1005201--3/16/2007--DEPOMED

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BUSINESS Competition, Patents and Proprietary Rights, Manufacturing, Marketing and Sales, Government Regulation, Product Liability, Employees MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources We depend heavily on King Pharmaceuticals for the successful commercialization of GLUMETZA in the United States. We are responsible for the distribution of GLUMETZA, and we have limited experience with distribution of pharmaceutical products. We have limited in-house sales and marketing resources, which we will require in order to successfully co-promote GLUMETZA and ProQuin XR through our own sales force. We depend on Esprit Pharma for the successful commercialization of ProQuin XR in the United States. We depend on our marketing partners for the successful commercialization of GLUMETZA in Canada and Korea, and of ProQuin XR in Europe. Our product candidates are at early stages of development and may not be successful or achieve market acceptance. We are expecting operating losses in the future. Our operating results may fluctuate and affect our stock price. 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. 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. It is difficult to develop a successful product. If we do not develop a successful product we may be unable to raise additional funds. 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. 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. 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. Pharmaceutical marketing is subject to substantial regulation in the United States. The approval process outside the United States is uncertain and may limit our ability to develop, manufacture and sell our products internationally. 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. We may be unable to compete successfully in the pharmaceutical product and drug delivery system industries. We depend on third parties who are single source suppliers to manufacture ProQuin XR, GLUMETZA and our later stage product candidates. If these suppliers are unable to manufacture ProQuin XR, GLUMETZA or our product candidates, our business will be harmed. We could become subject to product liability litigation and may not have adequate insurance to cover product liability claims. 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. We have implemented certain anti-takeover provisions. Increased costs associated with corporate governance compliance may significantly impact our results of operations. 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. If we are unable to satisfy regulatory requirements relating to internal controls, our stock price could suffer. Business interruptions could limit our ability to operate our business.

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1005201--3/16/2007--DEPOMED_INC