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, 2007
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 2, 2007 was 47,764,745.

DEPOMED, INC.

	Page
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006	3
Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2007 and 2006 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2007 and 2006 (unaudited)	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosure About Market Risk	25
Item 4. Controls and Procedures	25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults upon Senior Securities	39
Item 4. Submission of Matters to a Vote of Security Holders	39
Item 5. Other Information	39
Item 6. Exhibits	40
Signatures	41

2

PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DEPOMED, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 (in thousands, except share and per share amounts)

	September 30,			December 31,
	2007			2006
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	9,584		$	14,574
Marketable securities	20,033			16,985
Accounts receivable	3,045			7,127
Unbilled accounts receivable	11			1,955
Inventories	3,851			4,483
Prepaid and other current assets	1,420			2,756
Total current assets	37,944			47,880
Marketable securities	16,229			1,999
Property and equipment, net	1,860			2,541
Other assets	197			197
	$	56,230		$	52,617
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,040		$	4,886
Accrued compensation	1,510			1,818
Accrued clinical trial expense	27			726
Accrued promotion fee expense	2,150			2,340
Other accrued liabilities	4,426			3,088
Deferred product sales	4,735			4,825
Deferred license revenue	1,454			4,600
Other current liabilities	56			56
Total current liabilities	15,398			22,339
Deferred license revenue, non-current portion	21,126			57,483
Other long-term liabilities	42			84
Commitments
Shareholders’ equity (deficit):
Preferred stock, no par value, 5,000,000 shares authorized; Series A convertible preferred stock, 25,000 shares designated, 18,158 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively, with an aggregate liquidation preference of $18,159	12,015			12,015
Common stock, no par value, 100,000,000 shares authorized; 47,630,945 and 42,029,411 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively	167,184			144,820
Accumulated deficit	(159,618		)	(184,111		)
Accumulated other comprehensive gain (loss)	83			(13		)
Total shareholders’ equity (deficit)	19,664			(27,289		)
	$	56,230		$	52,617

(1) Derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

See accompanying notes to Condensed Consolidated Financial Statements.

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DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except share and per share amounts)

(Unaudited)

	Three MonthsEnded September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Revenue:
Product sales	$	3,832			$	—			$		7,666		$	1,265
Royalties	2,546				66				2,625				495
License revenue	46,481				893				50,003				2,679
Collaborative revenue	1				—				3				75
Total revenues	52,860				959				60,297				4,514
Costs and expenses:
Cost of sales	724				320				1,598				1,445
Research and development	4,724				6,436				19,425				18,888
Selling, general and administrative	8,483				7,328				21,033				16,157
Gain on termination of Esprit Pharma agreement	(5,000			)	—				(5,000			)	—
Total costs and expenses	8,931				14,084				37,056				36,490
Income (loss) from operations	43,929				(13,125			)	23,241				(31,976		)
Interest and other income	638				492				1,504				1,673
Net income (loss) before income taxes	44,567				(12,633			)	24,745				(30,303		)
Provision for income taxes	(248			)	—				(252			)	—
Net income (loss)	44,319				(12,633			)	24,493				(30,303		)
Deemed dividend on preferred stock	(174			)	(165			)	(511			)	(500		)
Net income (loss) applicable to common stock shareholders	$	44,145			$	(12,798		)	$	23,982			$	(30,803	)
Basic net income (loss) applicable to common stock shareholders per common share	$		0.93		$		(0.31	)	$	0.53			$	(0.74	)
Diluted net income (loss) applicable to common stock shareholders per common share	$		0.92		$		(0.31	)	$	0.52			$	(0.74	)
Shares used in computing basic net income (loss) per common share	47,630,945				41,776,362				45,334,269				41,382,662
Shares used in computing diluted net income (loss) per common share	47,786,334				41,776,362				45,801,242				41,382,662

See accompanying notes to Condensed Consolidated Financial Statements.

4

DEPOMED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
Operating Activities
Net income (loss)	$	24,493		$	(30,303		)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	687			1,069
Employee and director stock-based compensation	1,430			1,896
Stock-based compensation related to consultants	42			—
Changes in assets and liabilities:
Accounts receivable	6,026			(4,847		)
Inventories	632			(1,480		)
Prepaid and other current assets	1,336			(1,525		)
Other assets	—			32
Accounts payable and other accrued liabilities	(3,440		)	6,262
Accrued compensation	(307		)	(62		)
Royalty advances	—			619
Deferred revenue	(39,593		)	3,063
Net cash (used in) operating activities	(8,694		)	(25,276		)
Investing Activities
Purchases of property and equipment	(137		)	(669		)
Purchases of marketable securities	(38,677		)	(20,072		)
Maturities of marketable securities	21,626			37,240
Sales of marketable securities	—			1,497
Net cash (used in) provided by investing activities	(17,188		)	17,996
Financing Activities
Proceeds from issuance of common stock	20,892			2,463
Net cash provided by financing activities	20,892			2,463
Net (decrease) in cash and cash equivalents	(4,990		)	(4,817		)
Cash and cash equivalents at beginning of period	14,574			7,566
Cash and cash equivalents at end of period	$	9,584		$	2,749

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, 2007 are not necessarily indicative of results to be expected for the entire year ending December 31, 2007 or future operating periods.

The balance sheet as of December 31, 2006 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, 2006 filed with the SEC.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and Depomed Development, Ltd. (DDL) through April 2007, at which time DDL was dissolved. DDL did 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.

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.

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. 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 is 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. 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 expense.

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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, the Company currently cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of GLUMETZA until the right of return no longer exists, which occurs at the earlier of the time GLUMETZA units are dispensed through patient prescriptions or expiration of the right of return. The Company estimates patient prescriptions dispensed using an analysis of third-party information, including third-party market research data, information obtained from wholesalers with respect to inventory levels and out-movement and retail pharmacy re-stocking activity. As a result of this policy, the Company has a deferred revenue balance of $4.7 million at September 30, 2007 related to GLUMETZA product shipments that have not been recognized as revenue, which is net of estimated patient support program discounts, wholesaler fees, prompt payment discounts, chargebacks and Medicaid rebates. The Company will recognize revenue upon the earlier of prescription units dispensed or expiration of the right of return until it can reliably estimate product returns, at which time the Company will record a one-time increase in net revenue related to the recognition of revenue previously deferred. 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 Pharma, Inc. (Esprit) was recognized after the expiration of a 30-day period in which Esprit was entitled to reject product that did not meet agreed-upon specifications. The supply agreement with Esprit was terminated in July 2007. See Note 6 for additional information with respect to this termination agreement.

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 agreements with Biovail Laboratories s.r.l. (Biovail) and LG Life Sciences (LG) are recognized when the royalty payments are received as they are not estimable.

The Company recognized royalties under its license agreement with Esprit based on Esprit’s sales of ProQuin XR, net of any estimated returns, discounts, rebates and chargebacks, subject to minimum annual royalties. The license agreement with Esprit was terminated in July 2007. See Note 6 for additional information with respect to this termination agreement.

Revenue from license arrangements is recognized when 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.

Collaborative revenue recognized relates to services rendered in connection with collaborative arrangements and the achievement 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 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

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. As of September 30, 2007, 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, 2007 (in thousands):

	Less than 12 months							12 months or greater					Total
U.S. Debt Securities	Fair Value			Gross Unrealized Losses				Fair Value		Gross Unrealized Losses			Fair Value			Gross Unrealized Losses
U.S. government debt securities	$		—	$	—			$	—	$	—		$		—	$	—
U.S. corporate debt securities	7,983			(5			)	—		—			7,983			(5			)
Total available-for-sale	$	7,983		$		(5	)	$	—	$		—	$	7,983		$		(5	)

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s securities. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until maturity, there were no other-than-temporary impairments for these securities at September 30, 2007.

NOTE 3. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is calculated based on the weighted-average number of shares of our common stock outstanding during the period. Diluted net income (loss) per common share is calculated based on the weighted-average number of shares of our common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options and equivalents and the assumed exercise of the warrants are determined under the treasury stock method. Shares used in the computation on net income (loss) per common share are as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Weighted-average shares - basic	47,630,945	41,776,362	45,334,269	41,382,662
Effect of dilutive securities:
Stock options	120,599	—	290,949	—
Warrants	34,790	—	176,024	—
Weighted-average shares - diluted	47,786,334	41,776,362	45,801,242	41,382,662

For the three and nine months ended September 30, 2007, approximately 7.7 million and 7.3 million common stock equivalent shares are not included because their effect is anti-dilutive. For the three and nine months ended September 30, 2006, approximately 10.1 million common stock equivalent shares are not included because their effect is anti-dilutive.

8

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 following table presents stock-based compensation expense recognized under FAS 123(R) for stock options and the Company’s employee stock purchase program (ESPP) in the Company’s condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of sales	$	6	$	3	$	16	$	3
Research and development expense	134		239		542		728
Selling, general and administrative expense	277		437		914		1,165
Total	$	417	$	679	$	1,472	$	1,896

At September 30, 2007, Depomed had $6.0 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 2.5 years.

NOTE 5. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) for the three and nine months ended September 30, 2007 and 2006 approximates net income (loss) and includes unrealized gains and losses on marketable securities.

NOTE 6. COLLABORATIVE ARRANGEMENTS AND CONTRACTS

Esprit Pharma

In July 2005, the Company entered into an exclusive license agreement with Esprit to market and distribute ProQuin XR in the United States. The agreement was amended in July 2006. In connection with the license agreement, the Company also entered into a related supply agreement with Esprit, pursuant to which the Company supplied commercial quantities of ProQuin XR to Esprit.

The license agreement obligated Esprit to pay the Company $50.0 million in license fees, of which $30.0 million was paid in July 2005 and $10.0 million was paid in December 2006. The remaining $10.0 million was due in July 2007. The license fee payments received were scheduled to be recognized as revenue ratably until June 2020, which represented the length of time that the Company was obligated to manufacture ProQuin XR for Esprit or its licensees.

The license agreement also provided for royalty payments by Esprit to the Company of 15 percent to 25 percent of ProQuin XR net sales, based on escalating net sales and subject to certain minimum royalty amounts. Esprit’s minimum royalty obligation for 2007 was $5.0 million, and in subsequent years was $5.0 million per year, subject to annual increases in the consumer price index beginning in 2008.

In July 2007, the Company entered into a termination and assignment agreement with Esprit terminating the exclusive license agreement and related supply agreement. Upon entering into the termination and assignment agreement, the marketing and distribution rights in the United States for ProQuin XR reverted back to the Company and Esprit paid the Company $17.5 million, representing (i) a $10.0 million payment in respect of the final license payment that would have been due to the Company in July 2007 under the license agreement; (ii) a $2.5 million payment in respect of a pro-rated portion of minimum royalties for 2007 under the license agreement; and (iii) a $5.0 million termination fee. Esprit has no future royalty obligations to the Company.

9

As a result of termination of the license and supply agreements with Esprit, the Company no longer has continuing obligations to Esprit. Accordingly, all deferred revenue related to license fees previously received from Esprit was fully recognized as revenue in July 2007, resulting in recognition of approximately $36.1 million of license revenue. In addition, the final $10 million payment received in July 2007 was fully recognized as license revenue on receipt, resulting in total recognition of $46.1 million of license revenue in the third quarter of 2007. The royalty payment of $2.5 million was recognized as royalty revenue and the $5.0 million termination fee has been classified as a gain within operating income in the third quarter of 2007.

Watson Pharmaceuticals

In July 2007, the Company entered into a promotion agreement with Watson Pharmaceuticals (Watson) granting Watson a co-exclusive right to promote ProQuin XR to the urology specialty and to long-term care facilities in the United States. In September 2007, the agreement was amended to also grant Watson a co-exclusive right to promote ProQuin XR to the obstetrics/gynecology (ob/gyn) specialty. Watson is required to deliver a minimum number of annual sales detail calls and maintain a sales force of a minimum size. Watson will receive a promotion fee equal to an agreed upon portion of gross margin attributable to the urology and ob/gyn specialties and long-term care facilities above an agreed upon baseline level. The Company is responsible for the manufacture and distribution of ProQuin XR. Each party bears all of its own personnel and other costs, including marketing expenses. The term of the promotion agreement is three years, with up to two additional one-year renewal periods at the election of Watson, and subject to early termination under certain circumstances. The Company has retained the right to promote ProQuin XR to physicians outside the urology, ob/gyn and long-term care markets, either directly or through third parties. The Company re-launched ProQuin XR and Watson commenced promotion in October 2007.

LG Life Sciences

In January 2007, the Company and LG Life Sciences amended the parties’ license and distribution agreement, originally entered into in August 2004, as amended in November 2006. The amendment grants LG a license to certain of the Company’s intellectual property rights to manufacture LG’s version of Glumetza, Novamet GR (extended release metformin tablets), in exchange for royalties on net sales of Novamet GR in Korea, and to remove the provisions of the original agreement providing for the supply of 500mg Novamet GR tablets by the Company to LG. The Company received a $0.6 million upfront license fee in August 2004 and a $0.5 million milestone payment in November 2006 with respect to LG’s approval to market Novamet GR in the Republic of Korea that were originally deferred and amortized as revenue over the estimated length of time the Company was obligated to provide assistance in development and manufacturing. Under the amended agreement, the Company no longer has continuing performance obligations to LG that are other than inconsequential or perfunctory and accordingly, the remaining $0.9 million of previously deferred revenue was recognized as license revenue in the first quarter of 2007.

Biovail

In February 2007, the Company entered into a license and development agreement with Biovail granting Biovail an option to license the AcuForm drug delivery technology to develop and commercialize up to two pharmaceutical products. Pursuant to the agreement, Biovail paid the Company an upfront fee of $0.5 million in February 2007, and is contingently obligated to pay the Company additional fees related to the exercise of the license option, the initiation of the first Phase 3 trial for each product and upon receipt of U.S. regulatory approval for each product. The agreement also requires that Biovail make royalty payments to the Company on net commercial sales of any product developed under the agreement. As the Company has no continuing obligations to Biovail under the agreement that are other than inconsequential or perfunctory, the $0.5 million upfront license fee was recognized as license revenue in the first quarter of 2007.

Also in February 2007, the Company amended its stock purchase agreement with Biovail originally entered into in May 2002. The amended stock purchase agreement removed Biovail’s observer rights at the Company’s board of directors meetings and removed the right of first negotiation in favor of Biovail with respect to acquisition transactions involving the Company.

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NOTE 7. RELATED PARTY TRANSACTIONS

Retirement of John W. Fara, Ph.D.

In August 2007, John W. Fara, Ph.D. retired from his positions as President, Chief Executive Officer and Chairman of the Company. Dr. Fara will continue to serve as a member of the Company’s Board of Directors. The Company entered into a consulting agreement with Dr. Fara, pursuant to which Dr. Fara will provide consulting services to the Company through December 31, 2009. From August 2007 through December 31, 2008, the Company will pay Dr. Fara $20,833 per month for his consulting services, and will reimburse Dr. Fara for COBRA and life insurance premiums. Dr. Fara will be paid on an hourly basis for consulting services provided in 2009. For the three months ended September 30, 2007, the Company incurred expense of approximately $27,000 associated with this consulting agreement.

During the period of his consultancy, Dr. Fara will continue to vest in all of his currently unvested stock options, and his vested stock options will remain exercisable. For the three months ended September 30, 2007, the Company recognized approximately $12,000 in stock compensation expense associated with these awards.

In the event of a change in control of the Company, as defined by the Company’s 2004 Equity Incentive Plan, all of Dr. Fara’s unvested options will fully vest, and any remaining monthly payments for consulting under the agreement will be accelerated.

NOTE 8. REDUCTION IN FORCE

In September 2007, the Company reduced its workforce by 25 employees, or approximately 25% of its full-time staff, to conserve cash and align its workforce with its anticipated staffing needs. The total cost of the workforce reduction is expected to be $672,000, which consists of cash payments for severance, medical insurance and outplacement services and was recognized as expense during the three months ended September 30, 2007. Severance expense of $451,000 and $221,000 was recognized in research and development expense and selling, general and administrative expense, respectively, for the three months ended September 30, 2007. The following table summarizes the severance expense activity during the three months ended September 30, 2007 (in thousands):

Severance expense accrued	$	672
Cash payments	(392		)
Accrued severance balance as of September 30, 2007	$	280

The severance accrual as of September 30, 2007 is expected to be paid in the fourth quarter of 2007.

NOTE 9. INVENTORIES

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

	September 30, 2007		December 31, 2006
Raw materials	$	980	$	1,343
Work-in-process	272		1,387
Finished goods	1,961		970
Deferred costs	638		783
Total	$	3,851	$	4,483

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

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NOTE 10. SHAREHOLDERS’ EQUITY (DEFICIT)

Registered Direct Equity Offering

In April 2007, the Company completed a registered direct offering of 5,300,000 shares of common stock with selected institutional investors. The shares were sold at a price of approximately $3.78 per share, with net proceeds totaling approximately $20.0 million.

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 shareholder to resolve a misunderstanding between the Company and the shareholder 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 shareholder 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 shareholder. 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 shareholder. 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 may be satisfied only by surrender of the outstanding shares of Series A Preferred Stock.

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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, 2007, the Company recognized Series A Preferred Stock deemed dividends of approximately $0.2 and $0.5 million, 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, 2007, there were 18,158 shares of Series A Preferred Stock outstanding with an aggregate liquidation preference of approximately $18.2 million. The warrant was convertible into 2,773,402 shares of the Company’s common stock at a conversion price of $6.55 as of September 30, 2007.

Option Exercises

There were no options exercised by employees and consultants during the three months ended September 30, 2007. Employees and consultants exercised options to purchase 226,472 shares of the Company’s common stock with net proceeds to the Company of approximately $0.7 million during the nine months ended September 30, 2007.

Employee Stock Purchase Plan

In May 2007, the Company sold 72,217 shares under the ESPP. The shares were purchased at a weighted average exercise price of $3.09 with proceeds of approximately $0.2 million.

NOTE 11. INCOME TAXES

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 10 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As of January 1, 2007 and September 30, 2007, the Company had $2.3 million and $2.9 million of unrecognized tax benefits, which is netted against deferred tax assets and is fully offset by a valuation allowance. Upon adoption of FIN 48, no adjustment was made to the Company’s liability for uncertain tax positions or the Company’s beginning accumulated deficit balance. The adoption of FIN 48 did not have a material impact on the Company’s financial statements, results of operations or cash flows.

All tax years since inception remain open to examination by the Internal Revenue Service and the California Franchise Tax Board until such time the Company’s net operating losses and credits are either utilized or expire. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense by the Company. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with unrecognized tax benefits. The Company does not foresee any material changes to unrecognized tax benefits within the next twelve months.

NOTE 12. SUBSEQUENT EVENTS

King Pharmaceuticals

In October 2007, the Company terminated its promotion agreement with King Pharmaceuticals (King) related to the marketing of GLUMETZA in the United States. Pursuant to the termination agreement, King paid the Company $29.9 million in termination and other fees, and will fulfill its GLUMETZA promotion obligations through December 31, 2007. Beginning in the fourth quarter of 2007, the Company is no longer obligated to pay King promotion fees on sales of GLUMETZA in the United States.

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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, 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:

•    our ability to obtain development and marketing partners for Gabapentin GR™ and other product candidates;

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

•    the future commercialization of GLUMETZA™ in the United States, and our ability to find a new marketing partner for GLUMETZA in the United States;

•    the success of ProQuin® XR in the United States, and the success of our collaborative arrangement with Watson Pharmaceuticals with respect to ProQuin XR;

•    market acceptance of GLUMETZA and ProQuin XR;

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

•    our ability to raise additional capital; 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

Depomed is a specialty pharmaceutical company focused on the development and commercialization of differentiated products that address large and growing markets and are based on proprietary oral drug delivery technologies. We have developed two commercial products. GLUMETZA (metformin hydrochloride extended release tablets) is a once-daily treatment for adults with type 2 diabetes that we commercialize in the United States. ProQuin XR (ciprofloxacin hydrochloride extended release tablets) is a once-daily treatment for uncomplicated urinary tract infections that we jointly commercialize in the United States with Watson Pharmaceuticals.

We have a three-pronged approach to product development designed to optimize the use and value of our drug delivery technologies, while managing the costs and risks associated with developing and commercializing pharmaceutical products. We develop products for our own account that are designed to compete in large growing markets and that can be highly differentiated from immediate release versions of the compounds upon which they are based. Second, we selectively enter into collaborative partnerships with other companies where the unique capabilities of our technology can provide superior value to a partner’s compound, resulting in significantly greater value for Depomed than a traditional fee-for-service arrangement. Third, we enter into arrangements that enable our technology to be applied by other companies to a greater number of compounds than our infrastructure can support, so as to derive additional value from our technology. In the future, we plan to commercialize our proprietary products, relying on partners to cover the large primary care audiences, while maintaining co-promotion and distribution rights in order to be in a position to create our own sales force when appropriate, thereby increasing the value to us of our products, and our control over them.

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Our most advanced product candidate is Gabapentin GR, an extended release form of gabapentin. In July 2007, we announced that the primary endpoint of our Phase 3 clinical trial for the treatment of postherpetic neuralgia (PHN) was not achieved with statistical significance. We have also completed and announced positive results of a Phase 2 clinical trial for the treatment of diabetic peripheral neuropathy (DPN), and initiated a Phase 2 clinical trial for the treatment of menopausal hot flashes. Additionally, we have other product candidates in earlier stages of development, including a treatment for gastroesophageal reflux disease (GERD).

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

Significant Developments for the Quarter Ended September 30, 2007

•In July 2007, we announced the results of our Phase 3 clinical trial for Gabapentin GR for the treatment of PHN. The primary endpoint in the study was not achieved with statistical significance for either active treatment regimen, as compared to placebo, over the ten-week treatment period. However, important secondary endpoints related to efficacy were achieved with statistical significance relative to placebo, and the incidence of certain adverse events associated with gabapentin was relatively low.

•In July 2007, we terminated our license and supply arrangements with Esprit Pharma related to ProQuin XR, and the marketing and distribution rights in the United States for ProQuin XR were transferred back to us. We received $17.5 million in payments pursuant to the termination agreement.

