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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, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   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
    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)   Securities registered pursuant to Section 12(g) of the
    Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  12b-2
  Large accelerated
    filer o

Accelerated
    filer þ

Non-accelerated
    filer o

Smaller reporting company o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





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


2Item 1.

Business


3Item 1A.

Risk Factors


19Item 1B.

Unresolved Staff Comments


32Item 2.

Properties


32Item 3.

Legal Proceedings


32Item 4.

Submission of Matters to a Vote of Security
    Holders


33Part IIItem 5.

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


33Item 6.

Selected Consolidated Financial Data


35Item 7.

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


37Item 7A.

Qualitative and Quantitative Disclosures about
    Market Risk


50Item 8.

Financial Statements and Supplementary Data


51Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


51Item 9A.

Controls and Procedures


51Item 9B.

Other Information


52Part IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


52Item 11.

Executive Compensation


52Item 12.

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


52Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


52Item 14.

Principal Accounting Fees and Services


52Part IVItem 15.

Exhibits and Financial Statements Schedules


53Signatures


54Exhibit Index


81EX-3.9EX-10.22EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    1




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CAUTIONARY
    STATEMENT 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 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
    
    Fiaptatm
    (iloperidone), a compound for the treatment of schizophrenia and
    bipolar disorder. On November 27, 2007 the United States
    Food and Drug Administration (FDA) accepted a New Drug
    Application (NDA) for
    Fiaptatm
    for the treatment of schizophrenia. Acceptance of the NDA
    confirms that the application is sufficiently complete for FDA
    review. We expect a decision on the application on the
    Prescription Drug User Fee Act (PDUFA) action date of or about
    July 27, 2008, although the FDA may not meet, or may
    extend, the PDUFA action date.
    Fiaptatm
    is also ready to begin Phase III trials for the treatment
    of bipolar disorder. We also plan to develop further an extended
    release injectable formulation for
    Fiaptatm
    to address the patient compliance issues typically associated
    with antipsychotic therapies.
    VEC-162, a compound for the treatment of sleep and mood
    disorders. VEC-162 has demonstrated positive top-line results
    from a Phase III trial in transient insomnia. In November
    2007 we initiated, and in February 2008 we completed, enrollment
    in a Phase III trial of VEC-162 for the treatment of
    chronic primary insomnia. We expect to complete the trial and to
    report its top-line results in June 2008. We will have to
    conduct additional trials prior to our filing of an NDA for
    VEC-162. VEC-162 is also ready for Phase II trials for the
    treatment of depression.
    VSF-173, a compound for the treatment of excessive sleepiness.
    VSF-173 is in a Phase II program. On October 30, 2007
    we reported the top-line results of our first Phase II
    clinical trial of VSF-173 for the treatment of excessive
    sleepiness. We will have to conduct additional Phase II
    trials for this product candidate in order to further its
    development.  tm
    tm tm
 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 officially accepted the NDA for
    FiaptaTM
    for the treatment of schizophrenia. We have also successfully
    completed a Phase III trial of VEC-162, although we will
    need to conduct additional Phase III trials of VEC-162 in
    chronic sleep disorders prior to filing an NDA for this
    compound. In November 2007 we initiated, and in February 2008 we
    completed, enrollment in a Phase III trial of VEC-162 in
    chronic primary insomnia. We have committed, and will continue
    to commit, substantial resources towards completing the
    development of, and obtaining regulatory approvals for, our
    product candidates.
    Develop a focused commercialization capability in the United
    States.  Because we believe that the number of
    physicians accounting for the majority of prescriptions in the
    U.S. for schizophrenia and excessive sleepiness is
    relatively small, we believe that we can cost-effectively
    develop our own sales force to market and sell
    FiaptaTM
    and VSF-173.
    Enter into partnerships to extend our commercial
    reach.  Given the large number of physicians
    treating sleep and mood disorders, we intend to enter into a
    global partnership with a large pharmaceutical company to
    market, distribute and sell VEC-162. Additionally, we intend to
    seek commercial partners for
    FiaptaTM
    and VSF-173 outside of the United States.
    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. We believe this expertise will enable us to differentiate
    and extend the lifecycle of each of our product candidates. Our
    expertise may allow us to develop companion diagnostic tests to
    help physicians identify patient populations that will realize
    greater benefits from our compounds. Our NDA for
    FiaptaTM
    contains pharmacogenetic data aimed to further improve the
    benefit/risk profile of
    FiaptaTM
    in the treatment of patients with schizophrenia.
    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 StatusFiaptatm
(Oral)

Schizophrenia

NDA accepted by the FDA in November 2007Bipolar Disorder

Ready for Phase III trialFiaptatm
(Injectible)

Schizophrenia

Ready for Phase II trialVEC-162

Insomnia

Phase III trial for transient insomnia completed in 2006Phase III trial for chronic insomnia initiated in November
    2007Depression

