Document:

EX-10.17

 

Exhibit 10.17

Vanda Pharmaceuticals Inc.

2006 Equity Incentive Plan

(As
Adopted Effective
                    
      , 2006)

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page	 
	ARTICLE 1.
	 	INTRODUCTION	 	 	1	 
	ARTICLE 2.
	 	ADMINISTRATION	 	 	1	 
	2.1
	 	Committee Composition	 	 	1	 
	2.2
	 	Committee Responsibilities	 	 	1	 
	2.3
	 	Committee for Non-Officer Grants	 	 	2	 
	ARTICLE 3.
	 	SHARES AVAILABLE FOR GRANTS	 	 	2	 
	3.1
	 	Basic Limitation	 	 	2	 
	3.2
	 	Annual Increase in Shares	 	 	2	 
	3.3
	 	Shares Returned to Reserve	 	 	2	 
	3.4
	 	Dividend Equivalents	 	 	2	 
	ARTICLE 4.
	 	ELIGIBILITY	 	 	3	 
	4.1
	 	Incentive Stock Options	 	 	3	 
	4.2
	 	Other Grants	 	 	3	 
	ARTICLE 5.
	 	OPTIONS	 	 	3	 
	5.1
	 	Stock Option Agreement	 	 	3	 
	5.2
	 	Number of Shares	 	 	3	 
	5.3
	 	Exercise Price	 	 	3	 
	5.4
	 	Exercisability and Term	 	 	3	 
	5.5
	 	Effect of Change in Control	 	 	3	 
	5.6
	 	Modification or Assumption of Options	 	 	4	 
	5.7
	 	Buyout Provisions	 	 	4	 
	ARTICLE 6.
	 	PAYMENT FOR OPTION SHARES	 	 	4	 
	6.1
	 	General Rule	 	 	4	 
	6.2
	 	Surrender of Stock	 	 	4	 
	6.3
	 	Exercise/Sale	 	 	4	 
	6.4
	 	Promissory Note	 	 	4	 
	6.5
	 	Other Forms of Payment	 	 	4	 
	ARTICLE 7.
	 	AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS	 	 	5	 
	7.1
	 	Initial Grants	 	 	5	 
	7.2
	 	Annual Grants	 	 	5	 
	7.3
	 	Accelerated Exercisability	 	 	5	 
	7.4
	 	Exercise Price	 	 	5	 
	7.5
	 	Term	 	 	5	 
	7.6
	 	Affiliates of Outside Directors	 	 	5	 
	ARTICLE 8.
	 	STOCK APPRECIATION RIGHTS	 	 	5	 
	8.1
	 	SAR Agreement	 	 	5	 
	8.2
	 	Number of Shares	 	 	6	 

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	8.3
	 	Exercise Price	 	 	6	 
	8.4
	 	Exercisability and Term	 	 	6	 
	8.5
	 	Effect of Change in Control	 	 	6	 
	8.6
	 	Exercise of SARs	 	 	6	 
	8.7
	 	Modification or Assumption of SARs	 	 	6	 
	ARTICLE 9.
	 	RESTRICTED SHARES	 	 	7	 
	9.1
	 	Restricted Stock Agreement	 	 	7	 
	9.2
	 	Payment for Awards	 	 	7	 
	9.3
	 	Vesting Conditions	 	 	7	 
	9.4
	 	Voting and Dividend Rights	 	 	7	 
	ARTICLE 10.
	 	STOCK UNITS	 	 	8	 
	10.1
	 	Stock Unit Agreement	 	 	8	 
	10.2
	 	Payment for Awards	 	 	8	 
	10.3
	 	Vesting Conditions	 	 	8	 
	10.4
	 	Voting and Dividend Rights	 	 	8	 
	10.5
	 	Form and Time of Settlement of Stock Units	 	 	8	 
	10.6
	 	Death of Recipient	 	 	9	 
	10.7
	 	Creditors' Rights	 	 	9	 
	ARTICLE 11.
	 	PROTECTION AGAINST DILUTION	 	 	9	 
	11.1
	 	Adjustments	 	 	9	 
	11.2
	 	Dissolution or Liquidation	 	 	10	 
	11.3
	 	Reorganizations	 	 	10	 
	ARTICLE 12.
	 	AWARDS UNDER OTHER PLANS	 	 	11	 
	ARTICLE 13.
	 	PAYMENT OF DIRECTOR'S FEES IN SECURITIES	 	 	11	 
	13.1
	 	Effective Date	 	 	11	 
	13.2
	 	Elections to Receive NSOs, Restricted Shares or Stock Units	 	 	11	 
	13.3
	 	Number and Terms of NSOs, Restricted Shares or Stock Units	 	 	11	 
	ARTICLE 14.
	 	LIMITATION ON RIGHTS	 	 	12	 
	14.1
	 	Retention Rights	 	 	12	 
	14.2
	 	Stockholders' Rights	 	 	12	 
	14.3
	 	Regulatory Requirements	 	 	12	 
	ARTICLE 15.
	 	WITHHOLDING TAXES	 	 	12	 
	15.1
	 	General	 	 	12	 
	15.2
	 	Share Withholding	 	 	12	 
	ARTICLE 16.
	 	LIMITATION ON PAYMENTS	 	 	12	 
	16.1
	 	Scope of Limitation	 	 	12	 
	16.2
	 	Basic Rule	 	 	13	 
	16.3
	 	Reduction of Payments	 	 	13	 
	16.4
	 	Overpayments and Underpayments	 	 	13	 
	16.5
	 	Related Corporations	 	 	14	 

ii

 

 

	 	 	 	 	 	 	 
	ARTICLE 17.
	 	FUTURE OF THE PLAN	 	 	14	 
	17.1
	 	Term of the Plan	 	 	14	 
	17.2
	 	Amendment or Termination	 	 	14	 
	17.3
	 	Stockholder Approval	 	 	14	 
	ARTICLE 18.
	 	DEFINITIONS	 	 	14	 
	ARTICLE 19.
	 	EXECUTION	 	 	18	 

iii

 

 

Vanda Pharmaceuticals Inc.

2006 Equity Incentive Plan

     ARTICLE 1. INTRODUCTION.

          The Plan was adopted by the Board effective                      ___, 2006. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options
(which may constitute ISOs or NSOs) or stock appreciation rights.

          The Plan shall be governed by, and construed in accordance with, the laws of the State of
Delaware (except their choice-of-law provisions).

     ARTICLE 2. ADMINISTRATION.

               2.1 Committee Composition. The Committee shall administer the Plan. The Committee shall
consist exclusively of two or more directors of the Company, who shall be appointed by the Board.
In addition, each member of the Committee shall meet the following requirements:

          (a) Any listing standards prescribed by the principal securities market on
which the Company’s equity securities are traded;

          (b) Such requirements as the Internal Revenue Service may establish for outside
directors acting under plans intended to qualify for exemption under section
162(m)(4)(C) of the Code;

          (c) Such requirements as the Securities and Exchange Commission may establish
for administrators acting under plans intended to qualify for exemption under Rule
16b-3 (or its successor) under the Exchange Act; and

          (d) Any other requirements imposed by applicable law, regulations or rules.

               2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside
Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number,
vesting requirements and other features and conditions of such Awards, (c) interpret the Plan, (d)
make all other decisions relating to the operation of the Plan and (e) carry out any other duties
delegated to it by the Board. The Committee may adopt such

 

 

rules or guidelines as it deems appropriate to implement the Plan. The Committee’s
determinations under the Plan shall be final and binding on all persons.

               2.3 Committee for Non-Officer Grants. The Board may also appoint a secondary committee of the
Board, which shall be composed of one or more directors of the Company who need not satisfy the
requirements of Section 2.1. Such secondary committee may administer the Plan with respect to
Employees and Consultants who are not Outside Directors and are not considered executive officers
of the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such
Employees and Consultants and may determine all features and conditions of such Awards. Within the
limitations of this Section 2.3, any reference in the Plan to the Committee shall include such
secondary committee.

     ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

               3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but
unissued shares or treasury shares. The aggregate number of Common Shares issued under the Plan
shall not exceed (a) 1,500,000 plus (b) the additional Common Shares described in Sections 3.2 and
3.3. The number of Common Shares that are subject to Awards outstanding at any time under the Plan
shall not exceed the number of Common Shares that then remain available for issuance under the
Plan. All Common Shares available under the Plan may be issued upon the exercise of ISOs. The
limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article
11.

               3.2 Annual Increase in Shares. As of the first day of each fiscal year of the Company,
commencing on January 1, 2007, the aggregate number of Common Shares that may be issued under the
Plan shall automatically increase by a number equal to the lowest of (a) 4% of the total number of
Common Shares then outstanding, (b) 1,500,000 Common Shares or (c) the number determined by the
Board.

               3.3 Shares Returned to Reserve. If Options, SARs or Stock Units are forfeited or terminate
for any other reason before being exercised or settled, then the Common Shares subject to such
Options, SARs or Stock Units shall again become available for issuance under the Plan. If SARs are
exercised, then only the number of Common Shares (if any) actually issued in settlement of such
SARs shall reduce the number available under Section 3.1 and the balance shall again become
available for issuance under the Plan. If Stock Units are settled, then only the number of Common
Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available
under Section 3.1 and the balance shall again become available for issuance under the Plan. If
Restricted Shares or Common Shares issued upon the exercise of Options are reacquired by the
Company pursuant to a forfeiture provision or for any other reason, then such Common Shares shall
again become available for issuance under the Plan.

               3.4 Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not
be applied against the number of Common Shares that may be issued under the Plan, whether or not
such dividend equivalents are converted into Stock Units.

2

 

     ARTICLE 4. ELIGIBILITY.

               4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a
Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns
more than 10% of the total combined voting power of all classes of outstanding stock of the Company
or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(5) of the Code are satisfied.

               4.2 Other Grants. Only Employees, Outside Directors and Consultants shall be eligible for the
grant of Restricted Shares, Stock Units, NSOs or SARs.

     ARTICLE 5. OPTIONS.

               5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a
Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not inconsistent with
the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan need not be
identical. Options may be granted in consideration of a reduction in the Optionee’s other
compensation. A Stock Option Agreement may provide that a new Option will be granted automatically
to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form
described in Section 6.2.

               5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares
subject to the Option and shall provide for the adjustment of such number in accordance with
Article 11. Options granted to any Optionee in a single fiscal year of the Company shall not cover
more than 500,000 Common Shares, except that Options granted to a new Employee in the fiscal year
of the Company in which his or her Service as an Employee first commences shall not cover more than
1,000,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to
adjustment in accordance with Article 11.

               5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided
that the Exercise Price shall in no event be less than 100% of the Fair Market Value of a Common
Share on the date of grant.

               5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when
all or any installment of the Option is to become exercisable. The Stock Option Agreement shall
also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10
years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability
in the event of the Optionee’s death, disability or retirement or other events and may provide for
expiration prior to the end of its term in the event of the termination of the Optionee’s Service.
Options may be awarded in combination with SARs, and such an Award may provide that the Options
will not be exercisable unless the related SARs are forfeited.

               5.5 Effect of Change in Control. The Committee may determine, at the time of granting an
Option or thereafter, that such Option shall become exercisable as to all

3

 

or part of the Common Shares subject to such Option in the event that a Change in Control
occurs with respect to the Company or in the event that the Optionee is subject to an Involuntary
Termination after a Change in Control. However, in the case of an ISO, the acceleration of
exercisability shall not occur without the Optionee’s written consent. In addition, acceleration
of exercisability may be required under Section 11.3.

               5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Committee
may modify, reprice, extend or assume outstanding options or may accept the cancellation of
outstanding options (whether granted by the Company or by another issuer) in return for the grant
of new options for the same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall, without the consent of
the Optionee, alter or impair his or her rights or obligations under such Option.

               5.7 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in
cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash
out an Option previously granted, in either case at such time and based upon such terms and
conditions as the Committee shall establish.

     ARTICLE 6. PAYMENT FOR OPTION SHARES.

               6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options
shall be payable in cash or cash equivalents at the time when such Common Shares are purchased,
except that the Committee at its sole discretion may accept payment of the Exercise Price in any
other form(s) described in this Article 6. However, if the Optionee is an Outside Director or
executive officer of the Company, he or she may pay the Exercise Price in a form other than cash or
cash equivalents only to the extent permitted by section 13(k) of the Exchange Act.

               6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price
may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned
by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when
the new Common Shares are purchased under the Plan.

               6.3
Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and
any withholding taxes may be paid by delivering (on a form prescribed by the Company) an
irrevocable direction to a securities broker approved by the Company to sell all or part of the
Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to
the Company.

               6.4 Promissory Note. With the Committee’s consent, all or any part of the Exercise Price and
any withholding taxes may be paid by delivering (on a form prescribed by the Company) a
full-recourse promissory note.

               6.5 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise
Price and any withholding taxes may be paid in any other form that is consistent with applicable
laws, regulations and rules.

4

 

     ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.

               7.1 Initial Grants. Each Outside Director who first becomes a member of the Board after the
date of the Company’s initial public offering shall receive a one-time grant of an NSO covering
35,000 Common Shares. Such NSO shall be granted on the date when such Outside Director first joins
the Board and shall become exercisable in 48 equal monthly installments over the four-year period
commencing on the date of grant. An Outside Director who previously was an Employee shall not
receive a grant under this Section 7.1.

               7.2 Annual Grants. Upon the conclusion of each regular annual meeting of the Company’s
stockholders held in the year 2007 or thereafter, each Outside Director who will continue serving
as a member of the Board thereafter shall receive an NSO covering 15,000 Common Shares. NSOs
granted under this Section 7.2 shall become exercisable in 12 equal monthly installments over the
one-year period commencing on the date of grant. An Outside Director who previously was an
Employee shall be eligible to receive grants under this Section 7.2.

               7.3 Accelerated Exercisability. All NSOs granted to an Outside Director under this Article 7
shall also become exercisable in full in the event that:

          (a) Such Outside Director’s Service terminates because of death, or total and
permanent disability; or

          (b) The Company is subject to a Change in Control before such Outside
Director’s Service terminates.

Acceleration of exercisability may also be required by Section 11.3.

               7.4 Exercise Price. The Exercise Price under all NSOs granted to an Outside Director under
this Article 7 shall be equal to 100% of the Fair Market Value of a Common Share on the date of
grant, payable in one of the forms described in Sections 6.1, 6.2 and 6.3.

               7.5 Term. All NSOs granted to an Outside Director under this Article 7 shall terminate on the
earliest of (a) the date 10 years after the date of grant, (b) the date 12 months after the
termination of such Outside Director’s Service for any reason.

               7.6 Affiliates of Outside Directors. The Committee may provide that the NSOs that otherwise
would be granted to an Outside Director under this Article 7 shall instead be granted to an
affiliate of such Outside Director. Such affiliate shall then be deemed to be an Outside Director
for purposes of the Plan, provided that the Service-related vesting and termination provisions
pertaining to the NSOs shall be applied with regard to the Service of the Outside Director.

     ARTICLE 8. STOCK APPRECIATION RIGHTS.

               8.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement
between the Optionee and the Company. Such SAR shall be

5

 

subject to all applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the
Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s
other compensation.

               8.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which
the SAR pertains and shall provide for the adjustment of such number in accordance with Article 11.
SARs granted to any Optionee in a single fiscal year shall in no event pertain to more than
500,000 Common Shares, except that SARs granted to a new Employee in the fiscal year of the Company
in which his or her Service as an Employee first commences shall not pertain to more than 1,000,000
Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment
in accordance with Article 11.