•In July 2007, we entered into a promotion agreement with Watson Pharmaceuticals granting Watson a co-exclusive right to promote ProQuin XR to the urology specialty and long-term care facilities in the United States. In September 2007, we amended the agreement and additionally granted Watson a co-exclusive right to promote ProQuin XR to the ob/gyn specialty.

•In August 2007, Dr. John W. Fara retired from his positions as our Chairman, President and Chief Executive Officer of the Company. Dr. Fara will continue to serve the Company as a director and a consultant.

•In August 2007, Carl A. Pelzel was appointed as the Company’s President and Chief Executive Officer, and Craig R. Smith, M.D., was appointed Chairman of the Board of Directors.

•In August 2007, we announced the results of a Phase 2a pharmacokinetic/pharmacodynamic proof-of-concept study of patients suffering with nocturnal acid breakthrough (NAB) associated with GERD.

•In September 2007, we completed patient enrollment on a Phase 2 trial for Gabapentin GR for the treatment of menopausal hot flashes.

•In September 2007, we implemented a reduction in force affecting approximately one-fourth of our employees.

•Revenues for the three months ended September 30, 2007 were $52.9 million, and included $48.6 million associated with the termination of our Esprit license and supply agreements, compared to $1.0 million for the three months ended September 30, 2006.

•Operating expenses for the three months ended September 30, 2007 were $8.2 million and included a $5.0 million gain on termination of our Esprit license and supply agreements, compared to operating expenses of $13.8 million for the three months ended September 30, 2006.

•Cash, cash equivalents and marketable securities were $45.8 million as of September 30, 2007, compared to $33.6 million as of December 31, 2006.

Other Recent Developments

•In October 2007, John F. Hamilton retired as our Vice President, Finance and Chief Financial Officer, and Tammy L. Cameron, our Corporate Controller, was appointed as our principal accounting and financial officer on an interim basis.

•In October 2007, we terminated our promotion agreement with King Pharmaceuticals related to GLUMETZA. Pursuant to the termination agreement, King paid us $29.9 million in termination and other fees, and will fulfill its GLUMETZA promotion obligations through December 31, 2007.

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RECENT PRODUCT DEVELOPMENTS

MARKETED PRODUCTS

GLUMETZA™

King Pharmaceuticals. In October 2007, we terminated our promotion agreement with King related to GLUMETZA. Pursuant to the termination agreement, King paid us $29.9 million in termination and other fees, and will fulfill its GLUMETZA promotion obligations through December 31, 2007. We have no obligation to pay King promotion fees on sales of GLUMETZA for periods after September 30, 2007. We are in discussions with potential marketing partners for GLUMETZA in the United States.

In April 2007, we submitted a prior approval supplement to the FDA covering a 1000mg tablet strength of GLUMETZA seeking approval to market the product in the United States.  In August 2007, we received an approvable letter from the FDA in response to the prior approval supplement.  The conditions to approval set forth in the letter relate primarily to manufacturing, and we are working with Biovail to resolve them. We expect that the conditions will be satisfied, and the 1000mg GLUMETZA to be commercially available in the second quarter of 2008.

ProQuin® XR

Esprit Pharma. In July 2007, we entered into a termination and assignment agreement with Esprit terminating the exclusive license and marketing agreement originally entered into in July 2005 and subsequently amended in July 2006, in which we previously granted Esprit ProQuin XR marketing and distribution rights in the United States. The related supply agreement entered into in July 2005 and co-promotion agreement entered into in July 2006 were also terminated.

Upon entering into the termination and assignment agreement, the marketing and distribution rights in the United States for ProQuin XR were transferred back to us and Esprit paid us $17.5 million representing (i) a $10.0 million payment in respect of the final license payment that would have been due to us in July 2007 under the exclusive license and marketing agreement; (ii) a $2.5 million payment in respect to a pro-rated portion minimum royalties for 2007; and (iii) a $5.0 million termination fee. The termination and assignment agreement removed Esprit’s future minimum royalty obligations to us.

Under the termination and assignment agreement, Esprit is responsible for all returns and rebates associated with ProQuin XR product distributed by Esprit.

Watson Pharmaceuticals. In July 2007, we entered into a promotion agreement with Watson granting Watson a co-exclusive right to promote ProQuin XR to the urology specialty and long-term care facilities in the United States. In September 2007, we amended the agreement to also grant Watson a co-exclusive right to promote ProQuin XR to the ob/gyn specialty. Watson is required to deliver a minimum number of annual sales detail calls and maintain a sales force of a minimum size. Watson will receive a promotion fee equal to an agreed upon portion of gross margin attributable to the urology and ob/gyn specialties and long-term care facilities above an agreed upon baseline level. We will be responsible for the manufacture and distribution of ProQuin XR. Each party will bear all of its own personnel and other costs, including marketing expenses. The term of the Promotion Agreement is three years, subject to early termination in certain circumstances, with up to two additional one-year renewal periods at the election of Watson. We have retained the right to promote ProQuin XR to physicians outside the urology and ob/gyn specialties and long-term care markets, either directly or through third parties. We and Watson re-launched ProQuin XR in October 2007.

Madaus.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., who was acquired by Rottapharm in June 2007. 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 for ProQuin XR with the Medical Products Agency in Sweden.  We assisted Madaus with a response to comments and questions on the Marketing Authorization Application that Madaus received in May 2007.  Madaus submitted its response to the Swedish Medical Products Agency’s questions and comments in August 2007.  We anticipate that the Medical Products Agency will act on the response submitted by Madaus before the end of the first quarter of 2008.

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PRODUCT CANDIDATES

Gabapentin GR™

Postherpetic Neuralgia. In May 2006, we initiated a Phase 3 clinical trial for Gabapentin GR for the treatment of PHN. The study was a randomized, double-blind, placebo-controlled study of approximately 400 PHN patients. The study was fully enrolled in March 2007. Patients in the study were randomized into three treatment arms: placebo, a total daily dose of 1800mg of Gabapentin GR dosed once daily, and a total daily dose of 1800mg of Gabapentin GR dosed twice daily.

The primary objective of the study was to assess the efficacy of Gabapentin GR in reducing the pain associated with PHN, measured from baseline pain scores to the end of a ten-week treatment period on the basis of the Likert pain scale. Secondary objectives include an assessment of changes from baseline in sleep interference, and additional patient and clinician assessments of pain and quality of life.

In July 2007, we announced the primary endpoint was not achieved with statistical significance for either active treatment regimen, as compared to placebo, over the ten-week treatment period. The mean reductions in average daily pain scores from baseline to end of study were 1.83 (once-daily), 1.72 (twice-daily) and 1.43 (placebo). However, statistical significance relative to placebo was achieved in each of the first seven weeks for the once-daily treatment arm and in each of the first four weeks for the twice-daily treatment arm using the "baseline observation carried forward" statistical analysis applied to the primary endpoint in the study.

The secondary endpoints of sleep interference, Clinical Global Impression of Change (CGIC), a scale used by physicians for overall assessment of patient improvement, and Patient Global Impression of Change (PGIC), a scale used by patients to report their overall assessment of change, were all statistically significant for the once-daily treatment compared to placebo over the ten week study period. Sleep interference scores were reduced by 2.01 points with Gabapentin GR compared to -1.39 with placebo (p=0.014). Physicians reported that 48.0% of patients taking Gabapentin once-daily were “very much improved” or “much improved” compared to 27.1% of the patients who received placebo (p<0.001), as measured by the CGIC. Similar results were observed for the PGIC in the once-daily and placebo arms (p=0.009).

We are pursuing discussions with potential development and marketing partners for Gabapentin GR for PHN. In November 2007, we plan to submit to the FDA a special protocol assessment related to a new Phase 3 clinical trial in PHN for Gabapentin GR. Under the FDA’s special protocol assessment procedures, the FDA will evaluate within 45 days certain protocols for clinical trials to assess whether they are adequate to meet scientific and regulatory requirements necessary to support an approval. We believe that obtaining the FDA’s input on the details of a proposed modified protocol design before starting a further study will provide valuable guidance for the efficacy demonstration needed for an NDA filing for Gabapentin GR for the PHN indication.

Menopausal Hot Flashes. In April 2007, we commenced a Phase 2 study of Gabapentin GR for the treatment of menopausal hot flashes assessing the relationship between various doses and dosing schedules of Gabapentin GR and the safety and efficacy of the formulation of Gabapentin GR for the treatment of menopausal hot flashes. In September 2007, we completed patient enrollment in the trial and expect to report top-line data from the study in the first quarter of 2008. The study is a double-blind, placebo-controlled, multi-center trial of 124 menopausal women experiencing recurrent, moderate to severe hot flashes. The primary endpoints of the trial are the frequency and severity of hot flashes, relative to baseline. Secondary endpoints include, among others, the efficacy of Gabapentin GR relative to placebo based on changes from baseline to the end of each treatment period, average daily frequency and severity score of hot flashes and sleep quality.

Gastroesophageal Reflux Disease Program

In 2006, we conducted a Phase 1 study of the GERD treatment omeprazole, a generic proton pump inhibitor, designed to provide us with insight into our formulation strategy for our GERD program.  We have also conducted two proof-of-concept studies related to our GERD program.  In the initial study, we determined that our gastric retentive omeprazole tablet can predictably deliver omeprazole approximately four hours after ingestion.

In August 2007, we announced the results of the second study. The Phase 2a pharmacokinetic/pharmacodynamic proof-of-concept study demonstrated the potential clinical advantages of the delivery of omeprazole in two evening pulses to patients suffering with nocturnal acid breakthrough, or NAB, associated with GERD.

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The objective of the study was to determine if the delivery of a dose of omeprazole with dinner and a second dose four hours after dinner would reduce the incidence of NAB, which typically occurs in the late evening and early morning hours. The study was an open label crossover study that involved 16 patients with at least three months history of GERD with recurrent nighttime acid reflux while taking omeprazole or any other proton pump inhibitor. Fourteen of the 16 patients completed each of two treatment arms. In the proof-of-concept arm of the study, patients received 20 mg of omeprazole with dinner followed by a second 20 mg dose four hours later, in order to simulate a two pulse delivery mechanism. In the comparative arm of the study, patients received 40 mg of omeprazole 30 minutes before dinner.

Five patients who received the two pulses of omeprazole did not have clinically meaningful blood levels of the drug associated with the first pulse and therefore did not provide useful data for this trial, because the study objective was to evaluate a two pulse delivery of the drug. These patients received the commercially available formulation of omeprazole known as Prilosec®. It is not known why these patients did not achieve blood levels with Prilosec.

In the nine patients who did achieve blood levels from both doses of omeprazole, and thus provided useful data for the two pulse concept tested in the trial, none experienced NAB. In the 40 mg single dose treatment arm, three patients experienced NAB. All three of these patients had blood levels of omeprazole fall to undetectable levels between 2 a.m. and 3 a.m.. Results from both arms of the study therefore demonstrate the need to maintain adequate blood levels of omeprazole in order to inhibit NAB.

OTHER RESEARCH AND DEVELOPMENT AND COLLABORATIVE PROGRAMS

Supernus. 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. We continue to participate with Supernus on this collaborative program.

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 since we filed our 2006 Annual Report on Form 10-K with the Securities and Exchange Commission on March 16, 2007. For a description of our critical accounting policies, please refer to our 2006 Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2007 and 2006

Revenue

Total revenues are summarized in the following table (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Product sales:
GLUMETZA	$	3,832	$	—	$	7,666	$	—
ProQuin XR	—		—		—		1,265
Total product sales	3,832		—		7,666		1,265
Royalties:
GLUMETZA	46		9		125		107
ProQuin XR	2,500		57		2,500		388
Total royalties	2,546		66		2,625		495
License revenue:
GLUMETZA	364		382		1,996		1,146
ProQuin XR	46,117		511		47,507		1,533
AcuForm technology	—		—		500		—
Total license revenue	46,481		893		50,003		2,679
Collaborative revenue	1		—		3		75
Total revenues	$	52,860	$	959	$	60,297	$	4,514

Product sales

The GLUMETZA product that we began selling to wholesalers and retail pharmacies in September 2006 is subject to rights of return of up to twelve months after product expiration. Given the limited sales history of GLUMETZA and return privileges, we currently cannot reliably estimate expected returns of the product at the time of shipment. We defer recognition of revenue on product shipments of GLUMETZA until the right of return no longer exists, which occurs at the earlier of the time GLUMETZA units are dispensed through patient prescriptions or expiration of the right of return. We estimate the volume of prescription units dispensed by pharmacies based on an analysis of third-party information, including third-party market research data, information obtained from certain wholesalers with respect to inventory levels and out-movement and retail pharmacy re-stocking activity. For the three and nine months ended September 30, 2007, we recognized approximately $3.8 million and $7.7 million of product sales of GLUMETZA, respectively, which is net of estimated patient support program discounts, wholesaler fees, stocking allowances, prompt payment discounts, chargebacks and Medicaid rebates. We have deferred recognition of revenue on GLUMETZA product shipments to customers which we estimate have not been dispensed through patient prescriptions. At September 30, 2007, we have a deferred revenue balance, which is classified as a liability on the consolidated balance sheet, of $4.7 million associated with the deferral of revenue on GLUMETZA product shipments, which is net of estimated patient support program discounts, wholesaler fees, stocking allowances, prompt payment discounts, chargebacks and Medicaid rebates.

ProQuin XR product sales in 2006 relate to our supply agreement with Esprit. We began supplying Esprit with commercial quantities of ProQuin XR in the fourth quarter of 2005, and in 2007, there were no sales pursuant to the supply agreement. We terminated the license and supply agreements in July 2007 and the marketing and distribution rights in the United States for ProQuin XR reverted back to us. In October 2007, we re-launched ProQuin XR with Watson and expect to begin recognizing product sales as revenue in the fourth quarter of 2007.

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Royalties

In July 2007, we terminated our license agreement with Esprit that provided for royalty payments by Esprit to us on ProQuin XR net sales in the United States. Under the termination and assignment agreement related to our license and supply agreements, Esprit paid us $2.5 million in royalties in July 2007, which was recognized as royalty revenue in the third quarter of 2007. Esprit is no longer obligated to pay us royalties on ProQuin XR sales.

GLUMETZA royalties for the three and nine months ended September 30, 2007 relate to royalties we received from Biovail based on net sales of GLUMETZA in Canada and royalties we received from LG based on net sales of LG's version of GLUMETZA, Novamet GR, in Korea. In July 2007, the royalty payable by Biovail was increased to ten percent on Canadian net sales of the 500mg GLUMETZA. We began receiving royalties from LG in the first quarter of 2007.

License revenue

Our license agreement with Esprit for ProQuin XR provided for $50.0 million in license fees from Esprit. We received $30.0 million in license fees in July 2005 and an additional $10.0 million in December 2006. The final $10.0 million installment was due in July 2007. The first $40.0 million in license fees received were recognized as revenue ratably commencing on our receipt of the fees through June 2020, which represented the length of time we were obligated to manufacture ProQuin XR under our ProQuin XR supply agreement with Esprit. In July 2007, we and Esprit terminated the license and supply agreements.

As a result of the termination of our agreements with Esprit, we no longer have continuing obligations to Esprit. Accordingly, all deferred revenue related to license fees previously received from Esprit was fully recognized as revenue in July 2007, resulting in recognition of approximately $36.1 million of license revenue. In addition, the final $10 million payment received in July 2007 was fully recognized as license revenue on receipt, resulting in total recognition of $46.1 million of license revenue related to our agreements with Esprit during the third quarter of 2007.

We received $25.0 million in GLUMETZA license fees from Biovail in July 2005. We are recognizing the $25.0 million license fee payment as revenue ratably until February 2023, which represents the estimated length of time our obligations exist under the arrangement related to royalties we are obligated to pay Biovail on net sales of GLUMETZA in the United States and for our obligation to use Biovail as our sole supplier of the 1000mg GLUMETZA, should the 1000mg GLUMETZA obtain approval in the United States.

We received a $0.6 million upfront license fee from LG in August 2004 and a $0.5 million milestone payment received in November 2006 with respect to LG’s approval to market Novamet GR in the Republic of Korea. These payments were originally deferred and amortized as license revenue over the estimated length of time we were obligated to provide assistance in development and manufacturing. In January 2007, we amended our agreement with LG, granted LG a license to certain of the Company’s intellectual property rights to manufacture the 500mg Novamet GR in exchange for royalties on net sales of Novamet GR in Korea, and removed the provisions of the original agreement providing for the supply of 500mg Novamet GR tablets by us to LG. Under the amended agreement, we no longer have continuing performance obligations that are other than inconsequential or perfunctory to LG. Accordingly, the remaining $0.9 million of previously deferred revenue was recognized as license revenue in the first quarter of 2007.

In February 2007, we received $0.5 million from Biovail upon entering into a license and development agreement with Biovail granting Biovail an option to license our AcuForm drug delivery technology to develop and commercialize up to two pharmaceutical products. We have no continuing performance obligations that are other than inconsequential or perfunctory under the agreement. Accordingly, we have recognized the entire upfront license fee as revenue in the first quarter of 2007.

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Cost of Sales

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 related to our product sales. Total cost of sales for the three and nine months ended September 30, 2007, as compared to the prior year, was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of sales	$	724	$	320	$	1,598	$	1,445

Cost of sales for the three and nine months ended September 30, 2007 relates primarily to costs associated with the sale of GLUMETZA. Costs of sales for the three and nine months ended September 30, 2006 relates primarily to costs associated with the supply of ProQuin XR to Esprit. The costs of manufacturing associated with deferred revenue on GLUMETZA product shipments are recorded as deferred costs, which are included in inventory, until such time the deferred revenue is recognized.

Research and Development Expense

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. Total research and development expense for the three and nine months ended September 30, 2007, as compared to the prior year, was as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Research and development expense	$	4,724		$	6,436	$	19,425		$	18,888
Dollar change from prior year	(1,712		)			537
Percentage change from prior year	(26.6		)%			2.8		%

The decrease in research and development expense for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 was primarily due to lower outside contract service expenses related to the completion of the Phase 3 clinical trial for Gabapentin GR for the treatment of postherpetic neuralgia which was completed in the first half of 2007.

The increase in research and development expense for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to higher outside contract service expenses for our clinical trial expenses related to our Phase 2 clinical trial for Gabapentin GR for the treatment of menopausal hot flashes and costs associated with our Phase 2a proof-of-concept GERD formulation studies.

We may decide to commence one or more additional Phase 3 trials for Gabapentin GR for the treatment of postherpetic neuralgia or menopausal hot flashes either alone or with a collaborative partner, which may result in increased research and development expense in future periods.

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Selling, General and Administrative Expense

Selling, general and administrative expenses primarily consist of personnel expenses to support our operating activities, marketing and promotion expenses associated with GLUMETZA, facility costs and professional expenses, such as legal and accounting fees. Total selling, general and administrative expenses, as compared to the prior year, were as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Selling, general and administrative	$	8,483		$	7,328	$	21,033		$	16,157
Dollar change from prior year	1,155					4,876
Percentage change from prior year	15.8		%			30.2		%

The increase in selling, general and administrative expense for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 was primarily due to $2.1 million in promotion fees due to King under the promotion agreement for GLUMETZA, which was launched in September 2006, offset by decreases of $0.6 million in marketing expenses related to GLUMETZA and $0.2 million related to stock-based compensation.

The increase in selling, general and administrative expense for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to an increase of $3.0 million in promotion fees due to King under the promotion agreement for GLUMETZA, $0.7 million in marketing costs associated with GLUMETZA, and $1.4 million increase in legal fees resulting from our patent infringement case against IVAX, offset by a decrease of $0.3 million related to stock-based compensation.

We are no longer obligated to pay King promotion fees related to sales of GLUMETZA. Accordingly, selling, general and administrative expenses may decrease in the fourth quarter of 2007.

Gain on Termination of Esprit Pharma Agreement

In conjunction with the termination and assignment agreement entered into with Esprit in July 2007, we received a $5.0 million termination payment from Esprit, which has been classified as a gain within operating income for the three months ended September 30, 2007.

Interest and Other Income

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2007			2006		2007			2006
Interest and other income	$	638		$	492	$	1,504		$	1,673
Dollar change from prior year	146					(169		)
Percentage change from prior year	29.7		%			(10.1		)%

Interest and other income increased during the three months ended September 30, 2007 as compared to the corresponding period in 2006 due to higher investment balances in the three months ended September 30, 2007 as a result of receipt of $17.5 million from Esprit in July 2007. Interest and other income decreased during the nine months ended September 30, 2007 as compared to the corresponding periods in 2006 as a result of lower investment balances in 2007.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands)	September 30, 2007		December 31, 2006
Cash, cash equivalents and marketable securities	$	45,846	$	33,558

Since inception through September 30, 2007, we have financed our product development efforts and operations primarily from private and public sales of equity securities and receipts of upfront license and termination fees from collaborative and license partners.

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In December 2006, we entered into a common stock purchase agreement with Azimuth Opportunity, Ltd., pursuant to which Azimuth is committed to purchase, from time to time and at our sole discretion, up to the lesser of (a) $30.0 million of our common stock, or (b) 8,399,654 shares of common stock. Sales to Azimuth under the agreement, if any, will occur over a 24-month term and will be made at a price equal to the average closing price of our common stock over a given pricing period, minus a discount ranging from approximately 3.8% to 6.4%, which varies based on a threshold price set by us. Upon each sale of the our common stock to Azimuth under the agreement, we have also agreed to pay Reedland Capital Partners a placement fee equal to approximately 1.1% of the aggregate dollar amount of common stock purchased by Azimuth. Azimuth is not required to purchase our common stock when the price of our common stock is below $2 per share. As of September 30, 2007, we have not sold any common stock to Azimuth under this common stock purchase agreement.

In April 2007, we completed a registered direct offering of 5,300,000 shares of common stock with institutional investors. The shares were sold at a price of approximately $3.78 per share, with net proceeds totaling approximately $20.0 million.

In July 2007, Esprit paid us $17.5 million in connection with the termination of the license and supply agreement.

In October 2007, King paid us $29.9 million in connection with the termination of our GLUMETZA promotion agreement with King.

