Document:

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                                                                  Exhibit 10.31

                 CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE

     THIS SEPARATION AGREEMENT AND RELEASE (this "Agreement"), dated September
30, 2003 (the "Date of this Agreement"), is entered into by and between
Questcor Pharmaceuticals, Inc. (the "Company") and Kenneth R. Greathouse (the
"Executive"). The Company and the Executive are sometimes referred to herein as
a "Party" or collectively as the "Parties".

     WHEREAS, the Executive is employed by the Company as the Company's Senior
Vice President, Commercial Operations; and

     WHEREAS, Executive and the Company desire to modify and subsequently
terminate such employment relationship on the mutually agreed upon terms set
forth herein.

     For and in consideration of the foregoing recitals and the mutual
covenants and agreements set forth herein, the Company and the Executive agree
as follows:

     1.   Resignation.
          (a)   Effective as of the Date of this Agreement, the Executive
hereby resigns from his position as Senior Vice President, Commercial
Operations of the Company and from all other executive officer positions then
held by the Executive with the Company or any of its direct or indirect
subsidiaries, and the Company hereby relieves the Executive of all duties and
responsibilities performed by the Executive prior to the Date of this Agreement.

          (b)   From the Date of this Agreement through March 31, 2004 (the
"Date of Resignation"), the Executive shall remain a full-time employee of the
Company in a non-executive capacity and shall continue to perform services for
the Company as agreed to by Executive and the Chief Executive Officer of the
Company.

          (c)   Effective as of the Date of Resignation, the Executive agrees
to resign as an employee of the Company or any of its direct or indirect
subsidiaries, at which time the Executive will be relieved of all duties and
responsibilities performed by the Executive prior to the Date of Resignation.
Executive understands that as of the Date of Resignation he is giving up any
right or claim to continuing or future employment with the Company and any
benefits or compensation therefrom, except as provided in the Change of Control
Agreements (as defined in paragraph 8 of this Agreement).

     2. Compensation. From the Date of this Agreement through the Date of
Resignation, the Company shall continue to pay Executive his regular salary in
the amount of $10,270.84 (ten thousand two hundred seventy-dollars and
eighty-four cents), less tax withholding required by law and any additional
applicable withholdings or deductions, on a semi-monthly basis in accordance
with the Company's payroll practices. Any payment made to Executive in
accordance with this Section 2 shall be made only to the extent the General
Release set forth in Section 7 becomes irrevocable in accordance with Section
7(c)(6).
<PAGE>
     3.   Accrued Vacation. Executive acknowledges that the balance of the
Executive's accrued vacation as of the Date of this Agreement is zero. Executive
shall not be entitled to accrue vacation days from the Date of this Agreement
through the Date of Resignation.

     4.   Bonus for 2003. Company agrees to pay to Executive a bonus payment in
the amount of $27,000 (twenty-seven thousand dollars) as the total bonus payment
for 2003, less tax withholding required by law and any additional applicable
withholdings or deductions, in accordance with the Company's payroll practices
("2003 Bonus Payment"). Executive agrees to a deferral of said 2003 Bonus
Payment until January 2004. However, in no event will the 2003 Bonus Payment be
paid to Executive any later than January 31, 2004. Any payments made to
Executive in accordance with this Section 4 shall be made only to the extent the
General Release set forth in Section 7 becomes irrevocable in accordance with
Section 7(c)(6).

     5.   Stock Options. The Company has amended Executive's stock options
granted to Executive by the Company under the Questcor Pharmaceuticals
Incorporated 1992. Stock Option Plan and as set forth in the option agreements
dated: May 31, 2000; September 18, 2000; January 12, 2001; May 14, 2001; August
6, 2001; March 13, 2002; and December 18, 2002 (the "Option" or "Options"), to
provide that such Options (or portions thereof), to the extent vested on the
Date of Resignation, will be exercisable following Executive's resignation from
employment with the Company on the Date of Resignation through March 31, 2005
subject to and provided that: (i) this Agreement is executed and delivered by
Executive to the Company and (ii) the General Release set forth in Section 7
becomes irrevocable in accordance with Section 7(c)(6). Each of Executive's
Options shall continue to vest in accordance with its terms from the Date of
this Agreement through the Date of Resignation. Executive acknowledges and
understands that to the extent an Option, or any portion thereof, qualifies as
an "incentive stock option" under Section 422 of the Internal Revenue Code of
1986, as amended, such Option, or some portion thereof, may cease to qualify or
meet the requirements of an incentive stock option upon such amendment and may
be deemed a nonqualified stock option as of the effective date of such
amendment. Executive acknowledges that he has been advised by the Company to
consult his personal tax advisor regarding the tax implications to such
amendment to the Options.

     6.   Benefits. From the Date of this Agreement through the Date of
Resignation, Executive shall be entitled to participate in the Company's
employee benefit plans as set forth on Exhibit A in a manner consistent with
Executive's participation in such plans as of the date immediately prior to the
Date of this Agreement and shall, from and after the Date of Resignation, be
eligible for continued benefits, at Executive's expense, under COBRA; provided,
however, Executive shall be entitled to participate in the Company's employee
benefit plans pursuant to this Section 6 only to the extent that General Release
set forth in Section 7 becomes irrevocable in accordance with Section 7(c)(6).

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     7.   Release of the Company

          a.   General Release. In consideration for the payments and the other
matters described herein, the receipt and adequacy of which are hereby
acknowledged, the Executive, on behalf of himself and his heirs, executors,
administrators, successors, agents and assigns, hereby fully and without
limitation releases and forever discharges the Company and its shareholders,
parents, owners, subsidiaries, divisions, affiliates, officers, directors,
agents, employees, consultants, insurers, representatives, lawyers,
predecessors, successors and assigns, employee welfare benefit plans and pension
or deferred compensation plans under Section 401 of the Internal Revenue Code of
1986, as amended, and their trustees, administrators and other fiduciaries, and
all persons acting by, through, under or in concert with them, or any of them
(the "Company Releasees"), both individually and collectively, from any and all
rights, claims, demands, liabilities, actions, causes of action, damages,
losses, costs, expenses and compensation, of whatever nature whatsoever, known
or unknown, fixed or contingent ("Claims"), which the Executive may have, or now
claims to have against, or in the future claims from the Company Releasees by
reason of any matter, cause or thing whatsoever, from the beginning of time to
the date hereof, including, without limiting the generality of the foregoing,
any Claims arising out of, based upon or relating to the Executive's
recruitment, relocation, hire, employment, benefits, remuneration (including
salary, bonus, incentive or other compensation, vacation, sick leave or medical
insurance benefits, and/or benefits from any employee stock ownership,
profit-sharing and/or any deferred compensation plan under Section 401 of the
Internal Revenue Code of 1986, as amended) or termination by the Company, or any
contract, agreement, or compensation arrangement between the Executive and the
Company, other than any obligation created in this Agreement or the Change of
Control Agreements (defined in paragraph 8 below); provided, however, if a
"Change of Control" (as defined in the Change of Control Agreements) shall not
have occurred by December 31, 2003, then such Change of Control Agreements shall
terminate and be of no further force or effect and be subject to the General
Release contained in this Section 7(a) in all respects, and Executive expressly
agrees to release the Company from liability for any and all rights, claims,
benefits or awards due Executive under such Change of Control Agreements. As
part of this Agreement, the Executive expressly waives any Claims arising out of
Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act, as
amended, the Age Discrimination in Employee Act, as amended, the Family and
Medical Leave Act of 1993, the California Fair Employee and Housing Act of 1993,
as amended, the California Labor Code (including but not limited to Section
970), the Fair Labor Standards Act, as amended, Section 17200 of the Business
and Professions Code, the federal and state wage and hour laws, the Americans
With Disabilities Act, as amended, the Immigration Reform and Control Act of
1986, the Employee Retirement Income Security Act of 1974, as amended, the
Uniformed Services Employment and Reemployment Rights Act, the Rehabilitation
Act of 1973, as amended, the California Family Rights Act, the Worker Adjustment
and Retraining Notification Act, the California common law of fraud,
misrepresentation, negligence, defamation, infliction of emotional distress,
breach of contract, or wrongful termination, and/or any other local, state or
federal law, rule or regulation governing employment, discrimination in
employment or the payment of wages and benefits. Nothing in this Paragraph shall
affect Executive's rights to vested funds held for his benefit in the Company's
401(k) plan.

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     b.   Release of Unknown Claims. The Executive acknowledges that he is aware
of California Civil Code Section 1542, which provides as follows:

     "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."

     With full awareness and understanding of the above provision, the Executive
hereby waives any rights he may have under Section 1542, as well as under any
other statutes or common law principles of similar effect. The Executive intends
to, and hereby does, release the Company Releasees from claims which he does not
presently know or suspect to exist at this time.

     c.   Release of Age Discrimination Claims. Executive agrees and expressly
acknowledges that this General Release includes a waiver and release of all
claims that Executive has or may have under the Age Discrimination in Employment
Act of 1967, as amended, 29 U.S.C. sec. 621, et seq. ("ADEA"). The following
terms and conditions apply to and are part of the waiver and release of the ADEA
claims under this Agreement:

          (1)  That this section and this Agreement are written in a manner
calculated to be understood by Executive.

          (2)  The waiver and release of claims under the ADEA contained in this
Agreement does not cover rights or claims that may arise after the date on which
Executive signs this Agreement.

          (3)  This Agreement provides for consideration in addition to anything
of value to which Executive is already entitled.

          (4)  Executive is advised to consult an attorney before signing this
Agreement.

          (5)  Executive is granted twenty-one (21) days after Executive is
presented with this Agreement to decide whether or not to sign this Agreement.
If Executive executes this Agreement prior to the expiration of such period,
Executive does so voluntarily and after having had the opportunity to consult
with an attorney.

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               (6)  Executive may revoke this Agreement within seven (7) days of
execution of the Agreement by Executive. Unless revoked by Executive, this
General Release shall become irrevocable upon the expiration of such 7-day
period ("Release Effective Date"). In the event of such a revocation, Executive
shall not be entitled to the consideration for this General Release set forth in
Sections 2, 4, 5, and 6.

          d.   No Assignment of Claims. Executive represents and warrants to the
Company Releasees that there has been no assignment or other transfer of any
interest in any Claim which Executive may have against the Company Releasees,
and Executive agrees to indemnify and hold the Company Releasees harmless from
any liability, claims, demands, damages, costs, expenses and attorneys' fees
incurred as a result of any person asserting any such assignment or transfer of
any rights or Claims under any such assignment or transfer from such Party.

          e.   No Suits or Actions. Executive has not filed any claims, actions
or charges against the Company Releasees. Executive agrees that if he hereafter
commences, joins in, or in any manner seeks relief through any suit arising out
of, based upon, or relating to any of the Claims released hereunder, or in any
manner asserts against the Company Releasees any of the Claims released
hereunder, then he will pay to the Company Releasees, in addition to any other
damages caused thereby, all attorneys' fees incurred by the Company Releasees in
defending or otherwise responding to said suit or Claim; provided, however, that
the requirement of payment of fees and/or damages shall not apply to claims or a
challenge to the release of claims under the Age Discrimination in Employment
Act.

     8.   Terminated Agreements. The offer of employment letter dated May 2,
2000, and amendment thereto dated March 25, 2003, entered into between Executive
and the Company (the "Terminated Agreement"), are hereby terminated in their
entirety and the obligations of the Parties thereunder are hereby terminated,
except to the extent provided in the amendments to the Terminated Agreement,
dated November 3, 2000 and March 21, 2003, relating to a change in control of
the Company (the "Change of Control Agreements"), subject to the provisions of
Sections 7 and 10 hereunder. Executive waives any and all rights, claims,
benefits and awards under the Terminated Agreement and releases the Company from
liability for any and all rights, claims, benefits or awards due Executive
thereunder. Executive further acknowledges and agrees that the Terminated
Agreement shall have no further force and effect.

     9.   Confidentiality of the Agreement. The Parties and their respective
agents, representatives, shareholders, officers, directors, attorneys,
employees, assigns, subsidiaries, affiliates, related companies, parent
companies, partners, partnerships, insurers, and predecessor or successor
companies shall maintain in strict confidence and shall not disclose the
contents of this Agreement (including the consideration received hereunder).
Notwithstanding the foregoing, such information may be disclosed by a Party (a)
in a legal action or proceeding to prove, interpret, or enforce this Agreement;
(b) by order of a court of competent jurisdiction; and (c) to its own employees,
outside accountants, financial advisors, lawyers, lenders, potential lenders,
insurers, or shareholders and taxing authorities to the extent necessary to
permit such individuals or entities to perform required tax, accounting,
insurance, financial, legal, or administrative tasks or services.

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     10.  Surviving Agreements. Nothing contained in this Agreement is intended
to or shall be construed to release or waive any rights of the Parties under any
agreement restricting solicitations of customers or employees of the Company, or
concerning the intellectual property of the Company. Company acknowledges that
the Change of Control Agreements shall remain in full force and effect through
December 31, 2003. Notwithstanding the foregoing, if a "Change of Control" (as
defined in the Change of Control Agreements) shall not have occurred by December
31, 2003, then such Change of Control Agreements shall terminate and be of no
further force or effect and be subject to the General Release contained in
Section 7(a) in all respects, and Executive expressly agrees to release the
Company from liability for any and all rights, claims, benefits or awards due
Executive under such Change of Control Agreements.

     11.  No Admission. Executive further understands and agrees that neither
the payment of money nor the execution of this Agreement shall constitute or be
construed as an admission of any liability whatsoever by the Company Releasees.

     12.  Acknowledgment. Executive represents and warrants that he (i) has
read this Agreement, (ii) has had adequate time to consider this Agreement,
(iii) understands the meaning and application of this Agreement, and (iv) has
signed this Agreement knowingly, voluntarily and of his own free will with the
intent of being bound by it.

     13.  Severability; Modification of Agreement. If any provision of this
Agreement shall be found invalid or unenforceable in whole or in part, then such
provisions shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable or shall be deemed
excised from this Agreement as such circumstances may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by law
as if such provision had been originally incorporated herein as so modified or
restricted or as if such provision had not been originally incorporated herein,
as the case may be.