               8.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price; provided that the
Exercise Price shall in no event be less than 100% of the Fair Market Value of a Common Share on
the date of grant.

               8.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any
installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of
the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the
Optionee’s death, disability or retirement or other events and may provide for expiration prior to
the end of its term in the event of the termination of the Optionee’s Service. SARs may be awarded
in combination with Options, and such an Award may provide that the SARs will not be exercisable
unless the related Options are forfeited. An SAR may be included in an ISO only at the time of
grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the
Plan may provide that it will be exercisable only in the event of a Change in Control.

               8.5 Effect of Change in Control. The Committee may determine, at the time of granting an SAR
or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such
SAR in the event that the Company is subject to a Change in Control or in the event that the
Optionee is subject to an Involuntary Termination after a Change in Control. In addition,
acceleration of exercisability may be required under Section 11.3.

               8.6 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any person having the right
to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b)
cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount
of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the
aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the
Common Shares subject to the SARs exceeds the Exercise Price. If, on the date when an SAR expires,
the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion
of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to
be exercised as of such date with respect to such portion.

               8.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may
modify, reprice, extend or assume outstanding SARs or may accept

6

 

the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in
return for the grant of new SARs for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an SAR shall, without
the consent of the Optionee, alter or impair his or her rights or obligations under such SAR.

     ARTICLE 9. RESTRICTED SHARES.

               9.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be
evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted
Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms
that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements
entered into under the Plan need not be identical.

               9.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such
consideration as the Committee may determine, including (without limitation) cash, cash
equivalents, property, full-recourse promissory notes, past services and future services. If the
Participant is an Outside Director or executive officer of the Company, he or she may pay for
Restricted Shares with a promissory note only to the extent permitted by section 13(k) of the
Exchange Act. Within the limitations of the Plan, the Committee may accept the cancellation of
outstanding options in return for the grant of Restricted Shares.

               9.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting.
Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in
the Restricted Stock Agreement. The Committee may include among such conditions the requirement
that the performance of the Company or a business unit of the Company for a specified period of one
or more fiscal years equal or exceed a target determined in advance by the Committee. The
Company’s independent auditors shall determine such performance. Such target shall be based on one
or more of the criteria set forth in Appendix A. The Committee shall identify such target not
later than the 90th day of such period. In no event shall more than 500,000 Restricted
Shares that are subject to performance-based vesting conditions be granted to any Participant in a
single fiscal year of the Company, subject to adjustment in accordance with Article 11. A
Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s
death, disability or retirement or other events. The Committee may determine, at the time of
granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become
vested in the event that a Change in Control occurs with respect to the Company or in the event
that the Participant is subject to an Involuntary Termination after a Change in Control.

               9.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall
have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted
Stock Agreement, however, may require that the holders of Restricted Shares invest any cash
dividends received in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to which the dividends
were paid.

7

 

     ARTICLE 10. STOCK UNITS.

               10.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a
Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to
all applicable terms of the Plan and may be subject to any other terms that are not inconsistent
with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a reduction in the
recipient’s other compensation.

               10.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units,
no cash consideration shall be required of the Award recipients.

               10.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting.
Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in
the Stock Unit Agreement. The Committee may include among such conditions the requirement that the
performance of the Company or a business unit of the Company for a specified period of one or more
fiscal years equal or exceed a target determined in advance by the Committee. The Company’s
independent auditors shall determine such performance. Such target shall be based on one or more
of the criteria set forth in Appendix A. The Committee shall identify such target not later than
the 90th
day of such period. In no event shall more than 500,000 Stock Units that are
subject to performance-based vesting conditions be granted to any Participant in a single fiscal
year of the Company, subject to adjustment in accordance with Article 11. A Stock Unit Agreement
may provide for accelerated vesting in the event of the Participant’s death, disability or
retirement or other events. The Committee may determine, at the time of granting Stock Units or
thereafter, that all or part of such Stock Units shall become vested in the event that the Company
is subject to a Change in Control or in the event that the Participant is subject to an Involuntary
Termination after a Change in Control. In addition, acceleration of vesting may be required under
Section 11.3.

               10.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights.
Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s
discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be
credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit
is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of
dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a
combination of both. Prior to distribution, any dividend equivalents that are not paid shall be
subject to the same conditions and restrictions as the Stock Units to which they attach.

               10.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made
in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the
Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than
the number included in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based on the average
Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be
settled in a lump sum or in installments. The distribution may occur or commence when all vesting
conditions applicable to

8

 

the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date.
The amount of a deferred distribution may be increased by an interest factor or by dividend
equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to Article 11.

               10.6 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s
death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a
Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by
filing the prescribed form with the Company. A beneficiary designation may be changed by filing
the prescribed form with the Company at any time before the Award recipient’s death. If no
beneficiary was designated or if no designated beneficiary survives the Award recipient, then any
Stock Units Award that becomes payable after the recipient’s death shall be distributed to the
recipient’s estate.

               10.7 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a
general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the
Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

               ARTICLE 11. PROTECTION AGAINST DILUTION.

               11.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a
declaration of a dividend payable in Common Shares or a combination or consolidation of the
outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares,
corresponding adjustments shall automatically be made in each of the following:

          (a) The number of Options, SARs, Restricted Shares and Stock Units available
for future Awards under Article 3;

          (b) The limitations set forth in Sections 5.2, 8.2, 9.3 and 10.3;

          (c) The number of Common Shares covered by each outstanding Option and SAR;

          (d) The Exercise Price under each outstanding Option and SAR; or

          (e) The number of Stock Units included in any prior Award that has not yet been
settled.

In the event of a declaration of an extraordinary dividend payable in a form other than Common
Shares in an amount that has a material effect on the price of Common Shares, a recapitalization, a
spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole
discretion, deems appropriate in one or more of the foregoing. Except as provided in this Article
11, a Participant shall have no rights by reason of any issuance by the Company of stock of any
class or securities convertible into stock of any class, any subdivision or consolidation of

9

 

 shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class.

               11.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options,
SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the
Company.

               11.3 Reorganizations. In the event that the Company is a party to a merger or consolidation,
all outstanding Awards shall be subject to the agreement of merger or consolidation. Such
agreement shall provide for one or more of the following:

          (a) The continuation of such outstanding Awards by the Company (if the Company
is the surviving corporation).

          (b) The assumption of such outstanding Awards by the surviving corporation or
its parent, provided that the assumption of Options or SARs shall comply with
section 424(a) of the Code (whether or not the Options are ISOs).

          (c) The substitution by the surviving corporation or its parent of new awards
for such outstanding Awards, provided that the substitution of Options or SARs shall
comply with section 424(a) of the Code (whether or not the Options are ISOs).

          (d) Full exercisability of outstanding Options and SARs and full vesting of the
Common Shares subject to such Options and SARs, followed by the cancellation of such
Options and SARs. The full exercisability of such Options and SARs and full vesting
of such Common Shares may be contingent on the closing of such merger or
consolidation. The Optionees shall be able to exercise such Options and SARs during
a period of not less than five full business days preceding the closing date of such
merger or consolidation, unless (i) a shorter period is required to permit a timely
closing of such merger or consolidation and (ii) such shorter period still offers
the Optionees a reasonable opportunity to exercise such Options and SARs. Any
exercise of such Options and SARs during such period may be contingent on the
closing of such merger or consolidation.

