Company may grant from time to time, is referred to in this Agreement as “Base Compensation.”)               (b) **Incentive Bonuses**. The Executive shall be eligible for an annual incentive bonus with atarget amount equal to 25% of his Base Compensation (the “Annual Target Bonus”). Such bonus (ifany) shall be awarded based on objective or subjective criteria established in advance by theBoard. Any bonus for the fiscal year in which Executive’s employment begins shall be prorated,based on the number of days Executive is employed by the Company during that fiscal year. Anyincentive bonus for a fiscal year shall in no event be paid later than 21/2 months after the close ofsuch fiscal year. Such bonus shall be paid only if Executive is employed by the Company at thetime of payment. The determinations of the Board with respect to such bonus shall be final andbinding.               (c) **Signing Bonus**. The Company shall pay the Executive a signing bonus of $30,000 in thefirst pay period after the commencement of his Employment.               (d) **Relocation**. The Company shall reimburse the reasonable expenses, not to exceed $20,000,that the Executive incurs in moving himself, his family and his household to the Rockville area.               (e) **Stock Options**. Subject to the approval of the Compensation Committee of the Board, theCompany shall grant the Executive an option covering 60,427 shares of the Company’s Common Stock.Such option shall be granted as soon as reasonably practicable after commencement of Employment.The per-share exercise price of such option shall be equal to the fair market value of one share ofthe Company’s Common Stock on the later of (i) the closing of the last trading day prior to date ofthe Board (or Compensation Committee) meeting or written consent approving such option or (ii) thedate the Executive’s service to the Company commences. The term of such option shall be 10 years,subject to earlier expiration in the event of the termination of the Executive’s Employment. Theoption shall vest and become exercisable for 25% of the option shares after the first 12 months ofthe Executive’s continuous service and for the remaining option shares in equal monthlyinstallments over the next three years of continuous service. The vested and exercisable portionof the option shall be determined by adding 24 months to the Executive’s actual period of serviceif, after a Change in Control (as defined in the 2006 Equity Incentive Plan (the “Plan”)), theExecutive is subject to an Involuntary Termination (as defined in the Plan). The grant of suchoption shall be subject to the other terms and conditions set forth in the Plan and the Company’sform stock option agreement.          3. **Vacation and Employee Benefits.**During the term of his Employment, the Executive shall beeligible for 20 paid vacation days each year in accordance with the Company’s standard policy forsimilarly situated employees, as it may be amended from time to time. During the term of hisEmployment, the Executive shall be eligible to participate in any employee benefit plans maintainedby the Company for similarly situated employees, subject in each case to the generally applicableterms and conditions of the plan in question and to the determinations of any person or committeeadministering such plan.
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          4. **Business Expenses.**During the term of his Employment, the Executive shall be authorized toincur necessary and reasonable travel, entertainment and other business expenses in connection withhis duties hereunder. The Company shall reimburse the Executive for such expenses uponpresentation of an itemized account and appropriate supporting documentation, all in accordancewith the Company’s generally applicable policies.          5. **Term of Employment.**               (a) **Basic Rule**. The Company agrees to continue the Executive’s Employment, and the Executiveagrees to remain in Employment with the Company, from the date of this Agreement until the date theExecutive’s Employment terminates pursuant to Subsection (b) below. The Executive’s Employmentwith the Company shall be “at will,” meaning that either the Executive or the Company may terminatethe Executive’s Employment at any time, with or without cause. Any contrary representations whichmay have been made to the Executive shall be superseded by this Agreement. This Agreement shallconstitute the full and complete agreement between the Executive and the Company on the “at will”nature of the Executive’s Employment, which may only be changed in an express written agreementsigned by the Executive and a duly authorized officer of the Company (other than Executive).               (b) **Termination**. The Company may terminate the Executive’s Employment at any time and for anyreason (or no reason), and with or without cause, by giving the Executive 14 days’ advance noticein writing. The Executive may terminate his Employment by giving the Company 14 days’ advancenotice in writing. The Executive’s Employment shall terminate automatically in the event of hisdeath.               (c) **Rights Upon Termination**. Except as expressly provided in Section 6, upon the terminationof the Executive’s Employment pursuant to this Section 5, the Executive shall only be entitled tothe compensation, benefits and reimbursements described in Sections 2, 3 and 4 for the periodpreceding the effective date of the termination. The payments under this Agreement shall fullydischarge all responsibilities of the Company to the Executive.               (d) **Termination of Agreement**. This Agreement shall terminate when all obligations of theparties hereunder have been satisfied. The termination of this Agreement shall not limit orotherwise affect any of the Executive’s obligations under Section 7.          6. **Termination Benefits.**               (a) **General Release**. Any other provision of this Agreement notwithstanding, Subsections (b)and (c) below shall not apply unless the Executive (i) has executed a general release (in a formprescribed by the Company) of all known and unknown claims that he may then have against theCompany or persons affiliated with the Company, (ii) has agreed not to prosecute any legal actionor other proceeding based upon any of such claims and (iii) has returned all property of theCompany in the Executive’s possession. The Company shall deliver the form of release to theExecutive within 30 days after his Separation. The Executive shall execute the release within theperiod set forth in the form.