Ready for Phase II trialVSF-173

Excessive Sleepiness

Initial Phase II trial completed in 2007   Fiaptatm
  tm tm tm tm
  Therapeutic
    opportunity
  ® ® ® Ortho-McNeil-Janssen ® ® ®
  Limitations
    of current treatments
  trial-and-error
 5




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The New
    England Journal of Medicine,
  Potential
    advantages of
    Fiaptatm
  tm
  
    Efficacy and safety.  In a complete program of
    Phase II and Phase III trials comprising more than
    3,000 patients,
    Fiaptatm
    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,
    Fiaptatm
    is associated with a prolongation of the hearts QTc
    interval, but in no instance did any patient taking
    Fiaptatm
    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
    Fiaptatm
    may result in improved patient compliance with their treatment
    regimen.
    Extended-release injectable formulation.  We
    are developing an extended-release injectable formulation for
    Fiaptatm,
    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. 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
    $900 million in 2006, according to IMS. We believe that our
    four-week formulation for
    Fiaptatm
    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
    Fiaptatm
    will require oral titration, which would result in simplified
    dosing.  trial-and-error
  
    Pharmacogenetic evaluation of
    Fiaptatms
    efficacy.  Based on the results of our most recent
    Phase III trial, as well as analyses of prior clinical data
    for
    Fiaptatm,
    we have determined that certain patients may be more likely to
    respond to
    Fiaptatm
    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
    Fiaptatm,
    given the unpredictable efficacy and serious side effects
    currently associated with atypical antipsychotics, and be more
    likely to prescribe
    Fiaptatm
    as a result.
    Pharmacogenetic evaluation of
    Fiaptatm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
    Fiaptatm
    in their blood and may experience longer QTc intervals while
    taking
    Fiaptatm.
    We estimate that this genetic attribute is found in
    approximately
    25-30% of
    schizophrenia patients, comprised of poor metabolizers 6




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(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.  Potential
    indication for bipolar disorder
  tm tm
  Intellectual
    property
  tm tm tm tm tm tm tm tm tm 10-year tm 10-year
  tm tm
  VEC-162
    Therapeutic
    opportunity
   7




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® ® ® 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 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 VEC-162
  tm
 8




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tm next-day
  Overview
    of Phase III clinical trials
    next-day
  VEC-162 next-day
  Potential
    indication for depression
  ® tm
    ®
   9




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Intellectual
    property
  tm
    VSF-173
  ®
  Pharmacogenetics
    and pharmacogenomics expertise
    ®
  tm
 10




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
    were initially developed by an established biopharmaceutical
    company
    have already completed Phase I trials
    are free of significant formulation issues
    have potential for strong patent protection through composition
    of matter patents, new doses or new formulations  License
    agreements
    Fiapta tm
  tm tm
  tm tm
  VEC-162
   11




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VSF-173
      Government
    regulation
    United
    States government regulation
   12




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
    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
    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. 13




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
    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.           14




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Foreign
    regulation
        Third-party
    reimbursement and pricing controls
   15




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Marketing
    and sales
  tm tm tm tm VSF-173 tm tm tm
  Patents
    and proprietary rights; Hatch-Waxman protection
      10-year
 16




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10-year 10-year
      Manufacturing
  tm
    Competition
   17




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
    For
    Fiaptatm
    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 VEC-162 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 compounds such
    as 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 VEC-162 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 and
    Cymbalta®
    (duloxetine) by Eli Lilly. In addition to the approved products,
    compounds in Phase III trials for depression include
    agomelatine (Novartis and Les Laboratories Servier).
    For VSF-173 in the treatment of excessive sleepiness,
    Provigil®
    (modafinil) and
    Nuvigil®
    (armodafinil) by Cephalon Inc., and
    Xyrem®
    (sodium oxybate) by Jazz Pharmaceuticals, Inc.    Employees
    Corporate
    information
  (240) 599-4500.
  Available
    Information
  1-800-SEC-0330.
 18




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Form 10-K, Form 10-Q, Form 8-K,
    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
  Our
    success is dependent on the success of our three product
    candidates in clinical development:
    Fiaptatm(iloperiodone), VEC-162 and VSF-173. If any of these product
    candidates are determined to be unsafe or ineffective in humans,
    whether in clinical trials or commercially, our business will be
    materially harmed.
    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   19




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We
    face heavy government regulation, and FDA regulatory approval of
    our products is uncertain.
      
    a drug candidate may not be safe or effective
    the FDA may interpret data from pre-clinical and clinical
    testing 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 action date with
    respect to a particular NDA      
    warning letters
    fines
    civil penalties
    injunctions
    recall or seizure of products
    total or partial suspension of production
    refusal of the government to grant approvals
    withdrawal of approvals
    criminal prosecution       20




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We
    intend to seek regulatory approvals for our products in foreign
    jurisdictions, but we may not obtain any such
    approvals.
    Our
    product candidates may cause undesirable side effects or have
    other properties that could delay or prevent their regulatory
    approval or limit their marketability.
  tm tm tm
    
    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   21




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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, 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.
  tm tm tm tm
     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.
      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.
   23