          (e) The cancellation of outstanding Options and SARs and a payment to the
Optionees equal to the excess of (i) the Fair Market Value of the Common Shares
subject to such Options and SARs (whether or not such Options and SARs are then
exercisable or such Common Shares are then vested) as of the closing date of such
merger or consolidation over (ii) their Exercise Price. Such payment shall be made
in the form of cash, cash equivalents, or securities of the surviving corporation or
its parent with a Fair Market Value equal to the required amount. Such payment may
be made in installments and may be deferred until the date or dates when such
Options and SARs would have become exercisable or such Common Shares would have
vested. Such payment may be subject to

10

 

vesting based on the Optionee’s continuing Service, provided that the vesting
schedule shall not be less favorable to the Optionee than the schedule under which
such Options and SARs would have become exercisable or such Common Shares would have
vested. If the Exercise Price of the Common Shares subject to such Options and SARs
exceeds the Fair Market Value of such Common Shares, then such Options and SARs may
be cancelled without making a payment to the Optionees. For purposes of this
Subsection (e), the Fair Market Value of any security shall be determined without
regard to any vesting conditions that may apply to such security.

          (f) The cancellation of outstanding Stock Units and a payment to the
Participants equal to the Fair Market Value of the Common Shares subject to such
Stock Units (whether or not such Stock Units are then vested) as of the closing date
of such merger or consolidation. Such payment shall be made in the form of cash,
cash equivalents, or securities of the surviving corporation or its parent with a
Fair Market Value equal to the required amount. Such payment may be made in
installments and may be deferred until the date or dates when such Stock Units would
have vested. Such payment may be subject to vesting based on the Participant’s
continuing Service, provided that the vesting schedule shall not be less favorable
to the Participant than the schedule under which such Stock Units would have vested.
For purposes of this Subsection (f), the Fair Market Value of any security shall be
determined without regard to any vesting conditions that may apply to such security.

     ARTICLE 12. AWARDS UNDER OTHER PLANS.

          The Company may grant awards under other plans or programs. Such awards may be settled in the
form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes
under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued,
reduce the number of Common Shares available under Article 3.

     ARTICLE 13. PAYMENT OF DIRECTOR’S FEES IN SECURITIES.

               13.1 Effective Date. No provision of this Article 13 shall be effective unless and until the
Board has determined to implement such provision.

               13.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may
elect to receive his or her annual retainer payments and/or meeting fees from the Company in the
form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by
the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An
election under this Article 13 shall be filed with the Company on the prescribed form.

               13.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs,
Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and
meeting fees that would otherwise be paid in cash shall be calculated in a

11

 

manner determined by the Board. The Board shall also determine the terms of such NSOs,
Restricted Shares or Stock Units.

     ARTICLE 14. LIMITATION ON RIGHTS.

               14.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed
to give any individual a right to remain an Employee, Outside Director or Consultant. The Company
and its Parents, Subsidiaries and Affiliates reserve the right to terminate the Service of any
Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company’s certificate of incorporation and by-laws and a written employment agreement (if
any).

               14.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or
other rights as a stockholder with respect to any Common Shares covered by his or her Award prior
to the time when a stock certificate for such Common Shares is issued or, if applicable, the time
when he or she becomes entitled to receive such Common Shares by filing any required notice of
exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or
other rights for which the record date is prior to such time, except as expressly provided in the
Plan.

               14.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation
of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules
and regulations and such approval by any regulatory body as may be required. The Company reserves
the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award
prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares,
to their registration, qualification or listing or to an exemption from registration, qualification
or listing.

     ARTICLE 15. WITHHOLDING TAXES.

               15.1 General. To the extent required by applicable federal, state, local or foreign law, a
Participant or his or her successor shall make arrangements satisfactory to the Company for the
satisfaction of any withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.

               15.2 Share Withholding. To the extent that applicable law subjects a Participant to tax
withholding obligations, the Committee may permit such Participant to satisfy all or part of such
obligations by having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common Shares that he or
she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date
when they are withheld or surrendered.

     ARTICLE
16. LIMITATION ON PAYMENTS.

               16.1 Scope of Limitation. This Article 16 shall apply to an Award only if:

12

 

          (a) The independent auditors selected for this purpose by the Committee (the
“Auditors”) determine that the after-tax value of such Award to the Participant,
taking into account the effect of all federal, state and local income taxes,
employment taxes and excise taxes applicable to the Participant (including the
excise tax under section 4999 of the Code), will be greater after the application of
this Article 16 than it was before the application of this Article 16; or

          (b) The Committee, at the time of making an Award under the Plan or at any time
thereafter, specifies in writing that such Award shall be subject to this Article 16
(regardless of the after-tax value of such Award to the Participant).

If this Article 16 applies to an Award, it shall supersede any contrary provision of the Plan or of
any Award granted under the Plan.

               16.2 Basic Rule. In the event that the Auditors determine that any payment or transfer by the
Company under the Plan to or for the benefit of a Participant (a “Payment”) would be nondeductible
by the Company for federal income tax purposes because of the provisions concerning “excess
parachute payments” in section 280G of the Code, then the aggregate present value of all Payments
shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Article 16, the
“Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate
present value of the Payments without causing any Payment to be nondeductible by the Company
because of section 280G of the Code.

               16.3 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible
by the Company because of section 280G of the Code, then the Company shall promptly give the
Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and the Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or
her election within 10 days of receipt of notice. If no such election is made by the Participant
within such 10-day period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present value of the Payments
equals the Reduced Amount) and shall notify the Participant promptly of such election. For
purposes of this Article 16, present value shall be determined in accordance with section
280G(d)(4) of the Code. All determinations made by the Auditors under this Article 16 shall be
binding upon the Company and the Participant and shall be made within 60 days of the date when a
Payment becomes payable or transferable. As promptly as practicable following such determination
and the elections hereunder, the Company shall pay or transfer to or for the benefit of the
Participant such amounts as are then due to him or her under the Plan and shall promptly pay or
transfer to or for the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.

               16.4 Overpayments and Underpayments. As a result of uncertainty in the application of section
280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible
that Payments will have been made by the Company which

13

 

should not have been made (an “Overpayment”) or that additional Payments which will not have
been made by the Company could have been made (an “Underpayment”), consistent in each case with the
calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or the Participant
that the Auditors believe has a high probability of success, determine that an Overpayment has been
made, such Overpayment shall be treated for all purposes as a loan to the Participant that he or
she shall repay to the Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the
Participant to the Company if and to the extent that such payment would not reduce the amount that
is subject to taxation under section 4999 of the Code. In the event that the Auditors determine
that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the
Company to or for the benefit of the Participant, together with interest at the applicable federal
rate provided in section 7872(f)(2) of the Code.

               16.5 Related Corporations. For purposes of this Article 16, the term “Company” shall include
affiliated corporations to the extent determined by the Auditors in accordance with section
280G(d)(5) of the Code.

     ARTICLE 17. FUTURE OF THE PLAN.

               17.1 Term of the Plan. The Plan, as set forth herein, shall become effective on the date of
the Company’s initial public offering. The Plan shall remain in effect until the earlier of (a)
the date when the Plan is terminated under Section 17.2 or (b) the 10th anniversary of
the date when the Board adopted the Plan.

               17.2 Amendment or Termination. The Board may, at any time and for any reason, amend or
terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not affect any Award previously granted
under the Plan.

               17.3 Stockholder Approval. An amendment of the Plan shall be subject to the approval of the
Company’s stockholders only to the extent required by applicable laws, regulations or rules.
However, section 162(m) of the Code may require that the Company’s stockholders approve:

     (a) The Plan not later than the first regular meeting of stockholders that
occurs in the fourth calendar year following the calendar year in which the
Company’s initial public offering occurred; and

     (b) The performance criteria set forth in Appendix A not later than the first
meeting of stockholders that occurs in the fifth year following the year in which
the Company’s stockholders previously approved such criteria.

     ARTICLE 18. DEFINITIONS.

          18.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more
Subsidiaries own not less than 50% of such entity.

14

 

          18.2 “Award” means any award of an Option, an SAR, a Restricted Share or a Stock Unit under
the Plan.

          18.3 “Board” means the Company’s Board of Directors, as constituted from time to time.