     14.  Proprietary Information; Return of Company Property. The Executive
acknowledges that certain information, observations and data obtained by him
during the course of or related to his employment with the Company (including,
without limitation, financial information, shareholder information, product
design information, business plans, marketing plans or proposals and customer
lists and other customer information) are the sole property of the Company and
constitute trade secrets of the Company. On or before the Date of this
Agreement, the Executive agrees to promptly return all files, customer lists,
financial information or other Company property which are in the Executive's
possession or control without making copies thereof. Notwithstanding the
foregoing, Executive may retain the computer equipment formerly located in
Executive's office at the Company and currently in the possession of the
Executive. The Executive further agrees that he will not disclose to any person
or use for his own account any trade secret information, observations or data
without the written consent of the Company's Board of Directors, unless and to
the extent that the aforementioned matters become generally

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known to and available for use by the public, other than as a result of the
Executive's acts or omissions to act, which acts or omissions were unauthorized
and against the Company's interest. Further, the Executive acknowledges that any
unauthorized use of the above described confidential information will cause
irreparable harm to the Company and will give rise to an immediate action by the
Company for injunctive relief.

     15.  No Solicitation.

          a.   For a period of twelve (12) months after the Date of this
Agreement, Executive shall not, directly or indirectly, solicit, induce or
encourage any of the Company's employees, agents, independent contractors or
consultants to end their relationship with the Company.

          b.   For a period of twelve (12) months after the Date of this
Agreement, Executive shall not, directly or indirectly, solicit, induce or
encourage any of the Company's customers or potential customers to end their
relationship with the Company, or interfere in such customers' or potential
customers' relationship with the Company.

     16.  No Disparagement. The Parties shall not make any disparaging or
derogatory comments concerning each other. The Parties shall further refrain
from making any derogatory or disparaging comments toward or concerning other
Company employees, consultants or independent contractors.

     17.  Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the Parties hereto and their respective
successors and assigns. Notwithstanding the foregoing, neither this Agreement
nor any rights hereunder may be assigned to any party by the Company or
Executive without the prior written consent of the other Party hereto.

     18.  Headings. The headings in this Agreement are for convenience only, and
shall not be given any affect in the interpretation of this Agreement.

     19.  Waiver. No waiver of any provision of this Agreement shall be valid
unless it is in writing and signed by the Party against whom the waiver is
sought to be enforced. The failure of a Party to insist upon strict performance
of any provision of this Agreement in anyone or more instances shall not be
construed as a waiver or relinquishment of the right to insist upon strict
compliance with such provision in the future.

     20.  Entire Agreement; No Oral Modification. This is the entire agreement
between the Parties with respect to the subject matter hereof. Executive
represents and warrants that no promise or inducement has been offered or made
except as expressly set forth herein. Executive acknowledges that (i) the
consideration expressly set forth herein is the sole consideration for this
Agreement, and (ii) except as expressly set forth herein, Executive shall not be
entitled to receive any further compensation and/or benefits from the Company.
This

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Agreement may not be modified other than in a writing executed by both Parties
and stating its intent to modify or supersede this Agreement.

     21.  Choice of Law. The Parties agree that this Agreement shall be
construed and enforced in accordance with the laws of the State of California
without regard to the conflict of laws provisions thereof.

     22.  Arbitration.   The Parties agree that any and all disputes,
controversies or claims arising out of or relating to this Agreement, or breach
thereof, shall be submitted to final and binding arbitration. The arbitration
may be compelled and enforced according to the California Arbitration Act (Code
of Civil Procedure Sections 1280 et seq.). Unless the Parties mutually agree
otherwise, the arbitration shall be conducted before the American Arbitration
Association, according to its Employment Arbitration Rules. Judgment on the
award the arbitrator renders may be entered in any court having jurisdiction
over the Parties. Arbitration shall be initiated in accordance with the
Employment Arbitration Rules of the American Arbitration Association.

     23.  Fees. If any Party to this Agreement brings an action to enforce his
or its rights hereunder, the prevailing Party shall be entitled to recover his
or its costs and expenses, including attorneys' fees, if any, incurred in
connection with such action.

     24.  Counterparts: Fax Signatures. This Agreement may be executed in
counterparts. The Parties may executed faxed copies of this Agreement, and
faxed signatures may be relied upon by either Party.

     IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the
dates indicated below.

KENNETH R. GREATHOUSE                         QUESTCOR PHARMACEUTICALS, INC.

     /s/ KENNETH R. GREATHOUSE                By:     /s/ CHARLES J. CASAMENTO
----------------------------------               -------------------------------

Date:   September 30, 2003                    Title:  CHAIRMAN, PRESIDENT + CEO
     -----------------------------                  ----------------------------

                                              Date:   September 30, 2003
                                                   -----------------------------

                                       8Exhibit 4.1

 

EXHIBIT 4.1

ARADIGM CORPORATION

SECURITIES PURCHASE AGREEMENT

NOVEMBER 7, 2003

 

 

ARADIGM CORPORATION

SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this “Agreement”) is made as of
November 7, 2003, by and among Aradigm Corporation, a California corporation
(the “Company”) with its principal office at 3929 Point Eden Way, Hayward,
California 94545, and the persons listed on the Schedule of Purchasers attached
hereto as Exhibit A (the “Purchasers”).

RECITALS

     Whereas, the Company has authorized the sale and issuance of the Common
Shares and the Warrants (each as defined herein);

     Whereas, the Company and the Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D, as promulgated by the SEC (as defined
herein) under the Securities Act (as defined herein);

     Whereas, at the Closing, the Company desires to sell, and each Purchaser
desires to purchase, the Shares and the Warrants, upon the terms and conditions
stated in this Agreement; and

     Now, Therefore, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

Authorization and Sale of Common Shares and Warrants

     1.1 Authorization. The Company has authorized (a) the sale and issuance
of up to seven million five hundred two thousand seven hundred seventy-five
(7,502,775) shares of its Common Stock (the “Common Shares”) and (b) the sale
and issuance of warrants, in the form attached hereto as Exhibit B (the
“Warrants”), to purchase up to one million eight hundred seventy-five thousand
six hundred ninety-one (1,875,691) shares of the Company’s Common Stock (the
“Common Stock”) pursuant to this Agreement.

     1.2 Sale of Common Shares and Warrants. At the Closing (as defined
herein), subject to the terms and conditions of this Agreement, the Company
agrees to issue and sell to each Purchaser and each Purchaser severally agrees
to purchase from the Company:

          (a) Common Shares in the amount and at the purchase price set forth
opposite each Purchaser’s name on Exhibit A; and

1.

 

          (b) Warrants to purchase shares of the Company’s Common Stock in the
amount set forth opposite each Purchaser’s name on Exhibit A at an exercise
price equal to $2.50 per share of Common Stock (the
“Warrant Price”). The
shares of Common Stock issuable upon exercise of or otherwise pursuant to the
Warrants are referred to herein as the “Warrant Shares”. The Common Shares and
the Warrant Shares are collectively referred to herein as the “Shares”. The
Shares and the Warrants are collectively referred to herein as the
“Securities.”

ARTICLE 2

Closing Date; Delivery

     2.1 Closing Date. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Article 5 and Article 6 of this Agreement, the
closing of the purchase and sale of the Common Shares and Warrants hereunder
(the “Closing”) shall be held at the offices
of Cooley Godward llp (“Cooley
Godward”), One Maritime Plaza, 20th Floor, San Francisco, California 94111, at
10:00 a.m. California time on Monday, November 10, 2003 or at such other time
and place upon which the Company and the Purchasers purchasing the majority of
the Common Shares shall agree. The date of the Closing is hereinafter referred
to as the “Closing Date”.

     2.2 Delivery. At the Closing, the Company will deliver to each Purchaser
a duly executed Warrant and a certificate representing the number of Common
Shares to be purchased by such Purchaser, registered in the Purchaser’s name as
shown on Exhibit A. Such delivery shall be against payment of the purchase
price therefor by wire transfer of immediately available funds to the Company
in accordance with the Company’s written wiring instructions.

ARTICLE 3

Representations and Warranties of the Company

     Except as set forth on the Disclosure Schedule delivered by the Company to
the Purchasers herewith, the Company represents and warrants to the Purchasers:

     3.1 Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of the State
of California and is in good standing as a domestic corporation under the laws
of said state.

     3.2 Corporate Power; Authorization. The Company has all requisite legal
and corporate power and has taken all requisite corporate action to execute and
deliver this Agreement, to sell and issue the Common Shares and Warrants, to
issue the Warrant Shares upon exercise of the Warrants in accordance with the
terms of such Warrants, and to carry out and perform all of its obligations
under this Agreement. This Agreement constitutes, and upon execution and
delivery by the Company of the Warrants, the Warrants will constitute, legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors’ rights generally and (b) as limited by equitable
principles generally. The execution and delivery of this Agreement does not,
and the

2.

 

performance of this Agreement and the compliance with the provisions
hereof, the issuance, sale and delivery of the Common Shares and the Warrants
by the Company will not materially conflict with, or result in a material
breach or violation of the terms, conditions or provisions of, or constitute a
material default under, or result in the creation or imposition of any material
lien pursuant to the terms of, the Articles of Incorporation (the “Articles”)
or Bylaws of the Company or any statute, law, rule or regulation or any state
or federal order, judgment or decree or any indenture, mortgage, lease or other
material agreement or instrument to which the Company or any of its properties
is subject.

     3.3 Issuance and Delivery of the Shares. When issued in compliance with
the provisions of this Agreement and the Articles, the Common Shares will be
validly issued, fully paid and nonassessable. Upon exercise of the Warrants in
accordance with the terms thereof, the Warrant Shares will be validly issued,
fully paid and nonassessable. The issuance and delivery of the Common Shares
and the Warrants is not subject to preemptive or any other similar rights of
the shareholders of the Company or any liens or encumbrances.

     3.4 SEC Documents; Financial Statements. Each report or proxy statement
delivered to the Purchasers is a true and complete copy of such document as
filed by the Company with the Securities and Exchange Commission (the “SEC”).
The Company has filed in a timely manner all documents that the Company was
required to file with the SEC under Sections 13, 14(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the
twelve (12) months preceding the date of this Agreement. As of their
respective filing dates, all documents filed by the Company with the SEC (the
“SEC Documents”) complied in all material respects with the requirements of the
Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”),
as applicable. None of the SEC Documents as of their respective dates
contained any untrue statement of material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents (the “Financial Statements”) comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto. The Financial Statements have
been prepared in accordance with generally accepted accounting principles
consistently applied and fairly present the consolidated financial position of
the Company and any subsidiaries at the dates thereof and the consolidated
results of their operations and consolidated cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, recurring adjustments or to the extent
that such unaudited statements do not include footnotes).

     3.5 Governmental Consents. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with,
any federal, state, or local governmental authority on the part of the Company
is required in connection with the consummation of the transactions
contemplated by this Agreement except for (a) compliance with the securities
and blue sky laws in the states in which the Common Shares and Warrants are
offered and/or sold, which compliance will be effected in accordance with such
laws, (b) the filing of the Registration Statement (as defined herein) and all
amendments thereto with the SEC as contemplated by Section 7.2 of this
Agreement, and (c) the filing of the Nasdaq National Market Notification Form
with the Nasdaq National Market.

3.

 

     3.6 No Material Adverse Change. Except as otherwise disclosed herein or
in the SEC Documents, since June 30, 2003, there have not been any changes in
the assets, liabilities, financial condition, business prospects or operations
of the Company from that reflected in the Financial Statements except changes
in the ordinary course of business which have not been, either individually or
in the aggregate, materially adverse.

     3.7 Authorized Capital Stock. The authorized capital stock of the Company
consists of (a) one hundred million (100,000,000) shares of Common Stock, no
par value, of which, as of November 7, 2003, fifty-four million nine hundred
sixty-seven thousand five hundred twenty-one (54,967,521) shares were
outstanding, and (b) five million (5,000,000) shares of Preferred Stock, no par
value, one million (1,000,000) shares of which are designated Series A Junior
Participating Preferred Stock, none of which shares is currently outstanding,
and two million fifty thousand (2,050,000) of which are designated Series A
Convertible Preferred Stock, of which, as of November 7, 2003, one million five
hundred forty-four thousand six hundred twenty-six (1,544,626) shares are
outstanding. Except as described on Schedule 3.7 of the Disclosure Schedule,
there are no outstanding warrants, options, convertible securities or other
rights, agreements or arrangements of any character under which the Company is
or may be obligated to issue any equity securities of any kind and except as
contemplated by this Agreement.

     3.8 Litigation. Except as disclosed in the SEC Documents, there are no
actions, suits proceedings or investigations pending or, to the best of the
Company’s knowledge, threatened against the Company or any of its properties
before or by any court or arbitrator or any governmental body, agency or
official in which there is a reasonable likelihood (in the judgment of the
Company) of an adverse decision that (a) could have a material adverse effect
on the Company’s properties or assets or the business of the Company as
currently conducted, or (b) could impair the ability of the Company to perform
in any material respect its obligations under this Agreement.

     3.9 Eligibility to Use Form S-3. The Company is eligible to use Form S-3
for the registration of its securities under the Securities Act which are
offered in transactions involving secondary offerings.

     3.10
Company not an “Investment Company”. The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the “Investment Company Act”). The Company is not, and immediately after
receipt of payment for the Shares will not be, an “investment company” or an
entity “controlled” by an “investment company” within the meaning of the
Investment Company Act and shall conduct its business in a manner so that it
will not become subject to the Investment Company Act.

     3.11 NASDAQ Compliance. The Company’s Common Stock is registered
pursuant to Section 12(g) of the Exchange Act and is listed on The Nasdaq Stock
Market, Inc. National Market (the “Nasdaq National Market”), and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or de-listing the
Common Stock from the Nasdaq National Market, nor has the Company received any
notification that the SEC or the National Association of Securities Dealers,
Inc. is contemplating terminating such registration or listing

4.

