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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2008o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission File
    No. 000-51863
  VANDA PHARMACEUTICALS
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State or other jurisdiction
    of
    incorporation or organization)

03-0491827(I.R.S. Employer
    Identification No.)   9605 Medical Center Drive, Suite 300
 Rockville, Maryland 20850
 (240) 599-4500
 (Address and telephone number,
    including area code, of registrants principal executive
    offices)
  Securities registered pursuant to Section 12(b) of the
    Exchange Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001

The Nasdaq Stock Market LLC(NASDAQ Global Market)Rights to Purchase Series A Junior Participating Preferred Stock

The Nasdaq Stock Market LLC
    (NASDAQ Global Market)   Securities registered pursuant to Section 12(g) of the
    Exchange Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ
      Regulation S-K
  DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





Vanda
    Pharmaceuticals Inc.
 Form 10-K
  Table of Contents
   
 PagePart ICautionary Note Regarding Forward-Looking
    Statements


2Item 1.

Business


3Item 1A.

Risk Factors


19Item 1B.

Unresolved Staff Comments


34Item 2.

Properties


34Item 3.

Legal Proceedings


34Item 4.

Submission of Matters to a Vote of Security
    Holders


34Part IIItem 5.

Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities


34Item 6.

Selected Consolidated Financial Data


37Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


39Item 7A.

Qualitative and Quantitative Disclosures about
    Market Risk


52Item 8.

Financial Statements and Supplementary Data


53Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


53Item 9A.

Controls and Procedures


53Item 9B.

Other Information


54Part IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


54Item 11.

Executive Compensation


54Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


54Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


54Item 14.

Principal Accounting Fees and Services


55Part IVItem 15.

Exhibits and Financial Statements Schedules


55Signatures


56Exhibit Index


86Exhibit 10.23Exhibit 10.24Exhibit 10.25Exhibit 10.26Exhibit 10.27Exhibit 10.28Exhibit 10.29Exhibit 10.30Exhibit 10.31Exhibit 10.32Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2   1




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PART I CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS    
    delays in the completion of our clinical trials;
    a failure of our product candidates to be demonstrably safe and
    effective;
    our failure to obtain regulatory approval for our products or to
    comply with ongoing regulatory requirements;
    a lack of acceptance of our product candidates in the
    marketplace, or a failure to become or remain profitable;
    our expectations regarding trends with respect to our costs and
    expenses;
    our inability to obtain the capital necessary to fund our
    research and development activities;
    our failure to identify or obtain rights to new product
    candidates;
    our failure to develop or obtain sales, marketing and
    distribution resources and expertise or to otherwise manage our
    growth;
    a loss of any of our key scientists or management personnel;
    losses incurred from product liability claims made against
    us; and
    a loss of rights to develop and commercialize our products under
    our license and sublicense agreements.    Form 10-K. Form 10-K,
 2




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ITEM 1.
    BUSINESS  Overview
    
    Iloperidone, a compound for the treatment of schizophrenia. On
    November 27, 2007, the United States Food and Drug
    Administration (FDA) accepted a New Drug Application (NDA) for
    iloperidone for the treatment of schizophrenia. In July 2008, we
    announced that the FDA had determined that our NDA was not
    approvable and indicated, among other things, that we would have
    to conduct additional studies and submit that data before the
    FDA would approve iloperidone for commercial sale for the
    treatment of schizophrenia. In September 2008, we met with the
    FDA to discuss the FDAs determination. The FDA asked us to
    provide a complete response to the not-approvable letter, which
    we submitted on November 6, 2008. The FDA accepted our
    complete response for review and has set a new target action
    date of May 6, 2009. There are no guarantees that the FDA
    will provide its response by May 6, 2009, nor can there be
    any assurances that any such response will be favorable. Pending
    the FDAs reply to our complete response, we have suspended
    all non-essential iloperidone-related activities.
    Tasimelteon, a compound for the treatment of sleep and mood
    disorders, including Circadian Rhythm Sleep Disorders (CRSD). In
    November 2006, Vanda announced positive top-line results from
    the Phase III trial of tasimelteon in transient insomnia.
    In June 2008, the Company announced positive top-line results
    from the Phase III trial of tasimelteon in chronic primary
    insomnia. We will have to conduct additional trials prior to our
    filing of an NDA for tasimelteon. Tasimelteon is also ready for
    Phase II trials for the treatment of depression. Pending a
    response from the FDA with respect to our NDA for iloperidone,
    Vanda is concentrating its efforts on the design and evaluation
    of clinical development options for tasimelteon.  and/or
     3




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Our
    strategy
    
    Pursue the clinical development and regulatory approval of
    our current product candidates.On
    November 27, 2007, the FDA accepted the NDA for iloperidone
    for the treatment of schizophrenia. In July 2008, we announced
    that the FDA had determined that our NDA was not approvable. On
    November 6, 2008, we submitted a complete response to the
    not-approvable letter. The FDA has accepted the complete
    response for review and has set a new target action date of
    May 6, 2009. Pending the FDAs reply to our complete
    response, we have suspended all non-essential
    iloperidone-related activities. We have successfully completed a
    Phase III trial of tasimelteon in transient insomnia and
    announced positive top-line results in November 2006. In
    addition, we have successfully completed a Phase III trial
    of tasimelteon in chronic primary insomnia and announced
    positive top-line results in June 2008. We will need to conduct
    additional Phase III trials of tasimelteon in chronic sleep
    disorders prior to filing an NDA for this compound. Tasimelteon
    is also ready for Phase II trials for the treatment of
    depression.
    Develop a focused commercialization capability in the United
    States.  Because we believe that the number of
    physicians that would generate the majority of prescriptions in
    the United States for schizophrenia is relatively small, we
    believe that we can cost-effectively develop our own sales force
    to market and sell iloperidone in the United States.
    Enter into partnerships to extend our commercial
    reach.  We intend to seek commercial partners for
    iloperidone outside the United States and, even if we are able
    to develop our own sales force to market and sell iloperidone in
    the United States, we may decide to commercialize iloperidone in
    the United States with a partner, rather than on our own. In
    addition, given the range of potential indications for
    tasimelteon, we intend to pursue one or more partnerships for
    the development and commercialization of tasimelteon worldwide.
    Apply our pharmacogenetics and pharmacogenomics expertise to
    differentiate our products.We believe that our
    pharmacogenetics and pharmacogenomics expertise will yield new
    insights into our product candidates. These insights may enable
    us to target our products to certain patient populations and to
    identify unexpected conditions for our product candidates to
    treat.
    Expand our product portfolio through the identification and
    acquisition of additional compounds.We intend to
    continue to draw upon our clinical development expertise and
    pharmacogenetics and pharmacogenomics expertise to identify and
    pursue additional clinical-stage compounds. 4




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Development
    programs
    Product candidate

Target indications

Clinical statusIloperidone (Oral)

Schizophrenia

Pending FDA decision; PDUFA date May 6, 2009Iloperidone (Injectible)

Schizophrenia

Ready for Phase II trialTasimelteon

Sleep Disorders, including CRSD

Phase III trial for transient insomnia completed in 2006Phase III trial for chronic primary insomnia completed in
    2008Depression

Ready for Phase II trial   Iloperidone
    Therapeutic
    opportunity
  ® ® ® ® ® ®
  Limitations
    of current treatments
   5




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trial-and-error The New England Journal of Medicine,
  Potential
    advantages of iloperidone
    
    Efficacy and safety.  In a complete program of
    Phase II and Phase III trials comprising more than
    3,000 patients, iloperidone showed efficacy equivalent to
    other atypical antipsychotics, as well as a reduced risk of the
    side effects most associated with atypical antipsychotics,
    including low weight gain, no induction of diabetes, low
    extrapyramidal symptoms, including no akathisia (inability to
    sit still), no hyperprolactinemia, low incidence of sleepiness
    and low negative effects on cognition relative to placebo. Like
    other atypical antipsychotics, iloperidone is associated with a
    prolongation of the hearts QTc interval, but in no
    instance did any patient taking iloperidone in the controlled
    portion of a clinical trial have an interval exceeding a
    500-millisecond threshold that the FDA has identified as being
    of particular concern. Two patients experienced a prolongation
    of 500 milliseconds or more during the open-label extension of
    one trial. We believe that the safety profile of iloperidone may
    result in improved patient compliance with their treatment
    regimen.
    Extended-release injectable formulation.  Prior
    to our voluntary suspension of all nonessential
    iloperidone-related activities pending the FDAs reply to
    our complete response to the not-approvable letter, we were
    developing an extended-release injectable formulation for
    iloperidone, which is administered once every four weeks and
    which we believe will be a compelling complement to our oral
    formulation for both physicians and patients. Novartis conducted
    a two-month Phase I/IIa safety trial of this formulation in
    schizophrenia patients, in which it demonstrated the benefit of
    consistent release over a four-week time period with no greater
    side effects relative to oral dosing. If the FDA approves the
    oral formulation of iloperidone, we intend to resume the
    development of the injectable formulation and we believe we will
    need to conduct additional trials with this formulation to be
    able to file for FDA approval. The commercial potential for our
    extended-release injectable formulation has been demonstrated by
    the success of the injectable formulation for risperidone,
    Risperdal®

    Consta®,

    which achieved worldwide sales of approximately
    $1.1 billion in 2007, according to Alkermes Company press
    releases. We believe that our four-week formulation for
    iloperidone will be an attractive alternative to
    Risperdal®

    Consta®,

    which is required to be injected once every two weeks.
    Additionally, and unlike
    Risperdal®