As of September 30, 2007, we have accumulated net losses of $159.6 million. We expect to continue to incur operating losses in 2008. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of 2008. 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:

•   sales of our marketed products;

•   expenditures related to our commercialization and development efforts;

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

•   results of research and development efforts;

•   results of our litigation against IVAX;

•   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) our marketed products and product candidates.

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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, except for the common stock purchase agreement with Azimuth, we have 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 be unable 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;

•   significantly curtail commercialization of our marketed products or other operations; 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.

Cash Flows from Operating Activities

Cash used in operating activities during the nine months ended September 30, 2007 was approximately $8.7 million, compared to cash used in operating activities of approximately $25.3 million during the nine months ended September 30, 2006. During the nine months ended September 30, 2007 cash used in operating activities was primarily due to our net income adjusted for stock-based compensation, depreciation expense and movements in working capital, including recognition of previously deferred revenue. During the nine months ended September 30, 2006 cash used in operating activities was primarily due to our net loss adjusted for stock-based compensation, depreciation expense and movements in working capital. The decrease in cash used in operating activities for the nine months ended September 30, 2007 as compared to the prior year was primarily due to receipt of the $17.5 million in payments from Esprit on termination of the license and supply agreements for ProQuin XR.

Cash Flows from Investing Activities

Cash used in investing activities during the nine months ended September 30, 2007 was approximately $17.2 million and consisted of a $17.1 million net increase in marketable securities. Net cash provided by investing activities during the nine months ended September 30, 2006 was approximately $18.0 million and consisted of an $18.7 million net decrease in marketable securities offset by $0.7 million in purchases of laboratory and office equipment.

Cash Flows from Financing Activities

Cash provided by financing activities during the nine months ended September 30, 2007 was approximately $20.9 million compared to cash provided by financing activities of approximately $2.5 million for the same period in 2006. In the nine months ended September 30, 2007, the amount consisted of $20.0 million in proceeds from our registered direct offering in April 2007 and $0.9 million in cash proceeds from exercises of stock options and our ESPP. In the nine months ended September 30, 2006, the amount consisted primarily of cash proceeds from the exercises of warrants and stock options.

Contractual Obligations

As of September 30, 2007, our aggregate contractual obligations are as shown in the following table (in thousands):

	Less than 1 year		1-3 years		More than 3 years		Total
Operating leases	$	1,374	$	1,238	$	9	$	2,621

The contractual obligations reflected in this table exclude $3.5 million of contingent milestone payments we may be obligated to pay in the future under our sublicense agreement with PharmaNova. These payments relate to various milestones for the product candidate under the sublicense agreement, including dosing of the first patient in any Phase 3 trial, submission to the FDA of an NDA, and FDA approval of an NDA. The table above also excludes any future royalty payments we may be required to pay on products we have licensed or any promotion fees associated with our promotion agreement with Watson.

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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, 2006.

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 Company's President and Chief Executive Officer along with its interim principal accounting and 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, our management, including the Company’s President and Chief Executive Officer along with its interim principal accounting and financial officer, concluded that our disclosure controls and procedures were effective.

We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis 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, 2007 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 we own. The patents relate to our AcuForm delivery technology. The complaint alleges infringement of our patents by IVAX’s extended release metformin hydrochloride tablets.  In April 2006, IVAX filed an answer and counterclaim, in which it alleged that the patents in the suit are not infringed by IVAX and are invalid and unenforceable. In December 2006, the court issued an order construing certain of the claim terms appearing in the patents.  Fact and expert discovery in the case is substantially complete. In September 2007, we submitted a motion for summary judgment of infringement. In October 2007, IVAX submitted motions for summary judgment of invalidity, inequitable conduct, lack of willfulness, and for construction of a claim term appearing in the patents.  A consolidated hearing on the parties’ summary judgment motions is scheduled for November 20, 2007. The court has not set a trial date.

ITEM 1A. RISK FACTORS

The risk factors presented below amend and restate the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

The following factors, along with those described above under “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — LIQUIDITY AND CAPITAL RESOURCES” should be reviewed carefully, in conjunction with the other information contained in this Report and our consolidated financial statements. These factors, among others, could cause actual results to differ materially from those currently anticipated and contained in forward-looking statements made in this Form 10-Q and presented elsewhere by our management from time to time. See “Part I, Item 2—Forward-Looking Information.”

Our recent Phase 3 trial for Gabapentin GR failed to meet the primary efficacy endpoint and there can be no assurance this product will be approved.

In July 2007, we announced that our drug candidate Gabapentin GR failed to meet the primary efficacy endpoint in a Phase 3 trial for the treatment of postherpetic neuralgia (PHN).  We expect that one or more additional clinical trials will be required to obtain marketing approval in the United States for the product for the PHN indication.  We are pursuing discussions with potential development and marketing partners related to the continued development of Gabapentin GR for PHN.  However, we may not secure a development and marketing arrangement on terms favorable to us, or at all.  In that event, we must consider conducting one or more additional clinical trials alone.

We intend to submit a protocol for a Phase 3 registration trial for Gabapentin GR to the FDA for a special protocol assessment, or SPA, pursuant to which the FDA will assess whether the protocol is adequate to meet the scientific and regulatory requirements necessary to support marketing approval of Gabapentin GR for PHN.  In connection with the assessment, we may decide, or the FDA may require us, to modify the protocol by, for example, changing the proposed primary endpoint, the size of the study or otherwise, which may result in a delay in the completion of the trial.

If we conduct additional trials, we will incur significant additional expenses and will not know for at least one to two years whether the drug is safe and effective such that it could be approved for marketing.  Even if these trials are successful, the approval date for the drug is likely to be significantly delayed, which means that we would not receive revenue from drug sales for a number of years, if at all.  If we decide to abandon the further development of Gabapentin GR for PHN, our commercial prospects may be adversely affected.

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We have terminated our promotion arrangement with King Pharmaceuticals related to GLUMETZA in the United States, and have not yet identified a new commercialization partner for the product.

In June 2006, we entered into a promotion agreement with King Pharmaceuticals pursuant to which King promoted GLUMETZA in the United States through its sales force.  In October 2007, following a strategic shift in focus by King toward its neuroscience and hospital/acute care business, we and King terminated the promotion agreement.  Pursuant to the termination of the promotion agreement, we received payments from King of approximately $29.9 million, and King will continue detailing GLUMETZA through December 31, 2007.

We are seeking a new marketing partner for GLUMETZA.  However, we have not yet identified a new marketing partner and we may not succeed in entering into a marketing arrangement for GLUMETZA on favorable terms, or at all.  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 GLUMETZA will depend in large part on our ability to identify and enter into a marketing arrangement with a new partner.  Even if we enter into a new marketing arrangement for GLUMETZA, it may not be successful.  Any failure to successfully commercialize GLUMETZA could have a material adverse effect on our business, financial conditions, results of operations and cash flows.

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.

We depend on Watson Pharmaceuticals for the successful commercialization of ProQuin XR in the United States.

In July 2007, we granted Watson Pharmaceuticals the co-exclusive marketing rights to ProQuin XR in the United States for urology specialty and long-term care sales channels. In September 2007, we expanded our promotion arrangement with Watson to include the ob/gyn specialty as well. As described above, we do not have a commercial sales force and do not, for the foreseeable future, expect to have the resources to successfully promote ProQuin XR on our own.  Accordingly, we will depend on Watson to successfully promote this drug.  Our prior marketing partner for ProQuin XR, Esprit Pharma, was unable to successfully commercialize ProQuin XR following its initial launch in November 2005.  As a result, we and Esprit agreed to terminate the license in July 2007.  It is possible that Watson could also have similar difficulties commercializing ProQuin XR.  If Watson fails to successfully commercialize ProQuin XR, our business, financial condition and results of operations may be materially and adversely affected.

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

We are responsible for the distribution of GLUMETZA and ProQuin XR in the United States.  Our in-house commercial operations and distribution capabilities are limited.  In addition, we have entered into distribution arrangements with third parties, including Cardinal Health, AmeriSource Bergen and McKesson, and we will depend on them to ensure that our marketed products are widely available.  To continue to support our commercialization effort related to our marketed products, 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 continued 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.

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We depend on our marketing partners for the successful commercialization of GLUMETZA in Canada and Korea, and of ProQuin XR in Europe.

We have licensed exclusive marketing rights to the 500mg GLUMETZA in Canada to Biovail, and in Korea to LG Life Sciences.  Biovail launched the 500mg GLUMETZA in Canada in November 2005, and LG launched a 500mg product in Korea in 2006 under the trade name Novamet GR.  We have also entered into a supply and distribution agreement with Madaus, who was acquired by Rottapharm in June 2007, related to the commercialization of ProQuin XR in Europe. If Biovail fails to successfully commercialize GLUMETZA in Canada and/or LG fails to successfully commercialize Novamet GR in Korea, our business and future revenues may be adversely affected.

The development of drug candidates is inherently uncertain and we cannot be certain that any of our product candidates will be approved for marketing or, if approved, will achieve market acceptance.

We have the following programs in clinical development: Gabapentin GR for postherpetic neuralgia, Gabapentin GR for diabetic peripheral neuropathy, Gabapentin GR for the treatment of hot flashes associated with menopause and omeprazole for the treatment of gastroesophageal reflux disease.  We also 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.  Additionally, clinical trial results in earlier trials may not be indicative of results that will be obtained in subsequent larger trials, as was the case with our recently completed Phase 3 trial for Gabapentin GR for the treatment of postherpetic neuralgia.

We are unable to predict whether any of these 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, substantially all of our product candidates 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, product sales, royalties, collaborative research and development arrangements and feasibility studies. For the nine months ended September 30, 2007, we recorded total revenues of $60.3 million, and for the years ended December 31, 2006, 2005 and 2004, we recorded total revenue of $9.6 million, $4.4 million and $0.2 million, respectively. For the nine months ended September 30, 2007, we have recorded net income of $24.5 million, and for the years ended December 31, 2006, 2005 and 2004 we incurred net losses of $39.7 million, $24.5 million and $26.9 million, respectively. The termination of our license agreement with Esprit in July 2007, including the accelerated recognition of previously deferred revenue under the arrangement, and termination fees received associated with the termination of our promotion agreement with King are expected to allow us to be profitable in 2007. However, as we continue our research and development efforts, preclinical testing and clinical trial activities, we anticipate that we will incur operating losses in fiscal year 2008. 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 operating results may fluctuate and affect our stock price.

The following factors will affect our operating results and may result in a material adverse effect on our stock price:

•results of clinical trials for our product candidates;

•announcements regarding development plans for our drug candidates, including Gabapentin GR;

•the degree of commercial success of ProQuin XR and GLUMETZA;

•regulatory actions;

•adverse events related to our products, including recalls;

•interruptions of manufacturing or supply;

•results of litigation, including our pending litigation against IVAX Corporation;

•developments concerning proprietary rights, including patents, infringement allegations and litigation matters;

•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;

•adoption of new technologies by us or our competitors;

•the introduction of new products by our competitors;

•manufacturing costs and difficulties;

•third-party reimbursement policies; and

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

          As a result of these factors, our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the one we experienced following the announcement of our Gabapentin GR Phase 3 trial results, could give rise to shareholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved our favor.

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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, a company acquired by Shire Pharmaceuticals, Inc., 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 enter into less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs.

We may be unable 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.

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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 have fourteen patent applications 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 pharmaceutical products that contain gabapentin as an active pharmaceutical ingredient.  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.

From time to time, we may become aware of activities by third parties that may infringe our patents.  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.

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.  The complaint alleged infringement of our patents by IVAX’s extended release metformin hydrochloride tablet. Although we intend to vigorously enforce our intellectual property rights, there can be no assurance that we will be successful in our litigation against IVAX. If one or more of our patents is declared invalid or key claims are disallowed, the patent protection for our products and product candidates could be substantially weakened and our business and business prospects could be severely impacted.

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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.  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.

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 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 and our stock price may decline.

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 an ongoing clinical trial, or the initiation of other clinical programs. 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 of components used in the manufacture of our product candidates, including 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 be unable 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 clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.

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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, which could delay, limit or prevent regulatory approval, and the FDA may not agree with our methods of clinical data analysis or our conclusions regarding safety and/or efficacy. 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.

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.

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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.

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 be unable 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 (a subsidiary of TEVA Pharmaceutical Industries, Ltd.), 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.

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.

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 numerous 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.

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.

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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 other 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 the supply and distribution of GLUMETZA, and MOVA Pharmaceuticals, a subsidiary of Patheon, Inc., is our sole supplier for tablets of the 500mg strength of GLUMETZA pursuant to a supply agreement we entered into with MOVA Pharmaceuticals in December 2006. If approved, Biovail will be our sole supplier for the new formulation of 1000mg GLUMETZA.  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.

We are also responsible for supply and distribution of ProQuin XR.  For the manufacture of ProQuin XR tablets, we have entered into an agreement with MOVA Pharmaceuticals, as our sole supplier. We purchase the active ingredient for ProQuin XR from Uquifa Mexico, S.A., a sole supplier to us, on a purchase order basis. We will also be responsible for the manufacture of bulk ProQuin XR tablets to Madaus for the European market, if the product is approved for marketing in European jurisdictions.  We intend to purchase ProQuin XR tablets from MOVA Pharmaceuticals for that purpose. If we are unable, for whatever reason, to obtain the active pharmaceutical ingredient or ProQuin XR tablets from our contract manufacturers, we may be unable to manufacture ProQuin XR in a timely manner, if at all.

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 programs.

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 development and production of pharmaceutical products. We have obtained product liability insurance for clinical trials currently underway and forecasted 2007 sales of our products, but:

•we may be unable to obtain product liability insurance for future trials;

•we may be unable to obtain product liability insurance for future products;

•we may be unable to maintain product liability insurance on acceptable terms;

•we may be unable 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.

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If we choose to acquire new and complementary businesses, products or technologies, 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.

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 our President and Chief Executive Officer, Carl A. Pelzel, 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 Mr. Pelzel or any of our other executive officers that provide for their continued employment with us.  Our former Chairman, President and Chief Executive Officer retired in August 2007, and our Chief Financial Officer retired in October 2007.  We may have difficulty filling open senior scientific, financial and commercial positions. Management, scientific and operating personnel are in high demand in our industry and are often subject to competing offers. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed could result in delays in the research, development and commercialization of our products and potential product candidates.

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 be unable 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 selling, general and administrative expenses are likely to increase.

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If we sell shares of our common stock under our equity line of credit arrangement or in other future financings, existing common shareholders will experience immediate dilution and, as a result, our stock price may go down.

We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock.  As a result, our existing common shareholders will experience immediate dilution upon the purchase of any shares of our common stock sold at such discount.  For example, in December 2006, we entered into a common stock purchase agreement with Azimuth Opportunity Ltd., pursuant to which we may sell shares of common stock at a discount to the prevailing market price ranging from approximately 3.8% to 6.4%, excluding an additional placement agent fee of approximately 1.1% payable by us on the gross offering proceeds. In addition, as other capital raising opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common shareholders will experience dilution and this dilution will be greater if we find it necessary to sell securities at a discount to prevailing market prices.

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.

Business interruptions could limit our ability to operate our business.

Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. In particular, our corporate headquarters are located in the San Francisco Bay area, which 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

Not applicable.

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

Not applicable.

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ITEM 6. EXHIBITS

(a)	Exhibits
	10.1	Termination and Assignment Agreement, dated July 5, 2007, between the Company and Esprit Pharma
	10.2  (+)	Amended Promotion Agreement, dated September 21, 2007, between the Company and Watson Pharmaceuticals
	10.3  (1)	Consulting Agreement, dated August 24, 2007, between the Company and John W. Fara, Ph.D.
	10.4  (1)	Offer Letter, dated August 24, 2007, between the Company and Carl A. Pelzel
	10.5  (1)	Amendment No. 1 to Management Continuity Agreement, dated August 24 2007, between the Company and Carl A. Pelzel
	10.6  (2)	Consulting Agreement, dated October 10, 2007, between the Company and John Hamilton
	10.7  (2)	Letter Agreement, dated October 10, 2007, between the Company and John Hamilton
	31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of Carl A. Pelzel
	31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of Tammy L. Cameron
	32.1	Certification pursuant to 18 U.S.C. Section 1350 of Carl A. Pelzel
	32.2	Certification pursuant to 18 U.S.C. Section 1350 of Tammy L. Cameron

(+)   Confidential treatment requested.

(1)   Incorporated by reference to the Company’s Form 8-K filed with the SEC on August 27, 2007.

(2)   Incorporated by reference to the Company’s Form 8-K filed with the SEC on October 11, 2007.

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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 8, 2007	DEPOMED, INC.
	/s/ Carl A. Pelzel
	Carl A. Pelzel
	President and
	Chief Executive Officer
	/s/ Tammy L. Cameron
	Tammy L. Cameron
	Corporate Controller
	(Interim Principal Accounting
	and Financial Officer)

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EX-10.1

EXHIBIT 10.1

TERMINATION AND ASSIGNMENT AGREEMENT

This Termination and Assignment Agreement (the “Agreement”) is made and entered into this 5^th day of July 2007, by and between Depomed, Inc. (“Depomed”), a California corporation having an address at 1360 O’Brien Drive, Menlo Park, California 94025, and Esprit Pharma, Inc., (“Esprit”), a Delaware corporation having an address at 2 Tower Center Boulevard, East Brunswick, New Jersey 08816.

RECITALS

A.            Depomed and Esprit are parties to: (i) that certain Exclusive License and Marketing Agreement dated July 21, 2005, as amended by Amendment No. 1 to Exclusive License and Marketing Agreement dated July 24, 2006 (together, the “License Agreement”), (ii) that certain Supply Agreement dated July 21, 2005 (the “Supply Agreement”) and a related Quality Agreement, dated as of April 6, 2007 (the “Quality Agreement”) and (iii) that certain Co-Promotion Agreement dated July 24, 2006 (the “Co-Promotion Agreement” and together with the License Agreement,  the Supply Agreement and the Quality Agreement, the “ProQuin® XR Agreements”).  Capitalized terms used herein without definition shall have the meanings ascribed to them in the License Agreement.

B.            The Parties desire to terminate the ProQuin® XR Agreements on the terms set forth herein.

It is therefore agreed as follows:

1.             DEFINITIONS

The terms defined in this Article 1 shall, for all purposes of this Agreement, have the following meanings:

“Active Ingredient” means the chemical compound known as ciprofloxacin hydrochloride.

“Affiliate” means any corporation or other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the designated Party but only for so long as such relationship exists.  For the purposes of this section, “Control” means ownership of at least fifty percent (or such lesser percent as may be the maximum that may be owned by foreign interests pursuant to the laws of the country of incorporation) of the shares of stock entitled to vote for directors in the case of a corporation and at least fifty percent (or such lesser percent as may be the maximum that may be owned by foreign interests pursuant to the laws of the country of domicile) of the interests in profits in the case of a business entity other than a corporation.

“Call” means a face-to-face contact between a member of Esprit’s sales force and a prescriber or potential prescriber of Licensed Product during which relevant characteristics of Licensed Product are described by the member of Esprit’s sales force.

“Distribute” or “Distribution” means the distribution of, and fulfillment of customer orders for, Licensed Product, as well as the distribution of samples of Licensed Product.

“Effective Date” means the date first referred to above.

“Esprit Change of Control” means (i) the acquisition by any person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Securities and Exchange Act of 1934, as amended) of direct or beneficial ownership (as defined in Rule 13d-3 under the Securities and Exchange Act of 1934, as amended) of more than fifty percent of the voting stock of Esprit; (ii) any merger, amalgamation or consolidation of Esprit or an Affiliate of Esprit with another corporation or other entity in which the stockholders of Esprit, immediately prior to such amalgamation, consolidation, or merger, own less than fifty percent of the voting stock of the surviving corporation immediately after such transaction; or (iii) the sale or exclusive license of substantially all of the assets of Esprit.  Notwithstanding the foregoing, for purposes of Esprit Licensed Product detailing obligations referred to in Section 6.2 below, an Esprit Change of Control does not include any transaction or series of related transactions between Esprit and any existing stockholder of Esprit that would otherwise constitute an Esprit Change of Control.

“Esprit NDC Number” means any of the following NDC numbers related to Licensed Product Distributed by Esprit on or before the Effective Date:  (i) NDC No. 1545600103, which corresponds to the three tablet blister pack commercial presentation of Licensed Product Distributed by Esprit; (ii) NDC No. 1391300150, which corresponds to the fifty count bottle of Licensed Product Distributed by Esprit; (iii) NDC No. 1545600150, which corresponds to a fifty count bottle of Licensed Product; (iv) NDC No. 1545600199, which corresponds to the three tablet blister pack sample presentation of Licensed Product Distributed by Esprit to prescribers of Licensed Product.

“FDA” means the United States Food and Drug Administration or any successor United States governmental agency performing similar functions with respect to pharmaceutical products.

“IND” means an Investigational New Drug Application filed with the FDA.

“Licensed Product” means the once-daily oral tablet formulation that contains Active Ingredient, is known as ProQuin® XR, and is approved in the Territory under NDA No. 21-744 filed with the FDA on July 18, 2004 (as such NDA may be amended or supplemented subsequent to the Effective Date).

“Market” means to promote, Distribute, market, advertise, sell or offer to sell.

“NDA” means a New Drug Application or application for approval to market submitted to the FDA.

“Party” means Depomed or Esprit, and “Parties” means both Depomed and Esprit and their Affiliates.

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“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.

“Regulatory Approval” means the permission or consent granted by the FDA for the Marketing of the Licensed Product in the Territory.

“Regulatory Data” means data including, but not limited to, medical, toxicological, pharmacological and clinical data to the extent necessary to, required for, or included in any governmental regulatory filing to obtain or maintain Regulatory Approval to Market the Licensed Product, including post-approval reports, filings and submissions.

“Third Party(ies)” means a person or entity who or which is neither a Party nor an Affiliate of a Party.

“Trademark(s)” means the Proquin® trademark, U.S. Registration No. 2,968,719, and all related domain names identified on Exhibit A, and other common law trademark rights related thereto.

“Voided Payment” means any payment by Esprit under this Agreement that is subsequently invalidated, declared to be fraudulent or preferential or set aside or is required to be repaid to a trustee, receiver or any other party, under any bankruptcy, insolvency, reorganization or similar act or law, state, federal or foreign law, common law or equitable cause.