 

     3.12 Use of Proceeds. The proceeds of the sale of the Common Shares and
the Warrants hereunder shall be used by the Company for working capital and
general corporate purposes.

     3.13 Brokers and Finders. No person or entity will have, as a result of
the transactions contemplated by this Agreement, any valid right, interest or
claim against or upon the Company or a Purchaser for any commission, fee or
other compensation pursuant to any agreement, arrangement or understanding
entered into by or on behalf of the Company, other than SG Cowen.

     3.14 No Directed Selling Efforts or General Solicitation. Neither the
Company nor any person or entity acting on its behalf has conducted any general
solicitation or general advertising (as those terms are used in Regulation D)
in connection with the offer or sale of any of the Securities.

     3.15 No Integrated Offering. Neither the Company nor any of its
Affiliates, nor any person or entity acting on its or their behalf has,
directly or indirectly, made any offers or sales of any Company security or
solicited any offers to buy any security, under circumstances that would
adversely affect reliance by the Company on Section 4(2) for the exemption from
registration for the transactions contemplated hereby or would require
registration of the Securities under the Securities Act.

     3.16 Private Placement. The offer and sale of the Securities to the
Purchasers as contemplated hereby is exempt from the registration requirements
of the Securities Act

     3.17 Intellectual Property.

          (a)
“Intellectual Property” shall mean patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes.

          (b) Except as disclosed in the SEC Documents and to the knowledge of the
Company, the Company owns or has the valid right to use all of the Intellectual
Property that is necessary for the conduct of the Company’s business as
currently conducted or as currently proposed to be conducted with respect to
products currently in clinical trials, free and clear of all material liens and
encumbrances.

          (c) Except as disclosed in the SEC Documents, the conduct of the Company’s
business as currently conducted does not infringe or otherwise conflict with
(collectively, “Infringe”) any Intellectual Property rights of any third party
or any confidentiality obligation owed by the Company to a third party, and, to
the knowledge of the Company, the Intellectual Property and confidential
information of the Company are not being Infringed by any third party.

          (d) Each employee, consultant and contractor of the Company who has had
access to confidential information of the Company which is necessary for the
conduct of Company’s business as currently conducted or as currently proposed
to be conducted has executed an agreement to maintain the confidentiality of
such confidential information and has

5.

 

executed appropriate agreements that are
substantially consistent with the Company’s standard forms thereof.

     3.18 Questionable Payments. Neither the Company nor, to the knowledge of
the Company, any of its current or former stockholders, directors, officers,
employees, agents or other persons acting on behalf of the Company, has on
behalf of the Company or in connection with its business: (a) used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (b) made any direct or
indirect unlawful payments to any governmental officials or employees from
corporate funds; (c) established or maintained any unlawful or unrecorded fund
of corporate monies or other assets; (d) made any false or fictitious entries
on the books and records of the Company; or (e) made any unlawful bribe,
rebate, payoff, influence payment, kickback or other unlawful payment of any
nature.

     3.19 Transactions with Affiliates. Except as disclosed in the SEC
Documents and as contemplated pursuant to this Agreement, none of the officers
or directors of the Company and, to the knowledge of the Company, none of the
employees of the Company is presently a party to any transaction with the
Company or to a presently contemplated transaction (other than for services as
employees, officers and directors) that would be required to be disclosed
pursuant to Item 404 of Regulation S-K promulgated under the Securities Act.

     3.20 Disclosure. Except as disclosed on Schedule 3.20 of the Disclosure
Schedule, the information contained in the Exchange Act Documents as of the
date hereof and as of the Closing Date, did not and shall not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. For purposes herein,
“Exchange Act Documents” are the documents filed by the Company under the
Exchange Act, since the end of its most recently completed fiscal year through
the date hereof, including, without limitation, its most recent report on Form
10-K.

ARTICLE 4

Representations, Warranties and Covenants of the Purchasers

     Each Purchaser hereby severally represents and warrants to the Company:

     4.1 Authorization. Purchaser represents and warrants to the Company that:
(a) Purchaser has all requisite legal and corporate or other power and capacity
and has taken all requisite corporate or other action to execute and deliver
this Agreement, to purchase the Common Shares and the Warrants to be purchased
by it and to carry out and perform all of its obligations under this Agreement,
and (b) this Agreement constitutes the legal, valid and binding obligation of
such Purchaser, enforceable in accordance with its terms, except (i) as limited
by applicable bankruptcy, insolvency, reorganization, or similar laws relating
to or affecting the enforcement of creditors’ rights generally and (ii) as
limited by equitable principles generally.

     4.2 Investment Experience. Purchaser is an “accredited investor” as
defined in Rule 501(a) under the Securities Act. Purchaser is aware of the
Company’s business affairs and financial condition and has had access to and
has acquired sufficient information about the

6.

 

Company to reach an informed and
knowledgeable decision to acquire the Common Shares and the Warrants. Purchaser
has such business and financial experience as is required to give it the
capacity to protect its own interests in connection with the purchase of the
Common Shares and Warrants.

     4.3 Investment Intent. Purchaser is purchasing the Common Shares and the
Warrants for its own account as principal, for investment purposes only, and
not with a present view to, or for, resale, distribution or fractionalization
thereof, in whole or in part, within the meaning of the Securities Act, other
than as contemplated by Article 7. Purchaser understands that its acquisition
of the Common Shares and the Warrants has not been registered under the
Securities Act or registered or qualified under any state securities law in
reliance on specific exemptions therefrom, which exemptions may depend upon,
among other things, the bona fide nature of Purchaser’s investment intent as
expressed herein. Purchaser has completed or caused to be completed the
Purchaser Questionnaire attached hereto as Exhibit C for use in preparation of
the Registration Statement, and the responses provided therein shall be true
and correct as of the Closing Date and will be true and correct as of the
effective date of the Registration Statement. Purchaser, in connection with its
decision to purchase the Common Shares and the Warrants, has relied solely upon
the SEC Documents and the representations and warranties of the Company
contained herein. Purchaser will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) any of the Securities except
in compliance with the Securities Act, and the rules and regulations
promulgated thereunder.

     4.4 Registration or Exemption Requirements. Purchaser further
acknowledges and understands that the Securities may not be resold or otherwise transferred except in a
transaction registered under the Securities Act or unless an exemption from
such registration is available.

     4.5 Dispositions. Purchaser will not, prior to the earlier of the
effectiveness of the Registration Statement (as defined below) or the
Effectiveness Deadline Date (as defined below), if then prohibited by law or
regulation: (a) sell, offer to sell, solicit offers to buy, dispose of, loan,
pledge or grant any right with respect to (collectively, a “Disposition”) the
Securities; or (b) engage in any hedging or other transaction which is designed
or could reasonably be expected to lead to or result in a Disposition of
Securities by such Purchaser or any person or entity. In addition, Purchaser
agrees that for so long as it owns any Shares, it will not enter into any short
sale of Shares executed at a time when the Purchaser has no equivalent
offsetting long position in the Common Stock. For purposes of determining
whether the Purchaser has an equivalent offsetting long position in the Shares,
shares that the Purchaser is entitled to receive within sixty (60) days
(whether pursuant to contract or upon conversion or exercise of convertible
securities) will be included as if held long by the Purchaser.

     4.6 No Legal, Tax or Investment Advice. Purchaser understands that
nothing in this Agreement or any other materials presented to Purchaser in
connection with the purchase and sale of the Common Shares and the Warrants
constitutes legal, tax or investment advice. Purchaser 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 Common Shares
and the Warrants.

7.

 

     4.7 Confidentiality. Purchaser will hold in confidence all information
concerning this Agreement and the placement of the Securities hereunder until
the earlier of such time as (a) the Company has made a public announcement
concerning the Agreement and the placement of the Securities hereunder, or (b)
this Agreement is terminated; provided, however, that the foregoing provision
of this Section 4.7 shall not apply if the Company does not issue a press
release concerning the Agreement and the placement of the Securities hereunder
within one (1) day of the date hereof.

     4.8 Residency. Purchaser’s principal executive offices are in the
jurisdiction set forth immediately below Purchaser’s name on the Schedule of
Purchasers attached hereto as Exhibit A.

     4.9 Governmental Review. Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Shares or the
Warrants.

     4.10 Legend. Purchaser understands that, until such time as the
Registration Statement has been declared effective or the Securities may be
sold pursuant to Rule 144 under the Securities Act without any restriction as
to the number of securities as of a particular date that can then be
immediately sold, the Securities may bear a restrictive legend in substantially
the following form (and a stop transfer order may be placed against transfer of
the certificates for the Shares):

		
	 	     “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR IN ANY OTHER JURISDICTION. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS
OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.”

     If Rule 144(k) is available to a Purchaser, the Company shall, upon a
Purchaser’s written request and delivery of appropriate documents reasonably
requested by the Company, promptly cause certificates evidencing the Securities
to be replaced with certificates which do not bear such restrictive legends,
and Warrant Shares subsequently issued upon due exercise of the Warrants shall
not bear such restrictive legends provided Rule 144(k) is available with
respect to such Warrant Shares.

     4.11 Foreign Investors. If Purchaser is not a United States person (as
defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended), Purchaser hereby represents that it has satisfied itself as to the
full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Common Shares and the Warrants or any use of
this Agreement, including (a) the legal requirements within its jurisdiction
for the purchase of

8.

 

the Common Shares and the Warrants, (b) any foreign
exchange restrictions applicable to such purchase or acquisition, (c) any
government or other consents that may need to be obtained, and (d) the income
tax and other tax consequences, if any, that may be relevant to the purchase,
holding, redemption, sale or transfer of the Securities. Purchaser’s
subscription and payment for and continued beneficial ownership of the
Securities will not violate any applicable securities or other laws of
Purchaser’s jurisdiction.

ARTICLE 5

Conditions to Closing Obligations of Purchasers

     Each Purchaser’s obligation to purchase the Common Shares and the Warrants
at the Closing is, at the option of such Purchaser, subject to the fulfillment
or waiver as of the Closing Date of the following conditions:

     5.1 Representations and Warranties. The representations and warranties
made by the Company in Article 3 hereof qualified as to materiality shall be
true and correct at all times prior to and on the Closing Date, except to the
extent any such representation or warranty expressly speaks as of an earlier
date, in which case such representation or warranty shall be true and correct
as of such earlier date, and the representations and warranties made by the
Company in Article 3 hereof not qualified as to materiality shall be true and correct in all material respects at all
times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which
case such representation or warranty shall be true and correct in all material
respects as of such earlier date.

     5.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.

     5.3 Certificates. The Company shall have delivered to the Purchasers duly
executed certificates for the Common Shares and the Warrants (in such
denominations as set forth opposite each Purchaser’s name on Exhibit A).

     5.4 Legal Opinion. The Purchasers shall have received on the Closing Date
an opinion of Cooley Godward, counsel for the Company, dated the Closing Date,
to the effect as set forth in Exhibit D.

     5.5 Listing. The Company shall have complied with all requirements with
respect to the listing of the Shares on the Nasdaq National Market, except for
such requirements not required until after the issuance of the Shares, such
requirements to be complied with promptly after Closing.

     5.6 Officer’s Certificate. The Company shall have delivered a
Certificate, executed on behalf of the Company by its Chief Executive Officer
or its Chief Financial Officer, dated as of the Closing Date, certifying to the
fulfillment of the conditions specified in Sections 5.1 and 5.2.

9.

 

     5.7 Judgments. No judgment, writ, order, injunction, award or decree of
or by any court, or judge, justice or magistrate, including any bankruptcy
court or judge, or any order of or by any governmental authority, shall have
been issued, and no action or proceeding shall have been instituted by any
governmental authority, enjoining or preventing the consummation of the
transactions contemplated hereby.

     5.8 Secretary’s Certificate. The Company shall have delivered a
Certificate, executed on behalf of the Company by its Secretary, dated as of
the Closing Date, certifying the resolutions adopted by the Board of Directors
of the Company approving the transactions contemplated by this Agreement and
the issuance of the Securities, certifying the current versions of the Articles
and Bylaws of the Company and certifying as to the signatures and authority of
persons signing this Agreement and related documents on behalf of the Company.

     5.9 Stop Orders. No stop order or suspension of trading shall have been
imposed by the Nasdaq National Market, the SEC or any other governmental
regulatory body with respect to public trading in the Common Stock.

     5.10 Minimum and Maximum Investment. The Company shall receive a minimum
of $10,000,000 of aggregate purchase price and a maximum of $15,000,000 of
aggregate purchase price in connection with the Closing.

ARTICLE 6

Conditions to Closing Obligations of Company

     The Company’s obligation to sell and issue the Common Shares and the
Warrants at the Closing is, at the option of the Company, subject to the
fulfillment or waiver of the following conditions:

     6.1 Receipt of Payment. The Purchasers shall have delivered payment of
the purchase price to the Company for the Common Shares and the Warrants being
issued hereunder.

     6.2 Representations and Warranties. The representations and warranties
made by the Purchasers in Article 4 hereof qualified as to materiality shall be
true and correct at all times prior to and on the Closing Date, except to the
extent any such representation or warranty expressly speaks as of an earlier
date, in which case such representation or warranty shall be true and correct
as of such earlier date, and, the representations and warranties made by the
Purchasers in Article 4 hereof not qualified as to materiality shall be true
and correct in all material respects at all times prior to and on the Closing
Date, except to the extent any such representation or warranty expressly speaks
as of an earlier date, in which case such representation or warranty shall be
true and correct in all material respects as of such earlier date.

     6.3 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Purchasers on or prior to the Closing Date
shall have been performed or complied with in all material respects.

10.

 

     6.4 Delivery of Purchaser Questionnaire. The Company shall have received
from each Purchaser a fully completed Purchaser Questionnaire in the form
attached hereto as Exhibit C prior to the Closing for the Company’s use in
preparing the Registration Statement pursuant to Article 7 below.