          18.4 “Cause” means:

               (a) An unauthorized use or disclosure by the Participant of the Company’s confidential
information or trade secrets, which use or disclosure causes material harm to the Company;

               (b) A material breach by the Participant of any agreement between the Participant and the
Company;

               (c) A material failure by the Participant to comply with the Company’s written policies or
rules;

               (d) The Participant’s conviction of, or plea of “guilty” or “no contest” to, a felony under
the laws of the United States or any State thereof;

               (e) The Participant’s gross negligence or willful misconduct;

               (f) A continuing failure by the Participant to perform assigned duties after receiving written
notification of such failure from the Board; or

               (g) A failure by the Participant to cooperate in good faith with a governmental or internal
investigation of the Company or its directors, officers or employees, if the Company has requested
the Participant’s cooperation.

          18.5 “Change in Control” means:

               (a) The consummation of a merger or consolidation of the Company with or into
another entity or any other corporate reorganization, if persons who were not
stockholders of the Company immediately prior to such merger, consolidation or other
reorganization own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding securities of each
of (i) the continuing or surviving entity and (ii) any direct or indirect parent
corporation of such continuing or surviving entity;

               (b) The sale, transfer or other disposition of all or substantially all of the
Company’s assets;

               (c) A change in the composition of the Board, as a result of which fewer than
50% of the incumbent directors are directors who either:

15

 

               (i) Had been directors of the Company on the date 24 months prior to the date
of such change in the composition of the Board (the “Original Directors”); or

               (ii) Were appointed to the Board, or nominated for election to the Board, with
the affirmative votes of at least a majority of the aggregate of (A) the Original
Directors who were in office at the time of their appointment or nomination and (B)
the directors whose appointment or nomination was previously approved in a manner
consistent with this Paragraph (ii); or

               (d) Any transaction as a result of which any person is the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing at least 50% of the total voting power
represented by the Company’s then outstanding voting securities. For purposes of
this Subsection (d), the term “person” shall have the same meaning as when used in
sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company or
of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their ownership
of the common stock of the Company.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state
of the Company’s incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company’s securities immediately before such
transaction.

          18.6 “Code” means the Internal Revenue Code of 1986, as amended.

          18.7 “Committee” means a committee of the Board, as described in Article 2.

          18.8 “Common Share” means one share of the common stock of the Company.

          18.9 “Company” means Vanda Pharmaceuticals Inc., a Delaware corporation.

          18.10 “Consultant” means a consultant or adviser who provides bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a
Consultant shall be considered employment for all purposes of the Plan, except as provided in
Section 4.1.

          18.11 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an
Affiliate.

          18.12 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          18.13 “Exercise Price,” in the case of an Option, means the amount for which one Common Share
may be purchased upon exercise of such Option, as specified in the applicable Stock Option
Agreement. “Exercise Price,” in the case of an SAR, means an amount,

16

 

as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value
of one Common Share in determining the amount payable upon exercise of such SAR.

          18.14 “Fair Market Value” means the market price of Common Shares, determined by the Committee
in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair
Market Value by the Committee shall be based on the prices reported in The Wall Street
Journal. Such determination shall be conclusive and binding on all persons.

          18.15 “Involuntary Termination” means the termination of the Participant’s Service by reason
of:

               (a) The involuntary discharge of the Participant by the Company (or the Parent,
Subsidiary or Affiliate employing him or her) for reasons other than Cause; or

               (b) The voluntary resignation of the Participant following (i) a material
adverse change in his or her title, stature, authority or responsibilities with the
Company (or the Parent, Subsidiary or Affiliate employing him or her), (ii) a
material reduction in his or her base salary or (iii) receipt of notice that his or
her principal workplace will be relocated by more than 30 miles.

          18.16 “ISO” means an incentive stock option described in section 422(b) of the Code.

          18.17 “NSO” means a stock option not described in sections 422 or 423 of the Code.

          18.18 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase
Common Shares.

          18.19 “Optionee” means an individual or estate who holds an Option or SAR.

          18.20 “Outside Director” means a member of the Board who is not an Employee. Service as an
Outside Director shall be considered employment for all purposes of the Plan, except as provided in
Section 4.1.

          18.21 “Parent” means any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, if each of the corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status of a Parent on a date
after the adoption of the Plan shall be considered a Parent commencing as of such date.

          18.22 “Participant” means an individual or estate who holds an Award.

          18.23 “Plan” means this Vanda Pharmaceuticals Inc. 2006 Equity Incentive Plan, as amended from
time to time.

17

 

          18.24 “Restricted Share” means a Common Share awarded under the Plan.

          18.25 “Restricted Stock Agreement” means the agreement between the Company and the recipient
of a Restricted Share that contains the terms, conditions and restrictions pertaining to such
Restricted Share.

          18.26 “SAR” means a stock appreciation right granted under the Plan.

          18.27 “SAR Agreement” means the agreement between the Company and an Optionee that contains
the terms, conditions and restrictions pertaining to his or her SAR.

          18.28 “Service” means service as an Employee, Outside Director or Consultant.

          18.29 “Stock Option Agreement” means the agreement between the Company and an Optionee that
contains the terms, conditions and restrictions pertaining to his or her Option.

          18.30 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share,
as awarded under the Plan.

          18.31 “Stock Unit Agreement” means the agreement between the Company and the recipient of a
Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit.

          18.32 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a
Subsidiary commencing as of such date.

     ARTICLE 19. EXECUTION.

          To record the adoption of the Plan by the Board on ___, 2006, the Company has caused
its duly authorized officer to execute this document in the name of the Company.

	 	 	 	 	 
	 	Vanda Pharmaceuticals Inc. 

 	 
	 	By:  	 	 
	 	 	 	 
	 	Title:	 	 
	 

18

 

Appendix A

Performance Criteria for Restricted Shares and Stock Units

The performance goals that may be used by the Committee for such awards may consist of: operating
profits (including EBITDA), net profits, earnings per share, profit returns and margins, revenues,
shareholder return and/or value, stock price and working capital. Performance goals may be measured
solely on a corporate, subsidiary or business unit basis, or a combination thereof. Further,
performance criteria may reflect absolute entity performance or a relative comparison of entity
performance to the performance of a peer group of entities or other external measure of the
selected performance criteria. Profit, earnings and revenues used for any performance goal
measurement may exclude: gains or losses on operating asset sales or dispositions; asset
write-downs; litigation or claim judgments or settlements; accruals for historic environmental
obligations; effect of changes in tax law or rate on deferred tax liabilities; accruals for
reorganization and restructuring programs; uninsured catastrophic property losses; the cumulative
effect of changes in accounting principles; and any extraordinary non-recurring items as described
in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of
financial performance appearing in the Company’s annual report to stockholders for the applicable
year.<PAGE>
                                                                     Exhibit 4.2

                      FORM OF SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement, dated as of the date of acceptance set
forth below, is between PSIVIDA LIMITED, an Australian company (the "Company"),
and the undersigned (the "Buyer").

     The Company and the Buyer are executing and delivering this Agreement in
accordance with and in reliance upon the exemption from securities registration
afforded, inter alia, by Rule 506 under Regulation D ("Regulation D") as
promulgated by the United States Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section
4(2) of the 1933 Act.

     The Buyer wishes to purchase, upon the terms and subject to the conditions
of this Agreement, (i) such number of American Depositary Shares of the Company,
each representing ten (10) ordinary shares of the Company, as is stated on the
signature page of this Agreement (those American Depositary Shares, the
"Shares"), and (ii) a warrant in the form set forth in Exhibit A hereto (the
"Warrant") to purchase such number of American Depositary Shares of the Company
as is stated on the signature page of this Agreement (American Depositary Shares
issuable in connection with the exercise of the Warrant, the "Warrant Shares"),
subject to acceptance of this Agreement by the Company.