2.             TERMINATION OF PROQUIN® XR AGREEMENTS

                2.1           Termination of Supply Agreement and Quality Agreement.  The Supply Agreement is hereby terminated in its entirety, provided that the rights and obligations identified in Section 16.3 of the Supply Agreement shall survive such termination as and to the extent set forth in such Section 16.3.  In addition, the Quality Agreement is hereby terminated in its entirety.

                2.2           Termination of Co-Promotion Agreement.  The Co-Promotion Agreement is hereby terminated in its entirety, provided that the rights and obligations provided in Section 10 and Section 11 shall survive such termination as provided in Section 10.2 and Section 11.2.

                2.3           Termination of License Agreement.  The License Agreement is hereby terminated in its entirety, provided that the rights and obligations identified in Section 20.6 of the License Agreement shall survive such termination.

                2.4           Conflicting Terms.  Notwithstanding the provisions of the foregoing Sections 2.1, 2.2 and 2.3, to the extent that any surviving rights and obligations of the Parties under the ProQuin® XR Agreements directly conflict with the express rights and obligations of the Parties provided herein, the terms of this Agreement shall govern.

                2.5           Mutual Releases.  Each of the Parties, by and for itself and on behalf of its employees, agents, other representatives, officers, directors, stockholders, partners, members, Affiliates, subsidiaries, predecessors, successors, and assigns, fully releases and discharges the

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other Party and its employees, agents, other representatives, officers, directors, stockholders, partners, members, Affiliates, subsidiaries, predecessors, successors, and assigns, from any and all claims, rights, demands, liabilities, obligations, damages, actions, and causes of action, of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising out of any act, omission, event, transaction or occurrence on or before the Effective Date that relates to (a) the Licensed Product, and/or (b) the Proquin® XR Agreements; provided that this release (x) shall not affect the surviving rights and obligations under the Proquin® XR Agreements as set forth in Section 2.1, Section 2.2, or Section 2.3, or any rights and obligations under this Agreement (and the exhibits hereto), and (y) shall cease to be effective as a release of Esprit in the event of a Voided Payment.

3.             PAYMENT OBLIGATIONS

                3.1           Certain Payments.  Esprit shall make the following termination payments to Depomed on the Effective Date, by wire transfer of immediately available funds to a Depomed account pursuant to wire transfer instructions provided to Esprit by Depomed on or before the Effective Date:

                                (a)           Ten Million Dollars ($10,000,000), representing the license fee payable by Esprit on or before July 21, 2007, pursuant to the License Agreement;

                                (b)           Two and One-Half Million Dollars ($2,500,000), representing of one-half of the minimum royalty on Licensed Product for 2007 pursuant to the License Agreement; and

                                (c)           Five Million Dollars ($5,000,000), representing a termination fee.

4.             INTELLECTUAL PROPERTY MATTERS; PRODUCT DOCUMENTATION

                4.1           Termination of Rights and Licenses; Reversion of Rights.  Without limiting the generality of Section 2, all of Esprit’s rights and licenses under the following Sections of the License Agreement shall, as of the Effective Date, terminate, and all rights and licenses granted therein shall immediately and automatically revert to Depomed:  Sections 2.1, 2.2, and 4.1.

4.2           Ownership of Intellectual Property.  Esprit hereby represents and warrants to Depomed that: (i) to the best of Esprit’s knowledge, none of Esprit’s employees, agents, or other persons acting under its authority, developed, conceived or reduced to practice any inventions, discoveries or know-how relating to the Licensed Product, including formulations thereof, or methods of making or using same, or Improvements thereof during the term of, or in the course of performance of, any of the ProQuin® XR Agreements (collectively, “Inventions”), (ii) that in the event that any Inventions were so developed, conceived or reduced to practice by any such parties, Esprit does hereby assign all of its right, title and interest therein to Depomed and (iii) that in the event that Esprit becomes aware of the existence of any such Inventions, it will provide prompt written notice to Depomed of same, including without limitation, a written description of such Invention, and it will take such actions as Depomed shall reasonably request to evidence such assignment and to enable Depomed to understand and exploit such Invention.

4.3           Product Documentation.  Esprit hereby assigns to Depomed Esprit’s right, title and interest in and to any and all promotional or other materials or documents (including sales

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and training materials, website, marketing documents) related to the Licensed Product, including without limitation any such materials created for Esprit by or on behalf of Esprit’s agents, consultants or vendors.  Copies of all such materials in Esprit’s possession or control shall be delivered to Depomed (including without limitation in electronic form) as contemplated by the Transition Plan.

 5.            REGULATORY MATTERS; RECALLS

                5.1           Transfer of Regulatory Approvals; Notification to FDA.  Esprit hereby assigns to Depomed all of Esprit’s right, title and interest in and to any and all Regulatory Data, Regulatory Approvals and other filings with or approvals granted by any and all agencies or authorities of the United States federal government and any state or local agencies or authorities that pertain or relate to the Licensed Product.  On the Effective Date, Esprit shall send executed letters in substantially the forms attached hereto as Exhibit B-1 and Exhibit B-2 to FDA authorizing the transfer of the NDA and the IND for the Licensed Product to Depomed.

                5.2           Regulatory Records.  On the Effective Date, Esprit shall deliver to Depomed all files and documents in Esprit’s possession or control as of such date relating to the approvals or filings described in Section 5.1, a chronology of discussions with FDA relating to the Licensed Product, and other information in Esprit’s possession or control as of such date necessary to maintain compliance with the US regulatory authorities.

                5.3           Communication with Regulatory Authorities; Product Complaints.  From and after the effective date of the transfer by Esprit to Depomed of the IND and NDA for the Licensed Product as described in Section 5.1, Depomed shall have the sole right and obligation to: (i) take all actions and conduct all communications with the appropriate US regulatory authorities in respect of such IND and NDA, including preparing and filing all reports (including adverse drug experience reports) with the appropriate US regulatory authorities; (ii) take all actions and conduct all communications with Third Parties (including without limitation patients, pharmacists, physicians and other health care providers) in respect of Licensed Product sold pursuant to such NDA (whether sold before or after the Effective Date), including responding to all complaints in respect thereof, including complaints related to tampering or contamination; (iii) investigate all complaints and adverse drug experiences in respect of Licensed Product sold pursuant to such NDA (whether sold before or after the Effective Date); and (iv) respond to any inquiry related to the Licensed Product directed to Esprit from and after the Effective Date from any governmental health authority (including without limitation the FDA and any state, county or other health authority).  Following the Effective Date, as provided in the Transition Plan, Esprit will promptly notify Depomed’s Regulatory Affairs department in accordance with applicable laws and regulations, and in reasonably sufficient time to allow Depomed to make any filings with, or notification to, governmental authorities within the time periods required by law, of any inquiry (written or verbal) received by Esprit related to any of the foregoing, including without limitation any inquiry received by Esprit with respect to the Licensed Product (either commercial drug product or commercial samples) bearing Esprit’s name on the container-closure.  Esprit shall cooperate with Depomed’s reasonable requests and use commercially reasonable efforts to assist Depomed in connection with any of the foregoing.

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                5.4           Adverse Event Reporting.  From and after the Effective Date, as provided in the Transition Plan, Esprit shall promptly (and in any event, in reasonably sufficient time to allow Depomed to make any filings with, or notification to, governmental authorities within the time periods required by law) notify Depomed if Esprit receives a complaint or a report of an adverse drug experience in respect of the Licensed Product.  In addition, through December 31, 2007, Esprit shall cooperate with Depomed’s reasonable requests and use commercially reasonable efforts to assist Depomed in connection with the investigation of, and response to, any complaint or adverse drug experience related to Licensed Product sold by Esprit.

                5.5           Recalls.  From and after the Effective Date, Depomed shall have the sole right and obligation to conduct, and shall bear all costs and expenses in connection with, voluntary and involuntary recalls of units of Licensed Product (whether sold before or after the Effective Date), including recalls required by any US regulatory authority; provided, however, that to the extent that any such recall is involuntary and is attributable to Licensed Product sold by Esprit or its Affiliates prior to the Effective Date, then Esprit shall reimburse Depomed for all reasonable costs and expenses actually incurred by Depomed in connection with the conduct of the recall of such Licensed Product, including without limitation, the cost of replacing such Licensed Product, unless Depomed is required to bear such costs and expenses under Section 13.3 of the Supply Agreement, in which case Esprit shall not be required to so reimburse Depomed.  Each Party promptly (and in any event within the time periods required by law) shall notify the other Party in the event that the notifying Party becomes aware that a recall of Licensed Product sold by Esprit is necessary.

6.             TRANSITIONAL COMMERCIAL OBLIGATIONS

                6.1           Transition Plan.  Attached hereto as Exhibit C is a plan (the “Transition Plan”) pursuant to which Esprit and Depomed shall cooperate in transitioning the Marketing of the Licensed Product from Esprit to Depomed as efficiently as reasonably possible.  Each Party agrees to use all reasonable efforts to perform its obligations as set forth in the Transition Plan.  Esprit hereby designates Mark Janofsky and Chris Berardi, and Depomed hereby designates Tom Lee and Jill Jene to serve as a joint transition committee (the “JTC”) charged with overseeing the planning and implementation of the activities set forth in the Transition Plan on behalf of Esprit and Depomed.  Each Party may designate replacement members to the JTC by notice to the other Party.  The JTC shall have no authority to amend this Agreement or to materially modify the Transition Plan.  The JTC shall meet on a monthly basis during the six-month period beginning on the Effective Date.  Esprit shall have the right to designate the location of the first such meeting.  The right to designate the location of subsequent meetings of the JTC shall thereafter alternate between Depomed and Esprit.

                6.2           Licensed Product Post-Termination Detailing.  Commencing on the Effective Date and continuing until the earlier of (a) September 15, 2007 or (b) the occurrence of an Esprit Change of Control, Esprit shall assign its field sales force, currently consisting of 158 members, to making Detail Calls, as specified in the Transition Plan, and shall implement the incentive compensation program specified in the Transition Plan.  Except in the instance of a breach of Section 6.4, Esprit shall have no liability to Depomed whatsoever in connection with the acts and omissions of Esprit’s field sales force in connection with such Detail Calls.

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6.3           Distribution Channel.

(a)           Exhibit D attached hereto sets forth, to the best of Esprit’s knowledge, a true and accurate reconciliation (the “Distribution Channel Reconciliation”), as of the Effective Date, of all quantities of Licensed Product (including Licensed Product samples) purchased by Esprit from Depomed pursuant to the Supply Agreement against:  (i) the current inventory of Licensed Product owned by Esprit and held at its Third Party logistics provider (including samples of Licensed Product); (ii) Licensed Product sold by Esprit to wholesalers and distributors, and held in inventory at wholesalers and distributors (specifying quantities held at each wholesaler and distributor) as of June 29, 2007 (separately setting forth and identifying Licensed Product for which a return is pending or in process, as indicated, for example, by a request for a return authorization number); (iii) Licensed Product donated to charity by Esprit; (iv) Licensed Product dispensed to patients through June 30, 2007, as reflected in data provided by IMS Health Incorporated; (v) Licensed Product distributed as samples to physicians or others authorized to receive Licensed Product samples; (vi) Licensed Product destroyed by Esprit (whether in connection with Licensed Product Returns or otherwise); (vii) samples of Licensed Product in the possession of Esprit sales representatives; (viii) Licensed Product that does not correspond to the any other category specified in this Section 6.3 and that is not held at retail pharmacies (with a description of the status of such Licensed Product as of the Effective Date specifying the location where such Licensed Product is held and the purpose for holding such Licensed Product at that location, or a description of how such Licensed Product was disposed of, and the purpose for its disposition); and (ix) Licensed Product held at retail pharmacies that has not been dispensed to patients as of the Effective Date (assuming for purposes of this item (ix) that the information set forth in item (iv) above is accurate and current through the Effective Date).  The Transition Plan sets forth Esprit’s obligations with respect to actions to be taken following the Effective Date in respect of inventory of Licensed Product existing as of the Effective Date.

(b)           Esprit represents and warrants to Depomed that:  (i) to the best of Esprit’s knowledge after due inquiry, the Distribution Channel Reconciliation is true, accurate and complete in all respects as of the Effective Date; and (ii) Esprit has provided to Depomed true, accurate and complete copies of the documentation that serves as the basis of for the Distribution Channel Reconciliation; and (iii) Esprit has not Distributed any Licensed Product bearing NDC No. 1545600150, NDC No. 1545600130, or NDC No. 1391300103.

                6.4           Representations and Covenants of Esprit Regarding Transition Services.  Esprit shall perform its obligations under the Transition Plan (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 Licensed 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.  Esprit shall (i) destroy all existing inventory of the Licensed Product in Esprit’s possession bearing an Esprit NDC Number as set forth in the Transition Plan, (ii) limit its claims of efficacy and safety for Licensed Product to those within approved promotional materials and FDA-approved prescribing information for Licensed Product in the Territory, (iii) not add, delete or modify claims of efficacy and safety in the Marketing of Licensed Product under this Agreement from those claims of efficacy and safety within the FDA-approved prescribing information and applicable law and (iv) Market the

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Licensed 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.

6.5           Covenants of Depomed.  Depomed shall perform its obligations under the Transition Plan (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 Licensed 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) be responsible for submitting all necessary filings and taking all such actions necessary to have the Licensed Products packaged with NDC numbers of Depomed; and (b) not sell or offer for sale any Licensed Products bearing an Esprit NDC Number; provided, however, that from and after January 1, 2010, Depomed may sell or offer for sale Licensed Product bearing the NDC number 1391300150.

7.             COMMERCIAL CONTRACTS; PRODUCT RETURNS, CHARGEBACKS AND REBATES

                7.1           Commercial Contracts.

                                (a)           Exhibit E sets forth a complete and correct list of each contract to which Esprit is a party that relates exclusively to the manufacture, marketing, sale or distribution of the Licensed Product.  Except as otherwise provided in the Transition Plan, as promptly as reasonably possible on or after the Effective Date, Esprit shall use commercially reasonable efforts to terminate each such contract.

                                (b)           Exhibit F sets forth a complete and correct list of each contract to which Esprit is a party and pursuant to which Esprit sells Licensed Product, together with other pharmaceutical products of Esprit, to a Third Party, or that is otherwise related to the manufacture, marketing, sale or distribution of the Licensed Product, together with other pharmaceutical products of Esprit (the “Multi-Product Contracts”).  Esprit has made available to Depomed copies of all Multi-Product Contracts; provided that such copies have been redacted to prevent disclosure of information not related to the Licensed Product.  As promptly as reasonably possible after a request by Depomed with respect to such a contract, Esprit shall use commercially reasonable efforts to terminate such Multi-Product Contract as it pertains to Licensed Products.

                7.2           Product Returns.  Esprit will be responsible for issuing credits or other forms of reimbursement, at its own expense, in connection with all Licensed Product bearing an Esprit NDC Number that is returned after the Effective Date, and shall process and issue credits (or render reimbursement in such other form as Esprit may determine) for all such returned Licensed Product.

                7.3           Government Rebates.  Esprit will be responsible for all rebates pursuant to any government rebate programs with respect to government claims for the Licensed Product bearing an Esprit NDC Number sold (whether sold before or after the Effective Date) and accruing after the Effective Date.  Any such rebate shall continue to be processed and issued pursuant to the

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terms of that certain letter agreement, dated as of September 15, 2005, between Depomed and Esprit.

                7.4           Commercial Rebates.  Esprit will be responsible for all rebates with respect to the Licensed Product bearing an Esprit NDC Number which are owed to any managed care provider, wholesaler or retailer with whom Esprit had entered into a commercial rebate agreement, and shall process and issue any such rebate.

                7.5           Chargeback Claims.  Esprit shall be solely responsible for all chargeback claims for the Licensed Product bearing an Esprit NDC Number to the extent a chargeback invoice with respect to each such claim is dated (i.e. date of sale from the wholesaler to the wholesaler customer) prior to July 31, 2007 (the “Transition Chargebacks”), and shall process any such Transition Chargebacks.  Notwithstanding the foregoing, the Parties acknowledge that the VA National Acquisition Center must approve the removal of the Products from Esprit’s Federal Supply Schedule (“FSS”) before the responsibility of processing such rebates is transferred from Esprit to Depomed.  Accordingly, in the event such approval is not obtained prior to July 31, 2007, Esprit shall continue to be responsible for processing the FSS chargebacks on Depomed’s behalf, and Depomed shall reimburse Esprit for same.

                7.6           Mutual Expectations Regarding Licensed Product Returns.  Without limiting in any way Esprit’s obligations under this Article VII or any other provision of this Agreement, the parties acknowledge that as of the Effective Date, and on the basis of (a) the Distribution Channel Reconciliation, and (b) the expiration dating of Licensed Product Distributed by Esprit through the Effective Date (other than approximately 900 bottles of Licensed Product in the 50 count trade presentation with November 2008 expiration dating that have been Distributed by Esprit), and (c) Esprit’s obligations under this Agreement, the Parties anticipate that it is likely that by December 31, 2008, Esprit will have complied with any financial obligations it has under this Agreement in respect of Licensed Product returns (provided that Esprit complies promptly and in all respects with its obligations under this Agreement and that expired Licensed Product Distributed by Esprit is returned to Esprit before or promptly following its expiration in accordance Esprit’s current returned goods policy).

8.             CONFIDENTIALITY

Except as specifically authorized by this Agreement, each Party shall, for the term of this Agreement 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

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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.  For avoidance of doubt, this Section shall not limit or replace the obligations of the Parties under Section 8 of the License 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.

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 (collectively, “Losses”), arising out of any claim, suit or proceeding (“Claim”) brought against the other Party (or paid in settlement of any threatened Claim) to the extent such Claim or threatened Claim is based upon, arises out of, or relates 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 (ignoring for purposes of this Section 10.1 any knowledge qualifiers included in any such representations or warranties); 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 threatened Claim 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 and the sole right to settle or compromise any such Claim, 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

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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         Basket.  There shall be no obligation to indemnify, defend and hold harmless under Section 10.1 unless and until the aggregate of all Losses for which the applicable indemnified Party is entitled to indemnification thereunder exceeds on a cumulative basis an amount equal to $25,000.00, in which event the indemnified Party shall be entitled to indemnification in respect of all indemnifiable Losses.

11.          LIMITATION OF LIABILITY

EXCEPT WITH RESPECT TO CLAIMS ARISING OUT OF BREACHES OF CONFIDENTIALITY, BREACHES OF SECTIONS 6.1, 6.2 AND 6.3, THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF A PARTY, OR LOSSES COVERED BY ARTICLE 10 HEREOF, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER, OR THE OTHER’S CUSTOMERS, SUBLICENSEES, EMPLOYEES, OFFICERS, AGENTS, DIRECTORS OR CONTRACTORS, FOR ANY INCIDENTAL, SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND, INCLUDING LOSS OF PROFITS OR LOSS OF REVENUE, WHETHER ARISING IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE, EVEN IF A PARTY HAS BEEN APPRISED OF THE POSSIBILITY OF SUCH DAMAGES.

12.          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 termination of the ProQuin® XR Agreements 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, provided that the Parties shall work together to redact any Proprietary Information contained therein in a mutually agreeable manner that complies with the applicable requirements of such regulatory authority, provided, however, that the final determination as to the required disclosure of Proprietary Information shall be made by the Party making the disclosure.  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.

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13.          ASSIGNABILITY

                13.1         Assignment.  This Agreement may not be assigned by either Party without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

                13.2         Liability.  No assignment permitted by this Article 13 shall serve to release either Party from liability for the performance of its obligations hereunder.

14.          NOTICES

                14.1         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

                                ESPRIT PHARMA, INC.

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

                14.2         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.

15.          MISCELLANEOUS

                15.1         Enforceability.  It is the desire and intent of the Parties that the provisions of this Agreement shall be enforced to the extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought.  Accordingly, if any particular provision of this Agreement which substantially affects the commercial basis of this Agreement shall be determined to be invalid or unenforceable, such provision shall be amended as hereinafter provided to delete therefrom or revise the portion thus determined to be invalid or unenforceable, such amendment to apply only with respect to the operation of such provision of this Agreement in the particular jurisdiction for which such determination is made.  In such event, the Parties agree to use reasonable efforts to agree on substitute provisions, which, while valid, will achieve as closely as possible the same economic effects or commercial basis as the invalid provisions, and this Agreement otherwise shall continue in full force and effect.  If the Parties cannot agree

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to such revision within sixty days after such invalidity or unenforceability is established, the matter may be submitted by either Party to arbitration as provided in this Agreement to finalize such revision.

                15.2         Entire Agreement.  This Agreement (including all Exhibits) represents 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.  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.

                15.3         Waiver.  The waiver by a Party of any single default or breach or succession of defaults or breaches by the other shall not deprive either Party of any right under this Agreement arising out of any subsequent default or breach.

                15.4         Governing Law.  All matters affecting the interpretation, validity, and performance of this Agreement shall be governed by the laws of the State of California without regard to that state’s conflict of laws rules or principles.

                15.5         Independent Contractors.  Nothing in this Agreement authorizes either Party to act as agent for the other Party as to any matter.  The relationship between Depomed and Esprit is that of independent contractors.

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

[signature page follows]

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed by their duly authorized officers on the date first above written.

DEPOMED, INC.
By:	/s/ John W. Fara, Ph.D.
	John W. Fara, Ph.D.
	President and CEO
ESPRIT PHARMA, INC.
By:	/s/ John T. Spitznagel
	John T. Spitznagel
	Chairman and CEO

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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.

AMENDED AND RESTATED PROMOTION AGREEMENT

This AMENDED AND RESTATED PROMOTION AGREEMENT (this “Agreement”) is made as of September 21, 2007 (the “Effective Date”), by and between Depomed, Inc., a California corporation (“Depomed”), and Watson Pharma, Inc., a Delaware corporation (“Watson”). Each of Depomed and Watson is referred to herein individually as a “Party” and collectively as the “Parties”.