ARTICLE 7

Covenants

     7.1 Definitions. For the purpose of this Article 7:

          (a)
the term “Registration Statement” shall mean any registration
statement required to be filed by Section 7.2 below, and shall include any
preliminary prospectus, final prospectus, exhibit or amendment included in or
relating to such registration statements; and

          (b)
the term “Registrable Shares” shall mean all of the Common Shares and
the Warrant Shares.

     7.2 Registration Procedures and Expenses. The Company shall:

          (a) use its best efforts to file a Registration Statement with the SEC
within thirty (30) days following the Closing Date to register the Registrable
Shares on Form S-3 under the Securities Act (providing for shelf registration
of such Registrable Shares under SEC Rule 415) or on such other form which is
appropriate to register such Registrable Shares for resale from time to time by
the Purchasers;

          (b) use its best efforts, subject to receipt of necessary information from
the Purchasers, to cause any such Registration Statement filed pursuant to
Section 7.2(a) above to become effective as promptly after filing of such
Registration Statement as practicable but in any event by the date (the
“Effectiveness Deadline Date”) that is ninety (90) days following the Closing
Date; provided, however, that in the event that a Registration Statement is
reviewed by the SEC, then the Effectiveness Deadline Date shall mean, with
respect to any Registration Statement, the date that is one hundred twenty
(120) days following the Closing Date;

          (c) prepare and file with the SEC such amendments and supplements to such
Registration Statement and the prospectus used in connection therewith as may
be necessary to keep such Registration Statement continuously effective until
termination of such obligation as provided in Section 7.6 below, subject to the
Company’s right to suspend pursuant to Section 7.5;

          (d) furnish to each Purchaser (and to each underwriter, if any, of such
Registrable Shares) such number of copies of prospectuses in conformity with
the requirements of the Securities Act and such other documents as the
Purchasers may reasonably request, in order to facilitate the public sale or
other disposition of all or any of the Registrable Shares by the Purchasers;

          (e) file such documents as may be required of the Company for normal
securities law clearance for the resale of the Registrable Shares in such
states of the United States

11.

 

as may be reasonably requested by each Purchaser;
provided, however, that the Company shall not be required in connection with
this paragraph (e) to qualify as a foreign corporation or execute a general
consent to service of process in any jurisdiction;

          (f) advise each Purchaser promptly:

               (i) of the effectiveness of the Registration Statement or any
post-effective amendments thereto;

               (ii) of any request by the SEC for amendments to the Registration
Statement or amendments to the prospectus or for additional information
relating thereto;

               (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement under the Securities Act or of the
suspension by any state securities commission of the qualification of the
Registrable Shares for offering or sale in any jurisdiction, or the initiation
of any proceeding for any of the preceding purposes; and

               (iv) of the existence of any fact and the happening of any event that
makes any statement of a material fact made in the Registration Statement, the
prospectus and amendment or supplement thereto, or any document incorporated by
reference therein, untrue, or that requires the making of any additions to or changes in the
Registration Statement or the prospectus in order to make the statements
therein not misleading;

          (g) use its best efforts to cause all Registrable Shares to be listed on
each securities exchange, if any, on which equity securities by the Company are
then listed;

          (h) bear all expenses in connection with the procedures in paragraphs (a)
through (g) of this Section 7.2 and the registration of the Registrable Shares
on such Registration Statement and the satisfaction of the blue sky laws of
such states; and

          (i) otherwise use commercially reasonable efforts to make available to its
security holders no later than the Availability Date (as defined below), an
earnings statement covering a period of at least twelve (12) months, beginning
after the effective date of each Registration Statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act,
including Rule 158 promulgated thereunder (for the purpose of this subsection
3(i), “Availability Date” means the 45th day following the end of the fourth
fiscal quarter after the fiscal quarter that includes the effective date of
such Registration Statement, except that, if such fourth fiscal quarter is the
last quarter of the Company’s fiscal year, “Availability Date” means the 90th
day after the end of such fourth fiscal quarter).

     7.3 Delay in Effectiveness. If the Registration Statement is not declared
effective by the SEC on or prior to the Effectiveness Deadline Date, then for
each thirty (30) day period following the Effectiveness Deadline Date, until
but excluding the date the Registration Statement is declared effective, the
Company shall, for such period, pay each Purchaser, as liquidated damages and
not as a penalty, an amount equal to one and one-half percent (1.5%) of the
purchase price of the Common Shares purchased by such Purchaser hereunder, for
such period (or prorated for any partial period); and for any such period, such
payment shall be made no later than the first business day of the calendar
month next succeeding the last month in which

12.

 

such period occurs. The parties hereto agree that the liquidated damages
provided for in this Section 7.3 constitute a reasonable estimate of the
damages that may be incurred by the Purchasers by reason of the failure of the
Registration Statement to be declared effective in accordance with the
provisions hereof.

     7.4 Indemnification.

          (a) The Company agrees to indemnify and hold harmless each Purchaser, the
partners, members, officers and directors of each Purchaser and each person, if
any, who controls such Purchaser within the meaning of the Securities Act or
the Exchange Act, from and against any losses, claims, damages or liabilities
to which they may become subject (under the Securities Act or otherwise)
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any 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 under which they were made, not
misleading or arise out of any failure by the Company to fulfill any
undertaking included in the Registration Statement and the Company will, as
incurred, reimburse such Purchaser, partner, member, officer, director or
controlling person for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in any such case
to the extent that such loss, claim, damage or liability
(collectively, “Loss”)
arises out of, or is based upon, an untrue statement or omission or alleged
untrue statement or omission made in such Registration Statement in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of such Purchaser, partner, member, officer, director or controlling
person specifically for use in preparation of the Registration Statement or any
breach of this Agreement by such Purchaser; and provided further, however, that
the Company shall not be liable to any Purchaser of Registrable Shares (or any
partner, member, officer, director or controlling person of such Purchaser) to
the extent that any such Loss is caused by an untrue statement or omission or
alleged untrue statement or omission made in any preliminary prospectus if
either (i)(A) such Purchaser failed to send or deliver a copy of the final
prospectus with or prior to the delivery of written confirmation of the sale by
such Purchaser to the person asserting the claim from which such Loss resulted
and (B) the final prospectus corrected such untrue statement or omission, (ii)
(X) such untrue statement or omission is corrected in an amendment or
supplement to the prospectus and (Y) having previously been furnished by or on
behalf of the Company with copies of the prospectus as so amended or
supplemented, such Purchaser thereafter fails to deliver such prospectus as so
amended or supplemented, with or prior to the delivery of written confirmation
of the sale of a Registrable Share to the person asserting the claim from which
such Loss resulted or (iii) such Purchaser sold Registrable Shares in violation
of such Purchaser’s covenant contained in Section 7.5 of this Agreement.

          (b) Each Purchaser, severally and not jointly, agrees to indemnify and
hold harmless the Company (and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, each officer of the Company who signs the Registration Statement
and each director of the Company), from and against any losses, claims, damages
or liabilities to which the Company (or any such officer, director or
controlling person) may become subject (under the Securities Act or otherwise),

 13.

 

insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any breach of
this Agreement by such Purchaser or any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
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 under which they were made, not misleading in each case, on the
effective date thereof, if, and to the extent, such untrue statement or
omission or alleged untrue statement or omission was made in reliance upon and
in conformity with written information furnished by or on behalf of such
Purchaser specifically for use in preparation of the Registration Statement,
and such Purchaser will reimburse the Company (and each of its officers,
directors or controlling persons) for any legal or other expenses reasonably
incurred in investigating, defending or preparing to defend any such action,
proceeding or claim; provided, however, that in no event shall any indemnity
under this Section 7.4(b) be greater in amount than the dollar amount of the
proceeds (net of the amount of any damages such Purchaser has otherwise been
required to pay by reason of such untrue statement or omission or alleged
untrue statement or omission) received by such Purchaser upon the sale of the
Registrable Securities included in the Registration Statement giving rise to
such indemnification obligation.

          (c) Promptly after receipt by any indemnified person of a notice of a
claim or the beginning of any action in respect of which indemnity is to be
sought against an indemnifying person pursuant to this Section 7.4, such
indemnified person shall notify the indemnifying person in writing of such
claim or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and such indemnifying person shall have been notified
thereof, such indemnifying person shall be entitled to participate therein,
and, to the extent that it shall wish, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified person. After notice from
the indemnifying person to such indemnified person of its election to assume
the defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person
or any affiliate or associate thereof, the indemnified person shall be entitled
to retain its own counsel at the expense of such indemnifying person; provided,
further, that no indemnifying person shall be responsible for the fees and
expense of more than one separate counsel for all indemnified parties. The
indemnifying party shall not settle an action without the consent of the
indemnified party, which consent shall not be unreasonably withheld.

          (d) If after proper notice of a claim or the commencement of any action
against the indemnified party, the indemnifying party does not choose to
participate, then the indemnified party shall assume the defense thereof and
upon written notice by the indemnified party requesting advance payment of a
stated amount for its reasonable defense costs and expenses, the indemnifying
party shall advance payment for such reasonable defense costs and expenses (the
“Advance Indemnification Payment”) to the indemnified party. In the event that
the indemnified party’s actual defense costs and expenses exceed the amount of
the Advance Indemnification Payment, then upon written request by the
indemnified party, the indemnifying party shall reimburse the indemnified party
for such difference; in the event that the Advance

 14.

 

Indemnification Payment exceeds the indemnified party’s actual costs and
expenses, the indemnified party shall promptly remit payment of such difference
to the indemnifying party.

          (e) If the indemnification provided for in this Section 7.4 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any losses, claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party thereunder,
shall to the extent permitted by applicable law contribute to the amount paid
or payable by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the
other, as well as any other relevant equitable considerations;
provided, that
in no event shall any contribution by an indemnifying party hereunder be
greater in amount than the dollar amount of the proceeds (net of the amount of
any damages such indemnifying party has otherwise been required to pay by
reason of such untrue statement or omission or alleged untrue statement or
omission) received by such indemnifying party upon the sale of the Registrable
Securities included in the Registration Statement giving rise to such
indemnification obligation..

     7.5 Prospectus Delivery. Each Purchaser hereby covenants with the Company
not to make any sale of the Registrable Shares without complying with Section
8.3. The Purchaser acknowledges that there may be times when the Company must
suspend the use of the prospectus forming a part of the Registration Statement
until such time as an amendment to the Registration Statement has been filed by
the Company and declared effective by the SEC, or until such time as the
Company has filed an appropriate report with the SEC pursuant to the Exchange
Act. The Purchaser hereby covenants that it will not sell any Registrable
Shares pursuant to said prospectus during the period commencing at the time at
which the Company gives the Purchaser notice of the suspension of the use of
said prospectus and ending at the time the Company gives the Purchaser notice
that the Purchaser may thereafter effect sales pursuant to said prospectus;
provided that such suspension periods shall in no event exceed thirty (30) days
in any twelve (12) month period and that, in the good faith judgment of the
Company’s Board of Directors, the Company would, in the absence of such delay
or suspension hereunder, be required under state or federal securities laws to
disclose any corporate development, a potentially significant transaction or
event involving the Company, or any negotiations, discussions, or proposals
directly relating thereto, in either case the disclosure of which would
reasonably be expected to have a material adverse effect upon the Company or
its shareholders; provided further, that the Company may suspend the use of the
prospectus forming a part of the Registration Statement to the extent necessary
to file any post-effective amendment to the Registration Statement in order to
amend the table of selling stockholders within the Registration Statement to
reflect transfers of the Securities pursuant to Sections 8.3(a) and 8.3(b).

     7.6 Termination of Obligations. The obligations of the Company pursuant
to Section 7.2 hereof shall cease and terminate upon the earlier to occur of
(a) such time as all of the Registrable Shares have been resold, (b) such time
as all of the Registrable Shares may be resold in a three-month period pursuant
to Rule 144, or (c) the third anniversary of the Closing Date.

 15.

 

     7.7 Reporting Requirements.

          (a) With a view to making available the benefits of certain rules and
regulations of the SEC that may at any time permit the sale of the Securities
to the public without registration or pursuant to a registration statement on
Form S-3, the Company agrees to use its best efforts to:

               (i) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;

               (ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and

               (iii) so long as any of the Purchasers own Registrable Shares, to furnish
to such Purchaser upon request (A) a written statement by the Company as to
whether it is in compliance with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, or whether it is qualified as a registrant
whose securities may be resold pursuant to SEC Form S-3, and (B) a copy of the
most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company.

     7.8 Blue Sky. The Company shall obtain and maintain all necessary blue
sky law permits and qualifications, or secured exemptions therefrom, required
by any state for the offer and sale of Securities.

ARTICLE 8

Restrictions on Transferability of Securities;

Compliance with Securities Act

     8.1 Restrictions on Transferability. The Securities shall not be
transferable in the absence of a registration under the Securities Act or an
exemption therefrom. The Company shall be entitled to give stop transfer
instructions to its transfer agent with respect to the Securities in order to
enforce the foregoing restrictions.

     8.2 Instruction Sheet. Each certificate representing Registrable Shares
shall bear the Instruction Sheet attached hereto as Exhibit E (in addition to
any legends required under applicable securities laws).

     8.3 Transfer of Securities.

          (a) Each Purchaser hereby covenants with the Company not to make any sale
of the Securities except:

               (i) in accordance with the Registration Statement, in which case Purchaser
covenants to comply with the requirement of delivering a current prospectus; or

               (ii) in accordance with Rule 144, in which case Purchaser covenants to
comply with Rule 144; or

 16.

 

               (iii) (A) If the transferee has agreed in writing to be bound by the terms
of this Agreement, (B) such Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (C) if
reasonably requested by the Company, such Purchaser shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such shares under the
Securities Act.

          (b) Notwithstanding the provisions of subsection (a) above, no such
restriction shall apply to a transfer by a Purchaser that is (i) a partnership
transferring to its partners or former partners in accordance with partnership
interests, (ii) a corporation transferring to a wholly-owned subsidiary or a
parent corporation that owns all of the capital stock of the Purchaser, (iii) a
limited liability company transferring to its members or former members in
accordance with their interest in the limited liability company, or (iv) an
individual transferring to the Purchaser’s family member or trust for the
benefit of an individual Purchaser; provided that in each case the transferee
will agree in writing to be subject to the terms of this Agreement to the same
extent as if he were an original Purchaser hereunder.