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
    the manufacturing process for VSF-173 has not been tested in
    quantities needed for continued clinical trials or commercial
    sales, and delays in
    scale-up to
    commercial quantities of VEC-162 and VSF-173 could delay
    clinical trials, regulatory submissions and commercialization of
    these product candidates
    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.
    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
    FiaptaTM
    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 Bristol-Myers Squibb Company/Otsuka
    Pharmaceutical Co., Ltd.,
    Geodon®
    (ziprasidone) by Pfizer Inc., and generic clozapine, as well as
    the 24




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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 VEC-162 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 compounds such
    as 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 VEC-162 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 and
    Cymbalta®
    (duloxetine) by Eli Lilly. In addition to the approved products,
    compounds in Phase III trials for depression include
    agomelatine (Novartis and Les Laboratories Servier).
    For VSF-173 in the treatment of excessive sleepiness,
    Provigil®
    (modafinil) and
    Nuvigil®
    (armodafinil) by Cephalon Inc., and
    Xyrem®
    (sodium oxybate) by Jazz Pharmaceuticals, Inc.    We
    have no experience selling, marketing or distributing products
    and no internal capability to do so.
    
    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, and we may
    experience difficulties in managing our growth.
    
    manage our clinical trials effectively
    manage our internal development efforts effectively 25




---



##### Table of Contents




    improve our operational, financial, accounting and management
    controls, reporting systems and procedures
    build marketing and sales organizations in order to
    commercialize
    Fiaptatm
    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.
    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.
   26




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##### 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
    three product candidates or future development programs 27




---



##### Table of Contents




    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 VEC-162 and VSF-173, these terms and conditions
    include options in favor of these pharmaceutical companies to
    reacquire rights to commercialize and develop these product
    candidates in certain circumstances.
  tm tm tm tm tm
  VEC-162
   28




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##### 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.
  tm tm
 29




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##### Table of Contents



10-year tm tm 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
    or 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.
      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.
   31




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##### Table of Contents



Anti-takeover
    provisions in our charter and bylaws, and in Delaware law, 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
    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  ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES        ITEM 3.
    LEGAL
    PROCEEDINGS   32




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##### Table of Contents



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, 2006

High


LowApril 12, 2006  June 30, 2006

$
11.35


$
7.21Third quarter 2006

$
10.10


$
8.02Fourth quarter 2006

$
28.67


$
8.95   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     Dividends
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number of SecuritiesRemaining Available forNumber of Securities





Future Issuance Underto be Issued Upon


Weighted-Average


Equity CompensationExercise of


Exercise Price of


Plans (ExcludingOutstanding Options,


Outstanding Options,


Securities Reflected inPlan Category

Warrants or Rights


Warrants and Rights


Column (a))(a)


(b)


(c)Equity compensation plans approved by security holders


2,938,610


$
16.39



**616,506Equity compensation plans not approved by security holders










Total


2,938,610


$
16.39



**616,506     **
    
    Does not include 1,066,109 additional shares authorized for
    issuance under the 2006 Equity Incentive Plan effective as of
    January 1, 2008, as a result of the automatic annual
    increase in the number of shares authorized for issuance
    thereunder. 33




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##### Table of Contents



Market
    Price of and Dividends on the Registrants Common Equity
    and Related Stockholder Matters
  Form 10-K Regulation S-K
  
  Use of
    Proceeds from Registered Securities
  Form S-1 No. 333-130759)
  tm tm
  Form S-1 No. 333-139485 No. 333-140081)
  tm
 34




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##### Table of Contents



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


Year Ended December 31,2003


2004


2005


2006


2007Statements of operations dataRevenue

$
47,565


$
33,980


$



$



$
Operating expenses:Research and development


2,010,532



7,442,983



16,890,615



52,070,776



47,234,867General and administrative


1,052,659



2,119,394



7,396,038



13,637,664



32,803,508Total operating expenses


3,063,191



9,562,377



24,286,653



65,708,440



80,038,375Loss from operations


(3,015,626
)


(9,528,397
)


(24,286,653
)


(65,708,440
)


(80,038,375
)Total other income, net


44,805



59,060



410,001



2,197,821



5,978,564Loss before tax provision


(2,970,821
)


(9,469,337
)


(23,876,652
)


(63,510,619
)


(74,059,811
)Tax provision






4,949



7,649



549



9,879Net loss


(2,970,821
)


(9,474,286
)


(23,884,301
)


(63,511,168
)


(74,069,690
)Beneficial conversion feature  deemed dividend to
    preferred stockholders(1)










(33,486,623
)






Net loss attributable to common stockholders

$
(2,970,821
)

$
(9,474,286
)

$
(57,370,924
)

$
(63,511,168
)

$
(74,069,690
)Basic and diluted net loss per share applicable to common
    stockholders

$
(983.72
)

$
(3,137.18
)

$
(3,374.33
)

$
(3.97
)

$
(2.81
)Shares used in calculation of basic and diluted net loss per
    shares attributable to common stockholders


