, any vote of shareholders or directors, California law, or otherwise, both as to action in Indemnitee’s official capacity and otherwise.  If and to the extent that a change in the California Corporations Code (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company’s Bylaws or under this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.

5.             Partial Indemnification.  If Indemnitee is entitled to indemnification by the Company for some or a portion of Expenses or Liabilities but not for the total amount, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses and Liabilities to which Indemnitee is entitled to be indemnified.

6.             Liability Insurance.  To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer, as the case may be.  If Indemnitee serves as a fiduciary of any employee benefit plan of the Company or any of its subsidiary or affiliated corporations, then to the extent that the Company maintains an insurance policy or policies providing fiduciaries’ liability insurance, Indemnitee shall be covered by such policy or policies in accordance with its or their terms, to the maximum extent of the coverage available for any fiduciary. Upon notice to the Company, either from Indemnitee or from any other source, of the commencement or threat of commencement of any Proceeding or matter which may give rise to a claim for indemnification of Indemnitee and which may be covered by any insurance policy maintained by the Company, the Company shall promptly give notice to the insurer in accordance with the procedures prescribed by such policy and shall thereafter take all necessary

5

or appropriate action to cause such insurer to pay, to or on behalf of Indemnitee all Liabilities and Expenses payable under such policy with respect to such Proceeding or matter.  The Company shall indemnify Indemnitee for Expenses incurred by Indemnitee in connection with any successful action brought by Indemnitee for recovery under any insurance policy referred to in this Section 6 and shall advance to Indemnitee the Expenses of such action in the manner provided in Section 3(c) above.

7.             Other Sources.  Indemnitee shall not be required to exercise any rights Indemnitee may have against any other parties (for example, under an insurance policy purchased by Indemnitee, the Company or any other person or entity) before Indemnitee exercises or enforces Indemnitee’s rights under this Agreement.  However, to the extent the Company actually indemnifies Indemnitee or advances Indemnitee funds in respect of Expenses, the Company shall be entitled to enforce any such rights which Indemnitee may have against third parties.  Indemnitee shall assist the Company in enforcing those rights if it pays Indemnitee’s costs and expenses of doing so.  If Indemnitee is actually indemnified or advanced Expenses by any such third party, then, for so long as Indemnitee is not required to disgorge the amounts so received, to that extent the Company shall be relieved of its obligation to indemnify Indemnitee or to advance Expenses.

8.             Certain Relationships.  The obligations and rights created under this Agreement shall not be affected by any amendment to the Company’s Articles of Incorporation or Bylaws or any other agreement or instrument to which Indemnitee is not a party, and shall not diminish any other rights which Indemnitee now or in the future has against the Company or any other person or entity.

9.             Severability.  If any provision of this Agreement is determined to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the Company and Indemnitee.  In any event, the remaining provisions of this Agreement shall remain enforceable to the maximum extent possible.

10.           Contribution.  If the indemnification provided in Section 2 of this Agreement is unavailable, then, in respect of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in the Proceeding), the Company shall contribute to the amount of Expenses and Liabilities as appropriate to reflect:   (i) the relative benefits received by the Company, on the one hand, and Indemnitee, on the other hand, from the transaction from which the Proceeding arose, and (ii) the relative fault of the Company, on the one hand, and of Indemnitee, on the other, in connection with the events which resulted in such Expenses and Liabilities, as well as any other relevant equitable considerations.  The relative fault of the Company, on the one hand, and of Indemnitee, on the other, shall be determined by reference to, among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses and Liabilities.  The Company agrees that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations described in this Section 10.

11.           Governing Law.  This Agreement shall be governed by and its provisions

6

construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California.

12.           Notices.  All notices and other communications under this Agreement shall be in writing and shall be given by personal or courier delivery, confirmed facsimile or telex transmission or first class mail, and shall be deemed to have been duly given upon receipt if personally delivered or delivered by courier, on the date of transmission if transmitted by facsimile or telex, or three days after mailing if mailed, to the addresses set forth below:

If to Indemnitee:

Attn:

If to the Company:

Depomed, Inc.

1360 O’Brien Drive

Menlo Park, CA 94025

Facsimile No.: (650) 462-9991

Attn: President

or to such other address as either party may designate by notice to the other from time to time.

13.           Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

14.           Successors and Assigns.  This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee’s spouse, estate, heirs, executors, administrators, personal or legal representatives and assigns.  The Company shall require any successor corporation (whether by merger, consolidation, or otherwise) by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

15.           Amendment and Waiver.  This Agreement may not be amended except by a writing executed by both the Company and Indemnitee.  No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party to be charged therewith.  A waiver of, or a failure to insist on, complete compliance with any provision of this Agreement shall not be construed as a waiver of a subsequent or different non-compliance, breach or default of that or any other provision of this Agreement.

16.           Acknowledgment.  The Company expressly acknowledges that it has entered into this Agreement and assumed the obligations imposed on the Company under this Agreement in

7

order to induce Indemnitee to serve or to continue to serve as a director or officer and acknowledges that Indemnitee is relying on this Agreement in serving or continuing to serve in such capacity.  The Company further agrees to stipulate in any court proceeding that the Company is bound by all of the provisions of this Agreement.

17.           Period of Limitations.  No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, estate, heirs, executors, administrators or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.

18.           Duration of Agreement.  This Agreement shall continue in effect for so long as Indemnitee is subject to any possible Proceeding, regardless of whether Indemnitee continues to serve as a director or officer.

8

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in its first paragraph.

DEPOMED, INC.

By:

Name:

Title:

Indemnitee

9

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Fara, certify that:

1.I have reviewed this Quarterly Report 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)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

(d)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 officers 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 function):

(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.

November 9, 2006
	By:	/s/ John W. Fara, Ph.D.
		John W. Fara, Ph.D.
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John F. Hamilton, certify that:

1.I have reviewed this Quarterly Report 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)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

(d)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 officers 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 function):

(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.

November 9, 2006
	By:	/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 September 30, 2006 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 results of operations of the Company.

Date: November 9, 2006

/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 September 30, 2006 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 results of operations of the Company.

Date: November 9, 2006

/s/ John F. Hamilton

John F. Hamilton

Chief Financial Officer