Exhibit 10.26  AMENDMENT NO. 1  TO EMPLOYMENT AGREEMENT  THIS
AMENDMENT NO. 1(this Amendment)
to the Employment Agreement by and between Peter G. Milner, M.D. (Executive) and ARYX
THERAPEUTICS, INC.,a Delaware
corporation  (the Company)
dated September 30, 2005 (the Prior Agreement),
is entered into and effective as of December 19, 2008 (the Effective Date). Capitalized terms
not herein defined shall have the meanings ascribed to them in the Prior
Agreement.  WHEREAS, the Company
and the Executive previously entered into the Prior Agreement; and  WHEREAS, the Company
and the Executive wish to amend the Prior Agreement by entering into this
Amendment to comply with the parties intent that the Prior Agreement be
interpreted, construed and administered in a manner that satisfies Section 409A
of the Internal Revenue Code of 1986, as amended from time to time, among other
things.  NOW,
THEREFORE, in consideration of the mutual promises and
covenants contained herein, the Company and the Executive, intending to be
legally bound, hereby amend the Prior Agreement effective as of the Effective
Date and agree as follows:  SECTION 1.AMENDMENT TO
THE PRIOR AGREEMENT  Effective as of
the Effective Date, the following sections of the Prior Agreement are hereby
amended and restated in their entirety to read as follows:  1.Section 5.1(a)(i) shall
read:  Definition of Cause. For
purposes of this Agreement, Cause
shall mean that Executive has committed, or there has occurred, one or more of
the following, as determined by the Board:  (a) conviction of, a
guilty plea with respect to, or a plea of nolo
contendere to a charge that the
Executive has committed a felony under the laws of the United States or of any
state of a crime involving moral turpitude, including, but not limited to,
fraud, theft, embezzlement or any crime that results in or is intended to
result in personal enrichment at the expense of the Company (a Conviction); (b) material
breach done in bad faith of any agreement entered into between the Executive
and the Company that impairs the Companys interest therein, including but not
limited to this Agreement or the Confidential Information Agreement; or (c) willful
misconduct, or gross neglect by the Executive of Executives duties, if such
conduct is not cured within seven (7) days of Executives receipt of
written notice (provided that notice is required only if such conduct can
reasonably be cured). Executives death or disability (as defined in Treasury
Regulations Section 1.409A-3(i)(4)(i)) shall also constitute Cause for
termination under this Agreement.  2.Section 5.1(c) shall
read:  Severance Benefits for Termination Without Cause.
If the Company terminates Executives employment at any time without Cause and
such termination is a  1


separation from
service under Treasury Regulation Section 1.409A-1(h), Executive shall be
eligible to receive the following as his sole severance benefits (the Without Cause Severance
Benefits):  (i) the Company shall make a lump
sum severance payment to Executive in an amount equal to twelve (12) months of
Executives then-current base salary, subject to withholdings and deductions,
payable within ten (10) days after the effective date of the release
executed in satisfaction of the requirements set forth in Section 8 of
this Agreement; (ii) if Executive timely elects COBRA health insurance
coverage, the Company will reimburse Executives COBRA premiums for a maximum
of either twelve (12) months following the employment termination date or until
such date as Executive is eligible for health insurance coverage from another
source, whichever occurs sooner (but in no event after Executive ceases to be
eligible for COBRA); and (iii) the vesting of the Standard Option and the
Special Option shall immediately accelerate in full so that all shares subject
to the Standard Option and the Special Option are fully vested and immediately
exercisable. For the avoidance of doubt, the New Options, and any other option
grants not specifically referenced in the immediately preceding sentence, will
not be subject to accelerated vesting under this Section 5.1(c). Executive
shall not earn or be entitled to receive any of the Without Cause Severance
Benefits unless and until the release requirements set forth in Section 8
of this Agreement are satisfied.  3.Section 5.2(c) shall
read:  Severance Benefits For Good Reason Resignation.
Executive may resign his employment for Good Reason so long as Executive
provides the Company with written notice specifying the occurrence of the event
which forms the basis for his resignation for Good Reason within ninety (90)
days following its initial existence and provides the Company forty-five (45)
days to cure such condition, and Executive tenders his written resignation to
the Company within thirty (30) days following the end of such cure period if
the condition is not cured.  If Executive
resigns for Good Reason and such termination is a separation from service
under Treasury Regulation Section 1.409A-1(h), Executive shall be eligible
to receive the Without Cause Severance Benefits as his sole severance benefits.
Executive shall not earn or be entitled to receive any of the Without Cause
Severance Benefits unless and until the release requirements set forth in Section 8
of this Agreement are satisfied. For the avoidance of doubt, Executive will not
be eligible to receive any severance benefits if he resigns after more than
thirty (30) days following the end of the cure period and the resignation does not
qualify hereunder as a Good Reason resignation.  4.Section 5.2(d) shall
read:  Definition of Good Reason. For
purposes of this Agreement, Good
Reason shall mean any one of the following events which occurs
on or after the Effective Date without Executives consent:  (i) any
material reduction of Executives then current annual base salary, except to
the extent that the annual base salary of all other officers of the Company is
similarly reduced; (ii) any requirement that the Executive relocate to a work
site that would increase the Executives one-way commute distance by more than
thirty-five (35) miles; or (iii) any material breach by the Company of its
obligations under this Agreement.  2