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               (b) **Severance Pay**. If, during the term of this Agreement, a Separation occurs because theCompany terminates the Executive’s Employment for any reason other than Cause or PermanentDisability, or because the Executive terminates his Employment within six months after a conditionconstituting Good Reason arises, then the Company shall pay the Executive:          (i) **Base Compensation**. His Base Compensation for a period of 12 monthsfollowing the Separation (the “Continuation Period”). Such Base Compensation shallbe paid at the rate in effect at the time of the Separation and in accordance withthe Company’s standard payroll procedures. The salary continuation payments shallcommence within 30 days after the Executive returns the release described inSubsection (a) above.          (ii) **Bonus Compensation**. A bonus (the “Severance Bonus”) in an amountdetermined as follows:          (A) If the Separation occurs prior to the first anniversary ofthe date of this Agreement, the Severance Bonus shall be equal to apro-rata portion of the anticipated first-year Annual Target Bonus,as determined by the Board in good faith.          (B) If the Separation occurs on or following the firstanniversary of the date of this Agreement and prior to the thirdanniversary of the date of this Agreement, the Severance Bonus shallbe equal to the greater of (I) the most recent Annual Target Bonusand (II) the average of Annual Target Bonuses awarded for the prioryears.          (C) If the Separation occurs on or following the thirdanniversary of the date of this Agreement, the Severance Bonus shallbe equal to the greater of (I) the most recent Annual Target Bonusand (II) the average of Annual Target Bonuses awarded for the priorthree years.The Severance Bonus shall be payable in accordance with the Company’s standardpayroll procedures within 30 days after the Executive returns the release describedin Subsection (a) above.The amount of the salary continuation payments under this Subsection (b) shall be reduced by theamount of any severance pay or pay in lieu of notice that the Executive receives from the Companyunder a federal or state statute (including, without limitation, the Worker Adjustment andRetraining Notification Act).               For purposes of the foregoing:               “**Cause**” shall mean (i) an unauthorized use or disclosure of the Company’s confidentialinformation or trade secrets, which use or disclosure causes material
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harm to the Company; (ii) a material breach of any agreement between Executive and theCompany; (iii) a material failure to comply with the Company’s written policies or rules;(iv) conviction of, or plea of “guilty” or “no contest” to, a felony under the laws of the UnitedStates or any state thereof; (v) gross negligence or willful misconduct which causes material harmto the Company; or (vi) a continued failure to perform assigned duties after receiving writtennotification of such failure from the Board.               “**Good Reason**” shall mean any of the following events: (i) the Executive’s receipt of noticethat his principal workplace will be relocated more than 30 miles; (ii) a reduction in theExecutive’s base salary by more than 10%, unless pursuant to a Company-wide reduction affecting allemployees proportionately; or (iii) a change in the Executive’s position with the Company thatmaterially reduces his level of authority or responsibility. A condition shall not be considered“Good Reason” unless the Executive gives the Company written notice of such condition within 90days after such condition comes into existence and the Company fails to remedy such conditionwithin 30 days after receiving the Executive’s written notice.               “**Permanent Disability**” shall mean the Executive’s inability to perform the essential functionsof the Executive’s position, with or without reasonable accommodation, for a period of at least 120consecutive days because of a physical or mental impairment.               “**Separation**” shall mean a “separation from service,” as defined in the regulations underSection 409A of the Internal Revenue Code of 1986, as amended (the “Code”).          (c) **Health Insurance**. If Subsection (b) above applies, and if the Executive elects tocontinue his health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act(“COBRA”) following the Separation, then the Company shall pay the Executive’s monthly premiumunder COBRA until the earliest of (i) the close of the Continuation Period, (ii) the expiration ofthe Executive’s continuation coverage under COBRA and (iii) the date the Executive is offeredsubstantially equivalent health insurance coverage in connection with new employment.          7. **Non-Solicitation, Non-Disclosure and Non-Competition**. The Executive has entered into aProprietary Information and Inventions Agreement with the Company, which agreement is incorporatedherein by this reference.          8. **Successors.**               (a) **Company’s Successors**. This Agreement shall be binding upon any successor (whether director indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to allor substantially all of the Company’s business and/or assets. For all purposes under thisAgreement, the term “Company” shall include any successor to the Company’s business and/or assetswhich becomes bound by this Agreement.               (b) **Executive’s Successors**. This Agreement and all rights of the Executive hereunder shallinure to the benefit of, and be enforceable by, the Executive’s personalor legal representatives, executors, administrators, successors, heirs, distributees, deviseesand legatees.