    Consta®,

    we do not believe that the injectable formulation for
    iloperidone will require oral titration, which would result in
    simplified dosing.  trial-and-error
 6




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
    Pharmacogenetic evaluation of iloperidones
    efficacy.  Based on the results of our most recent
    Phase III trial, as well as analyses of prior clinical data
    for iloperidone, we have determined that certain patients may be
    more likely to respond to iloperidone and to enjoy better
    treatment results relative to the general schizophrenia patient
    population. These patients have a common mutation of a gene,
    linked to central nervous system function, that is estimated to
    occur in approximately 70% of schizophrenia patients. We
    developed a genetic test which we used in our recently completed
    Phase III trial and confirmed this correlation. According
    to market research conducted by LEK Consulting, physicians
    treating schizophrenia patients would enthusiastically welcome a
    genetic test that would enable them to identify likely
    responders to iloperidone, given the unpredictable efficacy and
    serious side effects currently associated with atypical
    antipsychotics, and be more likely to prescribe iloperidone as a
    result.
    Pharmacogenetic evaluation of iloperidones
    safety.  Based on the results of our most recent
    Phase III trial, and other pharmacogenetic analysis, we
    have discovered that patients with an uncommon mutation of a
    well understood gene affecting drug metabolism experience higher
    levels of iloperidone in their blood and may experience longer
    QTc intervals while taking iloperidone. We estimate that this
    genetic attribute is found in approximately
    25-30% of
    schizophrenia patients, comprised of poor metabolizers
    (approximately 5-10% of schizophrenia patients) and intermediate
    metabolizers (approximately 20% of schizophrenia patients). We
    believe that certain physicians may choose to test patients for
    this mutation if they have a concern about QTc interval
    prolongation with respect to a particular patient.  Intellectual
    property
  10-year 10-year
    Tasimelteon
   7




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Therapeutic
    opportunity
    ® ® ® tm
  Limitations
    of current treatments
    
    Many of the products prescribed commonly for sleep disorders,
    including
    Ambien®,

    Lunesta®,

    and
    Sonata®,

    are classified as Schedule IV controlled substances by the
    United States Drug Enforcement Administration (DEA) due to their
    potential for abuse, tolerance and withdrawal symptoms. Drugs
    that are classified as Schedule IV controlled substances
    are subject to restrictions on how such drugs are prescribed and
    dispensed.
    Many drugs approved for and used in sleep disorders also induce
    a number of nuisance side effects beyond the more serious abuse
    and addiction effects associated with most approved products.
    These side effects include
    next-day
    grogginess, memory loss, unpleasant taste, dry mouth and
    hormonal changes.
    We believe that none of the drugs used and approved for sleep,
    other than
    Rozeremtm,

    work through the bodys natural sleep/wake cycle, which is
    governed by melatonin. We believe that, for patients whose sleep
    disruption is due to a misalignment of this sleep/wake cycle and
    these patients need to sleep (as is the case in circadian
    rhythm sleep disorders), a drug that naturally modulates the
    sleep/wake cycle 8




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would be an attractive new alternative because it would address
    the underlying cause of the sleeplessness, rather than merely
    addressing its symptoms.  Potential
    advantages of tasimelteon
  tm tm next-day
  Overview
    of Phase III clinical trials
    next-day
  next-day
  Potential
    indication for depression
  ® tm
    ®
 9




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Intellectual
    property
    License
    agreements
    Iloperidone
      Tasimelteon
   10




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Government
    regulation
    United
    States government regulation
  FDA
    approval process
      
    pre-clinical laboratory tests, animal studies and formulation
    studies under Current Good Laboratory Practices (cGLP)
    submission to the FDA of an investigational new drug
    application, or IND, which must become effective before human
    clinical trials may begin
    execution of adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product for each
    indication for which approval is sought
    submission to the FDA of an NDA 11




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
    satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the product is
    produced to assess compliance with Current Good Manufacturing
    Practices (cGMP)
    FDA review and approval of the NDA          
    Phase I: refers typically to closely-monitored clinical trials
    and includes the initial introduction of an investigational new
    drug into human patients or health volunteer subjects. Phase I
    trials are designed to determine the safety, metabolism and
    pharmacologic actions of a drug in humans, the potential side
    effects associated with increasing drug doses and, if possible,
    to gain early evidence of the product candidates
    effectiveness. Phase I trials also include the study of
    structure-activity relationships and mechanism of action in
    humans, as well as studies in which investigational drugs are
    used as research tools to explore biological phenomena or
    disease processes. During Phase I trials, sufficient information
    about a drugs pharmacokinetics and pharmacological effects
    should be obtained to permit the design of well-controlled,
    scientifically valid Phase II studies. The total number of
    subjects and patients included in Phase I trials varies, but is
    generally in the range of 20 to 80 people.
    Phase II: refers to controlled clinical trials conducted to
    evaluate appropriate dosage and the effectiveness of a drug for
    a particular indication or indications in patients with a
    disease or condition under study and to determine the common
    short-term side effects and risks associated with the drug.
    These trials are typically well-controlled, closely monitored
    and conducted in a relatively small number of patients, usually
    involving no more than several hundred subjects.
    Phase III: refers to expanded controlled and uncontrolled
    clinical trials. These trials are performed after preliminary
    evidence suggesting effectiveness of a drug has been obtained.
    Phase III trials are intended to gather additional
    information about the effectiveness and safety that is needed to
    evaluate the overall benefit-risk relationship of the drug and
    to provide an adequate basis for physician labeling.
    Phase III trials usually include several hundred to several
    thousand subjects.   12




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13




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The
    Hatch-Waxman Act
       14




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Foreign
    regulation
        Third-party
    reimbursement and pricing controls
     15




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Marketing
    and sales
    Patents
    and proprietary rights; Hatch-Waxman protection
      10-year 10-year 10-year
 16




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Manufacturing
      Competition
      
    For iloperidone in the treatment of schizophrenia, the atypical
    antipsychotics
    Risperdal®

    (risperidone), including the depot formulation
    Risperdal®

    Consta®,

    and
    Invega®

    (paliperidone), each by Ortho-McNeil-Janssen Pharmaceuticals,
    Inc.,
    Zyprexa®

    (olanzapine) by Eli Lilly and Company,
    Seroquel®

    (quetiapine) by AstraZeneca PLC,
    Abilify®

    (aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd.,
    Geodon®

    (ziprasidone) by Pfizer Inc., and generic clozapine, as well as
    the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine, and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase III
    trials (or for which an NDA has been recently filed) for the
    treatment of schizophrenia include bifeprunox (Solvay
    S.A./Lundbeck A/S), and asenapine (Schering-Plough Corporation)
    and pimavanserin (Acadia Pharmaceuticals).
    For tasimelteon in the treatment of insomnia,
    Rozeremtm

    (ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
    such as
    Ambien®

    (zolpidem) by sanofi-aventis (including Ambien
    CR®),

    Lunesta®

    (eszopiclone) by Sepracor Inc. and
    Sonata®

    (zaleplon) by King Pharmaceuticals, Inc., generic 17




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compounds such as zolpidem, trazodone and doxepin, and
    over-the-counter remedies such as
    Benadryl®

    and Tylenol
    PM®.

    In addition to the approved products, compounds in
    Phase III trials for insomnia (or for which an NDA has been
    recently filed) include indiplon (Neurocrine Biosciences, Inc.)
    and low-dose doxepin
    (Silenortm)

    by Somaxon Pharmaceuticals, Inc.  
    For tasimelteon in the treatment of depression, antidepressants
    such as
    Paxil®

    (paroxetine) by GlaxoSmithKline (GSK),
    Zoloft®

    (sertraline) by Pfizer,
    Prozac®

    (fluoxetine) by Eli Lilly, Lexapro (escitalopram) by Lundbeck
    A/S /Forest Pharmaceuticals Inc., and
    Effexor®

    (venlafaxine) by Wyeth as well as other compounds such as
    Wellbutrin®

    (buproprion) by GSK,
    Cymbalta®

    (duloxetine) by Eli Lilly, and Valdoxan (agomelatine) by
    Novartis and Les Laboratories Servier.    Employees
      Corporate
    information
  (240) 599-4500.
  Available
    Information
  1-800-SEC-0330.
  Form 10-K, Form 10-Q, Form 8-K,
  www.vandapharma.com.
 18




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ITEM 1A.
    RISK
    FACTORS  Investing in our common stock involves a high degree of risk.
    You should consider carefully the risks and uncertainties
    described below, together with all of the other information in
    this report, including the consolidated financial statements and
    the related notes appearing at the end of this annual report on
    Form 10-K,
    with respect to any investment in shares of our common stock. If
    any of the following risks actually occurs, our business,
    financial condition, results of operations and future prospects
    would likely be materially and adversely affected. In that
    event, the market price of our common stock could decline and
    you could lose all or part of your investment.
  Risks
    related to our business and industry
  If we
    fail to obtain approval for and commercialize our most advanced
    product candidate, iloperidone, we may have to curtail our
    product development programs and our business would be
    materially harmed.
    ® ®
  Our
    success is dependent on the success of our two product
    candidates in clinical development: iloperidone and tasimelteon.
    If either of these product candidates is determined to be unsafe
    or ineffective in humans, whether in clinical trials or
    commercially, our business will be materially
    harmed.
   19




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Any
    failure or delay in completing clinical trials for our product
    candidates could severely harm our business.
    