WHEREAS, Depomed and Watson are parties to that certain Promotion Agreement, dated as of July 18, 2007 related to the Product (the “Original Agreement”);

WHEREAS, Depomed and Watson desire to amend and restate the Original Agreement as set forth herein;

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein contained, the Parties hereto intending to be legally bound hereby agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement, the following terms shall have the following meanings:

Section 1.1“2007 Plan” has the meaning set forth in Section 4.5.

Section 1.2“Act” means the United States Federal Food, Drug and Cosmetic Act, 21 U.S.C. 301, et. seq., as it may be amended from time to time, and the regulations promulgated thereunder, including the Generic Drug Act.

Section 1.3“Adverse Drug Experience” means any “adverse drug experience” as defined or contemplated by 21 C.F.R. 314.80 or 312.32, associated with the Product.

Section 1.4“Adverse Drug Experience Report” means any oral, written or electronic report of any Adverse Drug Experience transmitted to any Person.

Section 1.5“Affiliate” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with, such first Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement, a Wholesaler Affiliate shall not constitute an Affiliate of Watson.

Section 1.6“Agreement” has the meaning set forth in the preamble to this Agreement

Section 1.7“Agreement Month” means each calendar month during the Term (including any partial calendar month in the case of the first and last calendar months of the Term).

Section 1.8“Agreement Quarter” means the Initial Agreement Quarter, each successive period of three months during the Term after the Initial Agreement Quarter and the Final Agreement Quarter.

Section 1.9“Alert Report” is the report per FDA 21 CFR 314.80 Reporting Requirements for postmarketing 15-day “Alert” reports; these are adverse drug experience reports that are both serious and unexpected, and must be reported in writing to the FDA within 15 calendar days.

Section 1.10“Annual Plan” has the meaning set forth in Section 4.5.

Section 1.11“cGMP” shall mean current “Good Manufacturing Practices” as such term is defined from time to time by the FDA or other relevant Governmental Authority having jurisdiction over the manufacture or sale of the Product pursuant to its regulations, guidelines or otherwise.

Section 1.12“Channel” shall mean the long-term sales channel as reported in the Prescriber Data, which includes but is not limited to nursing homes and assisted living facilities.

Section 1.13Co-Chairs” has the meaning set forth in Section 3.2.

Section 1.14“COGS” means, for a particular period, Depomed’s expenses for cost of goods sold (calculated in accordance with Section 7.2(d)) for Product in the Territory for such period including any expenses incurred directly in connection with the distribution of the Product in the Territory. The COGS as of the Initial Effective Date is set forth on Schedule 1.14.

Section 1.15“Confidentiality Agreement” means that certain Confidentiality Agreement, dated as of February 26, 2007, between Depomed and Watson.

Section 1.16“Control” or “Controlled” means, with respect to patents, know-how or other intellectual property rights of any kind, the possession by a Party of the ability to grant a license or sublicense of such rights without the payment of additional consideration and without violating the terms of any agreement or arrangement between such Party and any Third Party.

Section 1.17“DDMAC” means the FDA’s Division of Drug Marketing, Advertising and Communications.

Section 1.18“Depomed” has the meaning set forth in the preamble to this Agreement.

Section 1.19“Depomed APL” means Depomed’s Advertising and Promotional Labeling Committee responsible for reviewing and approving Promotional Materials related to the Product.

Section 1.20“Depomed Trademarks” means (a) the ProQuin® trademark, (b) the AcuForm^TM trademark, for which Depomed has sought registration for in the United States Patent and Trademark Office, and (c) Depomed®, and, in each case, all related domain names, successor trademarks and other trademark related rights. The Depomed Trademarks are attached hereto as Schedule 1.20.

Section 1.21“Detail” means an in-person, face-to-face sales presentation of the Product made by a Sales Representative to a Professional, including a P1 Detail or a P2 Detail, and after December 31, 2008, a P3 Detail.

Section 1.22“Detail Minimum” means, for a particular period, the sum of (A) the Urology Detail Minimum for such period, plus (B) the Ob/Gyn Detail Minimum for such period.

Section 1.23“Detail Shortfall” means, for a particular period, the remainder of (A) the Detail Minimum for such period, minus (B) the actual number of PDEs performed during such period. In determining the actual number of PDEs performed during any period (including without limitation for purposes of Section 8.2(a)):  (a) only PDEs performed on Professionals on the Watson Physician List shall be taken into account; and (b) not more than 100% of the P1 Details, 100% of the P2 Details and 100% of the P3 Details (if applicable) required to be performed for such period within each of the Urology Field and the Ob/Gyn Field, as reflected in the applicable Annual Plan(s) or 2007 Plan, shall be taken into account.

Section 1.24“Detail Shortfall Ratio” means, for any period, the quotient of (A) the remainder of (x) the Detail Minimum for such period, minus (y) the Detail Shortfall for such Period (if any), divided by (B) the Detail Minimum for such period. Notwithstanding the foregoing, if the Detail Shortfall is a negative number, the Detail Shortfall Ratio shall be equal to 1.0.

Section 1.25“Educational Programs” means any activities undertaken with respect to the medical education of Professionals and customers regarding the Product and the market or funded by unrestricted educational grants, including educational programs and seminars and continuing medical education materials.

Section 1.26“Effective Date” has the meaning set forth in the preamble to this Agreement.

Section 1.27“Esprit” means Esprit Pharma, Inc., a Delaware corporation.

Section 1.28“Esprit License Agreement” means the Exclusive License and Marketing Agreement, dated as of July 21, 2005, between Depomed and Esprit, as amended.

Section 1.29“Esprit Promotional Materials” has the meaning set forth in Section 4.3(b).

Section 1.30“Esprit Termination Agreement” means the Termination Agreement between Depomed and Esprit, dated as of July 5, 2007, providing for, among other matters, the termination of the Esprit License Agreement.

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Section 1.31“Executive Officers” means the Chief Operating Officer of Depomed (or, if there is no such officer, its President or Chief Executive Officer) and the President, Brand Division of Watson (or, if there is no such officer, its President or Chief Executive Officer).

Section 1.32“FDA” means the United States Food and Drug Administration or any successor agency performing comparable functions in the Territory.

Section 1.33“Field” means the Urology Field and the Ob/Gyn Field, subject to provisions of Sections 7.4 and 8.2(a).

Section 1.34“Field Baseline Prescriptions Per Month” means, subject to Section 8.2(a), the monthly average number of Units of Product included within total prescriptions dispensed during the three-month period beginning on June 1, 2007 and ending on August 31, 2007 in the Territory within the Field (as reflected in the Prescriber Data).

Section 1.35“Field Baseline Prescriptions” means, for any particular period, the result of (A) Field Baseline Prescriptions Per Month, multiplied by (B) the number of months within such period (rounded to the nearest one-tenth of one month).

Section 1.36“Field COGS” means, for a particular period, the result of (A) COGS for such period, multiplied by (B) the Field Ratio for such period.

Section 1.37“Field Gross Margin” means, for a particular period, the result of (A) the remainder of (x) Field Net Sales for such period minus (y) Field COGS for such period, multiplied by (B) the Detail Shortfall Ratio for such period.

Section 1.38“Field Net Sales” means, for a particular period, the result of (A) Net Sales for such period, multiplied by (B) the Field Ratio for such period.

Section 1.39“Field Prescription Units” means, for a particular period, the remainder of (A) the sum of (i) the number of Units of Product included within prescriptions filled during such period in the Territory within the Field, as reflected in the Prescriber Data, plus (ii) the number of Units of Product included within the Channel for such period, as reflected in the Prescriber Data, minus (B) Field Baseline Prescriptions for such period.

Section 1.40“Field Ratio” means, for a particular period, the sum of (A) the quotient of (i) Field Prescription Units for such period, divided by (ii) the number of Units of Product included within Product prescriptions filled during such period in the Territory, as reflected in the Prescriber Data (such quotient being the “Field Physician Ratio”), plus (B) the product of (i) the quotient of (x) PA/NP Prescription Units for such period, divided by (y) the number of Units of Product included within Product prescriptions filled during such period in the Territory, as reflected in the Prescriber Data, multiplied by (ii) the Field Physician Ratio.

Section 1.41“Final Agreement Quarter” means the period commencing on the first day following the last full Agreement Quarter during the Term and ending on the last day of the Term.

Section 1.42“Force Majeure Event” has the meaning set forth in Section 15.7.

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Section 1.43“GAAP” has the meaning set forth in Section 7.2(c).

Section 1.44“Governmental Authority” shall mean any court, agency, authority, department, regulatory body or other instrumentality of any government or country or of any national, federal, state, provincial, regional, county, city or other political subdivision of any such government or any supranational organization of which any such country is a member, which has competent and binding authority to decide, mandate, regulate, enforce, or otherwise control the activities of the Parties contemplated by this Agreement.

Section 1.45“Initial Agreement Quarter” means the period commencing on the Effective Date and ending on September 30, 2007.

Section 1.46“Initial Effective Date” means July 18, 2007.

Section 1.47“JAMS” has the meaning set forth in Section 3.5(b).

Section 1.48“JSC” has the meaning set forth in Section 3.1.

Section 1.49“Legal Requirements” means laws, rules and regulations of any Governmental Authority in the Territory.

Section 1.50“Minimum Sales Force Level” has the meaning set forth in Section 4.3(a).

Section 1.51“NDA” means any “new drug application” (as such term is used under the Act) filed or acquired by Depomed or any Affiliate with the FDA with respect to the Product and all subsequent submissions, supplements and amendments thereto, including NDA No. 21-744 filed with the FDA on July 18, 2004 (as such NDA may be amended or supplemented subsequent to the Initial Effective Date).

Section 1.52“Net Sales” means, for a particular period, the gross amount invoiced on sales of Product in the Territory recognized as gross revenue in accordance with GAAP by Depomed, its Affiliates, licensees, sublicensees and assigns to independent, unrelated Third Parties during such period in bona fide arms’ length transactions, less the following deductions, calculated in accordance with GAAP: (a) freight, insurance (but only insurance with respect to shipping the Product), 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 or duties or allowances on the selling price of Product; (c) chargebacks, trade, quantity and cash discounts and rebates to the extent customary in the trade, including governmental rebates; (d) allowances or credits, including allowances or credits to customers on account of rejection, defects or returns of the Product entering trade after the Promotion Commencement Date, or because of a retroactive price reduction;  and (f) costs associated with any Product voucher or co-pay assistance programs, to the extent funded by Depomed and approved by Watson. Net Sales shall not include a sale or transfer to an Affiliate, licensee, sublicensee or assign of Watson or Depomed or if done for clinical, regulatory or governmental purposes where no consideration is received; but the resale by such Affiliate, licensee, sublicensee or assign of Watson or Depomed shall be considered a sale of such Product.

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Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Section 1.53“Ob/Gyn Detail Minimum” means, for a particular period, [***] of the PDEs required to be performed on Professionals on the Watson Physician List within the Ob/Gyn Field for such Period, as reflected in the Annual Plan(s) or the 2007 Plan (as applicable) for such period and in Sections 4.1(c) – (j) of this Agreement (as applicable).

Section 1.54“Ob/Gyn Field” means Professionals practicing obstetrics and/or gynecology, as so identified by primary AMA specialty, and set forth in the Prescriber Data.

Section 1.55“Order” means any award, decision, injunction, judgment, decree, order, ruling, or verdict entered, issued, made, or rendered by any Governmental Authority or by any arbitrator.

Section 1.56“P1 Detail” means a Detail where the Product is the first item presented.

Section 1.57“P2 Detail” means a Detail where the Product is the second item presented.

Section 1.58“P3 Detail” means a Detail where the Product is the third item presented.

Section 1.59“PA/NP Prescription Units” means, for a particular period, the number of Units of Product included within Product prescriptions filled during such period in the Territory that result from prescriptions written by Physician Assistants and Nurse Practitioners, as reflected in the Prescriber Data.

Section 1.60“PDE” means a Primary Detail Equivalent, and is equivalent to either of the following:  [***]. Details other than P1 Details, P2 Details and P3 Details will have no effect on any calculation of PDEs. P3 Details will have no effect on the calculation of PDEs prior to December 31, 2008.

Section 1.61“PDMA” means the Prescription Drug Marketing Act, as amended, and the rules and regulations promulgated thereunder.

Section 1.62“Person” means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Authority.

Section 1.63“Prescriber Data” means IMS Health National Prescription Audit data, which measures both total prescriptions dispensed and extended units dispensed (i.e., Units) for Product  in the Territory, separately setting forth the Urology Field, the Ob/Gyn Field, the sales Channel (long term care), and prescriptions attributable to Physician Assistants and Nurse Practitioners during a specified time period, or such data from an alternative source mutually agreed in writing by the Parties.

Section 1.64“Product” means the once-daily oral tablet formulation containing ciprofloxacin as the sole active pharmaceutical ingredient known as ProQuin XR and approved in the Territory under NDA No. 21-744 approved by the FDA on May 19, 2005 (as such NDA may be amended or supplemented subsequent to the Initial Effective Date).

Section 1.65“Product Complaints” means any report concerning the quality, purity, quantity, weight, pharmacologic activity, labeling, identity or appearance of the Product.

Section 1.66“Professional” means a physician or other health care practitioner who is permitted by law to prescribe Product.

Section 1.67“Promote,” “Promotional” and “Promotion” mean, with respect to the Product, any activities undertaken to encourage sales or use of the Product, including Details, product sampling, detail aids, drop-offs, coupons, discount cards, journal advertising, direct mail programs, direct-to-consumer advertising, convention exhibits and all other forms of marketing, advertising, public relations or promotion.

Section 1.68“Promotion Commencement Date” has the meaning set forth in Section 4.1(b).

Section 1.69“Promotion Fees” has the meaning set forth in Section 7.1(a).

Section 1.70“Promotional Effort” has the meaning set forth in Section 4.1(a).

Section 1.71“Promotional Materials” has the meaning set forth in Section 4.4(a).

Section 1.72“Proprietary Information” means any proprietary or confidential information communicated from one Party to the other in connection or relating to this Agreement, which is identified as confidential or proprietary, or which the other Party knows or has reason to know is confidential or proprietary, including the Technology and financial, marketing, business, technical and scientific information or data, information related to Watson’s compensation of its Sales Representatives, information contained within the Annual Plan and 2007 Plan, and the information described in Section 4.6, whether communicated in writing, orally or electronically. Proprietary Information shall not include information that the receiving Party can show through written documentation:

(a)at the time of disclosure, is publicly known;

(b)after the time of disclosure, becomes part of the public domain, except by breach of an agreement between the disclosing Party or any Affiliate thereof and the receiving Party or any Affiliate thereof;

(c)is or was in the possession of the receiving Party or any Affiliate thereof at the time of disclosure by the disclosing Party and was not acquired directly or indirectly from the disclosing Party or any Affiliate thereof or from any other party under an agreement of confidentiality to the disclosing Party or any Affiliate thereof; and

(d)is or was developed by the receiving Party or its Affiliates without use of or reference to the other Party’s Proprietary Information.

Section 1.73“Regulatory Approval” means any and all consents or other authorizations or approvals required from a Governmental Authority to market and sell the Product in the Territory, but excluding any form of reimbursement approval.

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Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Section 1.74“Sales Representatives” means sales representatives employed by Watson to Promote the Product, who have been trained and equipped to Promote the Product in accordance with this Agreement. Third Parties may only be engaged as Sales Representatives if they are full-time contractors of Watson, exclusive to Watson, and carry Watson’s business card.

Section 1.75“Samples” has the meaning set forth in Section 6.5.

Section 1.76“Serious Adverse Drug Experience” means any Adverse Drug Experience, including those subject to expedited reporting as defined in the regulations cited below, that is fatal or life-threatening, requires hospitalization or prolongation of existing hospitalization, results in persistent or significant disability or incapacity, is a congenital anomaly/birth defect, or is of comparable medical significance or any other event which would constitute a “serious” Adverse Drug Experience pursuant to the terms of 21 C.F.R. 314.80 or 312.32.

Section 1.77“Serious Adverse Drug Experience Report” means any Adverse Drug Experience Report that involves a Serious Adverse Drug Experience.

Section 1.78“Tail Gross Margin Percentage” means the following:

(a)if this Agreement terminates on or after September 30, 2010 and before September 30, 2011, [***] (if the Tail Period is eight calendar quarters) or [***] (if the Tail Period is four calendar quarters);

(b)if this Agreement terminates on or after September 30, 2011 and before September 30, 2012, [***] (if the Tail Period is eight calendar quarters) or [***] (if the Tail Period is four calendar quarters); or

(c)if this Agreement terminates on or after September 30, 2012, [***] (if the Tail Period is eight calendar quarters) or [***] (if the Tail Period is four calendar quarters).

If this Agreement terminates only in part with respect to the Ob/Gyn Field or the Urology Field pursuant to Section 8.2(a), the Tail Gross Margin Percentage shall be determined as set forth in clauses (a) – (c) above with respect to each sub-Field upon the termination of this Agreement with respect to that sub-Field).

Section 1.79“Tail Period” means, [***]. Notwithstanding the foregoing, but subject to Section 8.7(c), there shall be no Tail Period unless the Term shall be in effect until at least September 30, 2010. If this Agreement terminates only in part with respect to the Ob/Gyn Field or the Urology Field pursuant to Section 8.2(a), there shall be a separate Tail Period for each sub-Field, and the length of each such Tail Period shall be determined as set forth in the immediately preceding sentence.

Section 1.80“Technology” means all pharmacological, toxicological, preclinical, clinical, technical or other information, data and analysis and know-how relating to the registration, manufacture, packaging, use, marketing and sale of the Product and all proprietary

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

rights relating thereto owned by Depomed or its Affiliates or to which Depomed or its Affiliates has rights so as to be able to license, and relating or pertaining to the Product.

Section 1.81“Term” has the meaning set forth in Section 8.1.

Section 1.82“Territory” means the United States, including its territories and possessions and Puerto Rico.

Section 1.83“Third Party” means any Person other than Watson or Depomed or their respective Affiliates.

Section 1.84“Unit” means a single tablet of the Product.

Section 1.85“United States Bankruptcy Code” shall mean the U.S. Bankruptcy Code, 11 U.S.C. §§ 101, et seq.

Section 1.86“Urology Detail Minimum” means, for a particular period, [***] of the PDEs required to be performed on Professionals on the Watson Physician List within the Urology Field for such Period, as reflected in the Annual Plan(s) or the 2007 Plan (as applicable) for such period and in Sections 4.1(c) – (j) of this Agreement (as applicable).

Section 1.87“Urology Field” means Professionals practicing urology, as so identified by primary AMA specialty and set forth in the Prescriber Data.

Section 1.88“Volume Forecast” has the meaning set forth in Section 6.3.

Section 1.89“Watson” has the meaning set forth in the preamble to this Agreement.

Section 1.90“Watson Physician List” means the list of Professionals to whom the Watson Sales Force presents Details, which list has been agreed to in writing by the Parties prior to the Effective Date (it being understood that such list includes [***]. The Watson Physician List is subject to change from time to time throughout the Term of this Agreement to reflect the then current [***], or as otherwise agreed in writing by the Parties.

Section 1.91“Watson Sales Force” means the field force of Sales Representatives employed or contracted by Watson to Promote the Product in the Territory within the Field.

Section 1.92“Watson Trademarks” means the trademarks set forth on Schedule 1.92.

Section 1.93“Wholesaler Affiliate” shall mean an affiliate of Watson, substantially all of the business of which consists of the wholesale distribution of pharmaceutical products.

ARTICLE II

GRANT

Section 2.1Grant of Promotion Rights. During the Term, subject to the terms and conditions of this Agreement, Depomed hereby grants to Watson and its Affiliates and Watson and its Affiliates hereby accept a co-exclusive right (together with Depomed and its Affiliates only) to Promote the Product under the Depomed Trademarks in the Territory within the Field and Channel on the terms and subject to the conditions set forth herein.

Section 2.2Sublicense. Watson shall not sublicense, subcontract or otherwise transfer or delegate any of its rights or obligations under this Agreement without the express written consent of Depomed, which consent may not be unreasonably withheld or delayed by Depomed.

Section 2.3Limitation on Promotion.

(a)During the Term of this Agreement, the Watson Sales Force shall not (i) Promote in the Territory any product containing ciprofloxacin hydrochloride, or (ii) Promote in the Territory within the Field any product for the treatment of urinary tract infections, in each case other than the Product.

(b)During the period beginning on the Initial Effective Date and ending on December 31, 2008, Watson shall not, and shall cause if Affiliates not to, Promote in the Territory any product containing ciprofloxacin hydrochloride, other than the Product.

Section 2.4Retention of Rights. Depomed retains and shall retain all proprietary and property interests in the Product until the point of sale or, in the case of Samples, until delivered to Watson as contemplated by Section 6.5. Watson will not have nor represent that it has any control or proprietary or property interests in the Product, except for the licenses and rights specifically granted hereunder. Except as expressly set forth herein, nothing contained herein shall be deemed to grant Watson, by implication, a license or other right or interest in any patent, trademark or other similar property of Depomed or its Affiliates, except as may be necessary for Watson to Promote the Product pursuant to this Agreement. Except as expressly set forth herein, nothing contained herein shall be deemed to grant Depomed, by implication, a license or other right or interest in any patent, trademark or other similar property of Watson or its Affiliates, except as may be necessary for Depomed to Promote the Product pursuant to this Agreement.

Section 2.5Esprit Termination Agreement. Depomed has entered into the Esprit Termination Agreement, which provides for, among other matters, the termination of the Esprit License Agreement and a transition plan providing for the transition of the Product back to Depomed from Esprit that includes specific activities and timelines (the “Transition Plan”). Watson has reviewed the Transition Plan. Depomed will use its reasonable best efforts to cause Esprit to comply with its obligations under the Esprit Termination Agreement and the Transition Plan. So long as Depomed uses its reasonable best efforts to cause Esprit to comply with its obligations under the Esprit Termination Agreement and the Transition Plan, Depomed shall not

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be in breach of this Agreement as a result of any failure by Esprit to comply with its obligations under the Esprit Termination Agreement or the Transition Plan.

ARTICLE III

JOINT STEERING COMMITTEE

Section 3.1Establishment. The Parties agree to establish, for the purposes specified herein, a Joint Steering Committee (the “JSC”). The Parties acknowledge and agree that the JSC does not have the power to amend, modify or waive any of the terms or conditions of this Agreement.