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     9. **Miscellaneous Provisions.**               (a) **Notice**. Notices and all other communications contemplated by this Agreement shall be inwriting and shall be deemed to have been duly given when personally delivered or when mailed byovernight courier, U.S. registered or certified mail, return receipt requested and postage prepaid.In the case of the Executive, mailed notices shall be addressed to him at the home address whichhe most recently communicated to the Company in writing. In the case of the Company, mailednotices shall be addressed to its corporate headquarters, and all notices shall be directed to theattention of its Secretary.               (b) **Modifications and Waivers**. No provision of this Agreement shall be modified, waived ordischarged unless the modification, waiver or discharge is agreed to in writing and signed by theExecutive and by an authorized officer of the Company (other than the Executive). No waiver byeither party of any breach of, or of compliance with, any condition or provision of this Agreementby the other party shall be considered a waiver of any other condition or provision or of the samecondition or provision at another time.               (c) **Whole Agreement**. This Agreement supersedes the offer letter dated March 9, 2006. Noother agreements, representations or understandings (whether oral or written and whether express orimplied) which are not expressly set forth in this Agreement have been made or entered into byeither party with respect to the subject matter hereof. This Agreement and the ProprietaryInformation and Inventions Agreement contain the entire understanding of the parties with respectto the subject matter hereof.               (d) **Tax Matters**. All payments made under this Agreement shall be subject to reduction toreflect taxes or other charges required to be withheld by law. For purposes of Section 409A of theCode, each periodic salary continuation payment under Section 6(b)(i) is hereby designated as aseparate payment. If the Company determines that the Employee is a “specified employee” underSection 409A(a)(2)(B)(i) of the Code and the regulations thereunder at the time of his Separation,then (i) the payments under Section 6(b), to the extent not exempt from Section 409A of the Code,shall commence on the earliest practicable date that occurs more than six months after theEmployee’s Separation and (ii) the payments that otherwise would have been made during the firstsix months following the Employee’s Separation shall be paid in a lump sum on the first day of theseventh month after his Separation. The Company shall not have a duty to design its compensationpolicies in a manner that minimizes the Employee’s tax liabilities, and the Employee shall not makeany claim against the Company or the Board related to tax liabilities arising from the Employee’scompensation.               (e) **Choice of Law**. The validity, interpretation, construction and performance of thisAgreement shall be governed by the laws of the State of Maryland (except their provisions governingthe choice of law).               (f) **Severability**. The invalidity or unenforceability of any provision or provisions of thisAgreement shall not affect the validity or enforceability of any other provision hereof, whichshall remain in full force and effect.
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               (g) **Arbitration**. Any controversy or claim arising out of or relating to this Agreement or thebreach thereof, or the Executive’s Employment or the termination thereof, shall be settled in theState of Maryland, by arbitration in accordance with the National Rules for the Resolution ofEmployment Disputes of the American Arbitration Association. The decision of the arbitrator shallbe final and binding on the parties, and judgment on the award rendered by the arbitrator may beentered in any court having jurisdiction thereof. The parties hereby agree that the arbitratorshall be empowered to enter an equitable decree mandating specific enforcement of the terms of thisAgreement. The Company and the Executive shall share equally all fees and expenses of thearbitrator. The Executive hereby consents to personal jurisdiction of the state and federal courtslocated in the State of Maryland for any action or proceeding arising from or relating to thisAgreement or relating to any arbitration in which the parties are participants. This arbitrationprovision does not apply to (a) workers’ compensation or unemployment insurance claims or(b) claims concerning the validity, infringement or enforceability of any trade secret, patentright, copyright or any other trade secret or intellectual property held or sought by eitherExecutive or the Company (whether or not arising under the Proprietary Information and InventionsAgreement between Executive and the Company).               (h) **No Assignment**. This Agreement and all rights and obligations of the Executive hereunderare personal to the Executive and may not be transferred or assigned by the Executive at any time.The Company may assign its rights under this Agreement to any entity that assumes the Company’sobligations hereunder in connection with any sale or transfer of all or a substantial portion ofthe Company’s assets to such entity.               (i)**Counterparts**. This Agreement may be executed in two or more counterparts, each of whichshall be deemed an original, but all of which together shall constitute one and the sameinstrument.*[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]*
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          **IN WITNESS WHEREOF**, each of the parties has executed this Agreement, in the case of theCompany by its duly authorized officer, as of the date first written above.         /s/ Paolo Baroldi         Paolo Baroldi         Vanda Pharmaceuticals Inc.           By /s/ Mihael H. Polymeropoulos            Title: Chief Executive Officer   
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