Document:

Exhibit 4.36

                                                  "TPC" AGREEMENT NO. 720-481443

                         TECHNOLOGY PARTNERSHIPS CANADA

               THE INTEGRATED COMMUNICATIONS SOLUTIONS R&D PROJECT

This Agreement made

Between: HER MAJESTY THE QUEEN IN RIGHT OF CANADA as represented by the Minister
         of Industry (hereinafter referred to as "the Minister")

And:     MARCH NETWORKS CORPORATION, a corporation duly incorporated under the
         laws of Canada, having its head office located at Ottawa, Ontario
         (hereinafter referred to as "a Proponent" or "March Networks")

And:     MITEL NETWORKS CORPORATION, a corporation duly incorporated under the
         laws of Canada, having its head office located at Ottawa, Ontario
         (hereinafter referred to as "a Proponent" or "Mitel Networks")

And:     MITEL KNOWLEDGE CORPORATION, a corporation duly incorporated under the
         laws of Canada, having its head office located at Ottawa, Ontario
         (hereinafter referred to as "a Proponent" or "Mitel Knowledge")

Collectively referred to as the Proponents.

WHEREAS in a context in which innovation is essential in an increasingly
knowledge-based economy, the Minister is charged with the achievement of
Canada's objectives of increasing economic growth, creating jobs and wealth, and
supporting sustainable development; and

WHEREAS the Technology Partnerships Canada ("TPC") Program is specifically
designed to promote the above objectives by means of strategically investing in
research, development and innovation in order to encourage private sector
investment, and so maintain and grow the technology base and technological
capabilities of Canadian industry throughout the country; and

WHEREAS the Minister agrees to make a TPC investment in the Proponents' Project
described in this Agreement, considering that:

(a)   the Project contributes to the attainment of TPC's objectives of
      increasing economic growth, creating jobs and wealth, and supporting
      sustainable development;

(b)   the technology developed under this project will provide broadband
      communication access to Canadians by building the devices and the
      compelling broadband applications that will take advantage of the existing
      under utilized broadband networks; and

(c)   the technology will contribute to the development of applications that
      will enable Internet Service Providers (ISP) to host web based
      applications, which their commercial enterprise clients could access as
      required, allowing new sources of revenues for the ISPs
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      while saving commercial enterprises the cost of purchasing and supporting
      these applications.

(d)   by combining their resources and eliminating duplications and
      inefficiencies, March Networks and Mitel Networks will maximize synergy
      and create an environment that is highly conducive to accelerate Canada's
      transition to converged, broadband networks.

AND WHEREAS the entering into this Agreement is not contingent upon any export
performance on the part of the Proponents.

NOW, THEREFORE, in consideration of their respective obligations set out below,
the parties hereto agree as follows.

Article 1 - Deadline for receipt of signed agreement

1.1   This Agreement must be signed by the Proponents and received by the
      Minister on or before October 15th, 2002, failing which it will be null
      and void.

Article 2 - Documents forming a part of this Agreement

2.1   The following documents form an integral part of this Agreement:

           These Articles of the Agreement
           Schedule 1 - TPC General Conditions
           Schedule 2 - The Project
           Schedule 3 - Claims and TPC Project Cost Principles
           Schedule 4 - Contractual Benefits
           Schedule 5 - Reporting Requirements
           Schedule 6 - Project Fact Sheet for News Release
           Schedule 7 - Special Purpose Equipment
           Schedule 8 - Specimen Warrant Certificate

2.2   In the event of conflict or inconsistency, the order of precedence amongst
      the documents forming part of this Agreement shall be:

           These Articles of the Agreement
           Schedule 1 - General Conditions
           Schedule 2 - The Project
           Other Schedules

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Article 3 - The Proponents' Obligations

3.1   The Proponents will carry out the Integrated Communications Solutions R&D
      Project ("the Project") as described in Schedule 2, will make claims in
      accordance with Schedule 3, will provide the benefits mentioned in
      Schedule 4, will issue the reports required under Schedule 5 and will
      fulfill all of its other obligations hereunder, in a diligent and
      professional mariner using qualified personnel.

3.2   The Proponents shall ensure that the Project is completed on or before
      September 30th, 2004 ("Project Completion Date"), unless otherwise agreed
      to in writing by the Minister.

Article 4 - The Contribution

4.1   Subject to all the other provisions of this Agreement, the Minister will
      make a Contribution to the Proponents in respect of the Project, of the
      lesser of

      (a)   25% of the Eligible Costs; and

      (b)   $60,000,000.

4.2   The Minister will not contribute to any Eligible Costs incurred by the
      Proponents prior to October 1st, 2001 nor after the Project Completion
      Date, unless otherwise agreed to in writing by the Minister.

4.3   Unless the Minister agrees otherwise in writing, and subject to the
      overall limit stipulated in section 4.1 above, the amount of the
      Contribution will not exceed the following amounts in the relevant Fiscal
      Years of the Project as follows:

                  2002/2003:        $28,000,000
                  2003/2004:        $20,000,000
                  2004/2005:        $12,000,000

      The Minister will consider any request to reprofile these funds, but the
      Minister will have no obligation to pay any greater amount in any of the
      said Fiscal Years except to the extent that such reprofiling will have
      been agreed to by the Minister.

Article 5 - Environmental Assessment

5.1   The Minister has assessed the Project under the Canadian Environmental
      Assessment Act and is satisfied that any potentially adverse environmental
      effects that may be caused by the Project are insignificant.

Article 6 - Other Government Assistance

6.1   The Proponents hereby acknowledge that, except for scientific research and
      experimental development tax credit deductions or allowances, no other
      federal, provincial or

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      municipal government financial assistance other than that described below
      has been requested or received by the Proponents for the Eligible Costs of
      the Project.

                  Federal           $0
                  Provincial        $0
                  Municipal         $0
                  Total             $0

6.2   The Proponents will inform the Minister promptly in writing of any other
      federal, provincial or municipal government assistance (except for
      scientific research and experimental development tax credit deductions or
      allowances) to be received for the Eligible Costs of the Project by the
      Proponents and the Minister will have the right to reduce the Contribution
      under this Agreement to the extent of any such assistance.

Article 7 - Addresses

7.1   Any notice to the Minister will be addressed to:

                  Director, Enabling Technologies
                  Technology Partnerships Canada
                  10th Floor
                  300 Slater Street
                  Ottawa, Ontario KIA OC8

                  Fax No: (613) 954-9117

7.2   Any notice to the Proponents during the project performance will be
      addressed to:

                  Dr. Donald Mills
                  Chief Operating Officer
                  March Networks Corporation
                  555 Legget Drive
                  Ottawa, Ontario K2K 2X3

                  Fax No: (613) 591-7337

                  Don Smith
                  Chief Executive Officer
                  Mitel Networks Corporation
                  350 Legget Drive
                  Ottawa, Ontario K2K 2W7

                  Fax: (613) 5927838

                  Jose Medeiros
                  Chief Financial Officer
                  Mitel Knowledge Corporation
                  555 Legget Drive - Tower B
                  Suite 534
                  Ottawa, Ontario K2K 2X3

                  Fax: (613) 271-9810

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Article 8 - Special Conditions

8.1   Statements of Work

The Proponents shall submit to the Minister's satisfaction an annual detailed
Statement of Work (nature of work, milestones, timing, cost breakdown) at the
time of execution of this Agreement covering the period from October 1st, 2001
to April 30th, 2003, and thereafter by each following March 31st to cover each
subsequent 12 month period extending from May 1st to April 30th. The last
Statement of Work must be submitted on March 31st 2004 and will cover the period
from May 1st, 2004 to September 30th, 2004. It is a condition precedent to any
payment in any given Fiscal Year that said detailed Statement of Work be
submitted and approved by the Minister; tiling an acceptable detailed Statement
of Work in a timely fashion shall constitute a material condition.

8.2   Reporting

8.2.1 If the cumulative R&D spending by the Proponents is lower than $80 million
      during any of the Proponents' fiscal years ending on or about April 30th,
      the Proponents, separately or together, shall submit to the Minister
      within 90 days following April 30th of that year a report indicating where
      and why spending has been lower than $80 million during the fiscal year.

8.2.2 The above report shall also include an action plan and a revised budget,
      acceptable to the Minister, that will put the Project on course to
      achieving the objectives of the Proponents' three year R&D strategy; aside
      from all other remedies the Minister may have pursuant to this Agreement,
      failure or delays in providing the analysis and corrective action plan may
      result in the Minister withholding disbursement of funds until mutually
      satisfactory resolution.

8.2.3 The Proponents shall also disclose in the report any other governmental
      financial assistance they applied for, or will receive or have received in
      connection with the Project.

8.3   Intellectual Property

8.3.1 For greater clarity, the definition of Intellectual Property pursuant to
      Section 1 of Schedule 1 - TPC General Conditions does not include
      background intellectual property.

8.3.2 Title to the Intellectual Property is to be vested, and unless otherwise
      agreed to in advance and in writing by the Minister, to remain,
      exclusively with the Proponents.

8.3.3 Should any of the Intellectual Property be licensed or sub-licensed by a
      Proponent, that Proponent shall ensure that all licence and sub-licence
      agreements are subordinated to the Minister's rights regarding the
      Intellectual Property in case of default and that should the

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      Minister exercise the remedies provided in Schedule 1, the Intellectual
      Property shall be clear of any contractual obligations resulting from the
      licences or sub-licences other than licences granted in the normal course
      of business to enable customers to use the Intellectual Property.

8.4   Third-Party Collaborations

8.4.1 The Minister hereby grants the Proponents the right to enter into
      third-party collaboration agreements (CA) for Work described in Schedule 2
      provided that:

      a)    the total number of CAs does not exceed 10;

      b)    no CA shall exceed $2,000,000 in typical TPC Eligible Cost as
            indicated in Schedule 3 - Claims and TPC Project Cost Principles;

      c)    the aggregate value in Eligible Costs for all CAs remains lower than
            $10 million;

      d)    the Proponent complies with Subsection 6.8 of Schedule 1 - TPC
            General Conditions;

      e)    the other terms and conditions of this subsection are met.