    our inability to manufacture or obtain from third parties
    materials sufficient for use in pre-clinical studies and
    clinical trials
    delays in patient enrollment and variability in the number and
    types of patients available for clinical trials
    difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data
    poor effectiveness of product candidates during clinical trials
    unforeseen safety issues or side effects
    governmental or regulatory delays and changes in regulatory
    requirements and guidelines    We
    face heavy government regulation, and FDA regulatory approval of
    our products is uncertain.
      
    a drug candidate may not be shown to be safe or effective
    the FDA may interpret data from pre-clinical and clinical trials
    in different ways than we do
    the FDA may not approve our manufacturing process
    the FDA may change their approval policies or adopt new
    regulations
    the FDA may not meet, or may extend, the PDUFA date with respect
    to a particular NDA      
    warning letters
    fines
    civil penalties 20




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
    injunctions
    recall or seizure of products
    total or partial suspension of production
    refusal of the government to grant future approvals
    withdrawal of approvals
    criminal prosecution          We
    intend to seek regulatory approvals for our products in foreign
    jurisdictions, but we may not obtain any such
    approvals.
   21




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Our
    product candidates may cause undesirable side effects or have
    other properties that could delay or prevent their regulatory
    approval or limit their marketability.
      
    regulatory authorities may require the addition of labeling
    statements, such as a black box warning or a
    contraindication
    regulatory authorities may withdraw their approval of the product
    we may be required to change the way the product is
    administered, conduct additional clinical trials or change the
    labeling of the product
    our reputation may suffer    Our
    product candidates may never achieve market acceptance even if
    we obtain regulatory approvals.
    If we
    fail to obtain the capital necessary to fund our research and
    development activities and commercialization efforts, we may be
    unable to continue operations or we may be forced to share our
    rights to commercialize our product candidates with third
    parties on terms that may not be attractive to us.
   22




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We
    have incurred operating losses in each year since our inception
    and expect to continue to incur substantial and increasing
    losses for the foreseeable future.
    If our
    contract research organizations do not successfully carry out
    their duties or if we lose our relationships with contract
    research organizations, our drug development efforts could be
    delayed.
   23




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We
    rely on a limited number of manufacturers for our product
    candidates and our business will be seriously harmed if these
    manufacturers are not able to satisfy our demand and alternative
    sources are not available.
      
    because most of our third-party manufacturers and formulators
    are located outside of the United States, there may be
    difficulties in importing our compounds or their components into
    the United States as a result of, among other things, FDA import
    inspections, incomplete or inaccurate import documentation or
    defective packaging
    because of the complex nature of our compounds, our
    manufacturers may not be able to successfully manufacture our
    compounds in a cost-effective
    and/or
    timely manner  Materials
    necessary to manufacture our product candidates may not be
    available on commercially reasonable terms, or at all, which may
    delay the development, regulatory approval and commercialization
    of our product candidates.
   24




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We
    face substantial competition which may result in others
    developing or commercializing products before or more
    successfully than we do.
    
    developing products
    undertaking pre-clinical testing and clinical trials
    obtaining FDA and other regulatory approvals of products
    manufacturing and marketing products      
    For iloperidone in the treatment of schizophrenia, the atypical
    antipsychotics risperidone, including the depot formulation
    Risperdal®

    Consta®,

    and
    Invega®

    (paliperidone), each by Ortho-McNeil-Janssen Pharmaceuticals,
    Inc.,
    Zyprexa®

    (olanzapine) by Eli Lilly and Company,
    Seroquel®

    (quetiapine) by AstraZeneca PLC,
    Abilify®

    (aripiprazole) by Bristol-Myers Squibb Company/Otsuka
    Pharmaceutical Co., Ltd.,
    Geodon®

    (ziprasidone) by Pfizer Inc., and generic clozapine, as well as
    the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine, and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase III
    trials (or for which an NDA has been recently filed) for the
    treatment of schizophrenia include bifeprunox (Solvay
    S.A./Lundbeck A/S), and asenapine (Schering-Plough Corporation)
    and pimavanserin (Acadia Pharmaceuticals).
    For tasimelteon in the treatment of insomnia,
    Rozeremtm

    (ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics
    such as
    Ambien®

    CR (zolpidem) by sanofi-aventis,
    Lunesta®

    (eszopiclone) by Sepracor Inc. and
    Sonata®

    (zaleplon) by King Pharmaceuticals, Inc., generic compounds such
    as zolpidem, trazodone and doxepin, and over-the-counter
    remedies such as
    Benadryl®

    and Tylenol
    PM®.

    In addition to the approved products, compounds in
    Phase III trials for insomnia (or for which an NDA has been
    recently filed) include indiplon (Neurocrine Biosciences, Inc.)
    low-dose doxepin
    (Silenortm)

    by Somaxon Pharmaceuticals, Inc. and
    Intermezza®

    (zolpidem tartarate sublingual lozenge) by Transcept
    Pharmaceuticals, Inc.
    For tasimelteon in the treatment of depression, generic
    antidepressants such as paroxetine, sertraline, fluoxetine and
    buproprion,
    Lexapro®

    (escitalopram) by Lundbeck A/S /Forest Pharmaceuticals Inc., and
    Effexor®

    (venlafaxine) by Wyeth as well as other compounds such as
    Cymbalta®

    (duloxetine) by Eli Lilly and Valdoxan (agomelatine) by Novartis
    and Les Laboratories Servier.    We
    have no experience selling, marketing or distributing products
    and no internal capability to do so.
   25




---



##### Table of Contents




    our inability to recruit and retain adequate numbers of
    effective sales and marketing personnel
    the inability of sales personnel to obtain access to or persuade
    adequate numbers of physicians to prescribe our product
    the lack of complementary products to be offered by our sales
    personnel, which may put us at a competitive disadvantage
    against companies with broader product lines
    unforeseen costs associated with creating our own sales and
    marketing team or with entering into a partnering agreement with
    an independent sales and marketing organization  We
    will need to increase the size of our organization upon
    regulatory approval of any of our product candidates, if any,
    and we may experience difficulties in managing this
    growth.
    
    manage our clinical trials effectively
    manage our internal development efforts effectively
    improve our operational, financial, accounting and management
    controls, reporting systems and procedures
    build marketing and sales organizations in order to
    commercialize iloperidone
    attract and retain sufficient numbers of talented employees    If we
    cannot identify, or enter into licensing arrangements for, new
    product candidates, our ability to develop a diverse product
    portfolio may be limited.
    If we
    lose key scientists or management personnel, or if we fail to
    recruit additional highly skilled personnel, it will impair our
    ability to identify, develop and commercialize product
    candidates.
   26




---



##### Table of Contents



Product
    liability lawsuits could divert our resources, result in
    substantial liabilities and reduce the commercial potential of
    our products.
    Legislative
    or regulatory reform of the healthcare system in the U.S. and
    foreign jurisdictions may affect our ability to sell our
    products profitably.
       27




---



##### Table of Contents



Recently
    enacted legislation may make it more difficult and costly for us
    to obtain regulatory approval of our product candidates and to
    produce, to market and to distribute our existing
    products.
    Our
    quarterly operating results may fluctuate
    significantly.
    
    our addition or termination of development programs
    variations in the level of expenses related to our existing two
    product candidates or future development programs
    our execution of collaborative, licensing or other arrangements,
    and the timing of payments we may make or receive under these
    arrangements
    any intellectual property infringement lawsuit in which we may
    become involved
    regulatory developments affecting our product candidates or
    those of our competitors    Risks
    related to intellectual property and other legal
    matters
  Our
    rights to develop and commercialize our product candidates are
    subject in part to the terms and conditions of licenses or
    sublicenses granted to us by other pharmaceutical companies.
    With respect to tasimelteon, these terms and conditions include
    an option in favor of the licensor to reacquire rights to
    commercialize and develop these product candidates in certain
    circumstances.
   28




---



##### Table of Contents



If our
    efforts to protect the proprietary nature of the intellectual
    property related to our products are not adequate, we may not be
    able to compete effectively in our markets.
    If we
    do not obtain protection under the Hatch-Waxman Act and similar
    foreign legislation to extend our patents and to obtain market
    exclusivity for our product candidates, our business will be
    materially harmed.
   29




---



##### Table of Contents



10-year 10-year
  Litigation
    or third-party claims of intellectual property infringement
    could require us to divert resources and may prevent or delay
    our drug discovery and development efforts.
      If we
    use hazardous and biological materials in a manner that causes
    injury or violates applicable law, we may be liable for
    damages.
     30




---



##### Table of Contents



Risks
    related to our common stock
  Our
    stock price has been volatile and may be volatile in the future,
    and purchasers of our common stock could incur substantial
    losses.
    
    publicity regarding actual or potential testing or trial results
    relating to products under development by us or our competitors
    the outcome of regulatory review relating to products under
    development by us or our competitors
    regulatory developments in the United States and foreign
    countries
    developments concerning any collaboration or other strategic
    transaction we may undertake
    announcements of patent issuances or denials, technological
    innovations or new commercial products by us or our competitors
    actual or anticipated variations in our quarterly operating
    results
    changes in estimates of our financial results or recommendations
    by securities analysts
    additions or departures of key personnel or members of our board
    of directors
    publicity regarding actual or potential transactions involving
    the Company
    economic and other external factors beyond our control    If
    there are substantial sales of our common stock, our stock price
    could decline.
     31




---



##### Table of Contents



If we
    fail to maintain the requirements for continued listing on the
    NASDAQ Global Market, our common stock could be delisted from
    trading, which would adversely affect the liquidity of our
    common stock and our ability to raise additional
    capital.
  Form 10-K,
  If
    securities or industry analysts do not publish research or
    reports or publish unfavorable research about our business, our
    stock price and trading volume could decline.
    Anti-takeover
    provisions in our charter and bylaws, and in Delaware law, and
    our rights plan could prevent or delay a change in control of
    our company.
    
