Executive with a written statement that it has concluded that no Excise Tax is payable (includingthe reasons therefor) and that the Executive has substantial authority not to report any ExciseTax on his federal income tax return. If a Gross-Up Payment is determined to be payable, it shallbe paid to the Executive within five days after the Determination has been delivered to him or theCompany, but in any event prior to the close of the calendar year next following the calendar yearin which the Excise tax was paid. Any determination by the Accounting Firm shall be binding uponthe Company and the Executive, absent manifest error.     **3. Over- and Underpayments.**As a result of uncertainty in the application ofsection 4999 of the Code at the time of the initial determination by the Accounting Firmhereunder, it is possible that Gross-Up Payments not made by the Company should have beenmade (''Underpayment”) or that Gross-Up Payments will have been made by the Companythatshould not have been made (“Overpayment”). In either event, the Accounting Firmshalldetermine the amount of the Underpayment or Overpayment that has occurred. In the case of anUnderpayment, the Company shall promptly pay the amount of such Underpayment to theExecutive or for his benefit, hi the case of an Overpayment, the Executive shall, at thedirectionand expense of the Company, take such steps as are reasonably necessary (including the filingofreturns and claims for refund), follow reasonable instructions from, and proceduresestablishedby, the Company, and otherwise reasonably cooperate with the Company to correct suchOverpayment, provided, however, that (i) the Executive shall in no event be obligated toreturnto the Company an amount greater than the net after-tax portion of the Overpayment that theExecutive has retained or has recovered as a refund from the applicable taxing authorities and(ii) this provision shall be interpreted in a manner consistent with the intent of paragraph 1above, which is to make the Executive whole, on an after-tax basis, from the application oftheExcise Tax, it being understood that the correction of an Overpayment may result in theExecutive’s repaying to the Company an amount that is less than the Overpayment.     **4. Limitation on Parachute Payments.**Any other provision of this Agreementnotwithstanding, if the Excise Tax could be avoided by reducing the Total Payments by $25,000or less, then the Total Payments shall be reduced to the extent necessary to avoid the ExciseTaxand no Gross-Up Payment shall be made. If the Accounting Firm determines that the TotalPayments are to be reduced under the preceding sentence, then the Company shall promptly givethe Executive notice to that effect and a copy of the detailed calculation thereof. If none oftheTotal Payments are subject to section 409A of the Code, then the reduction will occur in themanner elected by the Executive prior to the date of any such payment; provided,however, thatif the manner elected by the Executive pursuant to this sentence could in the opinion of theCompany result in any of the Total Payments becoming subject to section 409A of the Code,then the following sentence will instead apply. If any of the Total Payments is subject tosection409A of the Code, or the Executive fails to elect an order under the preceding sentence, thenthereduction will occur in the following order: (i) cancellation of acceleration of vesting ofanyequity or equity-based awards (including options to purchase shares of the Company’s stock)forwhich the exercise price (if any) exceeds the then-fair market value of the underlying stockorother equity; (ii) reduction of cash payments (with such reduction being applied to thepaymentsin the reverse order in which they would otherwise be made (that is, later payments will bereduced before earlier payments); and (iii) cancellation of acceleration of vesting of equityorequity-based awards not covered under (i) above; provided, however, that in the eventthatacceleration of vesting of equity or equity-based awards is to be cancelled, such accelerationof
 

 
vesting will be cancelled in the reverse order of the date of grant of such awards (that is, laterawards will be canceled before earlier awards).     **5. Whole Agreement.**No other agreements, representations or understandings (whether oral orwritten and whether express or implied) which are not expressly set forth in this Agreement havebeen made or entered into by either party with respect to the subject matter hereof. This Agreementcontains the entire understanding of the parties with respect to the subject matter hereof. The TaxIndemnity Agreement entered into as of November 7, 2007, between the Executive and the Company ishereby superseded.**[The rest of this page has been intentionally left blank.]**
 

 
     **IN WITNESS WHEREOF,**the Company and the Executive have duly executed this Agreement as of thedate first written above.   **VANDA PHARMACEUTICALS INC.**   /s/ James P Kelly            12/16/10    By: James P Kelly      Its: SVP & CFO      **EXECUTIVE**   /s/ Mihael H. Polymeropoulos            12/16/10 Mihael H. Polymeropoulos