3,020



3,020



17,002



16,001,815



26,360,177     (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. 35




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##### Table of Contents



As of December 31,2003


2004


2005


2006


2007Balance sheet dataCash and cash equivalents

$
7,165,722


$
16,259,770


$
21,012,815


$
30,928,895


$
41,929,533Marketable securities










10,141,189



941,981



51,223,291Working capital


6,204,248



14,827,621



28,308,434



24,714,285



74,177,567Total assets


8,385,913



17,752,241



35,752,770



36,260,276



96,860,780Total liabilities


1,378,880



1,808,654



5,087,963



9,503,404



13,131,849Convertible preferred stock


9,963,541



28,308,564



61,795,187







Deficit accumulated during the development stage


(2,970,821
)


(12,445,107
)


(36,329,408
)


(99,840,576
)


(173,910,266
)Total stockholders equity


7,007,033



15,943,587



30,664,807



26,756,872



83,728,931  36




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##### 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
  tm tm
  tm tm non-U.S. markets,
  tm
     37




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##### Table of Contents



tm tm tm tm
      Fiaptatm. tm tm tm tm
  tm
  tm tm tm
 38




---



##### Table of Contents



tm tm Form 10-K
  tm tm
  VEC-162. next-day
    VSF-173.
      Revenues. start-up
    Research and development expenses.
 39




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##### Table of Contents



Period fromMarch 13,














March 13,2003














2003(Inception) to


Year Ended


Year Ended


Year Ended


Year Ended


(Inception) toDecember 31,


December 31,


December 31,


December 31,


December 31,


December 31,2003(2)


2004


2005


2006


2007


2007Direct project costs(1)Fiaptatm
(iloperidone)





$
1,123,000


$
7,798,000


$
36,455,000


$
20,668,000


$
66,044,000VEC-162






3,221,000



6,133,000



11,665,000



18,947,000



39,966,000VSF-173






568,000



943,000



1,058,000



3,404,000



5,973,000Other product candidates






1,037,000



899,000



1,098,000



2,095,000



5,129,000Total direct product costs

$




5,949,000



15,773,000



50,276,000



45,114,000



117,112,000Indirect project costs(1)Facility(3)






259,000



247,000



578,000



495,000



1,579,000Depreciation


69,000



345,000



375,000



474,000



423,000



1,686,000Other indirect overhead costs


1,941,000



890,000



496,000



743,000



1,203,000



5,273,000Total indirect expenses


2,010,000



1,494,000



1,118,000



1,795,000



2,121,000



8,538,000Total research and development expenses

$
2,010,000


$
7,443,000


$
16,891,000


$
52,071,000


$
47,235,000


$
125,650,000     (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.
 40




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##### Table of Contents



Beneficial conversion feature. No. 98-5, Accounting for Convertible Securities with Beneficial
    Conversion Features or Contingently Adjustable Conversion
    Ratios No. 00-27, Application of Issue
    No. 98-5
    to Certain Convertible Instruments No. 98-5, No. 00-27,
  Interest and other income, net.
  Critical
    accounting policies
    Form 10-K.
  Accrued expenses. and/or
  Stock-based compensation. Share
    Based Payment
 41




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##### Table of Contents



Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation
      Period fromMarch 13,2003(Inception) toYear Ended December 31,


December 31,2005


2006


2007


2007Research and development

$
789,000


$
742,000


$
4,259,000


$
5,792,000General and administrative


4,313,000



5,350,000



15,228,000



24,968,000Total stock-based compensation expense

$
5,102,000


$
6,092,000


$
19,487,000


$
30,760,000   Recent
    Accounting Pronouncements
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities, Including an Amendment of FASB Statement
    No. 115 instrument-by-instrument
 42




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##### Table of Contents



No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities (EITF 07-3), EITF 07-3
  Business Combinations Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of Accounting Research
    Bulletin No. 51
  07-1, Accounting for Collaborative Arrangements (EITF 07-1). The Equity Method of
    Accounting for Investments in Common Stock, EITF 07-1 EITF 07-1
  Results
    of operations
    Year
    ended December 31, 2007 compared to year ended
    December 31, 2006
  Research and development expenses.
 43




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##### Table of Contents



Year EndedDecember 31,Research and Development Expenses

2006


2007Direct project costs:Clinical trials

$
36,249,000


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


8,958,000



16,253,000Milestone license fees


1,000,000



6,000,000Salaries, benefits and related costs


3,327,000



4,007,000Stock-based compensation


742,000



4,259,000Total direct costs


50,276,000



45,114,000Indirect project costs


1,795,000



2,121,000Total

$
52,071,000


$
47,235,000   tm tm tm tm tm tm tm
  General and administrative expenses.
 44




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##### Table of Contents



Year EndedDecember 31,General and Administrative Expenses

2006


2007Salaries, benefits and related costs

$
2,609,000


$
3,263,000Stock-based compensation


5,350,000



15,228,000Marketing and related consulting services


1,187,000



8,047,000Legal and other professional expenses


1,760,000



3,142,000Other expenses


2,732,000



3,124,000Total

$
13,638,000


$
32,804,000   tm
  Other income, net.
    Year EndedDecember 31,2006


2007Interest income

$
2,203,000


$
5,907,000Interest expense


(5,000
)