     The parties therefore agree as follows:

     1. Agreement to Purchase; Purchase Price. The undersigned hereby purchases
from the Company the Shares and the Warrant for the purchase price stated on the
signature page of this Agreement. The Buyer shall pay the purchase price for the
Shares and the Warrant by delivering to the Company on the date of this
Agreement immediately available funds in United States Dollars. Upon acceptance
of this Agreement by the Company and receipt of the purchase price, the Company
shall promptly deliver a binding and irrevocable instruction letter to the
Company's Depositary instructing the Depositary to issue an American Depositary
Receipt to the Buyer representing the Shares and shall deliver to the Buyer the
Warrant.

     2. Buyer Representations; Access to Information; Independent Investigation.
The Buyer represents to, and agrees with, the Company as follows:

          (a) Without limiting the Buyer's right to sell the Shares under a
Registration Statement (as defined below) or the Warrant Shares pursuant to the
terms set forth herein and in the Warrant, the Buyer is purchasing the Shares
and the Warrant in the ordinary course of its business for its own account for
investment only and not with a view towards the public sale or distribution
thereof and not with a view to or for sale in connection with any distribution
thereof.

          (b) The Buyer is (1) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (2) experienced in making investments of the kind represented by
the Shares and the Warrant, (3) able, by reason of the business and financial
experience of its officers (if an entity) and professional advisors (who are not
affiliated with or compensated in any way by the Company or

<PAGE>

any of its affiliates or selling agents), to protect its own interests in
connection with the transactions described in this Agreement, and (4) able to
afford the entire loss of its investment in the Shares and the Warrant.

          (c) All subsequent offers and sales of the Shares, the Warrant or the
Warrant Shares by the Buyer shall be made (i) pursuant to registration of the
Shares or Warrant Shares under the 1933 Act or pursuant to an exemption from
registration and (ii) in compliance with applicable blue sky laws and
regulations.

          (d) The Buyer understands that the Shares and the Warrant are being
offered and sold to the Buyer in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, agreements, acknowledgements and
understandings of the Buyer set forth herein in order to determine the
availability of those exemptions and the eligibility of the Buyer to acquire the
Shares and the Warrant.

          (e) The Buyer and the Buyer's advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Shares and the
Warrant that the Buyer has requested. The Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company and have received
complete and satisfactory answers to any such inquiries. Without limiting the
generality of the foregoing, the Buyer has also had the opportunity to obtain
and to review the Company's SEC Documents (as defined below).

          (f) The Buyer understands that its investment in the Shares and the
Warrant involves a high degree of risk.

          (g) The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the Warrant.

          (h) This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.

          (i) The Buyer has, in connection with its decision to purchase the
Shares and the Warrant, relied with respect to the Company and its affairs
solely upon the Company's SEC Documents, the representations and warranties of
the Company herein, and other information provided to the Purchaser and oral
statements of the Company's management made at meetings with the Purchaser.

          (j) The Buyer has not engaged and will not engage in any short sales
of the Company's ordinary shares or American Depositary Shares prior to the
effectiveness of the Initial

                                        2

<PAGE>

Registration Statement, except to the extent that any such short sale is fully
covered by shares of the Company's stock other than the Shares and Warrant
Shares.

          (k) The Buyer understands that nothing in this Agreement or any other
materials presented to the Buyer in connection with the purchase and sale of the
Shares and the Warrant constitutes legal, tax or investment advice and that no
independent legal counsel has reviewed these documents and materials on the
Buyer's behalf. The Buyer has consulted such legal, tax and investment advisors
as it, in its sole discretion, has deemed necessary or appropriate in connection
with its purchase of the Shares and the Warrant.

          (l) Notwithstanding any other provision of this Agreement, the Buyer
agrees and undertakes to the Company that the Buyer will not offer to transfer
or otherwise dispose of, or agree to the transfer or disposal of, the Shares,
the Warrant, or the Warrant Shares (or the fully paid ordinary shares underlying
either of them) in Australia (including through trading on the Australian Stock
Exchange) at any time prior to:

               (1) the Company's subsequent lodgment with the Australian
               Securities and Investments Commission of a prospectus under the
               Corporations Act 2001 (Cth) for fully paid ordinary shares of the
               Company (such prospectus incorporating the Initial Registration
               Statement or the Demand Registration Statement (as defined in
               Section 5 below) or extracts of the Initial Registration
               Statement or the Demand Registration Statement as deemed
               appropriate by the Company); or

               (2) the date which is 12 months after the date of issue of the
               Shares and the Warrant,

               (whichever occurs first).

          (m) The Buyer acknowledges that the Company may take any measures the
Company considers necessary or appropriate (in its sole discretion) in relation
to Section 2(l) above, and in particular that the ordinary shares underlying the
Shares and Warrant Shares will be subject to a holding lock on the Company's
Australian register, and entered into a restricted securities sub-register where
transfers of the shares cannot occur without the Company's prior consent.

     3. Company Representations. The Company represents to the Buyer as follows:

          (a) The Company is a company duly organized and in good standing under
the laws of Australia, and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company is
duly qualified as a foreign corporation to do business and is in good standing
in each jurisdiction where the nature of the business conducted or property
owned by it makes such qualification necessary, other than those jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the business, operations, properties or condition (financial or otherwise) of
the Company and its subsidiaries taken as a whole (an "MAE").

                                        3

<PAGE>

          (b) The Shares have been duly authorized and, when issued to Buyer,
will be duly and validly issued, fully paid and non-assessable and will not
subject the holder thereof to personal liability by reason of being such a
holder.

          (c) This Agreement and the transaction contemplated hereby have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company, and this Agreement, when executed and
delivered by the Company, will be a valid and binding agreement of the Company
enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium, and
other similar laws affecting the enforcement of creditors' rights generally.

          (d) The execution and delivery of this Agreement by the Company, the
issuance of the Shares and the Warrant, and the consummation by the Company of
the other transactions contemplated by this Agreement do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under (1) the organizational documents of
the Company, (2) any indenture, mortgage, deed of trust, or other material
agreement or instrument to which the Company is a party or by which it or any of
its properties or assets are bound, (3) to its knowledge, any existing
applicable law, rule, or regulation or any applicable decree, judgment, or (4)
to its knowledge, order of any court, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, except such conflict, breach or default that would not have a
material adverse effect on the transaction contemplated herein. The Company is
not in violation of any laws, governmental orders, rules, regulations or
ordinances to which its property, real, personal, mixed, tangible or intangible,
or its businesses related to such properties, are subject except any such
violation that would not have an MAE.

          (e) No authorization, approval or consent of any court, governmental
body, regulatory agency, self-regulatory organization, or stock exchange or
market is required to be obtained by the Company for the issuance and sale of
the Shares and the Warrant to the Buyer as contemplated by this Agreement,
except such authorizations, approvals and consents that have been obtained and
that no representation is made with respect to filings under states securities
or blue sky laws.

          (f) The American Depositary Shares of the Company are listed on the
Nasdaq National Market. The Company is in material compliance with the listing
and maintenance requirements for continued listing of the American Depositary
Shares of the Company on the Nasdaq National Market. The Company has filed on a
timely basis all reports, schedules, forms, statements and other documents
required to be filed by it in 2005 with the SEC (the "Company's SEC Documents").
The Company has disclosed publicly all information which, according to
applicable law, rule or regulation, should have been disclosed publicly by the
Company, other than with respect to the transaction contemplated by this
Agreement.

          (g) As of their respective dates, the Company's SEC Documents complied
in all material respects with the requirements of the 1933 Act or the Securities
Exchange Act of 1934, as amended, as the case may be and the rules and
regulations of the SEC promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to the

                                        4

<PAGE>

Company's SEC Documents, and none of the Company's SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the Company's registration
statement on Form 20-F, dated January 19, 2005, comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (1) as may be otherwise indicated in such financial
statements or the notes thereto or (2) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).