Section 3.2Joint Steering Committee. The JSC shall be established by the Parties and shall be comprised of four members, two of whom shall be appointed by Depomed and two of whom shall be appointed by Watson. Each Party’s respective initial appointments to the JSC are set forth on Schedule 3.2 hereto. A Party may change any of its representatives at any time if a new person is appointed to any of the foregoing positions by giving written notice to the other Party. The total number of JSC members may be changed by unanimous vote of the JSC from time to time as appropriate; provided, that the JSC shall in all cases be comprised of an equal number of members from each of Depomed and Watson. Watson and Depomed each will designate one representative of such Party to serve as co-chairs of the JSC (the “Co-Chairs”). The members appointed to the JSC by each Party shall be employees of such Party and shall be vested with appropriate decision-making authority and power by such Party. The Chief Executive Officers of Watson and Depomed shall not be members of the JSC.

Section 3.3JSC Responsibilities. The responsibilities of the JSC shall be exercised consistent with this Agreement and shall include, but shall not be limited to:

(a)reviewing and approving the Annual Plan as contemplated by Section 4.5 (which approval shall include, without limitation, approval of the number of P1 Details, P2 Details and P3 Details to be performed by the Watson Sales Force for periods after December 31, 2008);

(b)monitoring and reviewing compliance with the 2007 Plan or the Annual Plan;

(c)reviewing Product Promotion strategies and objectives, including Product positioning, messaging and branding;

(d)reviewing Product-related activities associated with managed markets, trade pipeline, manufacturing, and distribution;

(e)reviewing pricing for the Product;

(f)reviewing Product-related regulatory matters;

(g)reviewing sales incentive compensation for the Watson Sales Force related to the Product for periods through December 31, 2008;

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(h)reviewing and approving sales incentive compensation for the Watson Sales Force related to the Product for periods after December 31, 2008;

(i)such other functions as may be mutually agreed upon by the Parties from time to time.

For the avoidance of doubt, (i) the JSC shall not have any review or approval rights with respect to any matters relating to the development of the Product and (ii) any decisions of the JSC with respect to matters which relate to Regulatory Approval for the Product shall require Depomed’s prior written consent.

Section 3.4Meetings of the JSC. Meetings of the JSC may be called by the Co-Chairs of the JSC from time to time and, upon no less than five days’ notice, shall otherwise be called when requested by a Party; provided, however, that meetings of the JSC shall be held on at least a monthly basis during the first three months of the Term, and on at least a quarterly basis thereafter. 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 JSC shall alternate between the corporate offices of the Parties. The Parties shall determine the form of the meetings. Subject to Section 3.5, decisions shall be made unanimously, each Party having one (1) vote regardless of the number of representatives present or voting; provided, that no such vote shall be valid unless each Party is represented by at least two members either by written proxy or actual presence at the meeting at which the vote is taken. Subject to appropriate confidentiality undertakings where applicable, each Party shall have the right, upon written notice to the other Party, to have present at JSC meetings additional, non-voting participants (not to exceed six such participants at any JSC meeting without the consent of the other Party). Such additional participants shall not be deemed to be, or have any rights or responsibilities of, a member of the JSC. The Parties shall cause their respective representatives on the JSC to use their reasonable efforts to resolve all matters presented to them as expeditiously as possible. Watson shall propose the agenda for each regular meeting and appoint a secretary to the meeting who shall record the minutes of the meeting. Such minutes shall be circulated to the Parties promptly following the meeting for review and comment and for unanimous ratification by both Parties. Each Party shall bear its own travel and related costs incurred in connection with participation in the JSC.

Section 3.5JSC Disputes.

(a)In the event that the JSC is, after a period of ten (10) days, unable to make a decision due to a lack of required unanimity, either Party may submit the matter being considered to the Executive Officers for a joint decision. In such event, either Co-Chair of the JSC, by written notice to the other Party, shall formally request the dispute be resolved by the Executive Officers, specifying the nature of the dispute with sufficient detail to permit adequate consideration by the Executive Officers. The Executive Officers shall diligently and in good faith attempt to resolve the referred dispute expeditiously and, in any event, within fifteen (15) days of receiving such written notification.

(b)In the event that the Executive Officers are unable to reach a resolution of any referred dispute after good faith negotiations during the fifteen (15) day period referred to in

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Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Section 3.5(a) above and in the event such dispute is not related to compliance with this Agreement, regulatory matters, or the validity, breach or interpretation of this Agreement, either Party may commence mediation within fifteen days after the conclusion of such fifteen (15) day period by providing to the other Party a written request for non-binding mediation, setting forth the subject of the dispute and the relief requested (a “Mediation Notice”). The Parties will cooperate with Judicial Arbitration and Mediation Services (“JAMS”) and with one another in selecting a mediator from JAMS’ panel of neutrals, and in scheduling the mediation proceedings. The Parties shall endeavor to conclude any mediation under this Section 3.5 within thirty (30) days after delivery by either Party of Mediation Notice. The Parties covenant that they will participate in the mediation in good faith and that they will share equally in its costs; provided that each Party will be responsible for its own attorney’s fees. Either Party may seek equitable relief prior to the mediation to preserve the status quo pending the completion of that process. Except for such an action to obtain equitable relief, neither Party may commence a civil action with respect to the matters submitted to mediation until after the completion of the initial mediation session, or thirty days after delivery of the Mediation Notice, whichever occurs first.

(c)In furtherance of the foregoing provisions of Section 3.5(b), in connection with any mediation conducted as set forth pursuant to Section 3.5(b) with respect to a Detailing or Incentive Compensation Dispute (as defined below), each Party shall submit to the mediator selected pursuant to Section 3.5(b) and to the other Party, at least two weeks in advance of the mediation proceedings, a brief summarizing and supporting its contentions with respect to the dispute for the purpose of facilitating the mediation proceedings. If the Parties fail to resolve any Detailing or Incentive Compensation Dispute following the completion of mediation proceedings with respect to such Detailing or Incentive Compensation Dispute (a “Detailing or Incentive Compensation Impasse”), Depomed may terminate this Agreement pursuant to Section 8.2(c). A “Detailing or Incentive Compensation Dispute” is any dispute regarding either (i) the incentive compensation payable to the Watson Sales Force in respect of the Product for any period after December 31, 2008 where Watson proposes that less than [***] of the incentive compensation payable to Watson Sales Representatives detailing the Product will be dependent on sales of the Product, or (ii) the number of P1 Details, P2 Details or P3 Details to be performed by Watson for any period after December 31, 2009 where Watson proposes to perform fewer than [***] annual PDEs (on a pro-rated basis for partial years).

(d)The Parties agree that items that are solely reviewed by the JSC, and not both reviewed and approved by the JSC, are not subject to the dispute resolution mechanism set forth in this Section 3.5. Any disputes referred to the Executive Officers for resolution pursuant to this Section 3.5 shall not be subject to any dispute resolution mechanism or procedure unless and until the dispute resolutions procedures set forth in this Section 3.5 are exhausted.

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

ARTICLE IV

PRODUCT PROMOTION

Section 4.1Product Promotion.

(a)Subject to applicable Legal Requirements, as well as the provisions of this Agreement, Watson shall, from and after the Promotion Commencement Date, at its sole expense, use commercially reasonable efforts to Promote the Product in the Territory within the Field in accordance with the 2007 Plan or Annual Plan for subsequent years (the “Promotional Effort”). For purposes of the preceding sentence, Watson’s commercially reasonable efforts shall mean at least the same degree of effort (including with respect to the reach and frequency of Details) that Watson would use for the Promotion of any of Watson’s products that represent a similar commercial opportunity. The Parties acknowledge that efforts that constitute commercially reasonable efforts may change during the Term. All statements, core selling messages and materials to be utilized by Watson to Promote the Product shall be consistent in all material respects with the Promotional Materials provided or utilized by Depomed. Watson will cause the Watson Sales Force and Watson employees and agents acting on Watson’s behalf to comply with this Agreement and all applicable Legal Requirements in connection with the Promotion of the Product. It is understood, and Watson agrees, that it will be accountable for the acts or omissions of the Watson Sales Force and its employees and agents to the extent such acts or omissions fail to comply with Watson’s obligations under this Agreement.

(b)Watson shall commence (the date of such commencement, the “Promotion Commencement Date”) Promotion (including Details by the Watson Sales Force) of the Product in accordance with this Agreement and the performance of the other obligations contained herein that are required to be performed from and after the Promotion Commencement Date as soon as practicable following the date hereof, but no later than October 15, 2007.

(c)During the period beginning on the Promotion Commencement Date and ending four months thereafter, Watson shall perform a P1 Detail on at least [***] of the Professionals on the Watson Physician List within the Urology Field at least once every [***];

(d)During the period beginning on the Promotion Commencement Date and ending on December 31, 2007, Watson shall:

(i)perform an aggregate of at least [***] P1 Details and [***] P2 Details on Professionals on the Watson Physician List within the Urology Field; and

(ii)perform an aggregate of at least [***] P2 Details on Professionals on the Watson Physician List within the Ob/Gyn Field.

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

(e)During each Agreement Quarter in 2008, Watson shall perform at least [***] P1 Details and [***] P2 Details on Professionals on the Watson Physician List within the Urology Field.

(f)During the Agreement Quarters ending on March 31, 2008 and December 31, 2008, Watson shall perform at least [***] P1 Details on Professionals on the Watson Physician List within the Ob/Gyn Field.

(g)During the Agreement Quarters ending on June 30, 2008 and September 30, 2008, Watson shall perform at least [***] P2 Details on Professionals on the Watson Physician List within the Ob/Gyn Field.

(h)During each Agreement Quarter in 2009, Watson shall perform at least [***] Details on Professionals on the Watson Physician List within the Urology Field, which Details shall be allocated between P1 Details, P2 Details and P3 Details as reflected in the Annual Plan for 2009 approved by the JSC.

(i)During each Agreement Quarter during the Term commencing with the Agreement Quarter beginning on January 1, 2009, Watson shall perform such number of Details on Professionals on the Watson Physician List within the Ob/Gyn Field, and allocated between P1 Details, P2 Details and P3 Details, as is reflected in the Annual Plan approved by the JSC for the applicable year.

(j)During each Agreement Quarter during the Term commencing with the Agreement Quarter beginning on January 1, 2010, Watson shall perform such number of Details on Professionals on the Watson Physician List within the Urology Field, and allocated between P1 Details, P2 Details and P3 Details, as is reflected in the Annual Plan approved by the JSC for the applicable year.

(k)Representations to Customers. Watson will not make any false or misleading representations to Professionals, customers or others regarding Depomed or the Product and will not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Product that are not consistent with the applicable then-current FDA approved labeling, package insert or other documentation accompanying or describing the Product, including Depomed’s standard limited warranty and disclaimers. Watson agrees to undertake timely and complete corrective action for any deviations from this Section 4.2, subject to discussion and review by Depomed’s regulatory affairs and quality assurance department.

Section 4.2Watson Sales Force Staffing, Training and Compensation.

(a)Watson agrees that from and after the Promotion Commencement Date, the Watson Sales Force will be staffed with at least [***] full-time Sales Representatives (subject to vacancies consistent with average vacancy rate experienced by Watson across its total sales force) who are actively promoting the Product in accordance with the 2007 Plan or Annual Plan (the “Minimum Sales Force Level”). Throughout the remainder of the Term, Watson shall use

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

its commercially reasonable efforts to ensure that the number of Sales Representatives comprising the Watson Sales Force meets or exceeds the Minimum Sales Force Level.

(b)Watson shall be solely responsible for all costs and expenses of compensating its Sales Representatives. Consistent with applicable Legal Requirements, Watson shall pay incentive compensation to Watson Sales Representatives with respect to the Product in accordance with Watson’s incentive compensation; provided, however, that through December 31, 2007, at least [***] and through December 31, 2008, at least [***] of the incentive compensation payable to Watson Sales Representatives detailing the Product will be dependent on sales of the Product. In addition, Depomed may sponsor sales contests or other special incentive compensation, at its own expense, for Watson’s sales force with Watson’s approval. Watson will be responsible for implementing any such contest or incentive compensation.

(c)Watson shall notify its Sales Representatives prior to the Promotion Commencement Date, consistent with its procedures for Watson’s other products, of the total potential incentive compensation for the Product. Promptly after the adoption by Watson of an incentive compensation payment plan with respect to the Product pursuant to, and in compliance with, this Agreement, and promptly after any material amendments to such plan, Watson shall provide to Depomed a summary of the methodology used by Watson to make incentive compensation payments for the Product pursuant to such plan.

(d)The Parties hereby agree that Depomed shall provide to Watson, at no charge to Watson and in quantities agreed by the Parties in writing prior to the Initial Effective Date, previously generated training materials and/or associated electronic copies thereof where applicable. Watson shall furthermore have the option to purchase from Depomed, in sufficient quantities for the Watson Sales Force, additional training materials for the Product created or owned by Depomed, at Depomed’s out-of-pocket cost for such materials. It is anticipated that Watson will utilize Depomed’s training materials in connection with the Product-related training of its Sales Representatives. Any training materials for Watson’s Sales Representatives developed or created by Watson shall be subject to Depomed’s review as Promotional Materials as provided in Section 4.4. Watson shall, at its own expense prior to the Promotion Commencement Date, train its Sales Representatives using such training materials, the other Promotional Materials and such programs as Watson shall deem appropriate that are in compliance with Watson’s obligations hereunder and all other Legal Requirements. Such programs shall include training with respect to reporting Adverse Drug Experiences and technical complaints. After the initial training, Watson shall periodically provide additional training to each of its Sales Representatives, and shall update its training materials as appropriate in connection with such additional training, in accordance with this Section 4.3. Representatives of Depomed may attend, at Depomed’s expense, any Watson training session related to the Product. Watson will notify Depomed at least two weeks in advance of any such training session.

Section 4.3Promotional Materials; Educational Materials.

(a)Subject to Section 4.4(b), The Parties may, each at its sole expense, create prototypes of promotional, advertising, marketing and educational materials (“Promotional

Materials”) to support the Promotional Effort for the Product in the Territory within the Field. Such Promotional Materials may include, by way of example, detailing aids; leave items; journal advertising; appropriate reprints and reprint carriers; and product monographs. All Promotional Materials used by the Watson Sales Force will be subject to the review and approval of the Depomed APL. All Promotional Materials developed by Watson hereunder shall prominently display such Depomed Trademark(s) as shall be specified by Depomed to Watson following its review of the applicable prototype in accordance with Section 4.4(b).

(b)Each Party shall provide to the other a prototype of any Promotional Materials it creates to support the Promotional Effort for the Product in the Territory within the Field, for review by the other Party. The reviewing Party shall notify the creating Party of any objections it has to such prototype and the basis therefor as soon as reasonably practicable, but no later than ten (10) business days following its receipt thereof. The creating Party shall modify such Promotional Materials to the extent necessary to resolve any objections made by the reviewing Party to such Promotional Materials on the grounds that such Promotional Materials are inconsistent with any Legal Requirements or this Agreement and shall in good faith consider any other objection raised by the reviewing Party. The final version of the Promotional Materials approved by the Depomed APL shall be reviewed and approved by the Parties to confirm their consistency with the prototype approved by the Parties and the resolution of any objections in accordance with this Section 4.4(b), which review and approval shall occur, as soon as reasonably practicable, but no later than ten business days following its receipt by the reviewing Party. Upon approval, the Promotional Materials may be produced in quantity. Depomed’s regulatory affairs department will notify Watson’s regulatory affairs department when Promotional Materials have been submitted to the FDA. Such Promotional Materials may only be used by Watson subsequent to such notification from Depomed’s regulatory affairs department. The Parties have reviewed and approved certain Promotional Materials acquired by Depomed from Esprit in connection with the Esprit Termination Agreement (the “Esprit Promotional Materials”), as set forth on a list of such approved Esprit Promotional Materials agreed to in writing prior to the execution of the Original Agreement. Depomed will deliver to Watson, free of charge, such quantities of existing Esprit Promotional Materials that Depomed receives from Esprit pursuant to the Esprit Termination Agreement as the Parties agreed in writing prior to the execution of the Original Agreement.

(c)The Parties may purchase from each other sufficient copies of Promotional Materials for use by either Party’s sales force at the other Party’s out-of-pocket cost therefor.

(d)Depomed shall own all copyrights to all Promotional Materials that are created during the Term of this Agreement in connection with the Promotion of the Product. Watson 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 Depomed. Depomed shall, and does hereby, grant to Watson a royalty-free license to use and reproduce such materials solely in conjunction with its Promotion of the Product pursuant to this Agreement, which license shall not be assignable or transferable by Watson.

(e)Disputes between the Parties with respect to Promotional Materials shall be subject to the dispute resolution procedures applicable to JSC disputes set forth in Section 3.5.

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Section 4.42007 Plan; Annual Plan; Promotion Expenses.

(a)Watson has provided a sales plan for the remainder of 2007 (the “2007 Plan”) with respect to the Urology Field. Watson will revise the 2007 Sales Plan within fifteen (15) days of the Effective Date to reflect additional activities directed to the Ob/Gyn Field. On or prior to October 1 of the preceding calendar year with respect to each calendar year during the Term beginning with the 2008 calendar year, Watson shall develop an annual sales plan (the “Annual Plan”) and submit the Annual Plan to the JSC for review and approval. The Annual Plan shall set forth the manner in which the Product is to be Promoted by Watson in the Territory within the Field during the period to which the Annual Plan relates and shall include, at a minimum:

(i)the anticipated number of quarterly and annual P1 Details and P2 Details to be provided by the Watson Sales Force;

(ii)pharmacy efforts;

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

(iv)medical education programs to be conducted;

(v)planned public relations activities;

(vi)Sample forecasts and delivery schedules;

(vii)voucher or co-pay assistance plans;

(viii)format and quantity of sales, marketing and educational materials

(ix)convention schedule;

(x)marketing plans and strategies for the Channel and other managed markets, and for trade; and

(xi)any non-personal Promotion (including, but not limited to, e-detailing, e-sampling, direct mail, and telemarketing).

(b)The JSC shall use all reasonable efforts to approve each Annual Plan not later than November 1 of each preceding calendar year.

(c)Each Party will bear its own operating expenses associated with the Product and Promotion thereof, including all personnel, general and administrative and overhead costs. Watson will bear all Watson Sales Force expenses. Depomed will bear all costs associated with maintaining and continuing all Regulatory Approvals of the Product in the Territory, including all costs associated with Adverse Drug Experience reporting and all clinical and regulatory requirements. Neither Party has the authority to incur costs or expenses on behalf of the other Party, without the other Party’s express prior written approval.

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Section 4.5             Watson Promotion Reports; Prescriber Data.

(a)           Within fifteen (15) days following the end of each Agreement Quarter, Watson shall provide the JSC with a status report, which report will summarize Watson’s Promotional activities pursuant to this Agreement for such prior Agreement Quarter and on a calendar year-to-date basis, including, to the extent Watson customarily creates the following reports for Watson’s other products which are promoted by or on behalf of Watson:  (a) the number of P1 Details, P2 Details and P3 Details (if applicable) made and recorded by Watson’s standard record keeping procedures (separately setting forth Details performed within the Urology Field and Details performed within the Ob/Gyn Field); (b) the names, addresses and medical education numbers of the Professionals called upon (separately setting Professionals within the Urology Field and Professionals within the Ob/Gyn Field); (c) the percentage of Professionals Detailed who were provided with Samples; (d) the average number of such Samples delivered on each Detail; (e) a breakdown of all information required to be contained in each report on an aggregate basis; and (f) such other information as may be required in the then-current Annual Plan.

(b)           At the end of each Agreement Quarter, Watson shall provide directly to Depomed, within ten (10) days of its receipt, the Prescriber Data for such Agreement Quarter related to the Product, in the same form as such Prescriber Data is provided to Watson.

Section 4.6             Medical Inquiries. The Parties acknowledge that each may receive requests for medical information concerning the Product from members of the medical and paramedical professions and consumers regarding the Product. All such requests will be directed to, and handled by, Depomed’s medical affairs department (or a Third Party medical affairs firm designated by Depomed).

Section 4.7             Trademarks.

(a)           The “Depomed” trademark must appear on all Promotional Material that makes reference to the Product. The “AcuForm” trademark must appear on all Promotional Materials that make reference to the “AcuForm” drug delivery technology incorporated into the Product. Depomed hereby grants to Watson a non-assignable, non-sublicensable, non-exclusive, royalty-free right and license to use the Depomed Trademarks in the Territory solely in connection with Watson’s Promotion of the Product in accordance with this Agreement; provided Watson may assign and sublicense such right and license in accordance with Section 2.2. Such license shall expire immediately upon the expiration or termination of this Agreement. Subject to this Section 4.8 and to applicable Legal Requirements, Watson shall have the right to use the Watson Trademarks, and include the name “Watson” or any variation thereof on the Promotional Materials developed by Watson; provided, that such Watson Trademarks shall not appear in such Promotional Materials in greater prominence or in greater frequency than the Depomed Trademark(s). Watson recognizes Depomed’s title to the Depomed Trademarks, and shall not at any time, during or after the Term, do or knowingly suffer to be done any act or thing which will in any way impair the rights of Depomed in or to the Depomed Trademarks. Watson acknowledges and agrees that it shall not acquire and shall not claim any title to the Depomed Trademarks adverse to Depomed by virtue of the rights granted under this Agreement or through Watson’s use of the Depomed Trademarks, it being the intention of the Parties that all goodwill

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and improved reputation generated by Watson and use of the Depomed Trademarks shall inure to the benefit of Depomed.

(b)           Watson hereby grants to Depomed a non-assignable, non-sublicensable, non-exclusive, royalty-free right and license to use the Watson Trademarks in the Territory solely in connection with Depomed’s Promotion of the Product in the Field. Such license shall expire immediately upon the expiration or termination of this Agreement. Subject to this Section 4.8 and to applicable Legal Requirements, Depomed shall have the right to use Depomed Trademarks, and include the name “Depomed,” “AcuForm,” or any variation thereof on the Promotional Materials developed by Depomed in accordance with this Agreement. Depomed recognizes Watson’s title to the Watson Trademarks, and shall not at any time, during or after the Term, do or knowingly suffer to be done any act or thing which will in any way impair the rights of Watson in or to the Watson Trademarks. Depomed shall not be obligated to use the Watson Trademarks in the Depomed Promotional Materials. Depomed acknowledges and agrees that it shall not acquire and shall not claim any title to the Watson Trademarks adverse to Watson by virtue of the rights granted under this Agreement or through Depomed’s use of the Watson Trademarks, it being the intention of the Parties that all goodwill and improved reputation generated by Depomed and use of the Watson Trademarks shall inure to the benefit of Watson.