Other income






71,000Total, net

$
2,198,000


$
5,978,000   Year
    ended December 31, 2006 compared to year ended
    December 31, 2005
  Research and development expenses.
 45




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##### Table of Contents



Year EndedDecember 31,Research and Development Expenses

2005


2006Direct project costs:Clinical trials

$
6,275,000


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


6,747,000



8,958,000Milestone license fees






1,000,000Salaries, benefits and related costs


1,962,000



3,327,000Stock-based compensation


789,000



742,000Total direct costs


15,773,000



50,276,000Indirect project costs


1,118,000



1,795,000Total

$
16,891,000


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

2005


2006Salaries, benefits and related costs

$
1,411,000


$
2,609,000Stock-based compensation


4,313,000



5,350,000Marketing and related consulting services


279,000



1,187,000Legal and other professional expenses


620,000



1,760,000Other expenses


773,000



2,732,000Total

$
7,396,000


$
13,638,000    46




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##### Table of Contents



tm
  Interest income, net.
    Year EndedDecember 31,2005


2006Interest income

$
436,000


$
2,203,000Interest expense


(26,000
)


(5,000
)Total, net

$
410,000


$
2,198,000   Liquidity
    and capital resources
     47




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##### Table of Contents



As of December 31,2006


2007Balance sheet dataCash and cash equivalents

$
30,929,000


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






3,980,000U.S. corporate debt


942,000



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






5,925,000Marketable securities, short-term


942,000



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$
31,871,000


$
93,153,000     tm tm tm tm
     48




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##### Table of Contents



Cash
    flow
    Year Ended December 31,2005


2006


2007Net cash (used in) provided byOperating activities

$
(17,714,000
)

$
(51,620,000
)

$
(51,641,000
)Investing activities


(10,818,000
)


8,221,000



(48,760,000
)Financing activities


33,294,000



53,315,000



111,403,000Effect of foreign currency translation


(9,000
)






(1,000
)Net increase in cash and cash equivalents

$
4,753,000


$
9,916,000


$
11,001,000   Year
    ended December 31, 2007 compared to year ended
    December 31, 2006
  tm
  Year
    ended December 31, 2006 compared to year ended
    December 31, 2005
    Contractual
    obligations and commitments
    Cash Payments Due by PeriodAfterTotal

2008

2009

2010

2011

2012

2012Operating leases

$
6,335,000


$
662,000


$
685,000


$
706,000


$
727,000


$
749,000


$
2,806,000  49




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##### Table of Contents



Operating leases.
  Clinical research organization contracts and other
    contracts. tm
  License agreements.
  tm Form 10-K.
 ITEM 7A.  QUALITATIVE
    AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign
    exchange
    Interest
    rates
   50




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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
 51




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##### Table of Contents



Form 10-K.
  Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 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  Form 10-K.
  ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   52




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##### Table of Contents



Form 10-K.
 PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENTS SCHEDULES  Form 10-K
  Form 10-K.
 53




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##### 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, 2008/s/  STEVEN
    A. SHALLCROSSSteven
    A. Shallcross

Senior Vice President, Chief Financial Officer and Treasurer
    (principal financial and accounting officer)

March 13, 2008/s/  ARGERIS
    N. KARABELAS, Ph.D.Argeris
    N. Karabelas, Ph.D.

Chairman of the Board and Director

March 13, 2008/s/  RICHARD
    W. DUGANRichard
    W. Dugan

Director

March 13, 2008/s/  BRIAN
    K. HALAK, Ph.D.Brian
    K. Halak, Ph.D.

Director

March 13, 2008/s/  HOWARD
    PIENHoward
    Pien

Director

March 13, 2008/s/  DAVID
    RAMSAYDavid
    Ramsay

Director

March 13, 2008/s/  H.
    THOMAS WATKINSH.
    Thomas Watkins

Director

March 13, 2008  54




---



##### 



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


56Consolidated financial statementsBalance sheets at December 31, 2007 and
    2006


57Statements of operations for the years ended
    December 31, 2007, 2006 and 2005 and the period from
    March 13, 2003 (inception) to December 31, 2007


58Statements 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 and 2007


59Statements of cash flows for the years ended
    December 31, 2007, 2006 and 2005 and the period from
    March 13, 2003 (inception) to December 31, 2007


62Notes to the consolidated financial statements


63   55




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm     Internal Control 
    Integrated Framework
        
    56




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
 Consolidated
    Balance Sheets  December 31,2007


2006AssetsCurrent assetsCash and cash equivalents

$
41,929,533


$
30,928,895Marketable securities


43,243,960



941,981Prepaid expenses and other current assets


1,781,881



1,949,466Total current assets


86,955,374



33,820,342Marketable securities, long-term


7,979,331



Property and equipment, net


1,345,845



1,859,704Deposits


150,000



150,000Restricted cash


430,230



430,230Total assets

$
96,860,780


$
36,260,276Liabilities and stockholders equityCurrent liabilitiesAccounts payable