    authorize the issuance of blank check preferred
    stock that could be issued by our board of directors to thwart a
    takeover attempt
    do not provide for cumulative voting in the election of
    directors, which would allow holders of less than a majority of
    the stock to elect some directors 32




---



##### Table of Contents




    establish a classified board of directors, as a result of which
    the successors to the directors whose terms have expired will be
    elected to serve from the time of election and qualification
    until the third annual meeting following their election
    require that directors only be removed from office for cause
    provide that vacancies on the board of directors, including
    newly-created directorships, may be filled only by a majority
    vote of directors then in office
    limit who may call special meetings of stockholders
    prohibit stockholder action by written consent, requiring all
    actions to be taken at a meeting of the stockholders
    establish advance notice requirements for nominating candidates
    for election to the board of directors or for proposing matters
    that can be acted upon by stockholders at stockholder meetings    We may
    lose some or all of the value of some of our marketable
    securities.
    Unstable
    market conditions may have serious adverse consequences on our
    business.
      One of
    our stockholders has notified us that it intends to nominate a
    competing slate of directors for election at this years
    annual meeting of stockholders and to propose resolutions to our
    stockholders relating to our bylaws and the ongoing operations
    of our company.
   33




---



##### Table of Contents



ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES      ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES    Year Ended December 31, 2007

High


LowFirst quarter 2007

$
32.00


$
21.69Second quarter 2007

$
24.31


$
18.75Third quarter 2007

$
21.50


$
13.23Fourth quarter 2007

$
19.40


$
6.49   34




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##### Table of Contents



Year Ended December 31, 2008

High


LowFirst quarter 2008

$
7.13


$
2.70Second quarter 2008

$
6.59


$
2.98Third quarter 2008

$
4.03


$
0.76Fourth quarter 2008

$
1.02


$
0.45     Dividends
   35




---



##### Table of Contents



Market
    Price of and Dividends on the Registrants Common Equity
    and Related Stockholder Matters
  Form 10-K Regulation S-K
  
 36




---



##### Table of Contents



ITEM 6.
    SELECTED
    CONSOLIDATED FINANCIAL DATA  Form 10-K.
  Form 10-K.
  Period fromMarch 13, 2003(Inception) toYear Ended December 31,


December 31,2008


2007


2006


2005


2004


2003Statements of operations dataRevenue

$



$



$



$



$
33,980


$
47,565Operating expenses:Research and development


23,935,541



47,234,867



52,070,776



16,890,615



7,442,983



2,010,532General and administrative


28,909,580



32,803,508



13,637,664



7,396,038



2,119,394



1,052,659Total operating expenses


52,845,121



80,038,375



65,708,440



24,286,653



9,562,377



3,063,191Loss from operations


(52,845,121
)


(80,038,375
)


(65,708,440
)


(24,286,653
)


(9,528,397
)


(3,015,626
)Total other income, net


1,780,880



5,978,564



2,197,821



410,001



59,060



44,805Loss before tax provision


(51,064,241
)


(74,059,811
)


(63,510,619
)


(23,876,652
)


(9,469,337
)


(2,970,821
)Tax provision






9,879



549



7,649



4,949



Net loss


(51,064,241
)


(74,069,690
)


(63,511,168
)


(23,884,301
)


(9,474,286
)


(2,970,821
)Beneficial conversion feature-deemed dividend to preferred
    stockholders(1)














(33,486,623
)






Net loss attributable to common stockholders

$
(51,064,241
)

$
(74,069,690
)

$
(63,511,168
)

$
(57,370,924
)

$
(9,474,286
)

$
(2,970,821
)Basic and diluted net loss per share applicable to common
    stockholders

$
(1.92
)

$
(2.81
)

$
(3.97
)

$
(3,374.33
)

$
(3,137.18
)

$
(983.72
)Shares used in calculation of basic and diluted net loss per
    shares attributable to common stockholders


26,650,126



26,360,177



16,001,815



17,002



3,020



3,020     (1)
    
    In September and December of 2005, we completed the sale of an
    additional 27,235,783 shares of Series B preferred
    stock for net proceeds of approximately $33.5 million.
    After evaluating the fair value of the common stock obtainable
    upon conversion by the stockholders, we determined that the
    issuance of the Series B preferred stock sold in 2005
    resulted in a beneficial conversion feature which was fully
    accreted in 2005 and is recorded as a deemed dividend to
    preferred stockholders of approximately $33.5 million for
    the year ended December 31, 2005.  37




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##### Table of Contents



As of December 31,2008


2007


2006


2005


2004


2003Balance sheet dataCash and cash equivalents

$
39,079,304


$
41,929,533


$
30,928,895


$
21,012,815


$
16,259,770


$
7,165,722Marketable securities


7,378,798



51,223,291



941,981



10,141,189







Working capital


44,334,703



74,177,567



24,714,285



28,308,434



14,827,621



6,204,248Total assets


49,933,843



96,860,780



36,260,276



35,752,770



17,752,241



8,385,913Total liabilities


3,913,569



13,131,849



9,503,404



5,087,963



1,808,654



1,378,880Convertible preferred stock














61,795,187



28,308,564



9,963,541Deficit accumulated during the development stage


(224,974,507
)


(173,910,266
)


(99,840,576
)


(36,329,408
)


(12,445,107
)


(2,970,821
)Total stockholders equity


46,020,274



83,728,931



26,756,872



30,664,807



15,943,587



7,007,033  38




---



##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  You should read the following discussion and analysis of our
    financial condition and results of operations together with
    Selected Consolidated Financial Data and our
    consolidated financial statements and related notes appearing at
    the end of this annual report on
    Form 10-K.
    Some of the information contained in this discussion and
    analysis or set forth elsewhere in this annual report on
    Form 10-K
    include historical information and other information with
    respect to our plans and strategy for our business and contain
    forward-looking statements that involve risk, uncertainties and
    assumptions. Our actual results may differ materially from those
    anticipated in these forward-looking statements as a result of
    certain factors, including but not limited to those set forth
    under the Risk Factors section of this report and
    elsewhere in this annual report on
    Form 10-K.
  Overview
    and/or
     39




---



##### Table of Contents



Iloperidone.
 40




---



##### Table of Contents



Tasimelteon. next-day
    VSF-173.
    Revenues. start-up
    Research and development expenses.
 41




---



##### Table of Contents



Period fromMarch 13,


March 13,2003


2003Year Ended


Year Ended


Year Ended


Year Ended


Year Ended


(inception) to


(Inception) toDecember 31,


December 31,


December 31,


December 31,


December 31,


December 31,


December 31,2008


2007


2006


2005


2004


2003(2)


2008Direct project costs(1)iloperidone

$
8,485,000


$
20,668,000


$
36,455,000


$
7,798,000


$
1,123,000


$



$
74,529,000tasimelteon


11,344,000



18,947,000



11,665,000



6,133,000



3,221,000







51,310,000VSF-173


737,000



3,404,000



1,058,000



943,000



568,000







6,710,000Other product candidates


1,443,000



2,095,000



1,098,000



899,000



1,037,000







6,572,000Total direct product costs


22,009,000



45,114,000



50,276,000



15,773,000



5,949,000







139,121,000Indirect project costs(1)Facility(3)


683,000



495,000



578,000



247,000



259,000







2,262,000Depreciation


330,000



423,000



474,000



375,000



345,000



69,000



2,016,000Other indirect overhead costs


913,000



1,203,000



743,000



496,000



890,000



1,941,000



6,186,000Total indirect expenses


1,926,000



2,121,000



1,795,000



1,118,000



1,494,000



2,010,000



10,464,000Total research and development expenses

$
23,935,000


$
47,235,000


$
52,071,000


$
16,891,000


$
7,443,000


$
2,010,000


$
149,585,000     (1)
    
    Many of our research and development costs are not attributable
    to any individual project because we share resources across
    several development projects. We record direct costs, including
    personnel costs and related benefits and stock-based
    compensation, on a
    project-by-project
    basis. We record indirect costs that support a number of our
    research and development activities in the aggregate.(2)
    
    In 2003, there were no active development programs in process
    for our product candidates listed in the table.(3)
    
    In 2003, all facility-related costs were allocated to general
    and administrative expenses.  General and administrative expenses.
 42




---



##### Table of Contents



Interest and other income, net.
  Critical
    accounting policies
    Form 10-K.
  Accrued expenses. and/or
  Stock-based compensation. Share
    Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation
   43




---



##### Table of Contents



Period fromMarch 13,2003(Inception) toYear Ended December 31,


December 31,2008


2007


2006


2008Research and development

$
1,748,000


$
4,259,000


$
742,000


$
7,540,000General and administrative


11,667,000



15,228,000



5,350,000



36,635,000Total stock-based compensation expense

$
13,415,000


$
19,487,000


$
6,092,000


$
44,175,000   Recent
    Accounting Pronouncements
  Business
    Combinations.
  EITF 03-6-1, EITF 03-6-1). EITF 03-6-1 EITF 03-6-1
  No. 08-6, (EITF 08-6). EITF 08-6 EITF 08-6
  Results
    of operations
   44




---



##### Table of Contents



Year
    ended December 31, 2008 compared to year ended
    December 31, 2007
  Research and development expenses.
    Year EndedDecember 31,Research and Development Expenses