8.4.2 The Minister hereby agrees to subordinate his rights relating to the
      Intellectual Property developed in the context of the third-party
      collaboration agreement with respect to Subsection 8.4.1, and the specific
      technology developed under that agreement.

8.4.3 The Proponents shall obtain the Minister's written prior consent when
      entering into third-party collaboration agreements not contemplated by
      Subsection 8.4.1 above.

8.4.4 Any default under para. 8.4.3 constitutes an event of default under this
      Agreement.

8.4.5 The Parties agree to exclude from this section 8.4 the intellectual
      property resulting from work aimed at modifying an arm's length third
      Parties' intellectual property when the work is essential for the Project
      and solely to achieve the interoperability with or the incorporation into
      the Proponent's resulting products; such occurrences shall be reported to
      the Minister on an annual basis.

8.5   Alliance Agreement

A copy of the agreement entered into by March Networks and Mitel Networks,
entitled "Alliance Agreement between March Networks and Mitel Networks", dated
September 21st, 2001;

      i)    was shared with the Minister and constitutes a complete, up-to-date
            and true copy of the said document;

      ii)   is hereby incorporated by reference to this Agreement;

      iii)  shall not be amended or terminated without the Minister's prior
            written consent; and

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      iv)   any misrepresentation under paragraph i) or any default under
            paragraph iii) above constitutes an event of default under this
            Agreement pursuant to subsection 8.1 (d) of Schedule I - TPC General
            Conditions.

8.6   Contractual Benefits to Canada

In the context of Schedule 4, Section B, Subparagraph lb), the Minister hereby
consents that the Proponents may contract all of their manufacturing
requirements at arm's length outside of the Proponents companies. Furthermore,
the Minister hereby acknowledges that BreconRidge Manufacturing Solutions
Corporation may manufacture the resulting products outside Canada; any other
contract related to manufacturing to be carried on out of Canada shall require
the prior written consent of the Minister.

8.7   Parties Joint But Not Several

8.7.1 Notwithstanding any other provision of this Agreement, it is understood
      and agreed that each Proponent shall:

      a)    be exclusively responsible for the implementation of its portion of
            the Statement of Work;

      b)    be exclusively responsible for its compliance with the terms and
            conditions of this Agreement for its portion of the Project; and

      c)    have the right to receive payment of the contribution from the
            Minister for its portion of its Eligible Costs,

      being understood that the Proponents may choose to channel all
      correspondence through a coordinator of their choice.

8.7.2 Should any portion of the Statement of Work not be clearly identified as
      the exclusive responsibility of a Proponent, the Minister may notify the
      Proponents accordingly and require a clear identification of the relevant
      Proponent within the following 30 calendar days; failing to reply or give
      a satisfactory identification shall be resolved in accordance with section
      8.8 below.

8.8   Joint And Several

For greater clarity, any portion of the Project not clearly and specifically
attributable to one of the Proponents shall be the joint and several
responsibility of the Proponents and:

a)    any payment regarding such joint and several portion of the work may be
      validly paid by the Minister to any of the Proponents; and

b)    except as provided in section 8.15, the word Proponent used in singular
      form throughout this Agreement applies to each of the Proponents
      individually as contemplated in section 8.7 above.

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8.9   Early Termination

If the Minister declares that an event of default by one of the Proponents has
occurred and decides to terminate this Agreement, the Minister and the
non-defaulting Proponent shall be governed by the following provisions: the

a)    Minister shall notify the Proponent;

b)    Minister shall terminate any payment towards the Project;

c)    amount owed to the Minister shall be the total contribution received to
      date by that Proponent less the value set initially at the time of
      issuance of any warrants received previously;

d)    non-defaulting Proponent shall repay to the Minister within 30 days of
      notification of the amount owed;

e)    amount owed by the non-defaulting Proponent may the paid through the
      issuance of Warrants in favour of the Minister, to be issued in accordance
      with the provisions of this Article 8; and

f)    Intellectual Property of the defaulting Proponent seined by the Minister
      in accordance with subsection 8.2 of the General Conditions (if the
      Minister has so elected) may be transferred to the non-defaulting
      Proponent.

8.10  Project Reassessment

In the event the Minister declares a default pursuant to section 8.9 above, the
Minister and the non-defaulting Proponent:

a)    shall reassess and conclude on the feasibility of pursuing the Project
      with the non-defaulting Proponent within 30 days of the notice of default;

b)    should the Project still be feasible and parties wish to pursue the
      Project, the non defaulting Proponent shall submit a complete revised
      Statement of Work, acceptable to the Minister, within 60 days;

c)    should either the Minister or the non-defaulting Proponent decide to
      terminate the Project or should the Project no longer be feasible,

      i)    the Minister shall terminate any payment towards the Project;

      ii)   the non-defaulting Proponent shall repay to the Minister within 30
            days of notification by the Minister of the amount owed.

8.11    Warrant Benefits

8.11.1  In exchange for the Contribution, March Networks and Mitel Networks
        agree to provide financial benefits to the Minister as hereinafter
        described.

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8.11.2  For the purposes of this Agreement, "Warrants" means the Warrants issued
        in accordance with Schedule 8 and further governed by the provisions of
        this section.

8.11.3  Each of March Networks and Mitel Networks hereby:

        (A) represents and warrants that:

            i)    as of the date of this Agreement, the authorized share capital
                  of March Networks and Mitel Networks consists only of an
                  unlimited number of common shares;

            ii)   there are no provisions of the articles and by-laws, or any
                  resolutions of the directors and shareholders, of March
                  Networks or Mitel Networks or any agreement to which March
                  Networks or Mitel Networks is a party that will be contravened
                  by the issuance of the Warrants as hereinafter described.

            iii)  as of the date of this Agreement, there are no shareholders'
                  agreements in place except for those disclosed to the Minister
                  and listed hereafter:

                  a)    August 31st, 2001 Agreement:

                        - Mitel Networks Corporation,
                        - Mitel Systems Corporation (100% owned By T. Matthews)
                          81.15%,
                        - Zarlink Semiconductor Inc. 9.02%
                        - Power Technology Investment Corporation 3.61 %.

        (B) undertakes to:

            i)    take all corporate action required to authorize the issuance
                  of the Warrants in a timely fashion by the dates specified in
                  subsection 8.11.4 below;

            ii)   approve within 60 days any proposed transfer of the Minister's
                  Warrants; and

            iii)  take no actions and enter into no agreements which will
                  prevent or impair the Proponents ability to carry out the
                  provisions of this Agreement.

8.11.4  As at September 30th, 2002 and as at each September 30th thereafter for
        every 12 month period beginning October 1 where the Minister makes a
        contribution payment to a Proponent up to and including September 30th,
        2005, March Networks and Mitel Networks shall issue non-expiring, deemed
        fully-paid Warrants exchangeable on a one Warrant for one common share
        basis of the said Proponent with no consideration being payable for the
        issuance of such Warrants to the Proponent by the Minister.

8.11.5  The number of warrants to be issued by March Networks and Mitel Networks
        shall be equal to the amount of contributions paid by the Minister in
        the immediately proceeding twelve (12) months before each such September
        30th divided by the fair market value of the common shares of that
        Proponent as at the September 30th in question.

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8.11.6  In the event that Mitel Networks closes an equity round within three (3)
        months of September 30th, 2002, at an equivalent common share price
        which is lower than the price at which the common shares of Mitel
        Networks were valued on September 30th, 2002 in accordance with
        paragraph 8.11.5, then the Minister shall have the right to require that
        the number of Mitel Networks warrants issued as of September 30th, 2002
        be recalculated to reflect the lower equivalent common share price.

8.11.7  The fair market value of the common shares of March Networks and Mitel
        Networks shall be determined by the Minister using one of the following
        methods:

        a)  the most recent arms length (as that term is defined and applied in
            the Income Tax Act, R.S.C. 1985, C.1 (5th supplement), as amended)
            equity transaction involving the issuance or transfer of the
            Proponent's common shares (including, without limiting the
            generality of the foregoing, in the event that the Proponent's
            common shares are traded on a recognized North American stock
            exchange in such case using the closing sale prices for the common
            shares for the most recent 20 consecutive trading days on such stock
            exchange before the September 30th in question); or

        b)  if requested by either March Networks or Mitel Networks or the
            Minister, by an independent third-party assessment in accordance
            with the following mandatory guidelines:

            i)    the independent third-party assessment shall be conducted by a
                  chartered business valuator (the Assessor) specializing in
                  valuing internet related information and communications
                  technology businesses;

            ii)   the Assessor shall practice at a nationally recognized
                  auditing, consulting or valuation firm with offices in more
                  than three provinces including at least one office in either
                  the Province of Ontario or the Province of Quebec;

            iii)  the Assessor shall not be at a firm providing services to any
                  of the Proponents or related persons ("related persons" as
                  defined in Canada's Income Tax Act, sec. 251);

            iv)   the Assessor shall be selected by the mutual agreement of the
                  Proponent and the Minister, failing which the independent
                  third-party assessor shall be determined in accordance with
                  paragraph 8.14 of this Agreement;

            v)    the Assessor shall not take into account any issues of
                  minority discount or any Proponent internal agreements or
                  arrangements such as the fact that the intellectual property
                  used by the Proponent may be owned by another Proponent; and

            vi)   all costs related to the independent assessment shall be borne
                  by the Proponents.

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8.11.8  The Minister hereby agrees that he will hold all the issued Warrants up
        to and including September 30, 2004, and, thereafter, may only sell the
        issued Warrants at an accumulative rate of up to 6.25% of the number of
        originally issued warrants, from time to time for each three (3) month
        period commencing October 1st, 2004.