(c)           Each of Watson with respect to its use of the Depomed Trademarks and Depomed with respect to its use of the Watson Trademarks will maintain quality standards for all of its uses of the trademarks of the other Party in connection with the Promotion of the Product that are substantially equivalent to those standards used by the owner of such trademarks in connection with pharmaceutical products. Subject to the foregoing and to the other provisions of this Agreement, each Party acknowledges and agrees that the owner or licensee of the trademark has the right, at any time, to modify or supplement such quality standards and that the licensee or sublicensee must implement such new standards or changes following receipt of notice of such additions or changes; provided that the licensor agrees to bear all reasonable costs associated with such modifications and supplements.

ARTICLE V

CLINICAL AND REGULATORY AFFAIRS; DEVELOPMENT

Section 5.1             Regulatory Approvals. Depomed shall use commercially reasonable efforts to maintain and continue all Regulatory Approvals currently in effect for the Product. Watson agrees that all Regulatory Approvals, applications therefor and any other submissions to a Governmental Authority with respect to the Product shall be in the name of, and shall be owned by, Depomed or its designee.

Section 5.2             Compliance with Regulatory Requirements. Unless otherwise required by law or expressly required by this Agreement, Depomed will retain exclusive authority over and responsibility for complying with all regulatory requirements and maintaining all contacts with Governmental Authorities with respect to the Product, including maintaining and updating of the NDA, the development and submission of applications for new indications, the reporting of any adverse drug reactions to the FDA, the compliance of Promotional Materials with FDA rules and regulations and the filing of Promotional Materials with the FDA.

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Section 5.3             Compliance. In performing its duties hereunder, each Party shall, and shall cause its employees and agents (including the Watson Sales Force) to, comply with all Legal Requirements, including the FDA’s regulations and guidelines concerning the advertising of prescription drug products, DDMAC’s promotional guidelines, the Department of Health and Human Services Office of the Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers, the American Medical Association’s Guidelines on Gifts to Physicians, the PhRMA Code on Interactions with Healthcare Providers, the Prescription Drug Marketing Act of 1987, as amended, and the rules and regulations promulgated thereunder, the ACCME Standards for Commercial Support of Continuing Medical Education, equal employment, non-discrimination and federal and state anti-kickback Legal Requirements, Legal Requirements with respect to submission of false claims to governmental or private health care payors, and all industry and professional standards, which may be applicable to the activities (including the warehousing, handling and distribution of Samples) to be performed by such Party hereunder. None of Watson, Depomed, and either Party’s employees and agents (including the members of the Watson Sales Force) shall offer, pay, solicit or receive any remuneration to or from Professionals in order to induce referrals of or purchase of the Product. The Watson Sales Force shall have no direct contact with, nor shall the Watson Sales Force be involved with the delivery of Product to patients, other than delivery of Samples directly to Professionals authorized to prescribe the Product. The Watson Sales Force shall be trained in connection with compliance with Sec. 1128B(b) of the Social Security Act and the AMA Guidelines on Gifts to Physicians from Industry prior to engaging in Promotion of the Product.

Section 5.4             Communications with Regulatory Authorities.

(a)           All communications with Government Authorities concerning the Product shall be the sole responsibility of Depomed. Depomed shall within two (2) business days provide Watson with copies of  communications reasonably considered to be significant per CFR 314 (including summaries of all relevant verbal communications) related to Promotional Materials (DDMAC interactions other than clerical in nature) ; routine communications of any type (e.g., FDA 2253 correspondence) are to be forwarded to Watson within ten (10) business days.

(b)           Watson shall not, without the consent of Depomed or unless so required by Legal Requirements (and then only pursuant to the terms of this Section 5.4, unless this Section 5.4 is inconsistent with Legal Requirements), correspond or communicate with the FDA or with any other Governmental Authority, whether within the Territory or otherwise, concerning the Product, or otherwise take any action concerning any Regulatory Approval under which the Product is sold or any application for Regulatory Approval of the Product; provided that during the Term, Watson shall have the right to communicate with the FDA or any other Governmental Authority regarding the Product if such communication is necessary to comply with the terms of this Agreement or any Legal Requirement (including without limitation state or local Legal Requirements related to marketing activities undertaken by Watson or the Watson Sales Force), or if Watson made a request of such agency to communicate with Depomed instead, and such Governmental Authority denied such request (in any such case, Watson shall give Depomed notice as soon as reasonably practicable of such communication and, to the extent practicable, Depomed shall be permitted to accompany Watson, take part in any such communications and receive copies of all such communications). Watson shall, immediately upon receipt of any communication from the FDA or from any other Governmental Authority relating to the Product,

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forward a copy of the same to Depomed and respond to all inquiries by Depomed relating thereto. If Watson is required by law to communicate with the FDA or with any other Governmental Authority relating to the Product, then Watson shall so advise Depomed immediately (within one business day) and provide Depomed in advance with a copy of any proposed written communication, or a written summary of any proposed oral communication with the FDA or any other Governmental Authority. Watson shall comply with any and all reasonable direction of Depomed concerning any meeting or written or oral communication with the FDA or any other Governmental Authority relating to the Product unless otherwise required by Legal Requirements.

Section 5.5             Product Complaints. Depomed shall retain the sole responsibility to record, investigate and close out all Product Complaints. Watson shall refer any oral or written Product Complaints which it receives concerning the Product to Depomed within four (4) calendar days of its receipt thereof; provided, that all complaints concerning suspected or actual Product tampering, contamination or mix-up shall be delivered within twenty-four hours of its receipt thereof. Watson shall not take any other action in respect of any such complaint without the consent of Depomed unless otherwise required by Legal Requirements. If requested by Depomed, Watson will cooperate with Depomed to resolve any Product Complaints. All Product Complaints shall be directed to the attention of Depomed’s Vice President, Regulatory Affairs, at Depomed’s address set forth in Section 13.1. Depomed shall provide Watson with a summary of all Product Complaints received by Depomed within ten (10) business days of its receipt thereof.

Section 5.6             Adverse Drug Experience Reports.

(a)           Depomed shall provide Watson with a copy of all Adverse Drug Experience Periodic Reports per 21 CFR 314.80 within twenty (20) business days of the such Reports becoming available to Depomed or other Agents or partners for Depomed (including employees).

(b)           Watson will notify Depomed of all Serious Adverse Drug Experience Reports (cases or incidents) reported directly to Watson within forty-eight hours if possible, and in no case beyond two (2) business days of the time such report becomes known to Watson (including its employees), and of all Adverse Drug Experience Reports within five (5) business days of the time such Report becomes known to Watson (including its employees) to allow Depomed Medical and Regulatory Departments sufficient time to triage and report such events to the Agency.

(c)           Except as may otherwise be required by Legal Requirements, (i) Watson shall not disclose any information concerning Adverse Drug Experience Reports or Serious Adverse Drug Experience Reports to any Person or Governmental Authority without the prior consent of Depomed; and (ii) Depomed shall have the sole responsibility in its discretion to determine whether any Product Complaint, Adverse Drug Experience Report or Serious Adverse Drug Experience Report must be reported to the FDA or any other Governmental Authority.

(d)           All follow-up investigations concerning Adverse Drug Experience Reports and Serious Adverse Drug Experience Reports shall be conducted by Depomed; provided that

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Watson shall have the right to participate in such investigations upon its request. Watson shall provide all reasonable cooperation with any such follow-up investigation as may be requested by Depomed from time to time.

Section 5.7             Recalls or Other Corrective Action. Depomed shall have sole responsibility for and shall make all decisions with respect to any recall (including recall of packaging and promotion materials), market withdrawals or any other corrective action related to the Product. Depomed shall promptly notify Watson of any such actions taken by Depomed, including all actions that are reasonably likely to result in a material adverse effect on the marketability of the Product in the Territory. At Depomed’s request, Watson shall provide assistance to Depomed in conducting such recall, market withdrawal or other corrective action (including retrieving Samples distributed by the Watson Sales Force to Professionals). With respect to any recall, market withdrawal or corrective action initiated by Depomed as a result of Depomed becoming aware of any manufacturing defect in Product, Depomed shall reimburse Watson for its reasonable, documented, direct, out-of-pocket costs incurred in connection with participating in such recall, market withdrawal or other corrective action provided that Watson’s breach of its obligations hereunder is not a material cause of the recall, market withdrawal or other corrective action. Except as set forth above, Depomed shall be under no liability whatsoever to compensate Watson or make any other payment to Watson for any decision to recall, initiate a market withdrawal or take any other corrective action with respect to the Product.

ARTICLE VI

MANUFACTURING AND SUPPLY; SALES; PRICING

Section 6.1             Obligations of Depomed.

(a)           In accordance with the provisions of this Agreement and all applicable Legal Requirements, Depomed shall, at its cost and expense, use commercially reasonable efforts to perform or cause to be performed all Product manufacture, labeling, packaging, warehousing, distribution and return, order entry, customer services and all other activities to supply and distribute the Product in the Territory in order to fill orders for Product (conforming to the then-current Volume Forecast) in a timely and efficient manner.

(b)           Depomed has prepared and delivered, with input from Watson, a commercial stocking plan for the Product.

Section 6.2             Manufacturing Activities. The Product, including all Samples, to be manufactured by or for Depomed for sale in the Territory shall be manufactured to meet applicable specifications for the Product in accordance with the NDA, cGMP and in compliance with all other applicable Legal Requirements.

Section 6.3             Volume Forecasts. At least 30 days prior to the beginning of each Agreement Quarter ending after the Promotion Commencement Date, unless the Parties otherwise agree in writing to an alternative method of forecasting Product prescriptions in the Territory within the Field, Watson shall submit to the JSC a written non-binding forecast by

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Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

month of the number of Units of Product included within prescriptions expected to be filled in the Territory during the twelve (12) month period beginning with such Agreement Quarter, which forecast shall be prepared by Watson in good faith. The JSC shall review and discuss such forecast and shall make such modifications thereto as may be necessary for such forecast to be unanimously approved by the JSC and to be consistent with the forecasting and purchasing provisions of Depomed’s Third Party supply agreement relating to the Product (as so modified and approved for the applicable twelve (12) month period, the “Volume Forecast”). Depomed shall use commercially reasonable efforts to manufacture and distribute, or cause to be manufactured and distributed, Product consistent with the Volume Forecast or such other method of forecasting Product prescriptions in the Territory within the Field as is agreed in writing by the Parties. The Parties have agreed in writing to the Volume Forecast for the twelve month period beginning on August 1, 2007.

Section 6.4             Sales; Pricing.

(a)           Depomed or its Affiliates shall book all sales of the Product in the Territory and shall be responsible for entering into any contracts and other arrangements with any Person regarding the sale of the Product, and for establishing and approving the form, content and terms and conditions thereof, including any discount, allowance, rebate, chargeback or other term granted therein. For purposes of clarity, any contracts or arrangements supported by Watson as contemplated by Section 6.4(b) must be executed in Depomed’s name and administered by Depomed.

(b)           Watson will provide reasonable assistance to Depomed in support of managed markets and trade customer groups with respect to the Product to enable Depomed to enter into such contracts and other arrangements described in Section 6.4(a) above. In particular, as contemplated in the 2007 Plan, (i) Watson’s sales team dedicated to the Channel will provide reasonable assistance to Depomed in connection with Depomed’s contracting efforts within the Channel and (ii) Watson will provide reasonable assistance to Depomed in connection with Depomed’s efforts to stock the Product within retail pharmacies.

Section 6.5             Samples.

(a)           Depomed shall provide or cause to be provided to Watson, from time to time as contemplated by the Annual Plan, samples of the Product that are not for sale and with no fee associated (“Samples”) to be distributed by Watson solely in connection with the performance of Details. Depomed shall supply such Samples FOB Depomed’s or its designee’s warehouse, and the risk of loss and responsibility for handling and warehousing of the Samples shall pass to Watson upon delivery to a carrier designated by Watson. Watson shall be responsible for distributing the Samples to its Sales Representatives in a timely manner. Depomed shall invoice Watson for each shipment of Samples at [***] payable within thirty (30) days of the invoice date (excluding [***]). Watson shall also be responsible for securing the return and appropriate disposal of and reconciling existing Sample inventories from discontinued Sales Representatives.

(b)           Samples supplied by Depomed to Watson shall be used by Watson solely in performing Details to Professionals in accordance with this Agreement. Upon its receipt of

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Samples, Watson shall be solely responsible for accountability and compliance with the PDMA for the Watson Sales Force, and other applicable Legal Requirements relating to such Samples or the distribution of same by the Watson Sales Force, and shall be responsible for adherence by its Sales Representatives to such Legal Requirements.

(c)           Sampling volume will be included as a part of each Annual Plan.

ARTICLE VII

COMPENSATION

Section 7.1             Promotion Fees.

(a)           In consideration for Watson’s performance of its obligations under this Agreement, for each Agreement Quarter beginning with the Agreement Quarter ending on December 31, 2007, Depomed shall pay promotion fees (the “Promotion Fees”) in an amount equal to [***] of the Field Gross Margin for such Agreement Quarter. In the event that Promotion Fees payable to Watson under this Agreement for a particular period is a negative number, Watson will not be required to make a payment to Depomed equal to the negative Promotion Fees, and Depomed shall credit an amount equal to any negative Promotion Fees against any future payments due to Watson under this Agreement.

(b)           During the Term, upon the later to occur of (A) 30 days following the end of each Agreement Quarter, and (B) 20 days following Depomed’s receipt from Watson of the Prescriber Data for such Agreement Quarter as contemplated by Section 4.6(b), Depomed shall provide Watson with a statement setting forth:

(i)            Net Sales during such Agreement Quarter;

(ii)           Field Prescription Units during such Agreement Quarter;

(iii)          the Field Ratio for such Agreement Quarter;

(iv)          Field Net Sales during such Agreement Quarter;

(v)           Field COGS during such Agreement Quarter

(vi)          Field Gross Margin for such Agreement Quarter;

(vii)         a calculation of the amount, if any, payable by Depomed to Watson in respect of such Agreement Quarter pursuant to Section 7.3.

Notwithstanding the foregoing, within fifteen (15) days after the end of each Agreement Quarter, Depomed shall provide to Watson a non-binding, good faith estimate of the calculation of the amount payable to Watson for such Agreement Quarter to enable Watson to meet its financial reporting obligations. Where applicable, the foregoing calculation shall be based on such Prescriber Data (if any) for such Agreement Quarter as is then readily available to Depomed.

(c)           Except as expressly specified otherwise, any amounts payable by one Party to the other Party in respect of any Agreement Quarter pursuant to this Agreement shall be paid within forty-five (45) days after the end of such Agreement Quarter.

(d)           An example calculation of a Promotional Fee is attached as Schedule 7.1.

Section 7.2             Maintenance of Records.

(a)           Each Party agrees to keep, for a period of at least three years after the date of entry (or such longer period as may be required by Legal Requirements) full and accurate records maintained in accordance with such Party’s accounting practices in sufficient detail to enable a Third Party to accurately calculate (i) in the case of Depomed, the items set forth in Section 7.1(b)(i)-(vii) and Section 7.4, and (ii) in the case of Watson, P1 Details, P2 Details and P3 Details (if applicable) completed by the Watson Sales Force. Upon thirty (30) days prior written notice, 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 independent auditor will only examine such books and records during business hours but not more than once each fiscal year while this Agreement remains in effect and for three years thereafter in order to verify, in the case of Depomed, one or more of the items set forth in Section 7.1(b)(i)-(vii) and Section 7.4, and, in the case of Watson, P1 Details, P2 Details and P3 Details (if applicable) completed by the Watson Sales Force. Such independent auditor shall keep confidential any information obtained during such examination and shall report only the amounts which the independent auditor believes to be due and payable hereunder. The fees and expenses of the independent auditor performing such verification examination shall be borne by the Party conducting the verification; provided, however, that if any verification reveals that the audited Party has reported incorrectly, and the amount of such discrepancy is at least five percent (5%) of the aggregate amount that should have been reported for the period examined, then the audited Party shall pay the entire amount of the fees and expenses for such verification.

(b)           Each Party shall have the right, upon five (5) business days’ prior written notice, to audit all applicable records of the other Party (other than records described in Section 7.2(a)) for the purpose of determining the audited Party’s compliance with the obligations set forth in this Agreement, including with respect to training programs and certifications and records reports for the Samples. The audit will be conducted during normal business hours, at convenient times. Any such audit may be conducted no more than once each fiscal year. The fees and expenses of the auditing Party shall be borne by such Party. This right to audit shall extend throughout the term of this Agreement and for one year after expiration or termination of this Agreement.

(c)           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 (“GAAP”), consistent with the terms of this Agreement, except as set forth in Section 7.2(d) with respect to COGS. The term “out-of-pocket” costs or expenses means cost or expenses paid to Third Parties and shall not include any fixed costs or expenses, personnel costs or expenses, overhead costs or expenses, or other costs or expenses of a similar nature.

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(d)           COGS shall be determined in accordance with GAAP, except that COGS shall in no event include labor of more than one full-time equivalent Depomed employee for any period for which COGS is calculated under this Agreement.

Section 7.3             Payments. Any payments required to be made by either Party under this Agreement shall be made in United States dollars via wire transfer of immediately available funds to such bank account as the other Party shall designate in writing prior to the date of such payment.

Section 7.4             Tail Promotion Fees. During the Tail Period, Depomed shall pay to Watson an amount equal to the result of (A) the Tail Gross Margin Percentage, multiplied by (B) the Field Gross Margin for each calendar quarter within the Tail Period; provided, however, that in no event shall the amount payable to Watson in respect of any single calendar quarter within the Tail Period exceed an amount equal to the result of (A) the Tail Gross Margin Percentage, multiplied by (B) the average Field Gross Margin for the last two full Agreement Quarters prior to the termination of this Agreement. In the event that this Agreement is terminated only in part with respect to the Ob/Gyn Field or the Urology Field pursuant to Section 8.2(a), and the Tail Period applies to either or both sub-Fields, then the “Field” for purposes of the calculation of the amount payable under this Section 7.4 with respect to each sub-Field shall include only that sub-Field.

ARTICLE VIII

TERM AND TERMINATION

Section 8.1             Term. The term of this Agreement shall commence on the Initial Effective Date and shall continue, unless terminated sooner in accordance with this Article VIII, until September 30, 2010 (the “Initial Term”). Subject to Section 8.2(a)(i), Watson may extend the Term of this Agreement for two (2) additional one (1) year periods (each, a “Renewal Term”), to a total Term of approximately five (5) years, upon written notice to Depomed of Watson’s decision to extend the Term at least ninety (90) days prior to the end to the Initial Term or then current Renewal Term.

Section 8.2             Early Termination.

(a)           The following provisions shall apply in respect of any Renewal Term, and failures by Watson to perform the Detail Minimum, the Urology Detail Minimum, or the Ob/Gyn Detail Minimum:

(i)            Depomed may elect to terminate this Agreement with respect to the Ob/Gyn Field effective as of September 30, 2010 or September 30, 2011 upon at least 120 days’ prior written notice to Watson, provided that Depomed commences Promotion of the Product within the Ob/Gyn Field directly through its own sales force within sixty (60) days after any such termination of this Agreement with respect to Ob/Gyn Field.

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Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

(ii)           If Watson does not perform, in the aggregate, [***] the Detail Minimum in any two consecutive Agreement Quarters, Depomed shall have the right to terminate this Agreement on thirty (30) days’ prior written notice to Watson.

(iii)          If Watson does not perform, in the aggregate, [***] the Urology Detail Minimum or the Ob/Gyn Detail Minimum in any two consecutive Agreement Quarters, Depomed shall have the right to terminate this Agreement with respect to the Urology Field or the Ob/Gyn Field (as applicable) on thirty (30) days’ prior written notice to Watson.

(iv)          If Depomed desires to exercise its option to terminate this Agreement in whole or in part pursuant to Section 8.2(a)(ii) or (iii), it must give written notice to Watson within 60 days after receiving the report of the Agreement Quarter giving rise to the right to terminate this Agreement in whole or in part pursuant to this Section 8.2(a)(ii) or (iii).

(v)           If Depomed terminates this Agreement only with respect to the Urology Field or the Ob/Gyn Field pursuant to Section 8.2(a)(i) or (iii), then from and after such termination, (A) the “Field” for purposes of this Agreement shall no longer include the sub-Field (i.e., the Urology Field or the Ob/Gyn Field) with respect to which this Agreement has been terminated, and (B) “Field Baseline Prescriptions Per Month” shall no longer include Units of Product attributable to the sub-Field with respect to which this Agreement has been terminated. The Parties shall acknowledge in writing not later than October 31, 2007 the number of Units of Product within the Field Baseline Prescriptions Per Month attributable to the Urology Field and the number of Units of Product within the Field Baseline Prescriptions Per Month attributable to the Ob/Gyn Field.

(b)           If, as of the end of any period, aggregate Field Gross Margin is less than [***] for the immediately preceding two consecutive Agreement Quarters (but not before the two consecutive Agreement Quarters ending on March 31, 2009), either Party shall have the right to terminate this Agreement on 120 days’ prior written notice to the other Party. If either Party desires to exercise its option to terminate this Agreement pursuant to this Section 8.2(b), it must give written notice to the other Party within 60 days after receiving the report of the Agreement Quarter giving rise to the right to terminate this Agreement pursuant to this Section 8.2(b).

(c)           If there is a Detailing or Incentive Compensation Impasse, Depomed may terminate this Agreement upon thirty (30) days’ prior written notice to Watson; provided that such notice is provided to Watson within sixty (60) days after the occurrence of such Detailing or Incentive Compensation Impasse.