          (c) Purchaser further acknowledges and agrees that, if a Purchaser is
selling the Securities using the prospectus forming a part of the Registration
Statement, such Securities are not transferable on the books of the Company
unless the certificate evidencing such Securities is submitted to the Company’s
transfer agent and a separate certificate executed by an officer of, or other
person duly authorized by, the Purchaser in the form attached hereto as Exhibit
F is submitted to Cooley Godward.

     8.4 Purchaser Information. Each Purchaser covenants that it will promptly
notify the Company of any changes in the information set forth in the
Registration Statement regarding such Purchaser or such Purchaser’s “Plan of
Distribution.”

ARTICLE 9

Miscellaneous

     9.1 Termination.

          (a) This Agreement may be terminated and the sale and purchase of the
Common Shares and the Warrants abandoned at any time prior to the Closing, by
written notice of any individual Purchaser if the Closing has not occurred
within five (5) business days of the date hereof (other than as a result of the
failure on the part of the party giving such notice of termination to perform
its covenants and obligations under this Agreement in all material respects);
provided, however, that the abandonment of the sale and purchase of the Common
Shares and the Warrants shall be applicable only to such Purchaser providing
such written notice.

          (b) If this Agreement is terminated pursuant to this Section 9.1 all
further obligations of the parties shall terminate; provided,
however, that (i)
no party shall be relieved of any liability arising from any breach by such
party of any provision of this Agreement and (ii)

 17.

 

the parties shall, in all events, remain bound by and continue to be
subject to the provisions set forth in this Article 9.

     9.2 Waivers and Amendments. With the exception of Article 7 hereof, the
terms of this Agreement may be waived or amended with the written consent of
the Company and each Purchaser. With respect to Article 7 hereof, with the
written consent of the Company and the record holders of more than fifty
percent (50%) of the Registrable Shares then outstanding and held by
Purchasers, the terms of this Agreement may be waived or amended and any such
amendment or waiver shall be binding upon the Company and all holders of
Registrable Shares.

     9.3 Broker’s Fee. Each Purchaser acknowledges that the Company intends to
pay a fee in respect of the sale of the Securities to SG Cowen Securities
Corporation. Each of the parties to this Agreement represents that, on the
basis of any actions and agreements by it, there are no other brokers or
finders entitled to compensation in connection with the sale of Securities to
the Purchasers.

     9.4 Governing Law. This Agreement shall be governed in all respects by
and construed in accordance with the laws of the State of California without
any regard to conflicts of laws principles.

     9.5 Survival. The representations, warranties, covenants and agreements
made in this Agreement shall survive any investigation made by the Company or
the Purchasers and the Closing.

     9.6 Successors and Assigns. The provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties to this Agreement. Upon a permitted transfer of
a Purchaser’s Securities on the books of the Company in accordance with the
terms of Sections 8.3(a)(iii) or 8.3(b), the Purchaser may assign this
Agreement to the permitted transferee upon prior written notice to the Company.
Except as set forth in the previous sentence, no Purchaser shall assign this
Agreement without the prior written consent of the Company.

     9.7 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
thereof.

     9.8 Notices, etc. All notices and other communications required or
permitted under this Agreement shall be in writing and may be delivered in
person, by telecopy, overnight delivery service or registered or certified
United States mail, addressed to the Company or the Purchasers, as the case may
be, at their respective addresses set forth at the beginning of this Agreement
or on Exhibit A, or at such other address as the Company or the Purchasers
shall have furnished to the other party in writing. All notices and other
communications shall be effective upon the earlier of actual receipt thereof by
the person to whom notice is directed or (a) in the case of notices and
communications sent by personal delivery or telecopy, one business day after
such notice or communication arrives at the applicable address or was
successfully sent to the applicable telecopy number, (b) in the case of notices
and communications sent by overnight delivery service, at noon (local time) on
the second business day following the day such notice or communication was
sent, and (c) in the case of notices and communications sent

 18.

 

by United States mail, seven days after such notice or communication shall
have been deposited in the United States mail.

     9.9 Severability of this Agreement. If any provision of this Agreement
shall be judicially determined to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

     9.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

     9.11 Further Assurances. Each party to this Agreement shall do and
perform or cause to be done and performed all such further acts and things and
shall execute and deliver all such other agreements, certificates, instruments
and documents as the other party hereto may reasonably request in order to
carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.

     9.12 Expenses. The Company shall bear the expenses incurred on its behalf
with respect to this Agreement and the transactions contemplated hereby,
including fees of legal counsel. The Company agrees to reimburse counsels for
the Purchasers for their reasonable fees and expenses (in an amount not to
exceed twenty-five thousand dollars ($25,000) in the aggregate) incurred by
them with respect to this Agreement and the transactions contemplated hereby.

     9.13 Currency. All references to “dollars” or “$” in this Agreement shall
be deemed to refer to United States dollars.

     9.14 Waiver of Conflicts. Each party to this Agreement acknowledges that
legal counsel for the Company, Cooley Godward, has in the past and may continue
in the future to perform legal services for one or more of the Purchasers or
their affiliates in matters unrelated to the transactions contemplated by this
Agreement, including, but not limited to, the representation of the Purchasers
in matters of a similar nature to the transactions contemplated herein. Each
party to this Agreement hereby (a) acknowledges that they have had an
opportunity to ask for and have obtained information relevant to such
representation, including disclosure of the reasonably foreseeable adverse
consequences of such representation; (b) acknowledges that with respect to the
transactions contemplated herein, Cooley Godward has represented the Company
and not any individual Purchaser or any individual shareholder, director or
employee of the Company; and (c) gives its informed consent to Cooley Godward’s
representation of the Company in the transactions contemplated by this
Agreement.

 19.

 

The foregoing agreement is hereby executed as of the date first above written.

	 	 	 	 	 
	 	 	ARADIGM CORPORATION, a California corporation
	 	 	 	 	 
	 	 	
By:
	 	/s/ Richard P. Thompson
	 	 	

	 	 	
Name:
	 	Richard P. Thompson
	 	 	
Title:
	 	Chief Executive Officer
	 	 	 	 	 
	 	 	PURCHASERS:
	 	 	 	 	 
	 	 	SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Steven Becker
	 	 	

	 	 	
Name:
	 	Steven Becker
	 	 	
Title:
	 	Managing Director
	 	 	 	 	 
	 	 	SPECIAL SITUATIONS CAYMAN FUND, L.P.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Steven Becker
	 	 	

	 	 	
Name:
	 	Steven Becker
	 	 	
Title:
	 	Managing Director
	 	 	 	 	 
	 	 	SPECIAL SITUATIONS FUND, III L.P.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Steven Becker
	 	 	

	 	 	
Name:
	 	Steven Becker
	 	 	
Title:
	 	Managing Director
	 	 	 	 	 
	 	 	THE CONUS FUND L.P.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Andrew D. Zacks
	 	 	

	 	 	
Name:
	 	Andrew D. Zacks
	 	 	
Title:
	 	Managing Member, G.P.

SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT

 

	 	 	 	 	 
	 	 	EAST HUDSON INC. (BVI)
	 	 	 	 	 
	 	 	
By:
	 	/s/ Andrew D. Zacks
	 	 	

	 	 	
Name:
	 	Andrew D. Zacks
	 	 	
Title:
	 	Managing Director, Investment Manager
	 	 	 	 	 
	 	 	THE CONUS FUND OFFSHORE LTD.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Andrew D. Zacks
	 	 	

	 	 	
Name:
	 	Andrew D. Zacks
	 	 	
Title:
	 	Director, Managing Director, Investment Manager
	 	 	 	 	 
	 	 	THE CONUS FUND (QP) L.P.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Andrew D. Zacks
	 	 	

	 	 	
Name:
	 	Andrew D. Zacks
	 	 	
Title:
	 	Managing Member, G.P.

	 	 	 	 	 
	 	 	BAYSTAR CAPITAL II, LP, a Delaware limited
	 	 	partnership
	 	 	 	 	 
	 	 	By:     BayStar Capital Management, LLC, its general partner
	 	 	 	 	 
	 	 	 	
By:
	/s/ Steven M. Lamar
	 	 	 	 	

	 	 	 	
Name: 
	Steven M. Lamar
	 	 	 	
Title: 
	Managing Member
	 	 	 	 	 
	 	 	CRESTVIEW CAPITAL FUND II, LP
	 	 	 	 	 
	 	 	
By:
	 	/s/ Stewart R. Flink
	 	 	

	 	 	
Name:
	 	Stewart R. Flink
	 	 	
Title:
	 	Managing Partner

SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT

 

	 	 	 	 	 
	 	CASTLE CREEK HEALTHCARE PARTNERS, LLC
	 	 	 	 	 
	 	By: Castle Creek Partners, LLC
	 	 	 	 	 
	 	 	
By:
	 	/s/ Thomas A. Frei
	 	 	

	 	 	
Name:
	 	Thomas A. Frei
	 	 	
Title:
	 	Investment Manager
	 	 	 	 	 
	 	CC LIFESCIENCE, LTD.
	 	 	 	 	 
	 	By: Castle Creek Lifescience Partners, LLC
	 	 	 	 	 
	 	 	
By:
	 	/s/ Thomas A. Frei
	 	 	

	 	 	
Name:
	 	Thomas A. Frei
	 	 	
Title:
	 	Investment Manager
	 	 	 	 	 
	 	CAPITAL VENTURES INTERNATIONAL
	 	 	 	 	 
	 	By: Heights Capital Management, Inc., its authorized agent
	 	 	 	 	 
	 	 	
By:
	 	/s/ Martin Kobinger
	 	 	

	 	 	
Name:
	 	Martin Kobinger
	 	 	
Title:
	 	Investment Manager
	 	 	 	 	 
	 	PENN FOOTWEAR CO.
	 	 	 	 	 
	 	 	
By:
	 	/s/ Jeff Davidowitz
	 	 	

	 	 	
Name:
	 	Jeff Davidowitz
	 	 	
Title:
	 	President

SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT

 

Exhibit A

SCHEDULE OF PURCHASERS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Purchase	 	Common	 	 	 	 
	Purchaser	 	Price	 	Shares	 	Warrants
	Special Situations Private Equity Fund, L.P.
	 	$	1,999,999.80	 	 	 	1,111,111	 	 	 	277,777	 
	153 E. 53rd Street, 55th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10022
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (212) 207-6505
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (212) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Steve Becker
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: New York
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Special Situations Cayman Fund, L.P.
	 	$	499,998.60	 	 	 	277,777	 	 	 	69,444	 
	153 E. 53rd Street, 55th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10022
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (212) 207-6505
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (212) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Steve Becker
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: [Cayman
	 	 	 	 	 	 	 	 	 	 	 	 
	Islands]
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Special Situations Fund III, L.P.
	 	$	1,499,999.40	 	 	 	833,333	 	 	 	208,333	 
	153 E. 53rd Street, 55th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10022
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (212) 207-6505
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (212) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Steve Becker
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: New York
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Castle Creek Healthcare Partners LLC
	 	$	749,998.80	 	 	 	416,666	 	 	 	104,166	 
	c/o Castle Creek Partners
	 	 	 	 	 	 	 	 	 	 	 	 
	111 West Jackson Boulevard, Suite 2020
	 	 	 	 	 	 	 	 	 	 	 	 
	Chicago, Illinois 60604
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (312) 499-6900
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (312) 499-6999
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Thomas A. Frei
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence:
	 	 	 	 	 	 	 	 	 	 	 	 
	Delaware
	 	 	 	 	 	 	 	 	 	 	 	 

A-1.

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Purchase	 	Common	 	 	 	 
	Purchaser	 	Price	 	Shares	 	Warrants
	CC Lifescience, Ltd.
	 	$	749,998.80	 	 	 	416,666	 	 	 	104,166	 
	c/o Castle Creek
	 	 	 	 	 	 	 	 	 	 	 	 
	111 West Jackson Boulevard, Suite 2020
	 	 	 	 	 	 	 	 	 	 	 	 
	Chicago, Illinois 60604
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (312) 499-6900
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (312) 499-6999
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Thomas A. Frei
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence:
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Delaware
	 	 	 	 	 	 	 	 	 	 	 	 
	The Conus Fund L.P.
	 	$	427,860.00	 	 	 	237,700	 	 	 	59,425	 
	c/o Conus Partners, Inc.
	 	 	 	 	 	 	 	 	 	 	 	 
	1 Rockefeller Pl., 19th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10020
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (212) 332-7265
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (212) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Andrew Zacks
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: New York
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	East Hudson Inc. (BVI)
	 	$	71,100.00	 	 	 	39,500	 	 	 	9,875	 
	c/o Conus Partners, Inc.
	 	 	 	 	 	 	 	 	 	 	 	 
	1 Rockefeller Pl., 19th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10020
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Andrew Zacks
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: British
	 	 	 	 	 	 	 	 	 	 	 	 
	Virgin Islands
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	The Conus Fund Offshore Ltd.
	 	$	72,900.00	 	 	 	40,500	 	 	 	10,125	 
	c/o Hedge Fund Services (BVI) Ltd.
	 	 	 	 	 	 	 	 	 	 	 	 
	Skelton Building, 2nd Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	P.O. Box 23
	 	 	 	 	 	 	 	 	 	 	 	 
	Roadtown, Tortola, British Virgin Islands
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: British
	 	 	 	 	 	 	 	 	 	 	 	 
	Virgin
Islands

The Conus Fund (QP) L.P.
	 	$	58,140.00	 	 	 	32,300	 	 	 	8,075	 
	c/o Conus Partners, Inc.
	 	 	 	 	 	 	 	 	 	 	 	 
	1 Rockefeller Pl., 19th Floor
	 	 	 	 	 	 	 	 	 	 	 	 
	New York, New York 10020
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Andrew Zacks
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: New York
	 	 	 	 	 	 	 	 	 	 	 	 

A-2.