8.12    Undertaking

8.12.1  If either of March Networks and Mitel Networks confers any rights
        attaching to all of its common shares as a class or the common shares
        held directly, indirectly or beneficially by Terence H, Matthews or any
        other majority shareholder, either of March Networks or Mitel Networks
        undertakes to take such action ass may be required to ensure that the
        monetary value of the common shares underlying the Warrants while held
        by the Minister shall be equal to those common shares on an "as
        converted" basis, at no additional cost to the Minister. It shall be
        incumbent upon either of March Networks and Mitel Networks to
        demonstrate to the satisfaction of the Minister that the above condition
        is met, and failure to do so will constitute an event of default.

8.12.2  Each of March Networks and Mitel Networks represents that it has not
        entered into and undertakes not to enter into any agreement with a
        related person (as defined in section 251 of Canada's Income Tax Act,)
        that would negatively affect in any significant way either its revenues
        or its book value; the undertaking shall last as long as the Minister
        has not exercised or otherwise disposed of the Warrants.

8.13    Interpretation

8.13.1  Where a Proponent carries no activities described in the Statement of
        Work, it is dispensed from reporting to the Minister as contemplated
        under sections 8.1 and 8.2 above, except for paragraph 8.2.3.

8.13.2  For the purpose of the Schedules to this Agreement "Proponent" shall
        mean all Proponents unless otherwise stated.

8.14    Dispute Resolution

If a dispute arises concerning the application or interpretation of this
Agreement, the parties will attempt to resolve the matter through good faith
negotiation, and may, if necessary and the parties consent in writing, resolve
the matter through mediation by a mutually acceptable mediator or arbitration in
accordance with the Commercial Arbitration Code set out in the schedule to the
Commercial Arbitration Act (Canada), and all regulations made pursuant to that
Act.

8.15    Single Proponent

For the purposes of sections 8.7, 8.8, 8.9, 8.10, Schedule 3 and Schedule 5
excepting section 6 thereof, Mitel Networks and Mitel Knowledge shall form a
single Proponent.

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Article 9 - Entire Agreement

This Agreement constitutes the entire agreement between the parties and
supersedes all previous documents, negotiations, arrangements, undertakings and
understandings related to its subject matter.

IN WITNESS WHEREOF the parties hereto have executed this Agreement through duly
authorized representatives.

HER MAJESTY THE QUEEN IN RIGHT OF CANADA,
as represented by the Minister of Industry

Per:   /s/ Jeff Parker                                      9 Oct. 02
       ----------------------------------------             --------------------
       Technology, Partnerships Canada                      Date

       Jeff Parker, Executive Director
       ----------------------------------------

MARCH NETWORKS CORPORATION

Per:   /s/ Don Mills                                        10 Oct 02
       ----------------------------------------             --------------------
       March Networks Corporation                           Date

       Don Mills, COO
       ----------------------------------------
       Name and Title

MITEL NETWORKS CORPORATION

Per:   /s/ Jennifer Chilcott                                10 Oct 02
       ----------------------------------------             --------------------
       Mitel Networks Corporation                           Date

       Jennifer Chilcott, VP, General Counsel
       ----------------------------------------
       Name and Title

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MITEL KNOWLEDGE CORPORATION

Per:   /s/ Jose Medeiras                                    10 Oct 02
       ----------------------------------------             --------------------
       Mitel Knowledge Corporation                          Date

       Jose Medeiras, Chief Financial Officer
       ----------------------------------------
       Name and Title

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                       SCHEDULE 1- TPC GENERAL CONDITIONS

                                TABLE OF CONTENTS

1. Definitions

"Agreement"
"Background Intellectual Property"
"Contribution"
"Eligible Costs"
"Fiscal Year"
"Intellectual Property"
"Interest Rate"
"Project"
"Project Completion Date"
"Schedule"
"Statement of Work"

2. Material Changes

3. Disposal of Assets

4. Claims for Payment

4.1 Payment of Claims
4.2 Hold-back Rights
4.3 Overpayment by Minister
4.4 Set-off Rights of Minister

5. Monitoring

5.1 Minister's Right to Audit Accounts and Records
5.2 Access to Premises
5.3 Access to Third-party Information

6. Representations, Warranties and Undertakings

6.1 Power and Authority of Proponent
6.2 Authorized Signatories
6.3 Binding Obligations
6.4 No Pending Suits or Actions
6.3 No Gifts or Inducements
6.6 Intellectual Property
6.7 Compliance with Environmental Protection Requirements
6.8 Other Agreements
6.9 Dividend Restriction
6.10 Other Financing
6.11 Lobbyist Act

7. Term of Agreement

7.1 Contractual Benefits
7.2 Advance Payment
7.3 Audit

8. Default and Recovery

8.1 Events of Default
8.2 Remedies on Default
8.3 Remedies Fair and Reasonable
8.4 No Waiver

9. Force Majeure

9.1 Event of Force Majeure
9.2 Definition of Force Majeure

10. Announcements

10.1 Consent to Public Announcement
10.2 Confidentiality Obligation
10.3 Reporting under Security Laws

11. Notice

11.1 Form and Timing of Notice.
11.2 Change of Address

12. Compliance with Laws

13. Members of Parliament

14. Annual Appropriations

14.1 Parliamentary Allocation
14.2 Lack of Appropriation

15. Confidentiality

15.1 Consent Required
15.2 International Dispute
15.3 Financing and Licensing

16. Consent of the Minister

17. No Assignment of Agreement

18. Compliance with Post-employment Provisions

19. Contribution Agreement Only

20. Binding Agreement

21. Severability

22. Applicable Law

23. Signature in Counterparts

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                             TPC GENERAL CONDITIONS

1. Definitions

For the purposes of this Agreement,

"Agreement" means the agreement to which these General Conditions relate,
consisting of Articles of agreement and the Schedules referred to in these
Articles.

"Background Intellectual Property" means the intellectual property rights in the
technology developed prior to the beginning of the Project and required for the
carrying out of the Project or the exploitation of the Intellectual Property.

"Contribution" means the funding, in Canadian dollars payable by the Minister
under the Agreement.

"Eligible Costs" means the Project cost elements specified in the Statement of
Work in Schedule 2 and incurred by the Proponent in accordance with the TPC
Project Cost Principles, excluding, those Project cost elements that may be
specifically mentioned in the Statement of Work as not being supported by the
Minister.

"Fiscal Year" means the federal government fiscal year beginning on April 1 and
ending on the following March 31.

"Intellectual Property" means all technical data, including, without limitation,
all designs, specifications, software, data, drawings, plans, reports, patterns,
models, prototypes, demonstration units, practices, inventions, methods,
applicable special purpose equipment and related technology, processes or other
information conceived, produced, developed or reduced to practice in carrying
out the Project, and all rights therein including, without limitation, patents,
copyrights, industrial designs, trademarks, and any registrations or
applications for the same and all other rights of intellectual property therein,
including any rights which arise from the above items being treated by the
Proponent as trade secrets or confidential information.

"Interest Rate" means the Bank Rate, as defined in the Interest And
Administrative Charges Regulations, in effect on the due date, plus 300 basis
points, compounded monthly. The Interest Rate for a given month can be found at
http://www.pwgsc.gc.ca/recgen/text/podd-e.html.

"Project" means the project described in Schedule 2.

"Project Completion Date" means the date set in the Articles of Agreement for
the completion of the Project.

"Schedule" means a schedule to the Agreement.

"Statement of Work" refers to the document in Schedule 2 containing the
description of the Project.

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2. Material Changes

No material changes will be trade to the estimated total scope or nature of any
element of the Project without the prior written consent of the Minister.
Without limiting the generality of the foregoing, a material change will have
occurred if:

      (a)   a Project performance milestone is not expected to by achieved
            within six (6) months of the projected completion date mentioned in
            the Statement of Work for that element;

      (b)   the estimated Eligible Costs mentioned in of Statement of Work are
            expected to be exceeded by 20% or more;

      (c)   the Project is carried out at locations other than those mentioned
            in the Statement of Work;

      (d)   a change in respect of any other aspect of the Project (including
            but not limited to a change to key Project personnel, Project
            financing, or ownership of the Proponent) which has been
            specifically identified in another part of the Agreement as a
            "material change" for the purpose of this provision, has Occurred.

3. Disposal of Assets

The Proponent shall retain possession and control of the Project assets, the
cost of which has been contributed to by the Minister under the Agreement, and
shall not dispose of the same until they are no longer required to complete the
Project.

4. Claims for Payment

4.1 Payment of Claim

The Minister will pay the Contribution to the Proponent in respect of Eligible
Costs incurred on the basis of itemized claims submitted in accordance with the
procedures set out in Schedule 3.

4.2 Hold-Back Rights

The Minister may withhold up to ten per cent (10%) of the Contribution prior to
the completion of the Project or until such audit as he/she tray require has
been performed. In the event that no audit has been performed eighteen months
after receipt of the final claim, any amount so withheld shall be released to
the Proponent.

4.3 Overpayment by Minister

Where for any reason:

      (a)   the Proponent is not entitled to the Contribution; or

      (b)   the Minister determines that the amount of the Contribution
            disbursed exceeds the amount to which the Proponent is entitled.

                                      -16-
<PAGE>

the Proponent will repay to the Minister, promptly and no later than 30 days
from notice from the Minister, the amount of the Contribution disbursed or the
amount of the overpayment, as the case may be, together with interest at the
Interest Rate from the date of the notice to the day of repayment to the
Minister in full. Any such amount is a debt due to Her Majesty in Right of
Canada and is recoverable as such.

4.4 Set-off Rights of Minister

Without limiting the scope of the set-off rights provided for under the
Financial Administration Act, it is understood that the Minister may set off
against the Contribution, any amounts owed by the Proponent to Her Majesty in
Right of Canada under legislation or contribution agreements and the Proponent
shall declare to the Minister all amounts outstanding in that regard when making
a claim under Schedule 3.