          (h) Since December 31, 2004, there has been no material adverse change
in the business, properties, operations, financial condition, or results of
operations of the Company.

          (i) There is no fact known to the Company (other than general economic
conditions known to the public generally) or as disclosed in the Company's SEC
Documents that has not been disclosed in writing to the Buyer that (1) would
reasonably be expected to have an MAE or (2) would reasonably be expected to
have a material adverse effect the ability of the Company to perform its
obligations pursuant to this Agreement.

     4. Certain Covenants and Acknowledgments. (a) The Buyer acknowledges that
(1) none of the Shares, the Warrant or the Warrant Shares have been registered
under the provisions of the 1933 Act, and none of them may be transferred unless
(A) subsequently registered thereunder, as provided for herein, or (B) the Buyer
shall have delivered to the Company and the Depositary, if required, an opinion
of counsel, reasonably satisfactory in form, scope and substance to the Company,
to the effect that the Shares, the Warrant or the Warrant Shares to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration, and (2) any sale of the Shares, the Warrant or Warrant Shares made
in reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder.

          (b) The Buyer acknowledges and agrees that until such time as the
Shares have been registered under the 1933 Act as contemplated hereby and sold
in accordance with an effective registration statement, the Shares shall bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such Shares):

     THESE SHARES (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
     ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF
     ANY STATE AND MAY NOT BE SOLD OR OFFERED

                                        5

<PAGE>

     FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
     SHARES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
     CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

          (c) The Company shall make all necessary filings in connection with
the sale of the Shares and the Warrant to the Buyer under any United States laws
and regulations, or by any domestic securities exchange or trading market, and
to provide a copy thereof to the Buyer promptly after such filing.

          (d) So long as the Buyer beneficially owns any of the Shares or any
Warrant Shares or the Warrant remains exercisable, the Company shall file all
reports required to be filed with the SEC pursuant to Rule 13a-16 or 15d-16 of
the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would permit such termination.

     5. Covenant to Register. (a) For purposes of this Section, the following
definitions shall apply:

     "register," "registered," and "registration" refer to a registration under
the 1933 Act, effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of a Registration Statement, document or amendment
thereto.

     "Registrable Securities" means the Shares, the Warrant Shares, and any
securities of the Company or securities of any successor corporation issued as
or issuable upon the conversion or exercise of any warrant, right or other
security that is issued as a dividend or other distribution with respect to, or
in exchange for, or in replacement of, the Shares and/or the Warrant Shares.

     "holder of Registrable Securities" means the Buyer and any permitted
assignee of registration rights in accordance with this Agreement.

          (b) Conditioned on compliance by each holder of Registrable Securities
with the provisions of this Agreement, including Section 5(f) hereof:

               (i) the Company shall use reasonable efforts to promptly prepare
and file a registration statement on an appropriate form covering the sale by
all holders of Registrable Securities of such Registrable Securities (the
"Initial Registration Statement") and cause that registration statement to
become effective as soon as commercially reasonable, but no later than one
hundred eighty (180) days from the date of this Agreement;

               (ii) the Company shall use reasonable efforts to keep the Initial
Registration Statement effective for so long as any holder of Registrable
Securities desires to dispose of the securities covered by the Initial
Registration Statement; provided, however, that in no event shall the Company be
required to keep the Initial Registration Statement effective for a period
greater than two (2) years from the date of this Agreement or, if earlier,
through such date

                                        6

<PAGE>

as all of the then-outstanding Registrable Securities can be sold within a given
three-month period or such date as all then-outstanding Registrable Securities
have been sold;

               (iii) on no more then one (1) occasion after the Initial
Registration Statement has ceased to be effective and upon the request given by
not fewer than fifty percent (50%) of the aggregate number of Warrant Shares
then-outstanding or issuable upon the exercise of then-outstanding Warrants, the
Company shall use reasonable efforts to prepare and file a registration
statement on an appropriate form within ninety (90) days of such request
covering the sale by all such holders of such Warrant Shares (the "Demand
Registration Statement", each of the Initial Registration Statement and the
Demand Registration Statement are referred to herein as a "Registration
Statement") and cause that registration statement to become effective as soon as
commercially reasonable after such request; and

               (iv) the Company shall use reasonable efforts to keep the Demand
Registration Statement effective for so long as any holder of Warrant Shares or
Warrants desires to dispose of the Warrant Shares covered by the Demand
Registration Statement; provided, however, that in no event shall the Company be
required to keep the Demand Registration Statement effective for a period
greater than one (1) year after it is declared effective or, if earlier, through
such date as all Warrant Shares can be sold within a given three-month period or
such date as all Warrant Shares have been sold.

          (c) The Company may delay or suspend, without penalty, the
effectiveness of any registration pursuant to Section 5(b) in the event and for
such period of time (i) as such a delay or suspension is required in order to
comply with the rules and regulations of the SEC, or (ii) as commercially
reasonable or necessary in connection with a material event or occurrence
concerning the Company prior to the effectiveness of the initial registration
pursuant to Section 5(b). The Company will use reasonable efforts to cause any
such delay or suspension to terminate at the earliest possible date.

          (d) If the Initial Registration Statement is not declared effective by
the SEC on or prior to one hundred eighty (180) days after the date of this
Agreement (the "Target Date"), unless delayed pursuant to Section 5(c), the
Company shall pay Buyer as liquidated damages an amount equal to one percent
(1%) of the total Purchase Price of the Shares and the Warrant for each thirty
(30) day period following the Target Date until such time as the Initial
Registration Statement is declared effective. Such payment shall be made to the
Buyer within ninety (90) days of the date due by cashier's check or wire
transfer in immediately available funds to such account as shall be designated
in writing by the Buyer.

          (e) Whenever required under this Section 5 to effect the registration
of any Registrable Securities, the Company shall, as promptly as reasonably
possible:

               (i) prepare and file with the SEC such amendments and supplements
to a Registration Statement and the prospectus used in connection with a
Registration Statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
Registration Statement and notify the holders of the filing and effectiveness of
such Registration statement and any amendments or supplements;

                                        7

<PAGE>

               (ii) furnish to each holder of Registrable Securities such number
of copies of a current prospectus, including a preliminary prospectus,
conforming with the requirements of the 1933 Act, copies of the applicable
Registration Statement and any amendment or supplement to any thereof and any
documents incorporated by reference therein, and such other documents as such
holder of Registrable Securities may reasonably require in order to facilitate
the disposition of Registrable Securities owned by such holder of Registrable
Securities;

               (iii) use reasonable efforts to register and qualify the
securities covered by a Registration Statement under such other securities or
"Blue Sky" laws of such jurisdictions as shall be reasonably requested in
writing by the holder of Registrable Securities; provided however that the
Company shall not be required to qualify to do business or consent to service of
process in any jurisdiction in which it is not now so qualified or has not so
consented; and

               (iv) notify each holder of Registrable Securities reasonably
promptly of the happening of any event as a result of which the prospectus
included in a Registration Statement, as then in effect, includes an untrue
statement of material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, and use its reasonable efforts to
promptly update and/or correct such prospectus.

          (f) Upon request of the Company, each holder of Registrable Securities
will furnish to the Company in connection with any registration under this
Section such information regarding itself, the Registrable Securities and other
securities of the Company held by it, and the intended method of disposition of
such securities as shall be reasonably required to effect the registration of
the Registrable Securities held by such holder of Registrable Securities. Each
such holder shall promptly notify the Company of any changes in any such
information.