$
2,988,069


$
2,783,249Accrued liabilities


9,789,738



6,322,808Total current liabilities


12,777,807



9,106,057Deferred grant revenue






129,950Deferred rent and other long-term liabilities


354,042



267,397Total liabilities


13,131,849



9,503,404CommitmentsStockholders equityPreferred stock, $0.001 par value; 20,000,000 shares
    authorized and none issued and outstanding at December 31,
    2007 and 2006






Common stock, $0.001 par value; 150,000,000 shares
    authorized, 26,652,728 and 22,128,534 shares issued and
    outstanding at December 31, 2007 and 2006, respectively


26,653



22,129Additional paid-in capital


257,600,368



126,578,588Accumulated other comprehensive income (loss)


12,176



(3,269
)Deficit accumulated during the development stage


(173,910,266
)


(99,840,576
)Total stockholders equity


83,728,931



26,756,872Total liabilities and stockholders equity

$
96,860,780


$
36,260,276    57




---



##### Table of Contents



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


December 31,2007


2006


2005


2007Revenues from services

$



$



$



$
81,545Operating expenses:Research and development


47,234,867



52,070,776



16,890,615



125,649,773General and administrative


32,803,508



13,637,664



7,396,038



57,009,263Total operating expenses


80,038,375



65,708,440



24,286,653



182,659,036Loss from operations


(80,038,375
)


(65,708,440
)


(24,286,653
)


(182,577,491
)Other income (expense):Interest income


5,907,219



2,202,654



435,537



8,698,789Interest expense






(4,833
)


(25,629
)


(80,485
)Other income, net


71,345







93



71,947Total other income, net


5,978,564



2,197,821



410,001



8,690,251Loss before tax provision


(74,059,811
)


(63,510,619
)


(23,876,652
)


(173,887,240
)Tax provision


9,879



549



7,649



23,026Net loss


(74,069,690
)


(63,511,168
)


(23,884,301
)


(173,910,266
)Beneficial conversion feature  deemed dividend to
    preferred stockholders










(33,486,623
)


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

$
(74,069,690
)

$
(63,511,168
)

$
(57,370,924
)

$
(207,396,889
)Basic and diluted net loss per share attributable to common
    stockholders

$
(2.81
)

$
(3.97
)

$
(3,374.33
)Shares used in calculation of basic and diluted net loss per
    share attributable to common stockholders


26,360,177



16,001,815



17,002    58




---



##### 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    59




---



##### 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 gains 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    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


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    61




---



##### 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 31,2007


2006


2005


2007Cash flows from operating activitiesNet loss

$
(74,069,690
)

$
(63,511,168
)

$
(23,884,301
)

$
(173,910,266
)Adjustments to reconcile net loss to net cash used in operating
    activitiesDepreciation and amortization


571,586



575,372



423,828



1,968,855Stock-based compensation


19,622,814



6,131,827



5,102,177



30,935,523Loss on disposal of assets


28,713



29,528







58,241Accretion of discount on investments


(1,571,905
)


(378,739
)


(42,335
)


(1,992,980
)Changes in assets and liabilities:Prepaid expenses and other current assets


168,987



270,745



(2,027,544
)


(1,777,948
)Deposits






690,000



(790,000
)


(150,000
)Accounts payable


204,029



526,711



1,514,868



2,988,016Accrued expenses


3,465,028



3,811,373



1,860,539



9,782,861Deferred grant revenue


(147,464
)






129,950



Deferred rent and other liabilities


86,644



234,833



(1,356
)


354,042Net cash used in operating activities


(51,641,258
)


(51,619,518
)


(17,714,174
)


(131,743,656
)Cash flows from investing activitiesPurchases of property and equipment


(279,433
)


(1,354,156
)


(291,978
)


(3,438,200
)Proceeds from sale of property and equipment


200,179











200,179Purchases of marketable securities


(138,953,879
)


(102,232,608
)


(11,846,176
)


(253,032,662
)Proceeds from sale of marketable securities


3,577,859



82,137,888







85,715,747Maturities of marketable securities


86,695,000



29,670,000



1,750,000



118,115,000Investments in restricted cash










(430,230
)


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


(48,760,274
)


8,221,124



(10,818,384
)


(52,870,166
)Cash flows from financing activitiesProceeds from borrowings on note payable














515,147Principal payments on obligations under capital lease






(1,540
)


(51,569
)


(91,796
)Principal payments on note payable






(141,074
)


(172,617
)


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










33,486,623



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


148,640



127,115



31,754



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



33,294,191



226,599,701Effect of foreign currency translation


(1,320
)


22



(8,588
)