5. Monitoring

5.1 Minister's Right to Audit Accounts and Records

The Proponent will, at its own expense, preserve and make available for audit
and examination by the Minister or the Minister's representatives the books,
accounts and records of the Project and of the information necessary to ensure
compliance with the terms and conditions of this Agreement, including payment of
amounts to the Minister. The Minister will have the right to conduct such
additional audits at the Minister's expense as may be considered necessary using
the audit staff of the Minister, the Audit Services Group of Consulting and
Audit Canada, an independent auditing firm or the Proponent's external auditors.
The Proponent will ensure that any licence agreement it enters into for the
exploitation of the Intellectual Property will contain similar provisions to
permit the Minister to audit licensees' accounts and records in respect to the
calculation of amounts that may be payable by the Proponent to the Minister
under this Agreement.

5.2 Access to Premises

The Proponent will provide the representatives of the Minister reasonable access
to the Proponent's premises to inspect and assess the progress of the Agreement
or any element thereof and supply promptly on request such data as the Minister
may reasonably require for statistical or Project evaluation purposes.

5.3 Access to Third-Party Information

The Proponent will, to the extent practicable, assist the Minister with the
implementation of the Agreement and facilitate access by the Minister to
information from third parties, relating to the Agreement.

                                      -17-
<PAGE>

6. Representations, Warranties and Undertakings

6.1 Power and Authority of Proponent

The Proponent represents and warrants that it is duly incorporated and validly
existing and in good standing and has the power and authority to carry on its
business, to hold property and to enter into this Agreement and undertakes to
take all necessary action to maintain itself in good standing and to preserve
its legal capacity.

6.2 Authorized Signatories

Each party represents and warrants that the signatories to the Agreement have
been duly authorized to execute and deliver the Agreement.

6.3 Binding Obligations

Each party represents and warrants that the execution, delivery and performance
of this Agreement have been duly and validly authorized and that when executed
and delivered, the Agreement will constitute a legal, valid and binding
obligation enforceable in accordance with its terms.

6.4 No Pending Suits or Actions

The Proponent warrants that it is under no obligation or prohibition, nor is it
subject to or threatened by any actions, suits or proceedings which could or
would prevent compliance with the Agreement. The Proponent will advise the
Minister forthwith of any such occurrence during the term of the Agreement.

6.5 No Gifts or Inducements

The Proponent represents and warrants that it has not, nor has any person
offered or promised to any official or employee of Her Majesty the Queen in
Right of Canada, for or with a view to obtaining the Agreement any bribe, gift
or other inducement, and it has not nor has any person on its behalf employed
any person to solicit the Agreement for a commission, contingency fee or any
other consideration dependant upon the execution of the Agent.

6.6 Intellectual Property

      (a)   The Proponent represents and warrants that it either owns the
            Background Intellectual Property or holds sufficient rights in the
            same to permit the Project to be carried out and the Intellectual
            Property to be exploited by the Proponent.

      (b)   The Proponent will ensure that title to the Intellectual Property is
            to be vested, and unless otherwise agreed to in writing by the
            Minister, to remain, exclusively with the Proponent.

      (c)   The Proponent shall take appropriate steps to protect the
            Intellectual Property and shall, upon request, provide information
            to the Minister in that regard.

                                      -18-
<PAGE>

6.7 Compliance with Environmental Protection Requirements

The Proponent shall apply, in relation to the Project, in all material respects,
the requirements of all applicable environmental laws, regulations, orders and
decrees and of regulatory bodies having jurisdiction over the Proponent or the
Project.

6.8 Other Agreements

The Proponent represents and warrants that it has not entered, and undertakes
not to enter, without the Minister's written consent, into any agreement that
would prevent the full implementation of the Agreement by the Proponent.

6.9 Dividend Restriction

The Proponent will not make any dividend payments or other shareholder
distributions that would prevent it from implementing the Project and other
Proponent's obligations under the Agreement including the making of payments to
the Minister as required under the Agreement.

6.10 Other Financing

The Proponent remains solely responsible for providing or obtaining the funding,
in addition to the Contribution, required for the carrying out of the Project
and the fulfillment of the Proponent's other obligations under the Agreement.

6.11 Lobbyist Act

The Proponent represents and warrants that any person who lobbys on its behalf
to obtain the Agreement, or any benefit thereunder, and who is required to be
registered pursuant to the Lobbyists Registration Act R.S. 1985 c. 44 (4th
Supplement), is registered pursuant to that Act.

7. Term of Agreement

7.1 Contractual Benefits

The Agreement will terminate when all of the Proponent's undertakings in regard
to the contractual benefits mentioned in Schedule 4 have been fulfilled.

7.2 Advisee Payment

Any advance or accelerated payment by the Proponent of the amounts due to the
Minister under Schedule 4 shall not have the effect of shortening the period set
in Schedule 4 for the fulfillment of contractual benefits to Canada.

7.3 Audit

The audit rights of the Minister under section 5 above will survive for one year
the termination date established under subsection 7.1 above.

                                      -19-
<PAGE>

8. Default and Recovery

8.1 Events of Default

The Minister may declare that an event of default has occurred if:

      (a)   the Proponent is adjudged or declared bankrupt or if it goes into
            receivership or takes the benefit of any statute from time to time
            in force relating to bankrupt or insolvent debtors

      (b)   an order is made which is not being contested or appealed by the
            Proponent or a resolution is passed for the winding-up of the
            Proponent or it is dissolved;

      (c)   the Proponent has intentionally submitted false or misleading
            information to the Minister or intentionally made a false or
            misleading representation;

      (d)   any material term, condition or undertaking in the Agreement is not
            complied with in any material respect; or

      (e)   the Proponent neglects or fails to pay to the Minister any amount
            due in accordance with this Agreement;

provided that the Minister will not declare an event of default has occurred by
reason of paragraphs (c), (d) or (e) unless the Minister has given notice to the
Proponent of the condition or event which in the Minister's opinion constitutes
an event of default and the Proponent has failed, within 30 days of receipt of
the notice, either to correct the condition or event complained of or to
demonstrate, to the satisfaction of the Minister, that it has taken such steps
as are necessary to correct the condition, and has notified the Minister of the
rectification.

8.2 Remedies On Default

If the Minister declares that an event of default has occurred, the Minister may
exercise one or more of the following remedies:

      (a)   suspend any obligation by the Minister to contribute or continue to
            contribute to the Eligible Costs including any obligation to pay any
            amount owing prior to the date of much suspension;

      (b)   terminate any obligation of the Minister to contribute or continue
            to contribute to the Eligible Costs, including any obligation to pay
            any amount owing prior to the date of such termination;

      (c)   require the Proponent to repay to the Minister all or part of the
            Contribution paid by the Minister to the Proponent, and pay the
            Minister any amounts due under the Agreement. together with interest
            from the date of demand at the Interest Rate;

If an event of default has occurred in relation to paragraph 8.1(a) or (b), or
as a result of the failure of the Proponent to comply with subsection 6.6 of
these General Conditions (intellectual

                                      -20-
<PAGE>

Property), section A (Payments to Minister) or subsection B.1 (Work in Canada)
of Schedule 4, or the provisions that may be part of the Agreement regarding the
disposal of special purpose equipment, the Minister may direct the Proponent to
transfer and deliver to the Minister title to, possession of, and all rights of
the Proponent in the Intellectual Property, and the Proponent will immediately
comply.

8.3 Remedies Fair and Reasonable

The Proponent acknowledges that in view of the policy objectives served by the
Ministers agreement to make the contribution, the fact that the contribution
comes from public monies, and that the amount of damages sustained by the Crown
in the event of default is difficult to ascertain, that it is fair and
reasonable that the Minister be entitled to exercise any or all of the remedies
provided for in this section 8 and to do so in the manner provided for in that
section if an event of default occurs; provided that in exorcising any remedy in
accordance with paragraph 8.2(e) other than for a breach of paragraph 8.1(e),
the Minister will credit the Proponent for any amounts paid to the Minister
under Schedule 4 of this Agreement.

8.4 No Waiver

The fact that the Minister refrains from exercising a remedy he or she is
entitled to exercise under the Agreement will not constitute a waiver of such
right and any partial exercise of a right will not prevent the Minister in any
way from later exercising any other right or remedy under the Agreement or other
applicable law.

9. Force Majeure

9.1 Event of Force Majeure

The Proponent will not be in default by reason only of any failure in
performance of the Project in accordance with Schedule 2 if such failure arises
without the fault or negligence of the Proponent and is caused by any event of
force majeure.

9.2 Definition of Force Majeure

Force majeure means any cause which is unavoidable or beyond the reasonable
control of the Proponent, including war, riot, insurrection, orders of
government, strikes or any Act of God or other similar circumstance which is
beyond the Proponent's control, and which could not have been reasonably
circumvented by the Proponent without incurring unreasonable cost.

10. Announcements

10.1 Consent to Public Announcements

The Proponent hereby consents to public announcements by or on behalf of the
Minister containing any of the information contained in Schedule 6 entitled
"Project Fact Sheet for News Release".

                                      -21-
<PAGE>

10.2 Confidentiality Obligation

The Minister will inform the Proponent of the date on which the first public
announcement is to be made and the Proponent will not disclose the existence of
this Agreement until such date.

10.3 Reporting under Security Laws

Nothing in this Agreement shall be interpreted as preventing the fulfillment by
the Proponent of its reporting obligations under applicable security laws.

11. Notice

11.1 Form and Timing of Notice

Any notice, information or document provided for under the Agreement shall be
effectively given if delivered or sent by letter or facsimile, postage or other
charges prepaid. Any notice that is delivered shall have been received on
delivery; any notice sent by facsimile shall be deemed to have been received one
working day after having been sent, and any notice mailed shall be deemed to
have bean received eight (8) calendar days after being mailed.