2008


2007Direct project costs:Clinical trials

$
7,441,000


$
14,595,000Contract research and development, consulting, materials and
    other direct costs


8,731,000



16,253,000Milestone license fees






6,000,000Salaries, benefits and related costs


4,089,000



4,007,000Stock-based compensation


1,748,000



4,259,000Total direct costs


22,009,000



45,114,000Indirect project costs


1,926,000



2,121,000Total

$
23,935,000


$
47,235,000     General and administrative expenses.
 45




---



##### Table of Contents



Year EndedDecember 31,General and Administrative Expenses

2008


2007Salaries, benefits and related costs

$
4,946,000


$
3,263,000Stock-based compensation


11,667,000



15,228,000Marketing and related consulting services


5,731,000



8,047,000Legal and other professional expenses


3,719,000



3,142,000Other expenses


2,847,000



3,124,000Total

$
28,910,000


$
32,804,000     Other income, net.
    Year EndedDecember 31,2008


2007Interest income

$
1,781,000


$
5,907,000Other income






71,000Total, net

$
1,781,000


$
5,978,000   Year
    ended December 31, 2007 compared to year ended
    December 31, 2006
  Research and development expenses.
 46




---



##### Table of Contents



Year EndedDecember 31,Research and Development Expenses

2007


2006Direct project costs:Clinical trials

$
14,595,000


$
36,249,000Contract research and development, consulting, materials and
    other costs


16,253,000



8,958,000Milestone license fees


6,000,000



1,000,000Salaries, benefits and related costs


4,007,000



3,327,000Stock-based compensation


4,259,000



742,000Total direct costs


45,114,000



50,276,000Indirect project costs


2,121,000



1,795,000Total

$
47,235,000


$
52,071,000     General and administrative expenses.
    Year EndedDecember 31,General and Administrative Expenses

2007


2006Salaries, benefits and related costs

$
3,263,000


$
2,609,000Stock-based compensation


15,228,000



5,350,000Marketing and related consulting services


8,047,000



1,187,000Legal and other professional expenses


3,142,000



1,760,000Other expenses


3,124,000



2,732,000Total

$
32,804,000


$
13,638,000  47




---



##### Table of Contents



Other income, net.
    Year EndedDecember 31,2007


2006Interest income

$
5,907,000


$
2,203,000Interest expense






(5,000
)Other income


71,000



Total, net

$
5,978,000


$
2,198,000   Liquidity
    and capital resources
     48




---



##### Table of Contents



As of December 31,2008


2007Balance sheet dataCash and cash equivalents

$
39,079,000


$
41,930,000U.S. Treasury and government agencies


2,000,000



3,980,000U.S. corporate debt


5,252,000



33,339,000U.S. asset-backed securities


127,000



5,925,000Marketable securities, short-term


7,379,000



43,244,000U.S. Treasury and government agencies






2,002,000U.S. corporate debt






1,970,000U.S. asset-backed securities






4,007,000Marketable securities, long-term






7,979,000$
46,458,000


$
93,153,000         
    Level 1  defined as observable inputs such as
    quoted prices in active markets
    Level 2  defined as inputs other than quoted
    prices in active markets that are either directly or indirectly
    observable
    Level 3  defined as unobservable inputs in which
    little or no market data exists, therefore requiring an entity
    to develop its own assumptions 49




---



##### Table of Contents



Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for


Significant Other


SignificantIdentical Assets


Observable Inputs


Unobservable InputsDecember 31, 2008


(Level 1)


(Level 2)


(Level 3)Description :Available-for-sale securities

$
7,378,798


$
1,999,860


$
5,378,938


$
Total

$
7,378,798


$
1,999,860


$
5,378,938


$
       Cash
    flow
    Year Ended December 31,2008


2007


2006Net cash (used in) provided by Operating activities

$
(45,955,000
)

$
(51,641,000
)

$
(51,620,000
)Investing activities


43,088,000



(48,760,000
)


8,221,000Financing activities






111,403,000



53,315,000Effect of foreign currency translation


17,000



(1,000
)


Net change in cash and cash equivalents

$
(2,850,000
)

$
11,001,000


$
9,916,000  50




---



##### Table of Contents



Year
    ended December 31, 2008 compared to year ended
    December 31, 2007
    Year
    ended December 31, 2007 compared to year ended
    December 31, 2006
    Contractual
    obligations and commitments
    Cash Payments Due by PeriodAfterTotal


2009


2010


2011


2012


2013


2013Severance payments

$
1,613,000


$
1,597,000


$
16,000


$



$



$



$
Operating leases


5,673,000



685,000



706,000



727,000



749,000



771,000



2,035,000Total

$
7,286,000


$
2,282,000


$
722,000


$
727,000


$
749,000


$
771,000


$
2,035,000   Severance payments.
  Operating leases.
  Clinical research organization contracts and other
    contracts.
  Consulting fees.
 51




---



##### Table of Contents



License agreements.
  Form 10-K.
 ITEM 7A.  QUALITATIVE
    AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign
    exchange
    Interest
    rates
   52




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##### Table of Contents



Effects
    of inflation
    Marketable
    securities
    Off-balance
    sheet arrangements
    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE   ITEM 9A.  CONTROLS
    AND PROCEDURES  Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Rules 13a-15(e) 15d-15(e)
  Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f), Internal Control  Integrated
    Framework
 53




---



##### Table of Contents



Rules 13a-15(f) 15d-15(f)
  Form 10-K.
 ITEM 9B.  OTHER
    INFORMATION   PART III ITEM 10.  DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Form 10-K.
 ITEM 11.  EXECUTIVE
    COMPENSATION  Form 10-K, Regulation S-K Form 10-K
  ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Form 10-K, Form 10-K.
  ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE   54




---



##### Table of Contents



Form 10-K.
 ITEM 14.  PRINCIPAL
    ACCOUNTING FEES AND SERVICES  Form 10-K.
 PART IV ITEM 15.  EXHIBITS AND
    FINANCIAL STATEMENTS SCHEDULES  Form 10-K
  Form 10-K.
 55




---



##### Table of Contents



Signatures  Form 10-K
    By:
    /s/  MIHAEL
    H. POLYMEROPOULOS, M.D.    Chief Executive Officer
  Form 10-K
  Name

Title

Date/s/  MIHAEL
    H. POLYMEROPOULOS, M.D.Mihael
    H. Polymeropoulos, M.D.

President and Chief Executive Officer and Director (principal
    executive officer)

March 13, 2009/s/  STEPHANIE
    R. IRISHStephanie
    R. Irish

Acting Chief Financial Officer and Treasurer (principal
    financial and accounting officer)

March 13, 2009/s/  ARGERIS
    N. KARABELAS, Ph.D.Argeris
    N. Karabelas, Ph.D.

Chairman of the Board and Director

March 13, 2009/s/  RICHARD
    W. DUGANRichard
    W. Dugan

Director

March 13, 2009/s/  BRIAN
    K. HALAK, Ph.D.Brian
    K. Halak, Ph.D.

Director

March 13, 2009/s/  HOWARD
    PIENHoward
    Pien

Director

March 13, 2009/s/  DAVID
    RAMSAYDavid
    Ramsay

Director

March 13, 2009/s/  H.
    THOMAS WATKINSH.
    Thomas Watkins

Director

March 13, 2009  56




---



##### 



Vanda
    Pharmaceuticals Inc.
  Index to
    consolidated financial statements
   
 Page(s)Report of Independent Registered Public
    Accounting Firm


58Consolidated financial statementsBalance sheets at December 31, 2008 and
    2007


59Statements of operations for the years ended
    December 31, 2008, 2007 and 2006 and the period from
    March 13, 2003 (inception) to December 31, 2008


60Statements of changes in stockholders
    equity for the period from March 13, 2003 (inception) to
    December 31, 2004 and for the years ended December 31,
    2005, 2006, 2007 and 2008


61Statements of cash flows for the years ended
    December 31, 2008, 2007 and 2006 and the period from
    March 13, 2003 (inception) to December 31, 2008


65Notes to the consolidated financial statements


66   57




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm     Internal Control 
    Integrated Framework
        58




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)Consolidated Balance Sheets
  December 31,2008


2007AssetsCurrent assetsCash and cash equivalents

$
39,079,304


$
41,929,533Marketable securities


7,378,798



43,243,960Prepaid expenses and other current assets


1,287,400



1,781,881Total current assets


47,745,502



86,955,374Marketable securities, long-term






7,979,331Property and equipment, net


1,758,111



1,345,845Deposits






150,000Restricted cash


430,230



430,230Total assets

$
49,933,843


$
96,860,780Liabilities and stockholders equityCurrent liabilitiesAccounts payable

$
512,382


$
2,988,069Accrued liabilities


2,898,417



9,789,738Total current liabilities


3,410,799



12,777,807Deferred rent


502,770



354,042Total liabilities


3,913,569



13,131,849CommitmentsStockholders equityPreferred stock, $0.001 par value; 20,000,000 shares
    authorized and none issued and outstanding at December 31,
    2008 and 2007






Common stock, $0.001 par value; 150,000,000 shares
    authorized, 26,653,478 and 26,652,728 shares issued and
    outstanding at December 31, 2008 and 2007, respectively


26,653



26,653Additional paid-in capital


270,988,157



257,600,368Accumulated other comprehensive income (loss)


(20,029
)


12,176Deficit accumulated during the development stage


(224,974,507
)


(173,910,266
)Total stockholders equity


46,020,274



83,728,931Total liabilities and stockholders equity

$
49,933,843


$
96,860,780    59




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)Consolidated Statements of Operations
  Period fromMarch 13, 2003(inception) toYear Ended December 31,