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Purchase	 	Common	 	 	 	 
	Purchaser	 	Price	 	Shares	 	Warrants
	BayStar Capital II, LP
	 	$	1,999,999.80	 	 	 	1,111,111	 	 	 	277,777	 
	c/o BayStar Capital Management, LLC
	 	 	 	 	 	 	 	 	 	 	 	 
	80 E. Sir Francis Drake Blvd., Suite 2B
	 	 	 	 	 	 	 	 	 	 	 	 
	Larkspur, California 94939
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (415) 834-4600
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (415) 834-4601
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Steven Lamar
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: California
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Crestview Capital Fund II, LP
	 	$	999,999.00	 	 	 	555,555	 	 	 	138,888	 
	95 Revere Drive, Suite F
	 	 	 	 	 	 	 	 	 	 	 	 
	Northbrook, Illinois 60062
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (847) 559-0060
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (847) 559-5807
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Stewart Flink
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: Illinois
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Capital Ventures International
	 	$	2,999,998.80	 	 	 	1,666,666	 	 	 	416,666	 
	c/o Heights Capital Management
	 	 	 	 	 	 	 	 	 	 	 	 
	425 California Street, Suite 1100
	 	 	 	 	 	 	 	 	 	 	 	 
	San Francisco, California 94104
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (415) 403-6500
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (415) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Martin Kobinger
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: Cayman
	 	 	 	 	 	 	 	 	 	 	 	 
	Islands
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Penn Footwear Co.
	 	$	1,374,998.40	 	 	 	763,888	 	 	 	190,972	 
	Line and Grove Streets, P.O. Box 87
	 	 	 	 	 	 	 	 	 	 	 	 
	Nanticoke, Pennsylvania 18634
	 	 	 	 	 	 	 	 	 	 	 	 
	Tel: (570) 735-3200
	 	 	 	 	 	 	 	 	 	 	 	 
	Fax: (570) -
	 	 	 	 	 	 	 	 	 	 	 	 
	Attn: Jeff Davidowitz
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	State or Country of Residence: Pennsylvania
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	TOTAL
	 	$	13,504,991.40	 	 	 	7,502,773	 	 	 	1,875,689	 

A-3.

 

Exhibit B

FORM OF WARRANT

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

ARADIGM CORPORATION

WARRANT TO PURCHASE COMMON STOCK

November 10, 2003

Void After November 10, 2007

     This Certifies That, for value received,             , or assigns (the
“Holder”), is entitled to subscribe for and purchase at the Exercise Price
(defined below) from Aradigm Corporation, a California corporation, with its
principal office at 3929 Point Eden Way, Hayward, CA 94545 (the “Company”) up
to      (            ) shares of the Common Stock of the Company (the “Common
Stock”).

     1.     Definitions. As used herein, the following terms shall have the
following respective meanings:

          (a) “Exercise Period” shall mean the period commencing with the date
hereof and ending four (4) years from the date hereof, unless sooner terminated
as provided below.

          (b) “Exercise Price” shall mean $2.50 per share, subject to adjustment
pursuant to Section 5 below.

          (c) “Exercise Shares” shall mean the shares of the Company’s Common Stock
issuable upon exercise of this Warrant.

     2.     Exercise of Warrant. The rights represented by this Warrant may be
exercised in whole or in part at any time during the Exercise Period, by
delivery of the following to the Company at its address set forth above (or at
such other address as it may designate by notice in writing to the Holder):

          (a) An executed Notice of Exercise in the form attached hereto;

          (b) Payment of the Exercise Price either (i) in cash or by check, or (ii)
by cancellation of indebtedness; and

B-1

 

          (c) This Warrant.

     Upon the exercise of the rights represented by this Warrant, a certificate
or certificates for the Exercise Shares so purchased, registered in the name of
the Holder or persons affiliated with the Holder, if the Holder so designates,
shall be issued and delivered to the Holder within a reasonable time after the
rights represented by this Warrant shall have been so exercised.

     The person in whose name any certificate or certificates for Exercise
Shares are to be issued upon exercise of this Warrant shall be deemed to have
become the holder of record of such shares on the date on which this Warrant
was surrendered and payment of the Exercise Price was made, irrespective of the
date of delivery of such certificate or certificates, except that, if the date
of such surrender and payment is a date when the stock transfer books of the
Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.

     2.1 Net Exercise. Notwithstanding any provisions herein to the contrary,
after the Effectiveness Deadline Date (as defined in Section 7.2(b) of the
Securities Purchase Agreement dated November 7, 2003, (the “Purchase
Agreement”) by and among the Company and the persons listed on the Schedule of
Purchasers attach thereto as Exhibit A), if (i) the Registration Statement (as
defined in the Purchase Agreement) has not been declared effective until such
time as the Registration Statement is declared effective or at any time a
Registration Statement is no longer effective and (ii) the fair market value of
one share of the Company’s Common Stock is greater than the Exercise Price (at
the date of calculation as set forth below), in lieu of exercising this Warrant
by payment of cash, the Holder may elect to receive shares equal to the value
(as determined below) of this Warrant (or the portion thereof being canceled)
by surrender of this Warrant at the principal office of the Company together
with the properly endorsed Notice of Exercise in which event the Company shall
issue to the Holder a number of shares of Common Stock computed using the
following formula:

	 	 	 	 	 	 
	X	 	
=
	 	Y (A-B)	 
	 	 	 	 	
	 
	 	 	 	 	A	 

	 	 	 	 	 	 	 
	Where	 	
X
	 	=
	 	the number of shares of Common Stock to be issued to the Holder
	 	 	 	 	 	 	 
	 	 	
Y
	 	=
	 	the number of shares of Common Stock
purchasable under the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the Warrant being
canceled (at the date of such calculation)
	 	 	 	 	 	 	 
	 	 	
A
	 	=
	 	the fair market value of one share of the
Company’s Common Stock (at the date of such calculation)
	 	 	 	 	 	 	 
	 	 	
B
	 	=
	 	Exercise Price (as adjusted to the date of such
calculation)

     For purposes of the above calculation, the “fair market value” of one
share of Common Stock shall mean (i) the average of the closing sales prices
for the shares of Common Stock on the Nasdaq National Market or other trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets (or a comparable reporting service of national

B-2

 

reputation selected by the Company and reasonably acceptable to the
holders if Bloomberg Financial Markets is not then reporting sales prices of
such security) (collectively, “Bloomberg”) for the ten (10) consecutive trading
days immediately preceding such date, or (ii) if the Nasdaq National Market is
not the principal trading market for the shares of Common Stock, the average of
the reported sales prices reported by Bloomberg on the principal trading market
for the Common Stock during the same period, or, if there is no sales price for
such period, the last sales price reported by Bloomberg for such period, or
(iii) if neither of the foregoing applies, the last sales price of such
security in the over-the-counter market on the pink sheets or bulletin board
for such security as reported by Bloomberg, or if no sales price is so reported
for such security, the last bid price of such security as reported by
Bloomberg, or (iv) if fair market value cannot be calculated as of such date on
any of the foregoing bases, the fair market value shall be as determined by the
Board of Directors of the Company in the exercise of its good faith judgment.

     3.     Covenants of the Company.

     3.1 Covenants as to Exercise Shares. The Company covenants and agrees
that all Exercise Shares that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued and
outstanding, fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issuance thereof. The Company further covenants
and agrees that the Company will at all times during the Exercise Period, have
authorized and reserved, free from preemptive rights, a sufficient number of
shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant. If at any time during the Exercise Period the
number of authorized but unissued shares of Common Stock shall not be
sufficient to permit exercise of this Warrant, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.

     3.2 No Impairment. Except and to the extent as waived or consented to by
the Holder, the Company will not, by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Warrant and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder against impairment.

     3.3 Notices of Record Date. In the event of any taking by the Company of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, the Company shall mail to the Holder, at least
ten (10) days prior to the date specified herein, a notice specifying the date
on which any such record is to be taken for the purpose of such dividend or
distribution.

     4.     Representations of Holder.

     4.1 Acquisition of Warrant for Personal Account. The Holder represents
and warrants that it is acquiring the Warrant solely for its account for
investment and not with a view

B-3

 

to or for sale or distribution of said Warrant or any part thereof. The
Holder also represents that the entire legal and beneficial interests of the
Warrant and Exercise Shares the Holder is acquiring is being acquired for, and
will be held for, its account only.

     4.2 Securities Are Not Registered.

          (a) The Holder understands that the Warrant and the Exercise Shares have
not been registered under the Securities Act of 1933, as amended (the “Act”) on
the basis that no distribution or public offering of the stock of the Company
is to be effected. The Holder realizes that the basis for the exemption may
not be present if, notwithstanding its representations, the Holder has a
present intention of acquiring the securities for a fixed or determinable
period in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. The
Holder has no such present intention except as set forth in Article 7 of the
Purchase Agreement.

          (b) The Holder recognizes that the Warrant and the Exercise Shares must be
held indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available. The Holder recognizes that the
Company will register the Exercise Shares pursuant to the provisions of Section
7 of the Purchase Agreement.

          (c) The Holder is aware that neither the Warrant nor the Exercise Shares
may be sold pursuant to Rule 144 adopted under the Act unless certain
conditions are met, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale following the required holding period under Rule
144 and the number of shares being sold during any three month period not
exceeding specified limitations.

     4.3 Disposition of Warrant and Exercise Shares.

          (a) The Holder further agrees not to make any disposition of all or any
part of the Warrant or Exercise Shares in any event unless and until:

               (i) The Company shall have received a letter secured by the Holder from
the Securities and Exchange Commission stating that no action will be
recommended to the Commission with respect to the proposed disposition; or

               (ii) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or

               (iii) The Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and if reasonably
requested by the Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, for the Holder to
the effect that such disposition will not require registration of such Warrant
or Exercise Shares under the Act or any applicable state securities laws.

B-4

 

          (b) The Holder understands and agrees that all certificates evidencing the
shares to be issued to the Holder may bear the following legend:

		
	 	“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.”

     5.     Adjustment of Exercise Price and Shares.

          (a) In the event of changes in the outstanding Common Stock of the Company
by reason of stock dividends, split-ups, recapitalizations, reclassifications,
combinations or exchanges of shares, separations, reorganizations,
liquidations, consolidation, acquisition of the Company (whether through merger
or acquisition of substantially all the assets or stock of the Company), or the
like, the number and class of shares available under the Warrant in the
aggregate and the Exercise Price shall be correspondingly adjusted to give the
Holder of the Warrant, on exercise for the same aggregate Exercise Price, the
total number, class, and kind of shares or other property as the Holder would
have owned had the Warrant been exercised prior to the event and had the Holder
continued to hold such shares until the event requiring adjustment. The form
of this Warrant need not be changed because of any adjustment in the number of
Exercise Shares subject to this Warrant.

          (b) If at any time or from time to time the holders of Common Stock of the
Company (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to
receive, without payment therefor,

               (i) Common Stock or any shares of stock or other securities which are at
any time directly or indirectly convertible into or exchangeable for Common
Stock, or any rights or options to subscribe for, purchase or otherwise acquire
any of the foregoing by way of dividend or other distribution (other than a
dividend or distribution covered in section 5(a) above),

               (ii) any cash paid or payable otherwise than as a cash dividend, or

               (iii) Common Stock or additional stock or other securities or property
(including cash) by way of spinoff, split-up, reclassification, combination of
shares or similar corporate rearrangement (other than shares of Common Stock
pursuant to Section 5(a) above),

then and in each such case, the Holder hereof will, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (ii) and (iii) above) which such Holder
would hold on the date of such exercise had he been the holder of record of
such Common Stock as of the date on which holders of Common Stock received or
became entitled to receive such shares or all other additional stock and other
securities and property.

B-5

 

     6.     Fractional Shares. No fractional shares shall be issued upon the
exercise of this Warrant as a consequence of any adjustment pursuant hereto.
All Exercise Shares (including fractions) issuable upon exercise of this
Warrant may be aggregated for purposes of determining whether the exercise
would result in the issuance of any fractional share. If, after aggregation,
the exercise would result in the issuance of a fractional share, the Company
shall, in lieu of issuance of any fractional share, pay the Holder otherwise
entitled to such fraction a sum in cash equal to the product resulting from
multiplying the then current fair market value of an Exercise Share by such
fraction.

     7.     No Shareholder Rights. This Warrant in and of itself shall not entitle
the Holder to any voting rights or other rights as a shareholder of the
Company.

     8.     Transfer of Warrant. Subject to applicable laws and the restriction on
transfer set forth on the first page of this Warrant, this Warrant and all
rights hereunder are transferable, by the Holder in person or by duly
authorized attorney, upon delivery of this Warrant and the form of assignment
attached hereto to any transferee designated by Holder. The transferee shall
sign an investment letter in form and substance satisfactory to the Company.

     9.     Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost,
stolen, mutilated or destroyed, the Company may, on such terms as to indemnity
or otherwise as it may reasonably impose (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.
Any such new Warrant shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant shall be at any time enforceable by anyone.

     10.     Notices, etc. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next
business day, (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall
be sent to the Company at the address listed on the signature page and to
Holder at           or at such other address as the Company or Holder may
designate by ten (10) days advance written notice to the other parties hereto.

     11.     Acceptance. Receipt of this Warrant by the Holder shall constitute
acceptance of and agreement to all of the terms and conditions contained
herein.

     12.     Governing Law. This Warrant and all rights, obligations and
liabilities hereunder shall be governed by the laws of the State of California.

B-6

 

     In Witness Whereof, the Company has caused this Warrant to be executed by
its duly authorized officer as of November 10, 2003.

	 	 	 	 	 
	 	 	ARADIGM CORPORATION
	 	 	 	 	 
	 	 	
By:	 	 
	 	 	 	

	 	 	 	 	 
	 	 	Name: Thomas C. Chesterman
	 	 	Title: Senior Vice President and Chief Financial Officer
	 	 	 Address: 3929 Point Eden Way, Hayward, CA 94545

 

NOTICE OF EXERCISE

TO: ARADIGM CORPORATION

     (1)  o The undersigned hereby elects to purchase      shares
of the Common Stock of ARADIGM CORPORATION (the “Company”) pursuant to the
terms of the attached Warrant, and tenders herewith payment of the exercise
price in full, together with all applicable transfer taxes, if any.

           o The undersigned hereby elects to purchase      shares of
Common Stock of the Company pursuant to the terms of the net exercise
provisions set forth in Section 2.1 of the attached Warrant, and shall tender
payment of all applicable transfer taxes, if any.