11.2 Change of Address

A party may change the address which that party has stipulated in the Agreement
by notifying in writing the other party of the new address.

12. Compliance with Laws

In implementing the Agreement, the proponent will comply with all applicable
federal, provincial and municipal laws, including but not limited to statutes,
regulations, by-laws, ordinances and decrees.

13. Members of Parliament

No member of the House of Commons will be admitted to any share or part of this
Agreement or to any benefit to arise therefrom. No person who is a member of the
same will, directly or indirectly, be a party to or be concerned in the
Agreement.

14. Annual Appropriations

14.1 Parliamentary Allocation

Any payment by the Minister under this Agreement is subject to time bring an
appropriation for the Fiscal Year in which the payment is to be made; and to
cancellation or reduction in the event that department funding levels are
changed by Parliament.

14.2 Lack of Appropriation

In the event that the Minister is prevented from disbursing the full amount of
the Contribution due to a lack or reduction of appropriation or departmental
funding levels, are parties agree to

                                      -22-
<PAGE>

review the effects of such a shortfall in the Contribution on the implementation
of the Agreement and to adjust, as appropriate, the Contractual benefits
specified in Schedule 4.

15. Confidentiality

15.1 Consent Required

Subject to section 10 and the Access to Information Act, each party shall keep
confidential and shall not without the consent of all parties disclose the
contents of the Agreement and the documents pertaining thereto, whether provided
before or after the Agreement was entered into, or of the transactions
contemplated herein.

15.2 International Dispute

The Minister is hereby authorized to disclose any of the information referred to
in paragraph 15.1 above where, in the opinion of the Minister, such disclosure
is required to an international trade panel for the purposes of the conduct of a
dispute in which Canada is a party, or a third party intervenor. The Minister
shall give prior notice to the proponent of such disclosure.

15.3 Financing and Licensing

The Minister hereby consents to the Proponent disclosing the Agreement or any
portion thereof for the purposes of securing additional financing or of
licensing for commercial exploitation, subject to the Proponent having the
person to, whom the information is disclosed execute e nondisclosure agreement
prior to disclosure

16. Consent of the Minister

Whenever the Agreement provides for the proponent obtaining the consent or
agreement of the Minister, it is understood that such consent or agreement shall
not be unreasonably withheld and that the Minister may make the issuance of such
consent or agreement subject to reasonable conditions.

17. No Assignment of Agreement

The Proponent shall not assign the Agreement nor any part thereof without the
prior written consent of the Minister.

18. Compliance with Post-employment Provisions

The proponent confirms that no individual for whom the post-employment
provisions of the Conflict of Interest and Post-Employment Code for Public
Officer Holders or the conflict of Interest and Post-Employment Code for the
Public Service apply will derive a direct benefit from this Agreement unless
that individual is in compliance with the applicable post-employment provisions.

                                      -23-
<PAGE>

19. Contribution Agreement Only

The Agreement is a contribution agreement only, not a contract for services or a
contract of service or employment, and nothing in the Agreement, the parties
relationship or actions is intended to create, nor shall be considered as
creating, a partnership, employment or agency relationship between them. The
Proponent is not in any way authorized to make a promise, agreement or contract
and to incur any liability on behalf of Canada, nor shall Canada make a promise,
agreement or contract and incur any liability on behalf of the Proponent, and
the Proponent shall be solely responsible for any and all payments and
deductions required by the applicable laws.

20. Binding Agreement

This Agreement is binding on the parties and their successors and permitted
assigns.

21. Severability

Any provision of this Agreement prohibited by law or otherwise ineffective will
be ineffective only to the extent of such prohibition or ineffectiveness and
will be severable without invalidating or otherwise affecting the remaining
provisions of the Agreement.

22. Applicable Law

The Agreement shall be interpreted in accordance with the laws in force in the
province where the Proponent's head office is located.

23. Signature in Counterparts

This Agreement may be signed in counterparts, each of which when taken together,
will constitute an original Agreement.

                                      -24-
<PAGE>

                            SCHEDULE 2 - THE PROJECT

A - THE PROJECT

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

B - STATEMENT OF WORK (SOW) - OCTOBER 1st, 2001 TO APRIL 30th, 2002

Summary

During this period, the R&D program will contain three main sections:

[Subject to a request for confidential treatment; Separately filed with the
Commission]

The four major tasks are:

[Subject to a request for confidential treatment; Separately filed with the
Commission]

While each product development project will result in a distinct product, during
this first year designers will architect systems that are compatible with the
future goal of [Subject to a request for confidential treatment; Separately
filed with the Commission] solutions. The product families are all designed to
operate in the IP environment.

Detailed Tasks

1.

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      The products emerging during this phase of the work will include:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Product Goals:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Activities:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Problems/Achievements:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Innovations and Milestones:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

2)

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      The products emerging during this phase of the work will include:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Product Goals:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Activities:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Problems and Achievements:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Innovations and Milestones:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

3)

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      The products emerging during this phase of the work will include:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Product Goals:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Activities:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Problems and Achievements:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Innovations and Milestones:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

4)

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      The products emerging during this phase of the work will include:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Product Goals:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Activities:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Major Technical Problems/Achievements:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

      Innovations and Milestones:

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

                                      -25-
<PAGE>

                                                                          FORM B

                             FORM B - MILESTONES (1)

PROPONENT NAME: March Networks Corp., Mitel Networks Corp.
PROJECT NUMBER: 720-481443

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

                                                            File No.: 720-481443

                                      -26-
<PAGE>

                                                                          FORM B

                             FORM B - MILESTONES (2)

PROPONENT NAME: March Networks Corp., Mitel Networks Corp.
PROJECT NUMBER: 720-481443

      [Subject to a request for confidential treatment; Separately filed with
      the Commission]

                                                            File No.: 720-481443

                                      -27-
<PAGE>

                                                                          FORM C

           C - CURRENT FISCAL YEAR COST BREAKDOWN BY MAJOR ACTIVITIES

PROPONENT NAME: March Networks Corp., Mitel Networks Corp.
PROJECT NUMBER: 720-481443

FOR FISCAL YEAR ENDING MARCH 31, 2002

================================================================================
 DESCRIPTION OF
   ACTIVITY(1)                      ESTIMATED ELIGIBLE COSTS ($)
================================================================================
                   *       *        *      *        *        *         Total
--------------------------------------------------------------------------------
       *           *       *               *        *        *           *
--------------------------------------------------------------------------------
       *           *       *               *        *        *           *
--------------------------------------------------------------------------------
       *           *       *               *        *        *           *
--------------------------------------------------------------------------------
       *           *       *               *        *        *           *
--------------------------------------------------------------------------------

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

================================================================================
Total              *       *        *      *        *        *       45,389,777
================================================================================

* - [Subject to a request for confidential treatment; Separately filed with the
Commission]

Notes:
1. Title of key Project tasks enumerated and described in the SOW.

                                      -28-
<PAGE>

                                                                          FORM D

                        D - COST BREAKDOWN BY FISCAL YEAR

PROPONENT NAME: March Networks Corp., Mitel Networks Corp.
PROJECT NUMBER: 720-481443

================================================================================
     FISCAL YEAR                 ESTIMATED ELIGIBLE COSTS ($)
================================================================================
                      **     **      **      **      **      **       Total
--------------------------------------------------------------------------------
      2002 (6m)       **     **      **      **      **      **         **
--------------------------------------------------------------------------------
        2003          **     **      **      **      **      **         **
--------------------------------------------------------------------------------
        2004          **     **      **      **      **      **         **
--------------------------------------------------------------------------------
      2005 (6m)       **     **      **      **      **      **         **
--------------------------------------------------------------------------------
        20XX
================================================================================
Total                 **     **      **      **      **      **      240,000,000
================================================================================

*The above cost breakdown includes all estimated direct costs and associated
overhead costs for the Project. For claim purposes, these costs will be
determined in accordance with the TPC Cost Principles (Schedule 3) with overhead
being calculated at 65% of the salaries and wages of employees directly engaged
in the Project, as defined in the Canada Customs and Revenue Agency policy on
Scientific Research and Development.

** - [Subject to a request for confidential treatment; Separately filed with the
Commission]

                                      -29-
<PAGE>

               SCHEDULE 3 - CLAIMS AND TPC PROJECT COST PRINCIPLES

A. - CLAIMS

1.    The Minister will pay the Contribution to the Proponents, in respect of
      Eligible Costs incurred, on the basis of claims which will:

      a)    be submitted on a monthly basis ("Claim Period") by each Proponent,
            except for the first claim of each Proponent which may cover a
            longer period going back to October 1st, 2001;

      b)    be submitted on TPC claim forms, within forty-five (45) days of the
            end of each Claim Period;

      c)    be accompanied with details of all costs being claimed, which will
            be substantiated by such documents as may be required by the
            Minister and presented in accordance with the structure and the
            milestones contained in the Statement of Work in Schedule 2.

      d)    be certified by the chief financial officer of the each Proponent
            for their respective claim or other persons satisfactory to the
            Minister;

      e)    be accompanied by a report on the progress made, in carrying out the
            Project during the Claim Period, containing such information as
            mentioned in the section of Schedule 5 (Reporting Requirements)
            entitled Claim Reports;

      f)    include a deduction for Eligible Costs included in a previous claim
            but which have not been paid by the Proponent within ninety (90)
            days of such claim.

2.    In regard to paragraph 1(f) above, the Minister may request at any time
      that the Proponents provide satisfactory evidence to demonstrate that
      Eligible Costs have been paid.

3.    Within one hundred and twenty (120) days of the submission of the final
      claim, the Proponents shall individually submit an itemized statement
      certified by their respective chief financial officer attesting to the
      Eligible Costs for the entire Project having been incurred and paid.