December 31,2008


2007


2006


2008Revenues from services

$



$



$



$
81,545Operating expenses:Research and development


23,935,541



47,234,867



52,070,776



149,585,314General and administrative


28,909,580



32,803,508



13,637,664



85,918,843Total operating expenses


52,845,121



80,038,375



65,708,440



235,504,157Loss from operations


(52,845,121
)


(80,038,375
)


(65,708,440
)


(235,422,612
)Other income (expense):Interest income


1,780,880



5,907,219



2,202,654



10,479,669Interest expense










(4,833
)


(80,485
)Other income, net






71,345







71,947Total other income, net


1,780,880



5,978,564



2,197,821



10,471,131Loss before tax provision


(51,064,241
)


(74,059,811
)


(63,510,619
)


(224,951,481
)Tax provision






9,879



549



23,026Net loss


(51,064,241
)


(74,069,690
)


(63,511,168
)


(224,974,507
)Beneficial conversion feature  deemed dividend to
    preferred stockholders














(33,486,623
)Net loss attributable to common stockholders

$
(51,064,241
)

$
(74,069,690
)

$
(63,511,168
)

$
(258,461,130
)Basic and diluted net loss per share attributable to common
    stockholders

$
(1.92
)

$
(2.81
)

$
(3.97
)Shares used in calculation of basic and diluted net loss per
    share attributable to common stockholders


26,650,126



26,360,177



16,001,815    60




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Statements of Changes in Stockholders Equity  DeficitAccumulated


AccumulatedSeries A


Series B








Additional


Deferred


Other


During thePreferred Stock


Preferred Stock


Common Stock


Paid-in


Stock-Based


Comprehensive


Development


ComprehensiveShares


Par Value


Shares


Par Value


Shares


Par Value


Capital


Compensation


Loss


Stage


Loss


TotalBalances at March 13, 2003 (Inception)





$







$







$



$



$



$



$



$



$
Issuance of Series A preferred stock, net of issuance costs
    of $36,459


10,000,000



9,963,541







































9,963,541Issuance of Class A common stock


















3,020



3



3,997



















4,000Issuance of warrants


























40,573



















40,573Issuance of Series B preferred stock, net of issuance costs
    of $154,982










15,040,654



18,345,023































18,345,023Deferred compensation associated with stock options grants


























281,130



(281,130
)














Amortization of deferred stock-based compensation






























23,196















23,196Expense related to accelerated unvested stock options


























14,937



















14,937Comprehensive loss:Net loss






































(12,445,107
)


(12,445,107
)Cumulative translation adjustment


































(2,576
)






(2,576
)Comprehensive loss









































$
(12,447,683
)


(12,447,683
)Balances at December 31, 2004


10,000,000


$
9,963,541



15,040,654


$
18,345,023



3,020


$
3


$
340,637


$
(257,934
)

$
(2,576
)

$
(12,445,107
)





$
15,943,587    61




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Statements of Changes in Stockholders Equity
  DeficitAccumulated


AccumulatedSeries A


Series B








Additional


Deferred


Other


During thePreferred Stock


Preferred Stock


Common Stock


Paid-in


Stock-Based


Comprehensive


Development


ComprehensiveShares


Par Value


Shares


Par Value


Shares


Par Value


Capital


Compensation


Loss


Stage


Loss


TotalBalances at December 31, 2004


10,000,000


$
9,963,541



15,040,654


$
18,345,023



3,020


$
3


$
340,637


$
(257,934
)

$
(2,576
)

$
(12,445,107
)

$



$
15,943,587Issuance of Series B preferred stock net of issuance costs
    of $13,391










27,235,783



33,486,623































33,486,623Issuance of common stock from exercised stock options


















95,925



96



31,658



















31,754Deferred compensation associated with stock options grants


























18,788,385



(18,788,385
)














Deferred compensation associated with remeasurement of unvested
    stock grants


























1,702,625



(1,702,625
)














Expense related to remeasurement of stock options


























3,119,676



















3,119,676Amortization of deferred stock-based compensation






























1,982,501















1,982,501Beneficial conversion feature  deemed dividend on
    issuance of Series B preferred stock


























33,486,623



















33,486,623Beneficial conversion feature  accretion of
    beneficial conversion feature for Series B preferred stock


























(33,486,623
)


















(33,486,623
)Comprehensive loss:Net loss






































(23,884,301
)


(23,884,301
)Cumulative translation adjustment


































(17,711
)






(17,711
)Net unrealized gain on marketable securities


































2,678







2,678Comprehensive loss









































$
(23,899,334
)


(23,899,334
)Balances at December 31, 2005


10,000,000


$
9,963,541



42,276,437


$
51,831,646



98,945


$
99


$
23,982,981


$
(18,766,443
)

$
(17,609
)

$
(36,329,408
)





$
30,664,807    62




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Statements of Changes in Stockholders Equity
  DeficitAccumulated


AccumulatedSeries A


Series B








Additional


Deferred


Other


During thePreferred Stock


Preferred Stock


Common Stock


Paid-in


Stock-Based


Comprehensive


Development


ComprehensiveShares


Par Value


Shares


Par Value


Shares


Par Value


Capital


Compensation


Income (Loss)


Stage


Loss


TotalBalances at December 31, 2005


10,000,000


$
9,963,541



42,276,437


$
51,831,646



98,945


$
99


$
23,982,981


$
(18,766,443
)

$
(17,609
)

$
(36,329,408
)

$



$
30,664,807Elimination of deferred stock-based compensation costs


























(18,766,443
)


18,766,443















Initial public offering of common stock, net of issuance costs


















5,964,188



5,964



53,323,987



















53,329,951Conversion of preferred stock upon initial public offering


(10,000,000
)


(9,963,541
)


(42,276,437
)


(51,831,646
)


15,794,632



15,795



61,779,392



















Issuance of common stock from exercised stock options


















222,233



223



78,301



















78,524Exercise of warrants


















48,536



48



48,543



















48,591Employee stock-based compensation


























6,092,339



















6,092,339Non-employee stock-based compensation


























39,488



















39,488Comprehensive loss:Net loss






































(63,511,168
)


(63,511,168
)Cumulative translation adjustment


































17,007







17,007Net unrealized loss on marketable securities


































(2,667
)






(2,667
)Comprehensive loss









































$
(63,496,828
)


(63,496,828
)Balances at December 31, 2006


















22,128,534



22,129



126,578,588







(3,269
)


(99,840,576
)






26,756,872Issuance of common stock from exercised stock options


















154,194



154



148,486



















148,640Follow-on offering of common stock, net of issuance costs


















4,370,000



4,370



111,250,480



















111,254,850Employee stock-based compensation


























19,486,844



















19,486,844Non-employee stock-based compensation


























135,970



















135,970Comprehensive loss:Net loss






































(74,069,690
)


(74,069,690
)Cumulative translation adjustment


































(12,940
)






(12,940
)Net unrealized gain on marketable securities


































28,385







28,385Comprehensive loss









































$
(74,054,245
)


(74,054,245
)Balances at December 31, 2007





$







$




26,652,728


$
26,653


$
257,600,368


$



$
12,176


$
(173,910,266
)





$
83,728,931    63




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Statements of Changes in Stockholders Equity
  DeficitAccumulated


AccumulatedSeries A


Series B








Additional


Deferred


Other


During thePreferred Stock


Preferred Stock


Common Stock


Paid-In


Stock-Based


Comprehensive


Development


ComprehensiveShares


Par Value


Shares


Par Value


Shares


Par Value


Capital


Compensation


Loss


Stage


Loss


TotalBalances at December 31, 2007





$







$




26,652,728


$
26,653


$
257,600,368


$



$
12,176


$
(173,910,266
)

$



$
83,728,931Employee stock-based compensation


















750







13,415,460



















13,415,460Non-employee stock-based compensation


























(27,671
)


















(27,671
)Comprehensive loss:Net loss






































(51,064,241
)


(51,064,241
)Cumulative translation adjustment


































16,220







16,220Net unrealized loss on marketable securities


































(48,425
)






(48,425
)Comprehensive loss









































$
(51,096,446
)


(51,096,446
)Balances at December 31, 2008





$







$




26,653,478


$
26,653


$
270,988,157


$



$
(20,029
)

$
(224,974,507
)





$
46,020,274    64




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.(A development stage enterprise)
    Consolidated Statements of Cash Flows
  Period fromMarch 13, 2003(Inception) toYear Ended December 31,


December 31,2008


2007


2006


2008Cash flows from operating activitiesNet loss

$
(51,064,241
)

$
(74,069,690
)

$
(63,511,168
)

$
(224,974,507
)Adjustments to reconcile net loss to net cash used in operating
    activities Depreciation and amortization


530,805



571,586



575,372



2,499,661Stock-based compensation


13,387,789



19,622,814



6,131,827



44,323,312(Loss) gain on disposal of assets


(174
)


28,713



29,528



57,458Accretion of discount on investments


(235,162
)


(1,571,905
)


(378,739
)


(2,227,320
)Changes in assets and liabilities:Prepaid expenses and other current assets


495,200



168,987



270,745



(1,287,400
)Deposits


150,000







690,000



Accounts payable


(2,475,697
)


204,029



526,711



512,382Accrued expenses


(6,892,577
)


3,465,028



3,811,373



2,898,417Deferred grant revenue






(147,464
)






Deferred rent and other liabilities


148,728



86,644



234,833



502,770Net cash used in operating activities


(45,955,329
)


