FORWARD-LOOKING INFORMATION

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

†          regulatory filings and approval of DM-1796 for postherpetic
neuralgia;

†          the commercial success and market acceptance of DM-1796 if it is

†          the status and additional development of Serada™ for menopausal hot
flashes;

†          the commercial success and market acceptance of  Serada if we receive

† the commercial success of GLUMETZA® (metformin hydrochloride extended release tablets) in the United States, and the efforts of Santarus, Inc. (Santarus) with respect to the commercialization of GLUMETZA;

†          the results of our internal research and development efforts;

†          submission, acceptance and approval of regulatory filings;

†          our need for, and ability to raise additional capital;

†          our collaborative partners' compliance or non-compliance with their
obligations under our agreements with them; 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. In 2009, we completed Phase 3 clinical trial for two product candidates. In October 2009, we announced that DM-1796, an extended release formulation of gabapentin for the treatment of postherpetic neuralgia that we have licensed to Solvay Pharmaceuticals, Inc. met its primary endpoint with statistical significance. A New Drug Application (NDA) for DM-1796 is expected to be filed with the FDA in the first quarter of 2010. Also in October 2009, we announced the results of Breeze 1 and Breeze 2, our Phase 3 clinical trials for Serada, our proprietary extended release formulation of gabapentin for the treatment of menopausal hot flashes. The higher dose formulation of Serada evaluated in the studies met five of eight co-primary endpoints across the two studies, while the lower dose formulation evaluated met four of eight co-primary endpoints. We are continuing to analyze the data and intend to meet with the FDA to discuss the results of the studies and any additional clinical development that may be required to obtain approval to market Serada in the United States.

We seek to optimize the use and value of our product candidates and drug delivery technologies in three ways. First, we are seeking to assemble a number of pharmaceutical products that can be highly differentiated from immediate release versions of the compounds upon which they are based and may be promoted together within a specialty pharmaceutical field, such as women's health care providers. Our development of Serada, and our retention of co-promotion rights within the obstetrics/gynecology field in our commercialization arrangements with Covidien, Ltd. and Santarus, Inc., are examples of

this aspect of our business strategy. Second, we out-license product candidates after we have increased their value through our formulation and clinical development efforts. Our DM-1796 license and development arrangement with Solvay Pharmaceuticals is an example of this strategy. Third, we enter into collaborative partnerships with other companies where the unique capabilities of our technology can provide superior value to a partner's product candidate, resulting in greater value for Depomed than traditional fee-for-service arrangements. Our license and development arrangement with Covidien, Ltd. and our license agreement with Merck & Co., Inc. are examples of this strategy.

We have developed two products which have been approved by the FDA and are currently marketed. GLUMETZA is a once-daily treatment for adults with type 2 diabetes that we commercialize in the United States with Santarus, Inc. Proquin® XR (ciprofloxacin hydrochloride) is a once-daily treatment for uncomplicated urinary tract infections.

The following table summarizes our product pipeline and marketed products.

                                Product Pipeline



DM-1796             Postherpetic neuralgia      Phase 3 study completed.
                                                NDA filing expected in Q1 2010
                                                Licensed by Solvay in the United
                                                States, Mexico and Canada.

SeradaTM            Menopausal hot flashes      Phase 3 studies completed (Breeze 1
                                                and Breeze 2). FDA meeting to
                                                discuss results expected in
                                                December 2009.

DM-3458             Gastroesophageal reflux     Proof of concept studies completed.
                    disease

DM-1992             Parkinson's disease         Phase 1 study completed. Second
                                                Phase 1 study expected to be
                                                commenced in 2010.

                               Marketed Products



Product                    Indication                          Status

GLUMETZA®           Type 2 diabetes             Currently sold in the United States,
                                                Canada and Korea.
                                                Co-promoted in the United States
                                                with Santarus. Canadian rights held
                                                by Biovail. Korean rights held by LG
                                                Life Sciences.

Proquin® XR         Uncomplicated urinary       Currently sold in the United States.
                    tract infection             Regulatory application approved in
                                                Sweden.
                                                European rights held by
                                                Rottapharm/Madaus.

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

Significant Developments for the Quarter Ended September 30, 2009.

† In July 2009, we entered into a non-exclusive license agreement with Merck & Co., Inc. (Merck) granting Merck a license to certain patents related to the Company's metformin extended release technology to be used in developing fixed dose combinations of sitagliptin and extended release metformin.