                                      -30-
<PAGE>

B - TPC PROJECT COST PRINCIPLES

1. GENERAL PRINCIPLE

The total Eligible Costs of the Project shall be the sum of the applicable
directed indirect costs which are, or are to be reasonably and properly incurred
and/or allocated, in the performance of the Project, less any applicable
credits. These costs shall be determined in accordance with the Proponent cost
accounting system as accepted by the Minister and applied consistently over
time.

2. DEFINITION OF REASONABLE COST

      (1)   A cost is reasonable if, in nature and amount it does not exceed
            that which would be incurred by an ordinary prudent person in the
            conduct of a competitive business.

      (2)   In determining the reasonableness of a particular cost,
            consideration shall be given to:

            (a)   whether the cost is of a type generally recognized as normal
                  and necessary for the conduct of the Proponent's business or
                  performance of the Project;

            (b)   the restraints and requirements by such factors as generally
                  accepted sound business practices, arm's length bargaining,
                  federal, provincial and local laws and regulations, and
                  Agreement terms;

            (c)   the action that prudent business persons would take in the
                  circumstances, considering their responsibilities to the
                  owners of the business, their employees, customers, the
                  Government and public at large;

            (d)   significant deviations from the established practices of the
                  Proponent which may unjustifiably increase the Eligible Costs;
                  and

            (e)   the specifications, delivery schedule and quality requirements
                  of the particular Project as they affect costs.

3. DIRECT COSTS

There are three categories of direct costs:

      (a)   Direct Material Cost meaning the cost of materials which can be
            specifically identified and measured as having been used or to be
            used for the performance of the Project and which are so identified
            and measured consistently by the Proponent's cost accounting system
            as accepted by the Minister.

            (i.)  These materials may include, in addition to materials
                  purchased solely for the Project and processed by the
                  Proponent, or obtained from subcontractors, any other
                  materials issued from the Proponent's general stocks.

                                      -31-
<PAGE>

            (ii.) Materials purchased solely for the Project or subcontracts
                  shall be charged to the Project at the net laid down cost to
                  the Proponent before cash discounts for prompt payment.

            (iii.) Materials issued from the Proponent's general stocks shall be
                  charged to the Project in accordance with the method as used
                  consistently by the Proponent in pricing material inventories.

      (b)   Direct Labour Cost meaning that portion of gross wages or salaries
            incurred for activities which can be specifically identified and
            measured as having been performed or to be performed on the Project
            and which is so identified and measured consistently by the
            Proponent's cost accounting system as accepted by the Minister.

      (c)   Other Direct Costs meaning those applicable costs, not falling
            within the categories of direct material or direct labour, but which
            can be specifically identified and measured as having been incurred
            or to be incurred in performance of Project activities and which are
            so identified and measured consistently by the Proponent's costing
            system as accepted by the Minister.

4. INDIRECT COSTS

(1)   Indirect Costs (overhead) meaning those costs which, though necessarily
      having been incurred during the period of the performance of the Project
      activities for the conduct of the Proponent's business in general, cannot
      be identified and measured as directly applicable to the Project.

(2)   These Indirect Costs may include, but are not necessarily restricted to,
      such items as:

      (a)   indirect materials and supplies (*);

      (b)   indirect labour;

      (c)   fringe benefits (the Proponent's contribution only);

      (d)   service expenses: expenses of a general nature such as power, heat,
            light, operation and maintenance of general assets and facilities;

      (e)   fixed/period charges: recurring charges such as property taxes,
            rentals and reasonable provision for depreciation;

      (f)   general and administrative expenses: including remuneration of
            executive and corporate officers, office wages and salaries and
            expenses such as stationery, office supplies, postage and other
            necessary administration and management expenses;

      (g)   selling and marketing expenses associated with the products or
            services being acquired under the Agreement;

                                      -32-
<PAGE>

      (h)   general research and development expenses as considered applicable
            by the Minister.

      *     For supplies of similar low-value, high-usage items the costs of
            which meet the above definition of Direct Material Costs but for
            which it is economically expensive to account for these costs in the
            manner prescribed for direct costs, then they may be deemed to be
            indirect costs for the purposes of the Project.

5. ALLOCATION OF INDIRECT COSTS

Indirect costs shall be accumulated in appropriate indirect cost pools,
reflecting the Proponent's organizational or operational lines and these pools
subsequently allocated to the Project or contracts, in accordance with the
following two principles:

      (a)   the costs included in a particular indirect cost pool should have a
            similarity of relationship with the Project or contracts, as
            applicable, to which that indirect cost pool is subsequently
            distributed; further, the costs included in an indirect cost pool
            should be similar enough in their relationship to each other that
            the allocation of the total costs in the pool provides a result
            which would be similar to that achieved if each cost within that
            pool were separately distributed;

      (b)   the allocation basis for each indirect cost pool should reflect, as
            far as possible, the causal relationship of the pooled costs to the
            Project to which these costs are distributed.

6. CREDITS

The applicable portion of any income, rebate, allowance, or any other credit
relating to any applicable direct or indirect costs, received by or accruing to
the Proponent, shall be credited to the Eligible Costs.

7. NON-APPLICABLE COSTS

Notwithstanding that the following costs may have been or may be reasonably and
properly incurred by the Proponent during the performance of Project activities,
they are considered non-applicable costs to the Project:

      (a)   allowance for interest on invested capital, bonds, debentures, bank
            or other loans together with related bond discounts and finance
            charges;

      (b)   legal, accounting and consulting fees in connection with financial
            reorganization, security issues, capital stock issues, obtaining of
            patents and licenses and prosecution o claims against the Minister;

      (c)   losses on investments, bad debts and expenses for the collection
            thereof;

      (d)   losses on other projects or contracts;

                                      -33-
<PAGE>

      (e)   federal and provincial income taxes, excess profit taxes or surtaxes
            and/or special expenses in connection therewith;

      (f)   provisions for contingencies;

      (g)   premiums for life insurance on the lives of officers and/or
            directors where proceeds accrue to the Proponent;

      (h)   amortization of unrealized appreciation of assets;

      (i)   depreciation of assets paid for by the Minister;

      (j)   fines and penalties;

      (k)   expenses and depreciation of excess facilities;

      (l)   unreasonable compensation for officers and employees;

      (m)   product development or improvement expenses not associated with the
            product being acquired under the Project;

      (n)   advertising, except reasonable advertising of an industrial or
            institutional character placed in trade, technical or professional
            journals for the dissemination of information for the industry or
            institution;

      (o)   entertainment expenses;

      (p)   donations except those to charities registered under the Income Tax
            Act;

      (q)   dues and other memberships other than regular trade and professional
            associations;

      (r)   fees, extraordinary or abnormal for professional advice in regard to
            technical, administrative or accounting matters, unless approval
            from the Minister is obtained.

ADDENDUM TO TPC PROJECT COST PRINCIPLES

A -   Intellectual Property Protection

      Notwithstanding subsection 7(b) above, legal, accounting and consulting
      fees in connection with the obtaining of patents and statutory protection
      of other elements of the Intellectual Property are Eligible Costs.

B -   Specific Purpose Equipment

      For Eligible Costs in respect to Special Purpose Equipment, see the
      Schedule entitled Special Purpose Equipment.

                                      -34-
<PAGE>

C -   SR&ED Method of Calculating Labour and Overhead Allowance

      Notwithstanding the provisions on Direct Labour Costs and Indirect Costs
      contained above, in the event that it is mentioned in the Statement of
      Work that the Canada Customs and Revenue Agency policy on Scientific
      Research and Experimental Development has been chosen by the Proponent as
      a proxy for Overhead calculations for this Project, please see the
      attached guide, TPC Overhead Proxy.

                                      -35-
<PAGE>

                               TPC Overhead Proxy

Calculating the Prescribed Proxy Amount for Eligible Overhead Expenditures, A
Summary of CCRA T4088 Rev. 99 Guide to Form T661 - Claiming Scientific Research
and Experimental Development Expenditures
http://www.ccra-adrc.gc.ca/E/pub/tg/t4088eq/README.html. This summary has been
prepared to outline the major elements of calculating the prescribed proxy
amount (PPA). In case of disagreement between this summary and the SR&ED rules,
SR&ED will apply.

In lieu of standard PWGSC direct labour and overhead negotiations, TPC clients
may choose to follow the SR&ED rules. Under this method, rather than
specifically identifying and allocating incremental overhead expenditures to the
Project, a PPA for eligible overhead costs may be calculated based on a fixed
percentage of the salaries or wages, or portion thereof, of the employees
directly engaged in the Project. The base will include wages/salaries as well as
normal sick and vacation leave and statutory holidays. It will not include
expenditures for taxable benefits, as well as remuneration based on profits and
bonuses, or related benefits (the employer's share of EI, CPP or QPP, WCB or
CSST, employee pension and medical plans).

The current SR&ED PPA rate is 65% of the base.

The PPA will cover overhead expenditures such as:

      o     the related benefits (employer's share) of the approved
            wages/salaries

      o     office supplies

      o     general purpose office equipment

      o     heat, water, electricity and telephones

      o     support staff salaries or wages

      o     travel and training

      o     property taxes

      o     maintenance and upkeep of Project premises, facilities or equipment

      o     any other eligible expenditures, not specifically identified in the
            Statement of Work, that are incremental costs as a result of the
            approved Project activity.

Note, there are rules that limit the amount of wage/salary costs of specified
employees that can be included in the base. For year 2000, the maximum amount is
$94,000 per specified employee. Specified employees are those employees who do
not deal at arm's length with the employer or who own directly or indirectly, at
any time during the year, 10% or more of the issued shares of any capital stock
of the employer or of any corporation related to the employer.

The following table highlights the types of activity that should be included in
calculating the base as well as applicable limits.

                                      -36-
<PAGE>

                  Calculating the Prescribed Proxy Amount Base

--------------------------------------------------------------------------------
Include the Portion of Wages for Time spent on the Project of:
--------------------------------------------------------------------------------

Employees directly engaged in the Project, based on such tasks as:

o     preparing equipment and materials for experiments, tests and analysis (but
      not for maintaining equipment);

o     experimenting, testing and analysing;

o     collecting data for experimentation and analysis; and,

o     directing the course of the ongoing Project activities being claimed for
      the year.