(51,641,258
)


(51,619,518
)


(177,695,227
)Cash flows from investing activitiesPurchases of property and equipment


(943,659
)


(279,433
)


(1,354,156
)


(4,381,391
)Proceeds from sale of property and equipment






200,179







200,179Purchases of marketable securities


(14,786,080
)


(138,953,879
)


(102,232,608
)


(267,818,742
)Proceeds from sale of marketable securities


11,258,094



3,577,859



82,137,888



96,973,843Maturities of marketable securities


47,560,000



86,695,000



29,670,000



165,675,000Investments in restricted cash














(430,230
)Net cash (used in) provided by investing activities


43,088,355



(48,760,274
)


8,221,124



(9,781,341
)Cash flows from financing activitiesProceeds from borrowings on note payable














515,147Principal payments on obligations under capital lease










(1,540
)


(91,796
)Principal payments on note payable










(141,074
)


(515,147
)Proceeds from the issuance of preferred stock, net of issuance
    costs














61,795,187Proceeds from exercise of stock options and warrants






148,640



127,115



307,509Proceeds from issuance of common stock, net of issuance costs






111,254,850



53,329,951



164,588,801Net cash provided by financing activities






111,403,490



53,314,452



226,599,701Effect of foreign currency translation


16,745



(1,320
)


22



(43,829
)Net change in cash and cash equivalents


(2,850,229
)


11,000,638



9,916,080



39,079,304Cash and cash equivalentsBeginning of period


41,929,533



30,928,895



21,012,815



End of period

$
39,079,304


$
41,929,533


$
30,928,895


$
39,079,304Supplemental disclosureCash payments for interest

$



$



$
5,994


$
76,612Supplemental disclosure of non-cash financing activitiesEquipment acquired through obligation under capital lease

$



$



$



$
95,305    65




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)Notes to the Consolidated Financial
    Statements
  1.
    Business
    organization and presentation  Business
    organization
  ,
  Capital
    resources
  Accounting and Reporting by Development Stage
    Enterprises.
   66




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Basis
    of presentation
    2.
    Summary
    of significant accounting policies  Use of
    estimates
    Cash
    and cash equivalents
    Marketable
    securities
    Concentrations
    of credit risk
   67




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Fair
    value of financial instruments
    Property
    and equipment
      Foreign
    currency translation
    Comprehensive
    income (loss)
  Reporting Comprehensive Income,
  Accrued
    expenses
   68




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
  and/or
  Research
    and development expenses
  Accounting for Contingencies
  General
    and administrative expenses
    Accounting
    for stock-based compensation
  Share-Based Payment
  Accounting for Stock
    Issued to Employees Accounting for Stock Appreciation Rights and
    Other Variable Stock Option Plan or Award Plans
   69




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
  Accounting for Stock-Based
    Compensation
          Year Ended December 31,2008


2007


2006Expected dividend yield


0
%


0
%


0
%Weighted average expected volatility


68
%


68
%


73
%Weighted average expected term (years)


6.18



6.25



6.14Weighted average risk-free rate


3.27
%


4.10
%


4.66
%  70




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Period fromMarch 13, 2003(Inception) toYear Ended December 31,


December 31,2008


2007


2006


2008Research and development

$
1,747,863


$
4,259,315


$
742,048


$
7,540,189General and administrative


11,667,598



15,227,529



5,350,291



36,635,339Stock-based compensation expense

$
13,415,461


$
19,486,844


$
6,092,339


$
44,175,528Stock-based compensation expense per basic and diluted share of
    common stock

$
0.50


$
0.74


$
0.38     Income
    taxes
  Accounting for Income Taxes
  Accounting for Uncertainty in
    Income Taxes
    Segment
    information
   71




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
  Recent
    accounting pronouncements
  Business
    Combinations.
  EITF 03-6-1, EITF 03-6-1). EITF 03-6-1 EITF 03-6-1
  No. 08-6, (EITF 08-6). EITF 08-6 EITF 08-6
  Certain
    risks and uncertainties
        3.
    Earnings
    per share  Earnings per Share,
   72




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Year Ended December 31,2008


2007


2006Numerator:Net loss attributable to common stockholders

$
(51,064,241
)

$
(74,069,690
)

$
(63,511,168
)Denominator:Weighted average common shares outstanding


26,652,867



26,370,485



16,040,425Weighted average unvested common shares subject to repurchase


(2,741
)


(10,308
)


(38,610
)Denominator for basic and diluted net loss per share


26,650,126



26,360,177



16,001,815Basic and diluted net loss per share attributable to common
    stockholders

$
(1.92
)

$
(2.81
)

$
(3.97
)Historical outstanding anti-dilutive securities not included in
    diluted net loss per share calculation:Options to purchase common stock


4,453,629



2,938,160



1,706,732   4.
    Marketable
    securities    Gross


GrossAmortized


Unrealized


Unrealized


Fair MarketCost


Gains


Losses


ValueShort-term:U.S. Treasury and government agencies

$
1,992,452


$
7,408


$



$
1,999,860U.S. corporate debt


5,279,828



2,336



(29,818
)


5,252,346U.S. asset-based securities


126,547



45







126,592$
7,398,827


$
9,789


$
(29,818
)

$
7,378,798  73




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Gross


GrossAmortized


Unrealized


Unrealized


Fair MarketCost


Gains


Losses


ValueShort-term:U.S. Treasury and government agencies

$
3,980,732


$



$
(897
)

$
3,979,835U.S. corporate debt


33,301,950



48,247



(11,417
)


33,338,780U.S. asset-based securities


5,920,992



4,353







5,925,345$
43,203,674


$
52,600


$
(12,314
)

$
43,243,960Long-term:U.S. Treasury and government agencies

$
1,999,104


$
2,844


$



$
2,001,948U.S. corporate debt


1,988,637







(18,597
)


1,970,040U.S. asset-based securities


4,003,480



3,863







4,007,343$
7,991,221


$
6,707


$
(18,597
)

$
7,979,331   5.
    Fair
    Value Measurements      
    Level 1  defined as observable inputs such as
    quoted prices in active markets
    Level 2  defined as inputs other than quoted
    prices in active markets that are either directly or indirectly
    observable
    Level 3  defined as unobservable inputs in which
    little or no market data exists, therefore requiring an entity
    to develop its own assumptions    74




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
  Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets


Significant Other


Significantfor Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs2008


(Level 1)


(Level 2)


(Level 3)Description :Available-for-sale securities

$
7,378,798


$
1,999,860


$
5,378,938


$
Total

$
7,378,798


$
1,999,860


$
5,378,938


$
   6.
    Prepaid
    expenses and other current assets    December 31,2008


2007Current deposits with vendors

$
210,000


$
455,000Prepaid insurance


282,391



395,203Prepaid research and development expenses


221,690



175,955Accrued interest income


53,378



603,556Other prepaid expenses


104,511



146,771Other receivables


415,430



5,396Total prepaid expenses and other current assets

$
1,287,400


$
1,781,881   7.
    Property
    and equipment    EstimatedUseful Life


December 31,(Years)


2008


2007Laboratory equipment


5


$
1,348,098


$
1,281,877Computer equipment


3



776,921



758,776Furniture and fixtures


7



705,784



187,317Leasehold improvements


10



844,158



505,6843,674,961



2,733,654Less  accumulated depreciation and amortization






(1,916,850
)


(1,387,809
)$
1,758,111


$
1,345,845     8.
    Restricted
    cash   75




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    9.
    Accrued
    liabilities    December 31,2008


2007Accrued research and development expenses

$
925,124


$
7,151,360Bonus accrual






957,035Accrued consulting and other professional fees


233,829



1,307,650Employee benefits


126,816



168,275Lease abandonment






84,617Other accrued expenses






120,801Accrued severance


1,612,648



Total accrued liabilities

$
2,898,417


$
9,789,738   10.
    Singapore
    research facility      11.
    Commitments  Operating
    leases
       76




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
      2009


685,2702010


705,9942011


726,9922012


748,8072013


771,440Thereafter


2,034,404$
5,672,907     Consulting
    fees
    Accrued
    Severance
   77




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
  reductions-in-force:
  Year Ended December 31, 2008Beginning Balance


Charge


Cash Paid


Ending BalanceWorkforce Reduction:Research Development

$



$
571,391


$



$
571,391General & Administrative






1,041,257







1,041,257Total

$



$
1,612,648


$



$
1,612,648   License
    agreements
       78




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
        Clinical
    agreements
    Guarantees
    and indemnifications
    12.
    Equity
    incentive plans   79




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    10-year
   80




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Weighted Average


Weighted AverageNumber of


Exercise Price at


Remaining Term


AggregateShares


Grant Date


(Years)


Intrinsic ValueMarch 13, 2003 (inception)





$
Granted


333,602



0.33Cancelled


(18,639
)


0.33Outstanding at December 31, 2004


314,963



0.33Granted


1,318,753



0.33Cancelled


(5,249
)


0.33Exercised


(95,925
)


0.33






$
456,857Outstanding at December 31, 2005


1,532,542



1.39Granted


38,014



5.97Cancelled


(1,118
)


0.33Exercised


(222,233
)


0.33






$
5,096,166Outstanding at December 31, 2006


1,347,205



1.69Cancelled


(14,276
)


3.72Exercised


(162,954
)


0.93






$
3,325,163Outstanding at December 31, 2007


1,169,975



1.77



7.75


$
5,988,373Forfeited


(4,849
)


5.27Cancelled


(10,878
)