          (g) To the fullest extent permitted by law, the Company shall
indemnify, defend and hold harmless each holder of Registrable Securities that
are included in a Registration Statement and each of its officers, directors,
employees, agents, partners or controlling persons (within the meaning of the
1933 Act) (each, an "indemnified party") from and against, and shall reimburse
such indemnified party with respect to, any and all claims, suits, demands,
causes of action, losses, damages, liabilities, costs or expenses
("Liabilities") to which such indemnified party may become subject under the
1933 Act or otherwise, arising from or relating to (A) any untrue statement or
alleged untrue statement of any material fact contained in a Registration
Statement, any prospectus contained therein or any amendment or supplement
thereto, or (B) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading; provided,
however, that the Company shall not be liable in any such case to the extent
that any such Liability arises out of or is based upon an untrue statement or
omission or alleged untrue statement or omission so made in strict conformity
with information furnished by such indemnified party in writing specifically for
use in a Registration Statement.

          (h) In the event of any registration under the 1933 Act of Registrable
Securities, each holder of such Registrable Securities hereby severally agrees
to indemnity,

                                        8

<PAGE>

defend and hold harmless the Company, and its officers, directors, employees,
agents, partners, or controlling persons (within the meaning of the 1933 Act)
(each, an "indemnified party") from and against, and shall reimburse such
indemnified party with respect to, any and all Liabilities to which such
indemnified party may become subject under the 1933 Act or otherwise, arising
from or relating to (A) any untrue statement or alleged untrue statement of any
material fact contained in a Registration Statement, any prospectus contained
therein or any amendment or supplement thereto, or (B) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; provided, that such holders will be liable in
any such case to the extent and only to the extent, that any such Liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in a Registration Statement, prospectus or
amendment or supplement thereto in reliance upon and in conformity with written
information furnished by such holder specifically for use in the preparation
thereof, and such Liability may in no event exceed the value of the Registrable
Securities so registered.

          (i) Promptly after receipt by any indemnified party of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against another party (the "indemnifying party")
hereunder, notify such party in writing thereof, but the omission so to notify
such party shall not relieve such party from any Liability which it may have to
the indemnified party other than under this Section and shall only relieve it
from any Liability which it may have to the indemnified party under this Section
if and to the extent an indemnifying party is materially prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and such indemnified party shall notify an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel reasonably satisfactory to such indemnified party, and, after
notice from the indemnifying party to the indemnified party of its election so
to assume and undertake the defense thereof, the indemnifying party shall not be
liable to the indemnified party under this Section for any legal expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected; provided, however, that if the defendants in any such action
include both parties and the indemnified party shall have reasonably concluded
that there are reasonable defenses available to them which are different from or
additional to those available to the indemnifying party or if the interests of
the indemnified party reasonably are deemed to conflict with the interests of
the indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of one such
separate counsel and other reasonable expenses related to such participation to
be reimbursed by the indemnifying party as incurred.

          (j) With respect to the inclusion of Registrable Securities in a
Registration Statement, all fees, costs and expenses of and incidental to such
registration, inclusion and public offering shall be borne by the Company;
provided, however, that any security holders participating in such registration
shall bear their pro-rata share of the underwriting discounts and commissions,
if any, incurred by them in connection with such registration. The fees, costs
and expenses of registration to be borne by the Company as provided in this
Section 5(j) shall include, without limitation, all registration, filing and
NASD fees, printing expenses, fees and

                                        9

<PAGE>

disbursements of counsel and accountants for the Company, and all legal fees and
disbursements and other expenses of complying with state securities or Blue Sky
laws of any jurisdiction or jurisdictions in which securities to be offered are
to be registered and qualified. Subject to appropriate agreements as to
confidentiality, the Company shall make available to the holders of Registrable
Securities and their counsel its documents and personnel for due diligence
purposes, provided that the fees and disbursements of counsel and accountants
for the selling security holders shall be borne by the respective selling
security holders.

          (k) The rights to cause the Company to register all or any portion of
Registrable Securities pursuant to this Section 5 may be assigned by Buyer to a
proper transferee or assignee as described herein. Within a reasonable time
after such transfer, the Buyer shall notify the Company of the name and address
of such transferee or assignee, and the securities with respect to which such
registration rights are being assigned. Such assignment shall be effective only
if (1) the Buyer agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such transfer or assignment (subject to the purchase price
of the Shares being kept confidential by the Buyer and such transferee or
assignee), (2) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (A) the name and address of such
transferee or assignee, and (B) the Registrable Securities with respect to which
such registration rights are being assigned, (3) following such transfer or
assignment, the further disposition of the Registrable Securities by the
transferee or assignee is restricted under the 1933 Act and applicable state
securities laws, (4) at or before the time that the Company receives the written
notice contemplated by clause (2) of this sentence the transferee or assignee
agrees in writing with the Company to be bound by all of the provisions
contained herein, (5) such transfer shall have been made in accordance with the
applicable requirements of the purchase agreement covering the transaction and
(6) such transferee shall be an "accredited investor", as that term is defined
in Rule 501 of Regulation D, promulgated under the 1933 Act.

     6. Governing Law; Miscellaneous. The laws of the State of New York govern
all matters (including without limitation all tort claims) arising out of this
agreement. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. This Agreement
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.

     7. Notices. (a) For a notice or other communication under this agreement to
be valid, it must be in writing and signed by the sending party, and the sending
party must use one of the following methods of delivery: (1) personal delivery;
(2) internationally recognized courier, with all fees prepaid; or (3) facsimile.

                                       10

<PAGE>

          (b) For a notice or other communication under this agreement to be
valid, it must be addressed to the receiving party at the one or more addresses
listed below for the receiving party or to any other address designated by the
receiving party in a notice in accordance with this Section 7.

     To the Company: pSivida Limited
                     Level 12, BGC Centre
                     28 The Esplanade
                     Perth, WA 6000
                     Australia
                     Attention: Gavin Rezos, Managing Director
                     Fax: +61 (8) 9226 5499

                     With a copy to:

                     Curtis, Mallet-Prevost, Colt & Mosle LLP
                     101 Park Avenue
                     New York, NY 10178-0061
                     Attention: Lawrence Goodman
                     Fax: (212) 697-1559

     To the Buyer:   At the contact information stated
                     on the signature page of this Agreement

          (c) Subject to Section 7(d), a valid notice or other communication
under this agreement is effective when received or deemed to be received by the
receiving party. A notice or other communication is deemed to have been received
as follows:

               (i) if it is delivered in person or sent by registered or
certified mail or by nationally recognized overnight courier, upon receipt as
indicated by the date on the signed receipt;

               (ii) if it is sent by facsimile, upon receipt by the sending
party of an acknowledgment or transmission report generated by the machine from
which the facsimile was sent indicating that the entire facsimile was sent to a
machine at the receiving party's facsimile number; and

               (iii) if the receiving party rejects or otherwise refuses to
accept it, or if it cannot be delivered because of a change in address for which
no notice was given, then upon that rejection, refusal, or inability to deliver.

          (d) If a notice or other communication is received after 5:00 p.m. on
a business day at the location specified in the address for the receiving party,
or on a day that is not a business day, then the notice is deemed received at
9:00 a.m. on the next business day.

                                       11

<PAGE>

     8. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.

     This Agreement is being signed on the date stated below.

     For the purchase price of $__________ per Share, the Buyer tenders herewith
the full purchase price of US$______________ for _____________ Shares and the
Warrant to purchase _____________ Warrant Shares.

                                        BUYER:

                                        ----------------------------------------
                                        Print Name

                                        ----------------------------------------
                                        Signature

                                        ----------------------------------------
                                        Name and title of signatory, if
                                        different from name of Buyer

                                        ----------------------------------------

                                        ----------------------------------------

                                        ----------------------------------------
                                        Address

                                        Fax number:
                                                    ----------------------------

                                        ----------------------------------------
                                        If Buyer is an entity, jurisdiction
                                        of organization and type of entity

     This Agreement is being accepted as of August __, 2005.

                                        PSIVIDA LIMITED

                                        By:
                                            ------------------------------------
                                            Gavin Rezos
                                            Managing Director

                                       12

<PAGE>

                                    EXHIBIT A
                                 FORM OF WARRANT

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