Other employees' time is also considered to be directly engaged in the project
to the extent the following tasks are required as part of the SOW:

o     recording measurements, making calculations and preparing charts and
      graphs;

o     conducting statistical surveys and interviews,

o     preparing computer programs, and,

o     working in areas of engineering or design, operations research,
      mathematical analysis and psychological research.

Supervisors or managers time spent directly involved in the technical aspects of
the Project.

Note: employees who spend all or substantially all of their time (90%) on SOW
activities are considered to spend all of their time on the Project.

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

--------------------------------------------------------------------------------
Do Not Include
--------------------------------------------------------------------------------

Employees providing a service to Project staff including clerks, secretaries and
receptionists engaged in activities in such areas as accounting, payroll,
finance, legal, shipping, inventory control, maintenance and word processing.

Time managers and supervisors spend on the non technical management aspects of
activities such as long-term decision making, contract administration and other
decision-making functions that do not directly influence the Project activities.

Usually, do not include work performed beyond the first-line supervision level.

For a specified employee, the maximum amount of salary that can be included in
the base is limited to 75% of salary/wage costs, regardless of the share of time
working on the Project exceeds this amount. This amount is further restricted,
to be the lessor of the prior calculation or the following formula:

2.5 times the Maximum Pensionable Earnings (for CPP purposes, $37,600 for year
2000) times the number of days in the taxation year that the person is employed
by the client divided by 365.

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

                                      -37-
<PAGE>

                        SCHEDULE 4 - CONTRACTUAL BENEFITS

A -      PAYMENTS TO THE MINISTER

1.       Definitions

         "Warrant" means a certificate issued individually by March Networks and
         Mitel Networks giving to the Minister the right to purchase common
         shares issued respectively by March Networks and Mitel Networks at a
         stated price and stipulated date.

         "Fair market value" means the value of the shares on the Toronto Stock
         Exchange or other public exchange at the close of business on the day
         before receipt.

2.       Warrants

         2.1      March Networks and Mitel Networks shall in accordance with
                  section 8.11 of the Agreement individually issue to the
                  Minister a Warrant Certificate on September 30th, 2002 and on
                  every September 30th up to and including September 30th, 2005
                  evidencing a number of warrants based on the Contribution
                  disbursed in the preceding twelve months divided by the Fair
                  market value of the shares on the relevant September 30th.
                  These Warrant Certificates shall be delivered to the Minister
                  no later than 30 days after the issuance.

         2.2      The terms and conditions of the warrants will be as set forth
                  in the respective specimen Warrant Certificate contained in
                  Schedule 8 to this Agreement.

         2.3      The Warrant Certificate shall be accompanied by a legal
                  opinion addressed to the Minister confirming the due and valid
                  execution and delivery of the Warrant Certificate.

         2.4      March Networks and Mitel Networks will use their best efforts
                  to effect the issuance of the warrants. In the event the
                  Toronto Stock Exchange or other applicable public exchange
                  does not approve the issuance of these warrants, the
                  Proponents shall be obligated to repay the related portion of
                  the Contribution with interest at the Interest Rate from the
                  date the related warrant Certificate was required to be
                  issued.

B -      CONTRACTUAL BENEFITS TO CANADA

1.       Work in Canada

a) Unless otherwise agreed to in writing by the Minister, the Proponents will
ensure that the Intellectual Property is exploited through the production,
exclusively in Canada, of resulting products until live years after the
completion of the Project as described in Schedule 2 - The Project.

b) The Proponents will not, without the prior written, consent of the Minister,
grant any right to the production of resulting products or transfer title to any
of the Intellectual Property

                                      -38-
<PAGE>

outside of Canada, except the licence or sub-licence in conjunction with the
sale of resulting products, and will impose the same restriction on all
licensees or transferees.

c) The expression "resulting products" as used in paragraph a) and b) above
means products, including services, resulting from the use of the Intellectual
Property.

2.       Commercial Exploitation Work outside of Canada

The Proponents will have the right to insert the Intellectual Property produced
in Canada into existing products currently manufactured outside of Canada.

3.       R&D after Project Completion Date

The Proponents undertake to conduct an average of $80,000,000, with a minimum of
$50,000,000, worth of R&D per year during the next five years following the
Project Completion Date.

                                      -39-
<PAGE>

                       SCHEDULE 5 - REPORTING REQUIREMENTS

1.       Claim Reports

Whenever the Proponents individually submit a claim, they shall attach to the
claim a progress report containing:

(a) a description of the progress made in the fulfilment of the Statement of
Work during the Claim Period, detailed by Activity as defined in the Statement
of Work;

(b) a statement of milestones achieved, if any, during; the Claim Period;

(c) an assessment of any significant delay in completing the Project or the
attainment of any milestone identified in the Statement of Work, the reasons for
such delay, and mitigation measures being taken;

(d) the Proponent's revised projections of Project cash flows for the current
Fiscal Year, except that in cases where the Claim Period is monthly, this
information is to be provided on March 31st, June 30th, September 30th and
December 31st of each year;

(e) an update to the list of current holdings of Special Purpose Equipment
(Special Purpose Equipment Form in Schedule 7) if any modifications have been
made since the last claim;

No claim for the Contribution will be processed unless and until such report is
provided to the Minister.

2.       Annual Review

Unless otherwise agreed to, the parties shall meet at least once annually during
the Project period, at a mutually agreeable time, to review the progress of the
Project.

3.       Project Progress Reports

At least one (1) month prior to the date set for the Annual Review meeting
mentioned in section 2 above, the Proponents shall provide the Minister with a
written progress report containing:

(a) a description of the progress in completion of the Project activities, in
comparison with the schedule and milestones contained in the Statement of Work
and the related Project expenditures for that segment of Project activities;

(b) the Proponents' revised cost breakdown for the project, including an
estimated cost breakdown by major activity and by Fiscal Year; and

(c) an indication of any delay in completing the Project and the reasons for
such delay, together with the Proponents' revised schedule mid any proposed
revisions to the Statement of Work.

                                      -40-
<PAGE>

4.       Annual Information Updates

By February 15th, 2003, and by the same date each year thereafter until this
Agreement ends in accordance with section 7 of the General Conditions, the
Proponents shall individually provide the following information updates to the
Minister:

(a) an update of the projected and actual repayments to the Minister, as set out
in Form TPC-1 (Report on Estimated & Actual Repayments to the Minister) attached
hereto, together with an explanation of any significant changes from the last
update.

         (Note: Once the repayment period starts, this update shall be provided
         annually at the time of making repayment, in accordance with the
         provisions entitled "Payments to Minister" in Schedule 4)

(b) an update of projected and actual person years (PYs), as set out in Form
TPC-2 (Report on Job Creation and Maintenance) attached hereto, together with an
explanation of any significant changes from the last update;

(c) an update of other representations and expected results as set out in Form
TPC-3 (Report on Other Representations & Expected Results) attached hereto,
together with an explanation of any significant changes from the last update;

(d) an update of investment leverage, as set out in Form TPC-4 (Report on
Investment Leverage) attached hereto, together with an explanation of any
significant changes from the last update;

(e) an update on sustainable development impacts, a s set out in Form TPC-5
(Report on Sustainable Development impacts) attached hereto, together with an
explanation of any significant changes from the last update;

(f) a summary of the progress made in the fulfilment of specific commitments in
regard to contractual benefits to Canada identified in Schedule 4;

(g) an update to the list of current holdings of Special Purpose Equipment as
set out in the Special Purpose Equipment Form forming part of Schedule 7;

(h) an identification of any planned or completed transfer to commercial
production, transfer outside of Canada, sale, lease or other disposal of Special
Purpose Equipment,

5.       Changes in Annual Ceilings for Contribution

The revised forecasts on Project costs contained in the Claim Reports, the
Project Progress Reports and the Annual Information Updates, do not constitute
requests for reprofiling of annual ceilings for the Contribution as mentioned in
Article 4.3. Any reprofiling request shall be specifically and separately made
by the Proponents.

                                      -41-
<PAGE>

6.       Annual Financial Statements

The Proponents shall individually provide the Minister with a copy of their
annual audited financial statements within four (4) months of the end of each of
the Proponents' fiscal years.

                 SCHEDULE 5 - REPORTING REQUIREMENTS FORM TPC -1

            REPORT ON ESTIMATED AND ACTUAL REPAYMENTS TO THE MINISTER

PROPONENTS: March Networks Corporation                   PROJECT NO.: 720-481443
            Mites Networks Corporation
            Mitel Knowledge Corporation

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
       1               2             3              4              5              6             7             8
----------------------------------------------------------------------------------------------------------------------
  YEAR ENDING      ESTIMATED     ESTIMATED      ESTIMATED     ACTUAL VALUE     ACTUAL        ACTUAL        DUE DATE
                  VALUE OF A     NUMBER OF      POTENTIAL     OF A WARRANT    NUMBER OF     POTENTIAL
  (MM/DD/YY)        WARRANT      WARRANTS       RETURN AT        AT ITS       WARRANTS      RETURN AT      (MM/DD/YY)
                                                  6.25%       DELIVERANCE                     6.25%
                      ($)                       EXECUTION                                   EXECUTION
                                                                  ($)
                                                   ($)                                         ($)
----------------------------------------------------------------------------------------------------------------------
<S>                 <C>          <C>            <C>           <C>             <C>           <C>           <C>
----------------------------------------------------------------------------------------------------------------------
9/30/02                                                                                                   10/30/02
----------------------------------------------------------------------------------------------------------------------
9/30/03                                                                                                   10/30/03
----------------------------------------------------------------------------------------------------------------------
9/30/04                                                                                                   10/30/04
----------------------------------------------------------------------------------------------------------------------
10/1/04                                                                                                   10/30/04
----------------------------------------------------------------------------------------------------------------------
9/30/05                                                                                                   10/30/05
----------------------------------------------------------------------------------------------------------------------
10/1/05                                                                                                   10/30/05
----------------------------------------------------------------------------------------------------------------------
10/1/06                                                                                                   10/30/06
----------------------------------------------------------------------------------------------------------------------
10/1/07                                                                                                   10/30/07
----------------------------------------------------------------------------------------------------------------------
10/1/08                                                                                                  10/30/08
----------------------------------------------------------------------------------------------------------------------
TOTAL
----------------------------------------------------------------------------------------------------------------------
</TABLE>

SIGNATURE OF AUTHORIZED OFFICER:__________________________________________

REPORT DATE:_________________

The Proponent certifies that the initial repayment projections provided at the
time of the Agreement, and as may be revised from time to time per the
requirements of Schedule 5, represent reasonable estimates of the repayments
that the Minister can expect from this Project, as they could be determined at
any particular time. The Minister recognizes that those estimates may vary
through time, due to factors over which the Proponent has little or no control.