Section 8.3             Termination for Cause. Either Party may terminate this Agreement, effective at any time after providing sixty (60) days written notice and an opportunity to cure during such sixty (60) day period (ninety (90) days in the case of a breach by Depomed of Section 6.1), in the event of a material failure of the other Party to comply with its material obligations contained in this Agreement. If such cure is effected, such notice with respect to such termination shall be null and void.

Section 8.4             Termination for Bankruptcy or Force Majeure. To the extent permitted by law, each Party will have the right to terminate this Agreement immediately upon notice to the other Party, in the event of either of the following:

(a)           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

(b)           Any Force Majeure Event affecting the other Party beyond the other Party’s control which lasts for a period of at least six 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.

Notwithstanding the occurrence of any of the event specified in subsection (a) of this Section 8.4, the Parties acknowledge and agree that, to the extent Section 365(n) of the United States Bankruptcy Code applies to this Agreement, the non-insolvent Party may elect to retain and exercise the rights granted to it hereunder with respect to the intellectual property owned or controlled by the insolvent Party.

Section 8.5             Force Majeure. Any Force Majeure Event of the type described in Section 15.7 affecting a Party hereunder shall entitle 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 Event is discontinued during such sixty-day period), in addition to the right to terminate this Agreement under Section 8.4, the right to (i) extend this Agreement for a period equal to the duration of the Force Majeure Event 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 Event.

Section 8.6             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.

Section 8.7             Effect of Termination.

(a)           No additional payment obligations arising under Article VII hereof shall accrue after the date of expiration or termination of this Agreement except as set forth in Section 7.4; 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

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under this Agreement shall also survive, but only to the extent required for the full observation and performance of this Agreement.

(b)           Except as indicated in Section 8.5, expiration or 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. 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.

(c)           Notwithstanding any provision herein to the contrary:

(i)            if Watson terminates this Agreement pursuant to Section 8.3 during the Initial Term, Watson shall be entitled to a Tail Promotion Fee in accordance with Section 7.4. For purposes of calculation, in such an event, the Tail Period shall be determined in accordance with Section 1.72 and the Tail Gross Margin Percentage shall be calculated as if the Agreement had terminated on or after September 30, 2010 and before September 30, 2011; and

(ii)           if Depomed terminates this Agreement pursuant to Section 8.3, Watson shall not be entitled to any Tail Promotion Fee.

(d)           Upon the expiration or termination of this Agreement pursuant to this Article VIII, 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). Upon the expiration or termination of this Agreement, Watson shall provide to Depomed, at Watson’s out-of-pocket cost therefor, all Samples and Promotional Materials in Watson’s possession (including electronic files of all Promotional Materials); provided, however, that Watson may destroy any printed copies of Promotional Materials bearing the Watson Trademarks and may remove the Watson Trademarks from electronic files of Promotional Materials.

ARTICLE IX

REPRESENTATIONS AND WARRANTIES

Section 9.1             Representations and Warranties of Depomed. Depomed hereby represents and warrants to Watson as of the date hereof as follows:

(a)           Organization. Depomed (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and (ii) has all necessary corporate power and corporate authority to own its properties and to conduct its business, as currently conducted.

(b)           Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby are within the corporate power of

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Depomed, have been duly authorized by all necessary corporate proceedings of Depomed, and this Agreement has been duly executed and delivered by Depomed.

(c)           No Conflict. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby do not:  (i) conflict with or result in a breach of any provision of Depomed’s organizational documents; (ii) result in a material breach of any material agreement to which Depomed is Party; (iii) result in a violation of any Order to which Depomed is subject; (iv) require Depomed to obtain any material approval or consent from any Governmental Authority or Third Party other than those consents and approvals which have been obtained prior to the date hereof; or (v) violate any Legal Requirement applicable to Depomed in any material respect.

(d)           Enforceability. This Agreement constitutes the valid and binding obligation of Depomed, enforceable against Depomed in accordance with its terms, subject to bankruptcy, reorganization, insolvency and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law).

(e)           Broker. Depomed has not employed any broker, finder, or agent with respect to this Agreement or the transactions contemplated hereby.

(f)            Depomed Intellectual Property. To the knowledge of Depomed, the Promotion and sale of Product in the Territory in accordance with this Agreement will not infringe any patents, trademarks or other intellectual property rights of any Third Party; provided, that Depomed makes no representation as to the Watson Trademarks.

(g)           Litigation. There is no litigation, arbitration proceeding, governmental investigation, action or claims of any kind, pending or, to the knowledge of Depomed, threatened, by or against Depomed or any of its Affiliates relating to the Product or which would reasonably be expected to materially affect Depomed’s ability to perform its obligations hereunder.

(h)           Supply. Depomed currently has access to sufficient supplies of Product to perform the manufacturing obligations required by it under this Agreement. All Product will be manufactured with reasonable due care and in conformity with current generally accepted standards and procedures for manufacturing the Product and cGMP.

Section 9.2             Representations and Warranties of Watson. Watson hereby represents and warrants to Depomed as of the date hereof as follows:

(a)           Organization. Watson (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, and (ii) has all necessary corporate power and corporate authority to own its properties and to conduct its business, as currently conducted.

(b)           Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby are within the corporate power of Watson, have been duly authorized by all necessary corporate proceedings of Watson, and this Agreement has been duly executed and delivered by Watson.

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(c)           No Conflict. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby do not:  (i) conflict with or result in a breach of any provision of Watson’s organizational documents; (ii) result in a material breach of any material agreement to which Watson is Party; (iii) result in a violation of any Order to which Watson is subject; (iv) require Watson to obtain any material approval or consent from any Governmental Authority or Third Party other than those consents and approvals which have been obtained prior to the date hereof; or (v) violate any Legal Requirement applicable to Watson in any material respect.

(d)           Enforceability. This Agreement constitutes the valid and binding obligation of Watson, enforceable against Watson in accordance with its terms, subject to bankruptcy reorganization, insolvency and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law).

(e)           Broker. Watson has not employed any broker or finder with respect to this Agreement or the transactions contemplated hereby.

(f)            Watson Trademarks. To the knowledge of Watson, the use of the Watson Trademarks to Promote and sell Product in the Territory in accordance with this Agreement will not infringe any trademarks or other intellectual property rights of any Third Party.

(g)           Litigation. There is no litigation, arbitration proceeding, governmental investigation, action or claims of any kind, pending or, to the knowledge of Watson, threatened, by or against Watson or any of its Affiliates relating to the Product or which would reasonably be expected to materially affect Watson’s ability to perform its obligations hereunder.

Section 9.3             Depomed Disclaimer. EXCEPT AS EXPRESSLY PROVIDED HEREIN, DEPOMED DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH REGARD TO THE PRODUCT, INCLUDING THE WARRANTY OF MERCHANTABILITY AND WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.

Section 9.4             Watson Disclaimer. EXCEPT AS EXPRESSLY PROVIDED HEREIN, WATSON DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY AND WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE X

INTELLECTUAL PROPERTY MATTERS

Section 10.1           Infringement.

(a)           If either Party shall learn of a claim or assertion that the manufacture, use or sale of the Product in the Territory infringes or otherwise violates the intellectual property rights of any Third Party or that any Third Party violates the intellectual property rights owned or Controlled by (i) Depomed in the Product and the Depomed Trademarks in the Territory or (ii) Watson in the Watson Trademarks, then the Party becoming so informed shall promptly, but in

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all events within fifteen (15) business days thereof, notify the other Party to this Agreement of the claim or assertion.

(b)           If warranted in the opinion of Depomed, after consultation with the JSC, Depomed shall take such legal action as is advisable in Depomed’s opinion to restrain infringement of such Depomed patent rights or the Depomed Trademarks. Watson shall cooperate fully with, and as reasonably requested by, Depomed in Depomed’s attempt to restrain such infringement, and Depomed shall reimburse Watson for its out-of-pocket expenses incurred in providing such cooperation. Watson may be represented by counsel of its own selection at its own expense in any suit or proceeding brought to restrain such infringement, but Depomed shall have the right to control the suit or proceeding.

(c)           If warranted in the opinion of Watson, Watson shall take such legal action as is advisable in Watson’s opinion to restrain such infringement of the Watson Trademarks. Depomed shall cooperate fully with, and as requested by, Watson in Watson’s attempt to restrain such infringement, and Watson shall reimburse Depomed for its out-of-pocket expenses incurred in providing such cooperation. Depomed may be represented by counsel of its own selection at its own expense in any suit or proceeding brought to restrain such infringement, but Watson shall have the right to control the suit or proceeding.

ARTICLE XI

INDEMNIFICATION; LIMITS ON LIABILITY

Section 11.1           Indemnification. Each Party will defend, at its own expense, indemnify and hold harmless the other Party and its Affiliates and their respective directors, officers, employees, consultants,  contractors, representatives and agents from and against any and all damages, liabilities, losses, costs, and expenses, including reasonable attorneys’ fees, arising out of any Third Party claim, suit or proceeding brought against the other Party or its Affiliates 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) or (ii)) to the extent arising out of the breach, violation, failure, negligence or willful misconduct of the indemnified Party. In addition, Depomed will defend, at its own expense, indemnify and hold harmless Watson and its Affiliates and their respective directors, officers, employees, consultants, contractors, representatives and agents from and against any and all damages, liabilities, losses, costs, and expenses, including reasonable attorneys’ fees, arising out of any Third Party claim, suit or proceeding brought against Watson or its Affiliates to the extent such claim, suit, or proceeding is based upon a claim arising out of or relating to (x) any claim made by any Person that the manufacture, use or sale of the Product infringes or misappropriates the patent, trademark, or other intellectual property rights of such Person, except with respect to any claim relating to the Watson Trademarks; (y) the Esprit License Agreement or the Esprit Termination Agreement and (z) any product liability claim made by any Person with respect to the Product, except to the extent liability is based on a breach by Watson of Section 4.2. Each Party agrees that it shall promptly notify the other in writing of any such claim or action and give

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the indemnifying Party full information and assistance in connection therewith. The indemnifying Party shall have the sole right to control the defense 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. The provisions of this Section 11.1 shall survive the termination of this Agreement for seven (7) years (except as to claims as to which a Party has notified the other in writing prior to the third anniversary of the termination date of this Agreement, in which event, the indemnifying Party’s obligations under this Section 11.1 shall survive with respect to any such claim until its resolution).

Section 11.2           Consequential Damages. NEITHER WATSON NOR DEPOMED (WHICH FOR THE PURPOSES OF THIS SECTION 11.2 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 OR TO AMOUNTS PAYABLE TO A THIRD PARTY THAT ARE SUBJECT TO INDEMNIFICATION PURSUANT TO THIS ARTICLE 11.

ARTICLE XII

CONFIDENTIALITY AND PUBLICITY

Section 12.1           Proprietary Information. Pursuant to this Agreement, a Party receiving Proprietary Information from the other, directly or indirectly, will treat such Proprietary Information as confidential, will use such Proprietary Information only for the purposes of this Agreement and will not disclose, and will take all reasonable precautions to prevent the disclosure of, such Proprietary Information to (a) any of its officers, directors, managers, equity holders, employees, agents, representatives, Affiliates or consultants who are not required to know such Proprietary Information or who are not bound by a like obligation of confidentiality or (b) to Third Parties.

Section 12.2           Disclosures Required by Law. In the event the recipient Party is required (i) under applicable Legal Requirements to disclose Proprietary Information of the disclosing Party to any Governmental Authority to obtain any Regulatory Approval for the Product, (ii) to disclose Proprietary Information in connection with bona fide legal process (including in connection with any bona fide dispute hereunder) or (iii) to disclose Proprietary Information under the rules of the securities exchange upon which its securities are traded, the recipient Party may do so only if it limits disclosure to that purpose after giving the disclosing Party prompt written notice of any instance of such a requirement in reasonable time for the disclosing Party to attempt to object to or to limit such disclosure. In the event of disclosures

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required under applicable Legal Requirements, the recipient Party shall cooperate with the disclosing Party as reasonably requested thereby.

Section 12.3           Publicity. Neither Party will originate any publicity, news release, public comment or other public announcement, 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 in a manner that is consistent with the joint press release issued by the Parties and 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 the United States Securities and Exchange Commission (the “SEC”), as to the contents and existence of this Agreement as it shall reasonably deem necessary or appropriate. In such event, the filing Party shall consult with the other Party with respect to the extent of such disclosure, including whether and to what extent confidential treatment shall be sought; provided, that, notwithstanding the foregoing, the filing Party shall retain ultimate control and responsibility for any disclosure with the SEC. 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. Once such press release or any other written statement is approved for disclosure by both Parties, either Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party. The provisions of this Article 12 shall survive termination of the agreement and shall remain in effect until a date three years after the Term of this Agreement.

ARTICLE XIII

NOTICES

Section 13.1           Notices. All notices required or permitted hereunder shall be given in writing and sent by facsimile transmission (with a copy sent by first-class mail), or mailed postage prepaid by certified or registered mail (return receipt requested), or sent by a nationally recognized express courier service, or hand-delivered at the following address:

If to Depomed:

Depomed, Inc.
1360 O’Brien Drive
Menlo Park, California  94025
Attention:  President
Fax No.:  (650) 462-9991

If to Watson:

Watson Pharma, Inc.

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360 Mt. Kemble Avenue
Morristown, New Jersey 07962
Attention:  President, Brand Division
Fax No:  (973) 355-8580

With a copy to:

Watson Pharmaceuticals, Inc.

311 Bonnie Circle
Corona, California 92880
Attention:  General Counsel
Fax No:  (951) 493-5821

All notices shall be deemed made upon receipt by the addressee as evidenced by the applicable written receipt.

ARTICLE XIV

INSURANCE

Section 14.1           Insurance.

(a)           During the Term and for a period of two (2) years after any expiration or termination of this Agreement, each Party shall maintain (i) a commercial general liability insurance policy or policies with minimum limits of $10 million per occurrence and $10 million in the aggregate on an annual basis and (ii) a product liability insurance policy or policies with minimum limits of $10 million per occurrence and $15 million in the aggregate on an annual basis.

(b)           Upon request, each Party shall provide certificates of insurance to the other evidencing the coverage specified herein. Neither Party’s liability to the other is in any way limited to the extent of its insurance coverage.

ARTICLE XV

MISCELLANEOUS

Section 15.1           Headings. The titles, headings or captions and paragraphs in this Agreement are for convenience only and do not define, limit, extend, explain or describe the scope or extent of this Agreement or any of its terms or conditions and therefore shall not be considered in the interpretation, construction or application of this Agreement.

Section 15.2           Severability. In the event that any of the provisions or a portion of any provision of this Agreement is held to be invalid, illegal, or unenforceable by a court of competent jurisdiction or a governmental authority, such provision or portion of provision will be construed and enforced as if it had been narrowly drawn so as not to be invalid, illegal, or unenforceable, and the validity, legality, and enforceability of the enforceable portion of any such provision and the remaining provisions will not be adversely affected thereby.

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Section 15.3Entire Agreement. This Agreement, together with the schedules and exhibits hereto and the Confidentiality Agreement, all of which are incorporated by reference, contains all of the terms agreed to by the Parties regarding the subject matter hereof and supersedes any prior agreements (including without limitation the Original Agreement), understandings, or arrangements between them, whether oral or in writing.

Section 15.4Amendments. This Agreement may not be amended, modified, altered, or supplemented except by means of a written agreement or other instrument executed by both of the Parties hereto. No course of conduct or dealing between the Parties will act as a modification or waiver of any provisions of this Agreement.

Section 15.5Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original as against the Party whose signature appears thereon, but all of which taken together will constitute but one and the same instrument.

Section 15.6Waiver. The failure of either Party to enforce or to exercise, at any time or for any period of time, any term of or any right arising pursuant to this Agreement does not constitute, and will not be construed as, a waiver of such term or right, and will in no way affect that Party’s right later to enforce or exercise such term or right.

Section 15.7Force Majeure.

(a)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, declared or undeclared wars, acts of terrorism, or compliance with or other action taken to carry out the intent or purpose of any law or regulation) (a “Force Majeure Event”), 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. In the event that a Party is unable to perform by a reason described in this Section 15.7, its obligation to perform under the affected provision of this Agreement shall be suspended during such time of nonperformance.

(b)Neither Party shall be liable hereunder to the other Party nor shall be in breach for failure to perform its obligations caused by a Force Majeure Event. In the case of any such event, the affected Party shall promptly, but in no event later than 10 days of its occurrence, notify the other Party stating the nature of the condition, its anticipated duration and any action being taken to avoid or minimize its effect. Furthermore, the affected Party shall keep the other Party informed of the efforts to resume performance. After sixty (60) days of such inability to perform, the Parties agree to meet and in good faith discuss how to proceed. In the event that the affected Party is prevented from performing its obligations pursuant to this Section 15.7 for a period of six (6) months, the other Party shall have the right to terminate this Agreement pursuant to the provisions of Sections 8.4(b).

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Section 15.8Successors and Assigns. Subject to Section 15.9, this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and assigns permitted under this Agreement.

Section 15.9Assignment. This Agreement and the rights granted herein shall not be assignable by either Party hereto without the prior written consent of the other Party. Any attempted assignment without consent shall be void. Notwithstanding the foregoing, a Party may transfer, assign or delegate its rights and obligations under this Agreement without consent to (a) an Affiliate or (b) a successor to all or substantially all of its business or assets of the assigning Party to which this Agreement relates, whether by sale, merger, consolidation, acquisition, transfer, operation of law or otherwise.

Section 15.10Construction. The Parties acknowledge and agree that: (a) each Party and its representatives have reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; and (b) the terms and provisions of this Agreement will be construed fairly as to each Party hereto and not in favor of or against either Party regardless of which Party was generally responsible for the preparation or drafting of this Agreement. Unless the context of this Agreement otherwise requires: (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms “hereof,” “herein,” “hereby,” and derivative or similar words refer to this entire Agreement; (iv) the terms “Article,” “Section,” “Exhibit,” “Schedule,” or “clause” refer to the specified Article, Section, Exhibit, Schedule, or clause of this Agreement; (v) “or” is disjunctive but not necessarily exclusive; and (vi) the term “including” or “includes” means “including without limitation” or “includes without limitation.”  Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless business days are specified.

Section 15.11Governing Law. This Agreement will be construed under and in accordance with, and governed in all respects by, the laws of the State of New York, without regard to its conflicts of law principles.

Section 15.12Equitable Relief. Each Party acknowledges that a breach by it of the provisions of this Agreement may not reasonably or adequately be compensated in damages in an action at law and that such a breach may cause the other Party irreparable injury and damage. By reason thereof, each Party agrees that the other Party is entitled to seek, in addition to any other remedies it may have under this Agreement or otherwise, preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement by the other Party; provided, however, that no specification in this Agreement of a specific legal or equitable remedy will be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. Each Party agrees that the existence of any claim, demand, or cause of action of it against the other Party, whether predicated upon this Agreement, or otherwise, will not constitute a defense to the enforcement by the other Party, or its successors or assigns, of the covenants contained in this Agreement.

Section 15.13Relationship Between Parties. The Parties hereto are acting and performing as independent contractors, and nothing in this Agreement creates the relationship of partnership, joint venture, sales agency, or principal and agent. Neither Party is the agent of the

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other, and neither Party may hold itself out as such to any other Party. All financial obligations associated with each Party’s business will be the sole responsibility of such Party.

[Signature page follows]

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in duplicate on the day and year first above written.

DEPOMED, INC.
By:	/s/ Carl A. Pelzel
Name:	Carl A. Pelzel
Title:	President and Chief Executive Officer
WATSON PHARMA, INC.
By:	/s/ Edward F. Heimers, Jr.
Name:	Edward F. Heimers, Jr.
Title:	President, Brand Division

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Schedule 1.14

Product COGS as of the Initial Effective Date

					Estimated Range for
					2007
2007 Estimation	Low		High		Low			High
WAC per Tablet					$	[***	]	$	[***	]
Gross to Net Discounts & Allowances	[***	]	[***	]	$	[***	]	$	[***	]	(low model includes launch incentives)
Net Sales per Tablet					$	[***	]	$	[***	]
COGS per Tablet	[***	]	[***	]	$	[***	]	$	[***	]	(COGS per tablet will drop with higher quantities and shift towards 30 count bottles - Also, first 3-packs will have rework costs)
Gross Margin					$	[***	]	$	[***	]
Watson Profit Share per Tablet	[***	]	[***	]	$	[***	]	$	[***	]

					Estimated Range for
					2008
2008 Estimation	Low		High		Low			High
WAC per Tablet					$	[***	]	$	[***	]
Gross to Net Discounts & Allowances	[***	]	[***	]	$	[***	]	$	[***	]
Net Sales per Tablet					$	[***	]	$	[***	]
COGS per Tablet	[***	]	[***	]	$	[***	]	$	[***	]
Gross Margin					$	[***	]	$	[***	]
Watson Profit Share per Tablet	[***	]	[***	]	$	[***	]	$	[***	]

Schedule 1.20

Depomed Trademarks

Mark	Serial/Registration Numbers
PROQUIN	Reg. No. 2968719
DEPOMED	Reg. No. 2112593
DEPOMED (word and design mark)	Ser. No. 78781903
ACUFORM	Ser. No. 78781863

Schedule 1.92

Watson Trademarks

Mark	Serial/Registration Numbers
Watson (typed drawing)	2384629/75516726
Watson Pharma (typed drawing)	2387161/75636020
Watson Logo (mortar)	N/A

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Schedule 3.2

Depomed Initial JSC Representatives:

[***] (Co-chair)

[***]

Watson Initial JSC Representatives:

[***] (Co-chair)

[***]

Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities Exchange Commission

Schedule 7.1

Example Calculation of Promotional Fees

[***]

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, Carl A. Pelzel, 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 8, 2007
	By:	/s/ Carl A. Pelzel
			Carl A. Pelzel
			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, Tammy L. Cameron, 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 8, 2007
	By:	/s/ Tammy L. Cameron
		Tammy L. Cameron
		Interim Principal Accounting and 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, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carl A. Pelzel, 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 8, 2007

/s/ Carl A. Pelzel

Carl A. Pelzel

President 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, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tammy L. Cameron, Interim Principal Accounting and 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 8, 2007

/s/ Tammy L. Cameron

Tammy L. Cameron

Interim Principal Accounting and Financial Officer