† Revenue for the three months ended September 30, 2009 was $23.0 million, compared to $14.1 million for the three months ended September 30, 2008. Revenue for the three months ended September 30, 2009 included recognition of $10.0 million associated with our non-exclusive license agreement with Merck. Revenue for the three months ended September 30, 2008 included the recognition of $6.3 million in previously deferred GLUMETZA product sales.

† Operating expenses for the three months ended September 30, 2009 were $20.2 million, compared to $12.2 million for the three months ended September 30, 2008.

† Cash, cash equivalents and marketable securities were $88.6 million as of September 30, 2009, compared to $82.1 million as of December 31, 2008.

RECENT PRODUCT DEVELOPMENTS AND TRANSACTIONS

Serada™ for Menopausal Hot Flashes

Breeze 1 and 2 Clinical Trials.

Study Design. We recently completed our Breeze 1 and 2 clinical trials evaluating Serada in menopausal hot flashes. Each trial was a Phase 3 randomized, double-blind, placebo-controlled studies of approximately 540 patients. In September 2008, we enrolled and dosed the first patient in Breeze 1, and in October 2008, we enrolled and dosed the first patient in Breeze 2. In each study, patients were randomized into three treatment arms: (i) placebo;
(ii) 1200mg of Serada dosed in the evening; or (iii) a total dose of 1800mg of Serada dosed 600mg in the morning and 1200mg in the evening. We completed enrollment in Breeze 1 in February 2009, and completed enrollment in Breeze 2 in March 2009.

The treatment duration of the Breeze 1 study was six months, with primary efficacy endpoints assessed at 4 and 12 weeks. Persistence of efficacy were assessed at 6 months as one of the secondary endpoints. The treatment duration in the second study, Breeze 2, was three months, with assessment of efficacy at 4 and 12 weeks only.

The primary efficacy endpoints in both studies were reductions in the mean frequency of moderate to severe hot flashes, and the average severity of hot flashes. Various secondary efficacy endpoints were measured as well.

Efficacy. As set forth in the table below, in the higher dose treatment arm of the two doses evaluated, the 1800mg dose achieved positive results at 4 weeks. All four co-primary endpoints of the 1800mg dose at 4 weeks demonstrated significant reductions in frequency and severity in both clinical trials. Of the other four co-primary endpoints of the 1800mg dose at 12 weeks, one endpoint was positive (p=0.0026) while the other three endpoints did not achieve statistical significance.

In the lower dose treatment arm, the 1200mg dose at 4 weeks achieved statistical significance in three of the four co-primary endpoints. Frequency was significantly reduced in both clinical trials (p-values of 0.0024 and 0.0117) at four weeks. Severity was significantly reduced in only one trial (p-value 0.0016). Of the other four co-primary endpoints of the 1200mg dose at 12 weeks, one endpoint was positive (p=0.0024) while the other three endpoints did not achieve statistical significance.

Both patients' and clinicians' impression of overall improvement in the higher dose treatment arm was highly statistically significant relative to placebo in both studies.

The primary efficacy outcomes observed in the studies are set forth in the tables below.

                                    Breeze 1



Treatment               Frequency (# per day)                      Severity (average per incident)
Group       Baseline       4 weeks           12 weeks       Baseline       4 weeks            12 weeks
 1800mg       11.1     3.8 (p = 0.0001)   3.7 (p = 0.02)      2.5      1.8 (p = 0.0001)   1.7 (p = 0.0468)
 1200mg       11.3     4.5 (p = 0.0117)   3.8 (p = 0.183)     2.5      1.9 (p = 0.0016)   1.7 (p = 0.0433)
 placebo      11.3           5.4                4.3           2.5            2.1                1.8

                                    Breeze 2



Treatment               Frequency (# per day)                       Severity (average per incident)
Group       Baseline       4 weeks            12 weeks       Baseline       4 weeks            12 weeks
 1800mg       11.2     4.1 (p = 0.004)    3.7 (p = 0.028)      2.5      1.8 (p = 0.0003)   1.6 (p = 0.0026)
 1200mg       12.0     4.7 (p = 0.0024)   3.9 (p = 0.0024)     2.5       1.9 (p = 0.06)    1.7 (p = 0.028)
 placebo      11.2           5.7                5.0            2.5            2.0                1.9

Safety. Serada was generally well tolerated in the study. The most common side effects observed in the study were headache, somnolence, dizziness and nausea. The incidence of those side effects in each of the treatment groups for each study are set forth in the tables below:

                                    Breeze 1



Treatment Group   Somnolence (%)   Dizziness (%)   Headache (%)   Nausea (%)
    1800mg              19              19              9             9
    1200mg              13              24              9             7
    placebo             3                2              6             4