(56,346
)Net increase in cash and cash equivalents


11,000,638



9,916,080



4,753,045



41,929,533Cash and cash equivalentsBeginning of period


30,928,895



21,012,815



16,259,770



End of period

$
41,929,533


$
30,928,895


$
21,012,815


$
41,929,533Supplemental disclosureCash payments for interest

$



$
5,994


$
25,043


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

$



$



$



$
95,305    62




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)Notes to the consolidated financial
    statements
  1.
    Business
    organization and presentation  Business
    organization
  tm tm
  Capital
    resources
  Accounting and Reporting by Development Stage
    Enterprises.
  tm tm tm tm
 63




---



##### 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
   64




---



##### 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
  and/or
 65




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
    Research
    and development expenses
  Accounting for Contingencies
  General
    and administrative expenses
  tm
  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
  Accounting for Stock-Based
    Compensation
 66




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
            Year Ended December 31,2007


2006Expected dividend yield


0
%


0
%Weighted average expected volatility


68
%


73
%Weighted average expected term (years)


6.25



6.14Weighted average risk-free rate


4.10
%


4.66
%  67




---



##### 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 31,2007


2006


2005


2007Research and development

$
4,259,315


$
742,048


$
788,877


$
5,792,326General and administrative


15,227,529



5,350,291



4,313,300



24,967,741Stock-based compensation expense

$
19,486,844


$
6,092,339


$
5,102,177


$
30,760,067Stock-based compensation expense per basic and diluted share of
    common stock

$
0.74


$
0.38


$
300.09     Pro forma
    information under SFAS 123 for periods prior to
    January 1, 2006
    Year EndedDecember 31,2005Net loss attributable to common stockholders

$
(57,370,924
)Add: Stock based employee compensation expense included in net
    loss


5,102,177Less: Stock-based employee compensation expense determined under
    SFAS 123


(5,167,246
)Pro forma net loss attributable to common stockholders

$
(57,435,993
)Net loss per share:Basic and diluted, net loss attributable to common stockholders
    as reported

$
(3,374.33
)Pro forma basic and diluted, net loss attributable to common
    stockholders

$
(3,378.15
)  68




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
    Year EndedDecember 31,2005Expected dividend yield


0
%Weighted average expected volatility


67%-68
%Weighted average expected term (years)


5Weighted average risk-free rate


4.00
%   Income
    taxes
  Accounting for Income Taxes
  Accounting for Uncertainty in
    Income Taxes
    Segment
    information
    Recent
    accounting pronouncements
  Fair Value Measurements
 69




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
    , The
    Fair Value Option for Financial Assets and Financial
    Liabilities, Including an Amendment of FASB Statement
    No. 115 instrument-by-instrument
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities (EITF 07-3), EITF 07-3
  Business Combinations Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of Accounting Research
    Bulletin No. 51
  07-1, Accounting for Collaborative Arrangements (EITF 07-1). The Equity Method of
    Accounting for Investments in Common Stock, 07-1 EITF 07-1
  Certain
    risks and uncertainties
     70




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
    3.
    Earnings
    per share  Earnings per Share,
    Year Ended December 31,2007


2006


2005Numerator:Net loss

$
(74,069,690
)

$
(63,511,168
)

$
(23,884,301
)Beneficial conversion feature  deemed dividend to
    preferred stockholders










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

$
(74,069,690
)

$
(63,511,168
)

$
(57,370,924
)Denominator:Weighted average common shares outstanding


26,370,485



16,040,425



30,346Weighted average unvested common shares subject to repurchase


(10,308
)


(38,610
)


(13,344
)Denominator for basic and diluted net loss per share


26,360,177



16,001,815



17,002Basic and diluted net loss per share attributable to common
    stockholders

$
(2.81
)

$
(3.97
)

$
(3,374.33
)Historical outstanding anti-dilutive securities not included
    in diluted net loss per share calculation:Series A and B convertible preferred stock(1)










15,794,632Options to purchase common stock


2,938,610



1,706,732



1,532,542Warrants to purchase common stock










50,3352,938,610



1,706,732



17,377,509     (1)
    
    Common stock equivalents assuming conversion upon the initial
    public offering 71




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
   4.
    Marketable
    securities    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     Gross

GrossAmortized

Unrealized

Unrealized

Fair MarketCost

Gains

Losses

ValueShort-term:U.S. corporate debt

$
941,970


$
36


$
(25
)

$
941,981$
941,970


$
36


$
(25
)

$
941,981   5.
    Prepaid
    expenses and other current assets    December 31,2007


2006Current deposits with vendors

$
455,000


$
820,000Prepaid insurance


395,203



337,332Prepaid research and development expenses


175,955



185,229Accrued interest income


603,556



97,575Other prepaid expenses


146,771



332,400Prepaid public offering costs






69,064Other receivables


5,396



107,866Total prepaid expenses and other current assets

$
1,781,881


$
1,949,466  72




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
  6.
    Property
    and equipment    EstimatedUseful Life


December 31,(Years)


2007


2006Laboratory equipment


5


$
1,281,877


$
1,675,375Computer equipment


3



758,776



741,404Furniture and fixtures


7



187,317



169,549Leasehold improvements


10



505,684



736,5182,733,654



3,322,846Less  accumulated depreciation and amortization






(1,387,809
)