5.Section 6.2
shall read:  Change of Control Termination.
In the event Executives employment with the Company is involuntarily
terminated without Cause by the Company or its successor, or Executive resigns
for Good Reason, and in either case such termination is a separation from
service under Treasury Regulation Section 1.409A-1(h) and such
termination or resignation occurs within thirteen (13) months following a
Change of Control, Executive shall be entitled to:  (a) the severance
benefits set forth in either Sections 5.1(c) or 5.2(c) of this
Agreement, to the extent and as applicable; and (b) vesting of the
Standard Option, the Special Option and the New Options shall accelerate in
full, effective as of Executives termination or resignation date, so that all
shares subject to the Standard Option, the Special Option and the New Options
are fully vested and immediately exercisable. Executives receipt of severance
benefits, as applicable, and accelerated vesting of options as provided in this
Section 6.2 shall be conditioned on Executives full compliance with the
release requirements set forth in Section 8 of this Agreement.  6.Section 8
shall read:  RELEASE. As a condition of
receiving any of the severance benefits under this Agreement or as otherwise
specifically required by this Agreement, Executive shall execute a release in
the form attached hereto as Exhibit B
(the Release). Unless
the Release is executed by Executive, delivered to the Company within
twenty-one (21) days after the termination of Executives employment with the
Company (or any other longer time period required by law), and allowed by
Executive to become effective within seven (7) days thereafter, Executive
shall not earn or be eligible to receive any severance benefits (including
severance payments, reimbursement of COBRA premiums, acceleration of option
grant shares, or other payments) provided for under this Agreement.  SECTION 2.ADDITIONAL PROVISIONS  2.1ENTIRE
AGREEMENT AND MODIFICATION.  The Prior Agreement, together with this
Amendment, constitute the entire agreement among the parties with respect to
the subject matter thereof and hereof and supersede any prior understandings,
agreements, or representations by or among the parties, written or oral, to the
extent they related in any way to the subject matter hereof.  2.2GOVERNING
LAW.  This Amendment shall be governed by,
construed and interpreted in accordance with the laws of the State of
California without regard to its choice of law principles.  2.3COUNTERPARTS.  This
Amendment may be executed in counterparts, each of which shall be deemed an
original but all of which together will constitute one and the same instrument.  2.4HEADINGS.  The Section headings
contained in this Amendment are inserted for convenience only and shall not affect
in any way the meaning or interpretation of this Amendment.  2.5SEVERABILITY.  Any
term or provision of this Amendment that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability
of  3


the remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other situation or in
any other jurisdiction.  IN
WITNESS WHEREOF, the parties have executed this Amendment on
and effective as of the Effective Date.   ARYx THERAPEUTICS, INC.
  
  PETER G. MILNER, M.D.By:
  /s/ David Nagler
  
  /s/ Peter G. MilnerDavid NaglerVice President Corporate Affairs  4