     (2)  Please issue a certificate or certificates representing said shares of
Common Stock of the Company in the name of the undersigned or in such other
name as is specified below:

(Name)

(Address)

     (3) The undersigned represents that (i) the aforesaid shares of Common
Stock are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution thereof
and that the undersigned has no present intention of distributing or reselling
such shares, other than as contemplated by Article 7 of the Securities Purchase
Agreement dated as of November 7, 2003 by and among the Company and the
purchasers named therein (the “Purchase Agreement”); (ii) the undersigned is
aware of the Company’s business affairs and financial condition and has
acquired sufficient information about the Company to reach an informed and
knowledgeable decision regarding its investment in the Company; (iii) the
undersigned is experienced in making investments of this type and has such
knowledge and background in financial and business matters that the undersigned
is capable of evaluating the merits and risks of this investment and protecting
the undersigned’s own interests; (iv) the undersigned understands that the
shares of Common Stock issuable upon exercise of
this Warrant have not been
registered (except to the extent a registration statement pursuant to and as
contemplated by Article 7 of the Purchase Agreement is effective) under the
Securities Act of 1933, as amended (the “Securities Act”), by reason of a
specific exemption from the registration provisions of the Securities Act,
which exemption depends upon, among other things, the bona fide nature of the
investment intent as expressed herein, and, because such securities have not
been registered under the Securities Act, they must be held indefinitely unless
subsequently registered under the Securities Act or an exemption from such
registration is available; (v) the undersigned is aware that the aforesaid
shares of Common Stock may not be sold pursuant to Rule 144 adopted under the
Securities Act unless certain conditions are met and until the undersigned has
held the shares for the number of years prescribed by Rule 144, that among the
conditions for use of the Rule is the availability of current information to
the public about the Company; and (vi) the undersigned agrees not to make any
disposition of all or any part of the aforesaid shares of Common Stock unless
and until there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in

 

 

accordance with said registration statement, or the undersigned has
provided the Company with an opinion of counsel satisfactory to the Company,
stating that such registration is not required.

	 	 	 
	
	 	

	(Date)	 	
(Signature)
	 	 	

	 	 	
(Print name)

 

 

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this

form and supply required information. Do not use this

form to purchase shares.)

     For
Value Received, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to

	 	 	 
	Name:	 
	 	

	 	 	
(Please Print)
	Address:	 
	 	

	 	 	
(Please Print)
	Dated:	
            , 20   
	Holder’s	 	 
	Signature:	 
	 	

	Holder’s	 	 
	Address:	 
	 	

	 	 

NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement or any
change whatever. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to
assign the foregoing Warrant.

 

 

EXHIBIT C

INSTRUCTION SHEET FOR PURCHASER

(to be read in conjunction with the entire

Securities Purchase Agreement)

	A.	 	Complete the following items in the Securities Purchase Agreement:

	 	1.	 	Provide the information regarding the Purchaser requested on
the signature page. The Agreement must be executed by an individual
authorized to bind the Purchaser.
	 
	 	2.	 	Exhibit C-1 – Stock Certificate Questionnaire:
	 
	 	 	 	Provide the information requested by the Stock Certificate
Questionnaire.
	 
	 	3.	 	Exhibit C-2 – Registration Statement Questionnaire:
	 
	 	 	 	Provide the information requested by the Registration Statement
Questionnaire.
	 
	 	4.	 	Exhibit C-3 – Purchaser Certificate:
	 
	 	 	 	Provide the information requested by the Certificate for Individual
Purchasers or the Certificate for Corporate, Partnership, Trust,
Foundation and Joint Purchasers, as applicable.
	 
	 	5.	 	Return the signed Securities Purchase Agreement to:

	 
	Peter H. Werner, Esq
	Cooley Godward LLP
	One Maritime Plaza,
20th Floor
	San Francisco, California 94111

	B.	 	Instructions regarding the transfer of funds for the purchase of
Securities will be telecopied to the Purchaser at a later date.
	 
	C.	 	Upon the resale of the Registrable Shares by the Purchaser after the
Registration Statement covering the Registrable Shares is effective, as
described in the Securities Purchase Agreement, the Purchaser:

	 	(i)	 	must deliver a current prospectus, and annual and quarterly
reports of the Company to the buyer (prospectuses, and annual and
quarterly reports may be obtained from the Company at the
Purchaser’s request); and
	 
	 	(ii)	 	must send a letter in the form of Exhibit F to the Securities
Purchase Agreement to the Company so that the Registrable Shares may
be properly transferred.

C-1.

 

EXHIBIT C-1

ARADIGM CORPORATION

STOCK CERTIFICATE QUESTIONNAIRE

Pursuant to Section 4.3 of the Agreement, please provide us with the following
information:

	1.	 	The exact name that the Securities are to be registered in (this is
the name that will appear on the stock certificate(s)). You may use a
nominee name if appropriate:
	 
	2.	 	The relationship between the Purchaser of the Securities and the
Registered Holder listed in response to item 1 above:
	 
	3.	 	The mailing address of the Registered Holder listed in response to
item 1 above:
	 
	4.	 	The Tax Identification Number of the Registered Holder listed in
response to item 1 above:

C-1-1.

 

EXHIBIT C-2

ARADIGM CORPORATION

REGISTRATION STATEMENT QUESTIONNAIRE

     In connection with the preparation of the Registration Statement, please
provide us with the following information regarding the Purchaser.

	A.	 	General Information

	 	1.	 	Please state your organization’s name exactly as it should appear in
the Registration Statement:
	 
	 	2.	 	Have you or your organization had any position, office or other
material relationship within the past three years with the Company or its
affiliates other than as disclosed in the Prospectus included in the
Registration Statement?

o Yes     o No

	 	 	If yes, please indicate the nature of any such relationships below:
	 
	B.	 	Securities Holdings

       Please fill in all blanks in the following questions related to your
beneficial ownership of the Company’s capital stock. Generally, the term
“beneficial ownership” refers to any direct or indirect interest in the
securities which entitles you to any of the rights or benefits of ownership,
even though you may not be the holder of record of the securities. For
example, securities held in “street name” over which you exercise voting or
investment power would be considered beneficially owned by you. Other examples
of indirect ownership include ownership by a partnership in which you are a
partner or by an estate or trust of which you or any member of your immediate
family is a beneficiary. Ownership of securities held in the names of your
spouse, minor children or other relatives who live in the same household may be
attributed to you.

     Please note: If you have any reason to believe that any interest in
securities of the Company which you may have, however remote, is a beneficial
interest, please describe such interest. For purposes of responding to this
questionnaire, it is preferable to err on the side of inclusion rather than
exclusion. Where the SEC’s interpretation of BENEFICIAL OWNERSHIP would
require disclosure of your interest or possible interest in certain securities
of the Company, and you believe that you do not actually possess the attributes
of beneficial ownership, an appropriate response is to disclose the interest
and at the same time disclaim beneficial ownership of the securities.

C-2-1.

 

 

     1.     As
of          , 2003, I owned outright (including shares
registered in my name individually or jointly with others, shares held in the
name of a bank, broker, nominee, depository or in “street name” for my
account), the following number of shares of the Company’s capital stock:
     .

     2.     In addition to the number of shares I own outright as indicated by my
answer to question B(1), as of          ,
2003, I had or shared voting power
or investment power, directly or indirectly, through a contract, arrangement,
understanding, relationship or otherwise, over the following number of shares
of the Company’s capital stock:      .

     If the answer to this question B(2) was not “zero,” please complete the
following: with whom shared; and the nature of the relationship and any
underlying voting trust agreement, investment arrangement or the like:

		
	 	     Shared Voting Power:

	 
	Number of Shares	 	With Whom Shared	 	 	Nature of Relationship
	
	 	
	 	 	

		
	 	     Shared Investment Power:

	 
	Number of Shares	 	With Whom Shared	 	 	Nature of Relationship
	
	 	
	 	 	

     As of
     , 2004, I will have the right to
acquire            shares
of the Company’s capital stock pursuant to outstanding stock options issued
under the Company’s stock option plans and           shares pursuant to the
exercise of outstanding warrants (none, indicated by “0” above).

	 	 	 
	 Options and Warrants
	Class	 	Number of Shares
	
	 	

C-2-2.

 

 

     (4)      Please identify the natural person or persons who have voting and/or
investment control over the Company’s securities that you own, and state
whether such person(s) disclaims beneficial ownership of the securities. For
example, if you are a general partnership, please identify the general partners
in the partnership.

C-2-3.

 

 

	C.	 	NASD Questions

     1.     Are
you (i) a “member”1 of the National Association of Securities
Dealers, Inc. (the “NASD”), (ii) an
“affiliate”2 of a member of the NASD, (iii)
a “person associated with a member” or an “associated
person of a member”3 of
the NASD or (iv) an immediate family member4 of any of the foregoing persons?
If yes,  please identify the member and describe such relationship (whether
direct or indirect), and please respond to Question Number 2 below;
if no,
please proceed directly to Question Number 3.

Yes        No

Description:

  1    NASD defines a “member” as any broker or dealer admitted to membership in
the NASD, or any officer or partner or branch manager of such a member, or any
person occupying a similar status or performing a similar function for such a
member.

  2    The term “affiliate” means a person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is in common
control with, the person specified. Persons who have acted or are acting on
behalf of or for the benefit of a person include, but are not necessarily
limited to, directors, officers, employees, agents, consultants and sales
representatives. The following should apply for purposes of the foregoing:

     (i)     a person should be presumed to control a Member if the person beneficially
owns 10 percent or more the outstanding voting securities of a Member which is
a corporation, or beneficially owns a partnership interest in 10 percent or
more of the distributable profits or losses of a Member which is a partnership;

     (ii)      a Member should be presumed to control a person if the Member and Persons
Associated With a Member beneficially own 10 percent or more of the outstanding
voting securities of a person which is a corporation, or beneficially own a
partnership interest in 10 percent or more of the distributable profits or
losses of a person which is a partnership;

     (iii)    a person should be presumed to be under common control with a Member if:

		
	 	     (1)    the same person controls both the Member and another person by
beneficially owning 10 percent or more of the outstanding voting
securities of a Member or person which is a corporation, or by
beneficially owning a partnership interest in 10 percent or more of the
distributable profits or losses of a Member or person which is a
partnership; or
	 
	 	     (2)    a person having the power to direct or cause the direction of the management
or policies of the Member or such person also has the power to direct or cause
the direction of the management or policies of the other entity in question.

  3    The NASD defines a “person associated with a member” or an “associated
person of a member” as being every sole proprietor, partner, equity owner,
officer, director or branch manager of any member, or any natural person
occupying a similar status or performing similar functions, or any natural
person engaged in the investment banking or securities business who directly or
indirectly controls or is controlled by such member (for example, any
employee), whether or not any such person is registered or exempt from
registration with the NASD.

  4    Immediate family includes parents, mother-in-law, father-in-law, husband
or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or
daughter-in-law, and children, or any other person who is supported, directly
or indirectly, to a material extent, by a person associated with a member of
the NASD or any other broker/dealer.

C-2-4.

 

 

     2.     If you answered “yes” to Question Number 1, please furnish any
information as to whether any such member intends to participate in any
capacity in the public offering, including the details of such participation:

Description:

     3.     Are
you or have you been an “underwriter or related person”5 or a
person associated with an underwriter or related person, including, without
limitation, with respect to the proposed public offering? If yes, please
identify the underwriter or related person and describe such relationship
(whether direct or indirect).

Yes          No

Description:

     4.     If known, please describe in detail any underwriting compensations,
arrangements or dealings entered into during the previous twelve months, or
proposed to be consummated in the next twelve months, between (i) any
underwriter or related person, member of the NASD, affiliate of a member of the
NASD, person associated with a member or associated person of a member of the
NASD or any immediate family member thereof, on the one hand, and (ii) the
Company, or any director, officer or shareholder thereof, on the other hand,
which provides for the receipt of any item of value and/or the transfer of any
warrants, options or other securities from the Company to any such person
(other than the information relating to the arrangements with any investment
firm or underwriting organization which may participate in the proposed public
offering).

Description:

     5.     Have you purchased the securities in the ordinary course of business?

Yes          No

	  5  The term “underwriter or related person” includes underwriters,
underwriters’ counsel, financial consultants and advisors, finders, members of
the selling or distribution group, and any and all other persons associated
with or related to any of such persons, including members of the immediate
family of such persons.

C-2-5.

 

 

The answers to the foregoing questions are correctly stated to the best of my
information and belief. I shall advise Peter Werner at (415) 693-2172, the
Company’s outside counsel, promptly of any changes in the foregoing
information.

	 	 	 	 	 
	 	

	 	
(Print name of Selling Security Holder)	 	 
	 	 	 	 	 
	 	

	 	 
	 	
(Signature)	 	 
	 	 	 	 	 
	 	
By:	 	 
	 	 	

	 	 
	 	
(Name and title of signatory, if stockholder is an entity)	 	 
	 	 	 	 	 
	 	

	 	 
	 	
(Date)	 	 

C-2-6.

 

 

EXHIBIT C-3

ARADIGM CORPORATION

CERTIFICATE FOR INDIVIDUAL PURCHASERS

     If the investor is an individual Purchaser (or married couple) the
Purchaser must complete, date and sign this Certificate.

CERTIFICATE

     I certify that the representations and responses below are true and
accurate:

     In order for the Company to offer and sell the Securities in conformance
with state and federal securities laws, the following information must be
obtained regarding your investor status. Please initial each category
applicable to you as an investor in the Company.