(1,463,142
)$
1,345,845


$
1,859,704     7.
    Restricted
    cash    8.
    Accrued
    liabilities    December 31,2007


2006Accrued research and development expenses

$
7,151,360


$
4,552,050Bonus accrual


957,035



1,084,512Accrued consulting and other professional fees


1,307,650



329,177Employee benefits


168,275



78,656Lease abandonment


84,617



232,388Other accrued expenses


120,801



46,025Total accrued liabilities

$
9,789,738


$
6,322,808   9.
    Singapore
    research facility   73




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
    10.
    Commitments  Operating
    leases
        2008


662,1742009


685,2702010


705,9942011


726,9922012


748,807Thereafter


2,805,843$
6,335,080     License
    agreements
  tm tm tm
 74




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
            Clinical
    agreements
   75




---



##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
  Guarantees
    and indemnifications
    11.
    Equity
    incentive plans    10-year
 76




---



##### 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






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


1,169,975



1.77



7.75


$
5,988,373Exercisable at December 31, 2007


591,179



1.70



7.55


$
3,166,934     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


1,454,801



27.60Forfeited


(41,391
)


27.85Cancelled


(4,302
)


28.44Outstanding at December 31, 2007


1,768,635



26.08



9.14


$
Exercisable at December 31, 2007


400,836



26.42



9.06


$
    77




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
  12.
    Equity  Public
    offerings and reverse stock split
      1-for-3.309755
  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
 78




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
  13.
    Income
    taxes    December 31,2007


2006


2005Current federal tax expense

$



$



$
Current state tax expense










Current foreign expense


9,879



549



7,649Deferred tax expense










Total tax expense

$
9,879


$
549


$
7,649     December 31,2007


2006Deferred tax asset (liability)Net operating loss carryforwards

$
40,772,613


$
30,900,621Start-up
    costs


21,542,179



6,887,075Stock-based compensation


1,725,983



361,368Licensing agreements


3,076,083



Research and development credit


4,470,774



2,934,686Depreciation and amortization


(33,797
)


(49,654
)Amortization of warrants


12,162



12,162Accrued and deferred expenses


57,200



61,232Net deferred tax assets


71,623,197



41,107,490Deferred tax asset valuation allowance


(71,623,197
)


(41,107,490
)$



$
       December 31,2007


2006Federal tax at statutory rate


34.0
%


34.0
%State taxes


4.6
%


4.6
%Change in valuation allowance


(41.2
)%


(41.9
)%Research and development credit


2.1
%


3.4
%Meals, entertainment and other non-deductable items


0.5
%


(0.1
)%Effective tax rate


0.0
%


0.0
%    79




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##### Table of Contents



Vanda
    Pharmaceuticals Inc.
    (A development stage enterprise)
    Notes to the consolidated financial
    statements  (Continued)
        14.
    Employee
    benefit plan    15.
    Quarterly
    financial data (unaudited)  First

Second

Third

Forth2007

Quarter

Quarter

Quarter

QuarterLoss 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
)2006Loss from operations

$
(18,413,502
)

$
(22,080,492
)

$
(12,807,234
)

$
(12,407,212
)Net loss


(18,122,450
)


(21,373,084
)


(12,124,161
)


(11,891,473
)Basic and diluted net loss per share attributable to common
    stockholders


(385.61
)


(1.11
)


(0.55
)


(0.54
)  80




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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
.9

Amended and Restated Bylaws of the registrant, as amended on
    July 24, 2007.4
.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)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 VEC-162) (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
.4#

NDD-094 License Agreement between Novartis Pharma AG, Novartis
    AG and the registrant dated June 4, 2004 (relating to
    VSF-173) (filed as Exhibit 10.4 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
.12

Employment Agreement for Mihael H. Polymeropoulos dated
    February 10, 2005 (filed as Exhibit 10.12 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
.13

Employment Agreement for William D. Clark dated
    February 10, 2005 (filed as Exhibit 10.13 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) 81




---



##### Table of Contents



Exhibit No.

Description10
.14

Employment Agreement for Steven A. Shallcross dated
    October 18, 2005 (filed as Exhibit 10.14 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)10
.18

Employment Agreement for Paolo Baroldi dated July 6, 2006
    (filed as Exhibit 10.18 to the registrants report on
    Form 10-Q
    (File
    No. 000-51863)
    for the period ending June 30, 2006 and incorporated herein
    by reference)10
.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 report on
    Form 10-K
    (File
    No. 000-51863)
    for the fiscal year ending December 31, 2006 and
    incorporated herein by reference)10
.20

Employment Agreement for Al Gianchetti dated October 25,
    2007 (filed as Exhibit 10.20 to the registrants
    report on
    Form 10-Q
    (File
    No. 000-51863)
    for the period ending September 30, 2007 and incorporated
    herein by reference)10
.21

Form of Tax Indemnity Agreement (filed as Exhibit 10.20 to
    the registrants 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, 200721
.1

List of Subsidiaries (filed as Exhibit 21.1. 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)23
.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. 82