                                    Breeze 2



Treatment Group   Somnolence (%)   Dizziness (%)   Headache (%)   Nausea (%)
    1800mg              8               19              7             7
    1200mg              7               17              5             3
    placebo             3                3              8             2

Withdrawals due to adverse events in each of the treatment groups for each study are set forth in the tables below:

                                    Breeze 1



Treatment Group   Somnolence (%)   Dizziness (%)
    1800mg              2                1
    1200mg              3                3
    placebo             0                0

                                    Breeze 2



Treatment Group   Somnolence (%)   Dizziness (%)
    1800mg              2                3
    1200mg             0.5               3
    placebo            0.5               0

DM-1796 for Postherpetic Neuralgia

Solvay Pharmaceuticals, Inc. In November 2008, we entered into an exclusive license agreement with Solvay Pharmaceuticals, Inc. granting Solvay exclusive rights to develop and commercialize DM-1796 in the United States, Canada and Mexico for pain indications. The agreement became effective in January 2009, upon clearance of the transaction under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976.

Pursuant to the agreement, Solvay Pharmaceuticals paid us a $25 million upfront fee in February 2009. We are also eligible to receive aggregate milestone payments of up to $70 million for acceptance and FDA approval of the New Drug Application for DM-1796 for PHN, and up to $300 million in potential sales milestone payments. Solvay will pay us royalties of 14 to 20 percent of net product sales, depending on the level of net product sales.

We will remain responsible for completion of the ongoing Phase 3 clinical trial for DM-1796 in PHN, and will be responsible for certain other regulatory support activities through NDA approval. Solvay will be responsible for NDA filing and has the option to develop DM-1796 in further pain indications other than PHN. If Solvay elects to develop DM-1796 in fibromyalgia, we have a right of first negotiation for co-promotion rights in the obstetrics/gynecology field upon fibromyalgia indication regulatory approval.

We will be responsible for the manufacture of DM-1796 for up to four years from the effective date of the License Agreement, pursuant to a supply agreement to be entered into by Depomed and Solvay by the end of 2009. The License Agreement will expire with the last to expire of our patents covering DM-1796, subject to early termination in certain circumstances.

Abbott Laboratories (Abbott) has agreed to acquire the pharmaceutical business of Solvay in a transaction expected to close in the first quarter of 2010. Accordingly, following the closing, Abbott will be responsible for our DM-1796 license arrangement with Solvay, either directly or through a subsidiary.

Phase 3 Registration Program.

Study Design. In March 2008, we initiated dosing of the first patient in a Phase 3 clinical trial for DM-1796 for PHN. The study was a randomized, double-blind, placebo-controlled study of approximately 450 PHN patients. Patients in the study were randomized into two treatment arms: placebo, or 1800mg of DM-1796 dosed once daily. The study was conducted at sites in the United States, Russia and Argentina. In June 2009, the study was fully enrolled.

The primary objective of the study is to assess the efficacy of DM-1796 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.

Efficacy. DM-1796 demonstrated a statistically significant reduction in pain associated with postherpetic neuralgia (PHN) versus placebo using the baseline observation carried forward (BOCF) method required by FDA. The primary efficacy outcome observed in the study is set forth in the table below.

                 Treatment
                 Group       Reduction in pain score at 10 weeks
                  1800mg              -2.1 (p = 0.0146)
                  placebo                   -1.6

Safety. DM-1796 was generally well tolerated in the study. The most common side effects observed in the study were somnolence and dizziness. The incidence of those side effects in each of the treatment groups for each study is set forth in the table below.

Treatment Group   Somnolence (%)   Dizziness (%)
    1800mg              5               11
    placebo             3                2

DM-1992 for Parkinson's Disease

In July 2008, The Michael J. Fox Foundation awarded the Company a preclinical development grant to support the DM-1992 program. DM-1992 is our investigative novel gastric retentive extended-release formulation of levodopa/carbidopa.

In January 2009, we initiated a Phase 1 pharmacokinetic study in Parkinson's patients designed to provide us with insight into our formulation strategy for the DM-1992 program. The Phase 1 trial in DM-1992 was a randomized, open-label crossover study that enrolled 18 patients with stable Parkinson's disease at two leading neurology centers in Russia. The objective of the study was to compare the pharmacokinetics of two distinct formulations of DM-1992 and a generic version of Sinemet CR sustained-release levodopa/carbidopa, as well as the safety and tolerability of the formulations. Patients in the trial received a single dose of each of the three treatments being studied. A dose of the first treatment was administered at the beginning of the study, followed by a dose of a second treatment after 7 to 14 days, and a dose of the third treatment after another 7 to 14 days. Blood samples were drawn during the 24 hour period following administration of each treatment. Patients remained on any anti-Parkinson's therapy other than levodopa/carbidopa during the trial.