5.84Outstanding at December 31, 2008


1,154,248



1.72



6.72


$
128,600Exercisable at December 31, 2008


922,706



1.62



6.62


$
108,949     Weighted Average


Weighted AverageNumber of


Exercise Price at


Remaining Term


AggregateShares


Grant Date


(Years)


Intrinsic ValueOutstanding at January 1, 2006





$
Granted


359,527



20.21Outstanding at December 31, 2006


359,527



20.21Granted


1,451,801



27.60Forfeited


(41,391
)


27.85Cancelled


(4,302
)


28.44Outstanding at December 31, 2007


1,765,635



26.08



9.14


$
Granted


1,412,250



4.75Forfeited


(19,903
)


20.28Cancelled


(481,601
)


9.89Outstanding at December 31, 2008


2,676,381



17.79



8.53


$
Exercisable at December 31, 2008


1,140,847



21.22



8.34


$
    81




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
      Number of


Weighted Average


AggregateShares


Price/Share


Intrinsic ValueOutstanding at January 1, 2007





$
Granted


3,000



16.24Unvested at December 31, 2007


3,000



16.24


$
20,640Granted


623,000



0.57Vested


(750
)


16.24Cancelled


(2,250
)


16.24Unvested at December 31, 2008


623,000



0.57


$
311,500   13.
    Equity  Public
    offerings and reverse stock split
      1-for-3.309755
 82




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    Beneficial
    conversion feature  Series B preferred
    stock
  No. 98-5, Accounting for Convertible Securities with Beneficial
    Conversion Features or Contingently Adjustable Conversion
    Ratios (EITF 98-5) No. 00-27, Application of Issue
    No. 98-5
    to Certain Convertible Instruments (EITF 00-27)
  EITF 98-5 EITF 00-27
  14.
    Income
    taxes    December 31,2008


2007


2006Current federal tax expense

$



$



$
Current state tax expense










Current foreign expense






9,879



549Deferred tax expense










Total tax expense

$



$
9,879


$
549  83




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    December 31,2008


2007Deferred tax asset (liability)Net operating loss carryforwards

$
48,781,358


$
40,772,613Start-up
    costs


34,228,958



21,542,179Stock-based compensation


2,330,260



1,725,983Licensing agreements


2,925,575



3,076,083Research and development credit


5,455,721



4,470,774Depreciation and amortization


(10,179
)


(33,797
)Amortization of warrants


12,422



12,162Accrued and deferred expenses


263,343



57,200Net deferred tax assets


93,987,458



71,623,197Deferred tax asset valuation allowance


(93,987,458
)


(71,623,197
)$



$
       December 31,2008


2007Federal tax at statutory rate


34.0
%


34.0
%State taxes


5.4
%


4.6
%Change in valuation allowance


(41.1
)%


(41.2
)%Research and development credit


1.9
%


2.1
%Meals, entertainment and other non-deductable items


(0.2
)%


0.5
%Effective tax rate


0.0
%


0.0
%        84




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the Consolidated Financial
    Statements  (Continued)
    15.
    Employee
    benefit plan    16.
    Quarterly
    financial data (unaudited)  First


Second


Third


Forth2008

Quarter


Quarter


Quarter


QuarterLoss from operations

$
(20,061,879
)

$
(13,935,894
)

$
(11,192,687
)

$
(7,654,661
)Net loss


(19,196,129
)


(13,494,882
)


(10,869,211
)


(7,504,019
)Basic and diluted net loss per share attributable to common
    stockholders


(0.72
)


(0.51
)


(0.41
)


(0.28
)2007Loss from operations

$
(16,825,608
)

$
(17,643,200
)

$
(23,521,894
)

$
(22,047,673
)Net loss


(15,392,760
)


(15,985,023
)


(21,943,501
)


(20,748,406
)Basic and diluted net loss per share attributable to common
    stockholders


(0.61
)


(0.60
)


(0.82
)


(0.78
)  85




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##### Table of Contents



VANDA
    PHARMACEUTICALS INC.EXHIBIT INDEX
  Exhibit No.

Description3
.8

Form of Amended and Restated Certificate of Incorporation of the
    registrant (filed as Exhibit 3.8 to Amendment No. 2 to
    the registrants Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as filed on March 17, 2006, and incorporated herein by
    reference)3
.10

Form of Certificate of Designation of Series A Junior
    Participating Preferred Stock (filed as Exhibit 3.10 to the
    registrants current report on
    Form 8-K
    (File
    No. 001-34186)
    as filed on September 25, 2008 and incorporated herein by
    reference)3
.11

Second Amended and Restated Bylaws of the registrant, as amended
    and restated on December 16, 2008 (filed as
    Exhibit 3.11 to the registrants current report on
    Form 8-K
    (File
    No. 001-34186)
    as filed on December 17, 2008 and incorporated herein by
    reference)4
.1

2004 Securityholder Agreement (as amended) (filed as
    Exhibit 4.1 to the registrants Registration Statement
    on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)4
.4

Specimen certificate representing the common stock of the
    registrant (filed as Exhibit 4.4 to Amendment No. 2 to
    the registrants Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as filed on March 17, 2006, and incorporated herein by
    reference)4
.5

Rights Agreement, dated as of September 25, 2008, between
    the registrant and American Stock Transfer &
    Trust Company, LLC, as Rights Agent (filed as
    Exhibit 4.5 to the registrants current report on
    Form 8-K
    (File
    No. 001-34186)
    as filed on September 25, 2008 and incorporated herein by
    reference)10
.1

Registrants Second Amended and Restated Management Equity
    Plan (filed as Exhibit 10.1 to the registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.2#

Sublicense Agreement between the registrant and Novartis Pharma
    AG dated June 4, 2004 (as amended) (relating to
    iloperidone) (filed as Exhibit 10.2 to Amendment No. 1
    to the registrants Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as filed on February 16, 2006, and incorporated herein by
    reference)10
.3#

Amended and Restated License, Development and Commercialization
    Agreement by and between Bristol-Myers Squibb Company and the
    registrant dated July 24, 2005 (relating to tasimelteon)
    (filed as Exhibit 10.3 to Amendment No. 1 to the
    registrants Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as filed on February 16, 2006, and incorporated herein by
    reference)10
.7

Lease Agreement between the registrant and Red Gate III LLC
    dated June 25, 2003 (lease of Rockville, MD office space)
    (filed as Exhibit 10.7 to the registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.8

Amendment to Lease Agreement between the registrant and Red
    Gate III LLC dated September 27, 2003 (filed as
    Exhibit 10.8 to the registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.9

Lease Agreement between the registrant and MCC3 LLC (by
    Spaulding and Slye LLC) dated August 4, 2005 (filed as
    Exhibit 10.9 to the registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.10

Summary Plan Description provided for the registrants
    401(k) Profit Sharing Plan & Trust (filed as
    Exhibit 10.10 to the registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.11

Form of Indemnification Agreement entered into by directors
    (filed as Exhibit 10.11 to the registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-130759),
    as originally filed on December 29, 2005, and incorporated
    herein by reference)10
.17

2006 Equity Incentive Plan (filed as Exhibit 10.17 to
    Amendment No. 2 to the registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-130759),
    as filed on March 17, 2006, and incorporated herein by
    reference) 86




---



##### Table of Contents



Exhibit No.

Description10
.19

Amendment to Lease Agreement between the registrant and MCC3 LLC
    (by Spaulding and Slye LLC) dated November 15, 2006
    (filed as Exhibit 10.19 to the registrants annual report
    on Form 10-K (File No. 000-51863) for the year ending
    December 31, 2006 and incorporated herein by reference)10
.21

Form of Tax Indemnity Agreement (filed as Exhibit 10.20 to
    the registrants quarterly report on
    Form 10-Q
    (File
    No. 000-51863)
    for the period ending September 30, 2007 and incorporated
    herein by reference)10
.22

Second Amendment to Lease Agreement between the registrant and
    MCC3 LLC (by Spaulding and Slye MCC3 LLC) dated
    September 14, 2007 (filed as Exhibit 10.22 to the
    registrants annual report on Form 10-K (File No.
    000-51863) for the year ending December 31, 2007 and
    incorporated herein by reference)10
.23

Amended and Restated Employment Agreement for Mihael H.
    Polymeropoulos dated November 4, 200810
.24

Amended and Restated Employment Agreement for William D. Clark
    dated November 4, 200810
.25

Amended and Restated Employment Agreement for Steven A.
    Shallcross dated November 4, 200810
.26

Amended and Restated Employment Agreement for Paolo Baroldi
    dated November 4, 200810
.27

Amended and Restated Employment Agreement for Al Gianchetti
    dated November 4, 200810
.28

Offer Letter for John Feeney originally dated September 17,
    200710
.29

Severance Protection Letter for Stephanie Irish dated
    December 17, 200810
.30

Separation Agreement for Al Gianchetti dated December 1,
    200810
.31

Separation Agreement for Paolo Baroldi dated December 17,
    200810
.32

Separation Agreement for Steven A. Shallcross dated
    December 17, 200823
.1

Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm31
.1

Certification of the Chief Executive Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief Financial Officer as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certifications of the Chief Executive Officer and Chief
    Financial Officer as required by 18 U.S.C. 1350.32
.2

Certifications of the Chief Executive Officer and Chief
    Financial Officer as required by 18 U.S.C. 1350.     #
    
    Application has been made to the Securities and Exchange
    Commission to seek confidential treatment of certain provisions.
    Omitted material for which confidential treatment has been
    requested has been filed separately with the Securities and
    Exchange Commission. 87