          (1) A natural person whose net worth1, either individually or
jointly with such person’s spouse exceeds $1,000,000;

          (2) A natural person who had an income2 in excess of $200,000, or
joint income with the person’s spouse in excess of $300,000, in 2001 and 2002,
and reasonably expects to have individual income reaching the same level in
2003;

          (3) An executive officer or director of the Company.

	 	 	 	 	 
	Date:	 	 	 	 
	 	

	 	 	

	 	 	 	 	Name(s) of Purchaser
	 	 	 	 	 
	 	 	 	 	

	 	 	 	 	Signature
	 	 	 	 	 
	 	 	 	 	

	 	 	 	 	Signature

	  1    For purposes of this Certificate, “net worth” means the excess of total
assets at fair market value over total liabilities, except that the principal
residence owned by a natural person shall be valued either (a) at cost,
including the cost of improvements, net of current encumbrances upon the
property, or (b) at the appraised value of the residence as determined upon a
written appraisal used by an institutional lender making a loan to the
individual secured by the property, including the cost of subsequent
improvements, net of current encumbrances upon the property. As used in the
preceding sentence, “institutional lender” means a bank, savings and loan
company, industrial loan company, credit union or personal property broker or a
company whose principal business is as a lender of loans secured by real
property and which has such loans receivable in the amount of $2,000,000 or
more.
	 
	  2    For purposes of this Certificate, “income” means adjusted gross income, as
reported for federal income tax purposes, increased by the following amounts:
(a) the amount of any tax exempt interest income received, (b) the amount of
losses claimed as a limited partner in a limited partnership, (c) any deduction
claimed for depletion, (d) amounts contributed to an IRA or Keogh retirement
plan, (e) alimony paid, and (f) any amounts by which income from long-term
capital gains has been reduced in arriving at adjusted gross income pursuant to
the provisions of Section 1202 of the Internal Revenue Code.

C-3-2.

 

EXHIBIT C-3

ARADIGM CORPORATION

CERTIFICATE FOR CORPORATE, PARTNERSHIP,

TRUST, FOUNDATION, AND JOINT PURCHASERS

     If the investor is a corporation, partnership, trust, pension plan,
foundation, joint purchaser (other than a married couple) or other entity, an
authorized officer, partner, or trustee must complete, date and sign this
Certificate.

CERTIFICATE

     The undersigned certifies that the representations and responses below are
true and accurate:

     (a)  The investor has been duly formed and is validly existing and has full
power and authority to invest in the Company. The person signing on behalf of
the undersigned has the authority to execute and deliver the Securities
Purchase Agreement on behalf of the Purchaser and to take other actions with
respect thereto.

     (b)  Indicate the form of entity of the undersigned:

	o	 	 	Limited Partnership
	 
	o	 	 	General Partnership
	 
	o	 	 	Corporation
	 
	o	 	 	Revocable Trust (identify each grantor and indicate
under what circumstances the trust is revocable by the
grantor:

(Continue on a separate piece of paper, if necessary.)
	 
	o	 	 	Other Type of Trust (indicate type of trust and, for
trusts other than pension trusts, name the grantors and
beneficiaries:

(Continue on a separate piece of paper, if necessary.)
	 
	o	 	 	Other form of organization (indicate form of organization (     ).

C-3-3.

 

 

     (c)  Indicate the approximate date the undersigned entity was formed:      .

     (d)  In order for the Company to offer and sell the Securities in
conformance with state and federal securities laws, the following information
must be obtained regarding your investor status. Please initial each category
applicable to you as an investor in the Company.

		
	 	          (1) A bank as defined in Section 3(a)(2) of the Securities
Act, or any savings and loan association or other institution as defined
in Section 3(a)(5)(A) of the Securities Act whether acting in its
individual or fiduciary capacity;

		
	 	          (2) A broker or dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934;

		
	 	          (3) An insurance company as defined in Section 2(13) of the
Securities Act;

		
	 	          (4) An investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act;

		
	 	          (5) A Small Business Investment Company licensed by the U.S.
Small Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958;

		
	 	          (6) A plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or
its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5,000,000;

		
	 	          (7) An employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of such
act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a self-directed
plan, with investment decisions made solely by persons that are
accredited investors;

		
	 	          (8) A private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;

		
	 	          (9) An organization described in Section 501(c)(3) of the
Internal Revenue Code, a corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring
the Securities, with total assets in excess of $5,000,000;

		
	 	          (10) A trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the Securities, whose
purchase is directed by a sophisticated person who has such knowledge and
experience in financial and business matters that such person is capable
of evaluating the merits and risks of investing in the Company;

C-3-4.

 

		
	 	          (11) An entity in which all of the equity owners qualify
under any of the above subparagraphs. If the undersigned belongs to this
investor category only, list the equity owners of the undersigned, and
the investor category which each such equity owner satisfies:
(Continue on a separate piece of paper, if necessary.)

	 	 
	Dated:
	 	

	 
	

	Name of investor
	 
	

	Signature and title of authorized
	officer, partner or trustee

C-3-5.

 

 

EXHIBIT D

OPINION OF COMPANY COUNSEL

Ladies and Gentlemen:

     We have acted as counsel for Aradigm Corporation, a California corporation
(the “Company”), in connection with the issuance and sale pursuant to the terms
of the Securities Purchase Agreement dated as of November 7, 2003 (the
“Agreement”), by and among the Company and the purchasers named therein (each,
a “Purchaser” and collectively, the “Purchasers”), of an aggregate of 7,502,775
shares of the Company’s common stock (the “Common Shares”) and warrants to
purchase an aggregate of up to 1,875,691 shares of the Company’s common stock
(the “Warrants”). We are rendering this opinion pursuant to Section 5.4 of the
Agreement. Except as otherwise defined herein, capitalized terms used but not
defined herein have the respective meanings given to them in the Agreement.

     In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Agreement by the various parties and originals or copies
certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below. As to certain
factual matters, we have relied upon certificates of officers of the Company
and have not independently sought to verify such matters. Where we render an
opinion “to the best of our knowledge” or concerning an item “known to us” or
our opinion otherwise refers to our knowledge, it is based solely upon (i) an
inquiry of attorneys within this firm who perform legal services for the
Company, (ii) receipt of a certificate executed by an officer of the Company
covering such matters, and (iii) such other investigation, if any, that we
specifically set forth herein.

     In rendering this opinion, we have assumed: the genuineness and
authenticity of all signatures on original documents; the authenticity of all
documents submitted to us as originals; the conformity to originals of all
documents submitted to us as copies; the accuracy, completeness and
authenticity of certificates of public officials; and the due authorization,
execution and delivery of all documents (except the due authorization,
execution and delivery by the Company of the Agreement and the Warrants
(collectively, the “Transaction Documents”)), where authorization, execution
and delivery are prerequisites to the effectiveness of such documents. We have
also assumed: that all individuals executing and delivering documents had the
legal capacity to so execute and deliver; that you have received all documents
you were to receive under the Transaction Documents; that the Transaction
Documents are obligations binding upon the parties thereto other than the
Company; if you or any Purchasers are a corporation or other entity, that such
entities have filed any required California franchise or income tax returns and
have paid any required California franchise or income taxes; and that there are
no extrinsic agreements or understandings among the parties to the Transaction
Documents that would modify or interpret the terms of the Transaction Documents
or the respective rights or obligations of the parties thereunder.

     Our opinion is expressed only with respect to the federal laws of the
United States of America and the laws of the State of California. We express
no opinion as to whether the laws

D-1.

 

 

of any particular jurisdiction apply, and no opinion to the extent that
the laws of any jurisdiction other than those identified above are applicable
to the subject matter hereof. We are not rendering any opinion as to
compliance with any antifraud law, rule or regulation relating to securities,
or to the sale or issuance thereof.

          With regard to our opinion in paragraph 2 below with respect to the
Company’s obligation to qualify to do business in various states, we have
relied solely on a certificate of an officer of the Company regarding the
states in which the Company owns or leases property or has employees or other
representatives with authority to bind it to contracts; we have made no further
investigation.

          With regard to our opinion in paragraph 6 below, we express no opinion
with respect to any required consents, approvals, authorizations, orders,
filings, registrations and qualifications under any antitrust laws, rules or
regulations of the United States.

          On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:

	1.	 	The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of California.
	 
	2.	 	The Company has the requisite corporate power to enter into and perform
its obligations under the Transaction Documents. The Company has the
requisite corporate power to own its properties and assets and to conduct
its business as, to the best of our knowledge, it is currently being
conducted, and, to the best of our knowledge, is not required to qualify
as a foreign corporation to do business in any other jurisdiction in the
United States.
	 
	3.	 	The Transaction Documents have been duly and validly authorized, executed
and delivered by the Company and constitute valid and binding agreements
of the Company enforceable against the Company in accordance with their
respective terms, except as rights to indemnity under Section 7.4 of the
Agreement may be limited by applicable laws and except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws affecting creditors’ rights,
and subject to general equity principles and to limitations on
availability of equitable relief, including specific performance.
	 
	4.	 	The Common Shares and the Warrants have been duly authorized, and upon
issuance and delivery against payment therefor in accordance with the
terms of the Agreement, the Common Shares and the Warrants will be duly
authorized and validly issued and the Common Shares will be fully paid and
nonassessable. The shares of Common Stock issuable upon exercise of the
Warrants have been duly authorized and reserved for issuance, and upon
issuance and delivery upon exercise of the Warrants in accordance with the
terms of the Warrants, will be validly issued, fully paid and
nonassessable.
	 
	5.	 	The execution and delivery of the Transaction Documents by the Company
and the offer, issuance and sale of the Common Shares and the Warrants
pursuant to the Agreement do not violate or contravene (a) any
governmental statute, rule or regulation applicable to the

D-2.

 

	 	 	Company or (b) any order, writ, judgment, injunction, decree,
determination or award which has been entered against the Company and of
which we are aware, the violation or contravention of which would
materially and adversely affect the Company, its assets, financial
condition or operations.
	 
	6.	 	All consents, approvals, authorizations or orders of, and filings,
registrations and qualifications with any regulatory authority or
governmental body in the United States required for the issuance of the
Common Shares and the Warrants have been made or obtained, except (a) for
the filing of the “Notification Form: Change in Number of Shares
Outstanding” with the Nasdaq National Market, (b) for the filing of the
notice to be filed under California Corporations Code Section 25102.1(d),
(c) for the filing of a Form D pursuant to Securities and Exchange
Commission Regulation D and (d) other Blue Sky filings.
	 
	7.	 	The offer and sale of the Common Shares and the Warrants are exempt from
the registration requirements of the Securities Act of 1933, as amended,
subject to the timely filing of a Form D pursuant to Securities and
Exchange Commission Regulation D.

         This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other person, firm, or entity without our
prior written consent; except that each Purchaser may rely on this opinion as
if it were addressed and delivered to such Purchaser on the date hereof.

D-3.

 

 

EXHIBIT A

SCHEDULE OF PURCHASERS

	 
	Special Situations Private Equity Fund, L.P.
	Special Situations Cayman Fund, L.P.
	Special Situations Fund III, L.P.
	Castle Creek Healthcare Partners LLC
	CC Lifescience, Ltd.
	The Conus Fund L.P.
	East Hudson Inc. (BVI)
	The Conus Fund Offshore Ltd.
	The Conus Fund (QP) L.P.
	BayStar Capital II, LP
	Crestview Capital Fund II, LP
	Capital Ventures International
	Penn Footwear Co.

 

 

EXHIBIT E

ARADIGM CORPORATION

IMPORTANT - DO NOT REMOVE THIS INSTRUCTION SHEET FROM THE ATTACHED SHARE
CERTIFICATE UNLESS AND UNTIL THE SHARES ARE SOLD AS FOLLOWS:

(1)      THE SHARES ARE RESOLD PURSUANT TO THE REGISTRATION STATEMENT ON FORM S-3
(NO. [           ]), AND, IN CONNECTION WITH SUCH RESALE, THE HOLDER HAS
DELIVERED TO THE PURCHASER OF THE SHARES A CURRENT PROSPECTUS AND HAS PROVIDED
TO THE COMPANY OR TO THE TRANSFER AGENT FOR THE COMPANY’S STOCK A PURCHASER’S
CERTIFICATE OF SUBSEQUENT SALE; OR

(2)      THE SHARES ARE RESOLD IN A TRANSACTION EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, PROVIDED THAT, PRIOR TO
SUCH RESALE, THE HOLDER HAS NOTIFIED THE COMPANY OF SUCH DISPOSITION AND
PROVIDED THE COMPANY WITH WRITTEN ASSURANCES, IN FORM AND SUBSTANCE
SATISFACTORY TO THE COMPANY OF COMPLIANCE WITH THE REQUIREMENTS OF SUCH
EXEMPTION.

DO NOT REMOVE THIS INSTRUCTION SHEET FROM

THE ATTACHED SHARE CERTIFICATE

EXCEPT IN ACCORDANCE WITH

THE INSTRUCTIONS SET FORTH ABOVE.

E-1.

 

 

EXHIBIT F

PURCHASER’S CERTIFICATE OF SUBSEQUENT SALE

To:     Cooley Godward llp

Attention: Ron Metzger

The undersigned, the selling securityholder or an officer of, or other duly
authorized person, hereby certifies that    [fill in name of selling securityholder]    represents
that it has sold shares of the Common Stock of Aradigm Corporation and that such shares were
sold on    [date]    either (i) in accordance with the registration
statement on Form S-3 with
file number [       ], in which case the selling securityholder certifies
that the requirement of delivering a current prospectus has been complied with
or will be complied with in connection with such sale, or (ii) in accordance
with Rule 144 under the Securities Act of 1933 (“Rule 144”), in which case the
selling securityholder certifies that it has complied with the requirements of
Rule 144.

Print or type:

	 
	Number of shares sold (if
	sold on multiple dates,
	please provide a
	breakdown by date):
	 
	Name of selling
	securityholder:
	 
	Name of individual
	representing selling
	securityholder (if an
	institution):
	 
	Title of individual
	representing selling
	securityholder (if an
	institution):
	 

Signature by:

	 
	Selling securityholder or
	individual representative:

F-1.

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