In August 2009, we completed the Phase 1 study. In the study, DM-1992 extended coverage above levodopa's efficacious threshold and extended the time to peak levodopa concentration relative to currently available sustained release levodopa/carbidopa formulations. One of our formulations tested in the study extended the median time at which levodopa blood levels stayed above the efficacious threshold of 300 ng/mL to approximately nine hours, compared to approximately seven hours for the generic version of Sinemet CR tested in the study. The time to median peak levodopa blood levels in the study was extended to four hours, compared to 2.8 hours for the comparator.

We anticipate commencing a second Phase 1 study in 2010.

Merck & Co., Inc.

In July 2009, we entered into a non-exclusive license agreement with Merck & Co., Inc. granting Merck a license to certain patents related to our metformin extended release technology to be used in developing fixed dose combinations of sitagliptin and extended release metformin.

Under terms of the agreement, Merck received a non-exclusive license as well as other rights to certain of our patents directed to metformin extended release technology. In exchange, we received a $10.0 million upfront fee in the third quarter of 2009. We are also eligible to receive a milestone payment upon filing of the New Drug Application for the therapeutic candidate, as well as modest royalties on any net product sales for an agreed-upon period. Merck will also be granted a right of reference to the New Drug Application covering our GLUMETZA product in Merck's regulatory filings covering fixed dose combinations of sitagliptin and extended release metformin. We have no development obligations under the agreement.

Proquin® XR

Watson Pharma. In February 2009, we amended our promotion agreement with Watson related to Proquin XR. Pursuant to the amended agreement, Watson performed a specified number of details in the first quarter of 2009, and will make an agreed upon number of sales calls in which samples of Proquin XR are delivered to physicians in each of the last three quarters of 2009. The agreement will terminate effective December 31, 2009, or upon notice from us to Watson prior to that date. We have no obligation to pay Watson promotion fees in 2009, and thereafter.

We are currently seeking to divest Proquin XR in the United States.

Rottapharm/Madaus GmbH. In April 2009, we and Madaus GmbH, a successor in interest to Madaus S.r.l. and subsidiary of Rottapharm, (Rottapharm/Madaus) entered into an amended and restated license agreement for Proquin XR in Europe, which amended the parties' distribution and supply agreement originally entered into in November 2005 and subsequently amended in November 2006. Under the amended and restated license agreement, we will no longer be obligated to supply commercial quantities of Proquin XR tablets in bulk form to Rottapharm/Madaus as contemplated under the distribution and supply agreement, and we will now receive royalties on net sales of Proquin XR in Europe sold by Rottapharm/Madaus. We will be obligated to provide regulatory and manufacturing support and consultation for up to an agreed upon number of hours per month through December 31, 2010 as reasonably requested by Rottapham/Madaus. The term of the amended and restated license agreement is through July 2023.

In August 2008, Rottapharm/Madaus paid us an advance payment of $0.3 million intended for future product supply under the amended distribution and supply agreement. The $0.3 million advance payment will now be applied toward future royalties due to us under the amended and restated license agreement.

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 2008 Annual Report on Form 10-K with the Securities and Exchange Commission on March 6, 2009. For a description of our critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2009 and 2008

Revenue


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



                                     Three Months Ended September 30,            Nine Months Ended September 30,
                                        2009                  2008                 2009                  2008
Product sales:
GLUMETZA                          $           9,771     $          12,923    $          24,659     $          23,494
Proquin XR                                       88                    88                  448                   262
Total product sales                           9,859                13,011               25,107                23,756

Royalties:
GLUMETZA                                         67                   100                  168                   283
Teva                                            397                   416                1,289                   777
Total royalties                                 464                   516                1,457                 1,060

License and collaborative
revenue:
Merck                                        10,000                     -               10,000                     -
DM-1796                                       1,561                     -                4,599                     -
GLUMETZA                                        626                   584                1,878                 1,311
Acuform technology                              458                     -                1,374                     -
Proquin XR                                       26                     -                   59                     -
DM-1992                                          20                     -                   20                     -
Total license and collaborative
revenue                                      12,691                   584               17,930                 1,311

Total revenues                    $          23,014     $          14,111    $          44,494     $          26,127

Product sales

GLUMETZA. The decrease in GLUMETZA product sales in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 is primarily attributable to the recognition of $6.3 million in net product sales of previously deferred GLUMETZA product sales during the three months ended . . .