                                      -42-
<PAGE>

                       SCHEDULE 5 - REPORTING REQUIREMENTS          FORM TPC - 2

                     REPORT ON JOB CREATION AND MAINTENANCE

PROPONENTS- Mitel Network Corporation                     PROJECT NO. 720-481443
            Mitel Network Corporation
            Mitel Knowledge Corporation

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

GENERAL INSTRUCTIONS

The intent of this schedule is to identify the number of PY's expended on
Project related activities during any one year of the duration of the Agreement,
according to category of employment. Both part-time and full-time employees
should be claimed, as employment of all types represents a Project benefit.
Part-time work should be converted into PY units on the basis normally used by
the Proponent provided it is between 1800 and 2000 hours of work paid in a given
year.

1.    Data is to be provided based on a 52 week calendar year and should be
      expressed in PY units.

2.    Direct PYs are to be counted. The term "direct PY" relates to the work
      performed in Canada by employees of the proponent. Only those direct PYs
      which result from the Project are to be counted. Work performed outside of
      Canada by Canadian employees is not to be included except for eligible
      activities performed as part of the Statement of Work during the Work
      Phase. Reported PYs may be performed by existing staff or by new hires.
      These PYs are normally located in the Proponent's facility and involve an
      eligible operation or activity supported by the industrial assistance
      program. During the Benefits Phase, these PYs normally pertain to
      production/distribution activities associated with the supported facility,
      product or processes of the proponent.

3.    Indirect PYs refer to work performed in Canada as a result of the Project
      by employees who are not employed by the Proponent, and normally at a
      location other than the Proponent's facility. Apart from the following two
      exceptions, indirect PYs are never to be included in the PY count:

      1)    Subcontracted PYs. in the Work phase of R&D/innovation projects are
            included in the PY count, provided that the related activity is
            explicitly set out in the Statement of Work in the Contribution
            Agreement.

      2)    Benefit phase production PYs of related entities to the Proponent
            are included in the PY count, provided that the Contribution
            Agreement explicitly includes PY reporting requirements on the
            parties concerned and provides the Minister access to the related
            facilities for monitoring purposes.

4.    Reporting during the Work phase requires a yearly breakdown by category of
      employment. Reporting during the Benefits phase requires the average
      number of PYs during this phase by category of employment.

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

                                      -43-
<PAGE>

--------------------------------------------------------------------------------
                                                           FORM TPC - 2 (Cont'd)
--------------------------------------------------------------------------------
PART 1 :  WORK PHASE - Data compiled as of:  December 31, 2001

--------------------------------------------------------------------------------
      CATEGORY OF EMPLOYMENT                      TOTAL NUMBER OF PERSON YEARS
                                                --------------------------------
                                                  ESTIMATE              ACTUAL
--------------------------------------------------------------------------------
A)   KNOWLEDGE-BASED                      Yr. 1 ending 12/31/2002         *
     (SCIENCE, ENGINEERING &              Yr. 2 ending 12/31/2003         *
     TECHNICAL)                           Yr. 3 ending 12/31/2004         *
                                          Yr. 4 ending 12/31/2005         *
                                          Yr. 5 ending 12/31/2006
--------------------------------------------------------------------------------
B)   MANAGEMENT & ADMINISTRATION          Yr. 1 ending 12/31/2002         *
                                          Yr. 2 ending 12/31/2003         *
                                          Yr. 3 ending 12/31/2004         *
                                          Yr. 4 ending 12/31/2005         *
                                          Yr. 5 ending 12/31/2006         *
--------------------------------------------------------------------------------
C)   SUB-CONTRACTED WORK                  Yr. 1 ending 12/31/2002
                                          Yr. 2 ending 12/31/2003         *
                                          Yr. 3 ending 12/31/2004         *
                                          Yr. 4 ending 12/31/2005         *
                                          Yr. 5 ending 12/31/2006         *
--------------------------------------------------------------------------------
     TOTAL                                Yr. 1 ending 12/31/2002         *
                                          Yr. 2 ending 12/31/2003         *
                                          Yr. 3 ending 12/31/2004         *
                                          Yr. 4 ending 12/31/2005         *
                                          Yr. 5 ending 12/31/2006         *
--------------------------------------------------------------------------------
PART 2 - BENEFIT PHASE - Data compiled as of:  December 31, 2001
--------------------------------------------------------------------------------
      CATEGORY OF EMPLOYMENT                    NUMBER OF PERSON YEARS
                                         ---------------------------------------
                                          ESTIMATED AVERAGE           ACTUAL
                                          NUMBER OF PERSON         PERSON YEARS
                                         YEARS FOR DURATION        FOR REPORTING
                                          OF BENEFIT PHASE            PERIOD
--------------------------------------------------------------------------------
A)   KNOWLEDGE-BASED                             *
     (SCIENCE, ENGINEERING & TECHNICAL)
--------------------------------------------------------------------------------
B)   GENERAL PRODUCTION                          *
--------------------------------------------------------------------------------
C)   MANAGEMENT, ADMINISTRATION,                 *
     MARKETING, SALES & SUPPORT
--------------------------------------------------------------------------------
     TOTAL                                       *
--------------------------------------------------------------------------------

* [Subject to a request for confidential treatment; Separately filed with the
Commission]

SIGNATURE OF AUTHORIZED OFFICER:____________________________________

REPORT DATE:_________________________

The Proponent certifies that the initial employment projections presented at the
time of the Agreement, and as may be revised from time to time per the
requirements of Schedule 5, represent reasonable estimates of the employment
benefits that the Minister can expect from this Project, as they could be
determined at any particular time. The Minister recognizes that those estimates
may vary through time, due to factors over which the Proponent has little or no
control.

                                      -44-
<PAGE>

                       SCHEDULE 5 - REPORTING REQUIREMENTS          FORM TPC - 3

               REPORT ON OTHER REPRESENTATIONS & EXPECTED RESULTS

PROPONENTS: March Networks Corporation                   PROJECT NO.: 720-481443
            Mitel Networks Corporation
            Mitel Knowledge Corporation

--------------------------------------------------------------------------------
Other representations and expected results include:

1.    PATENTS: [are there any patents that are expected, to result from the
      development work of the Project]

2.    ACQUISITION OF TECHNOLOGY: [is the Proponent planning to acquire
      intellectual property rights, technology, or know-how essential to the
      success of the Project.]

3.    CORPORATE MANDATES: [specify any new or enhanced mandates expected]

4.    OTHER SIGNIFICANT REPRESENTATIONS/EXPECTED RESULTS: [strategic alliances
      or partnerships, new applications of technology, technology diffusion,
      etc.]
--------------------------------------------------------------------------------
DESCRIPTION OF EXPECTED       PLANNED/REVISED DATE       STATUS/ACTUAL DATE
RESULT/REPRESENTATION

--------------------------------------------------------------------------------
1.    N/A

2.    N/A

3.    N/A

4.    N/A
--------------------------------------------------------------------------------

SIGNATURE OF AUTHORIZED OFFICER:___________________________________

REPORT DATE:_____________________

The Proponent certifies that the initial projections presented at the time of
the Agreement, and as may be revised from time to time per the requirements of
Schedule 5, represent reasonable estimates of the benefits that the Minister can
expect from this Project, as they could be determined at any particular time.
The Minister recognizes that those estimates may vary through time, due to
factors over which the Proponent has little or no control.

                                      -45-
<PAGE>

                       SCHEDULE 5 - REPORTING REQUIREMENTS          FORM TPC - 4

                          REPORT ON INVESTMENT LEVERAGE

PROPONENT: March Networks Corporation                    PROJECT NO,: 720-481443
           Mitel Networks Corporation
           Mitel Knowledge Corporation

This form estimates all costs incurred in Canada and investment that may be
leveraged by TPC funds. These include:

--    ELIGIBLE SUPPORTED COSTS: Those costs incurred by the Proponent and
      towards which TPC provides financial support.

--    OTHER PROJECT RELATED COSTS (INCLUDING POST WORK PHASE INVESTMENT): Other
      non-recurring costs incurred in Canada that are directly related to the
      Project. This would include items such as cost overruns but would not
      include costs prior to the date indicated in Article 4.2. For example, a
      project may include capital costs (for land and building) that are not
      eligible for TPC support, but which the company will incur directly
      related to the project.

      Post work phase investment refers to any additional non-recurring, post
      work phase, Project related investment in Canada by the Proponent (e.g.
      non-recurring related to production facilities, marketing and distribution
      activities, etc ...). For example, a company may have to build new
      production lines, or create a new marketing team, or establish a new
      distribution line/network for the resulting product/technology.

--    OTHER INVESTMENT: Other investment unrelated to the specific Project but
      included in the contractual commitments made by the Proponent. For
      example, a company may commit to construction of a building as a condition
      of receiving a TPC investment, although the building is not directly part
      of the project.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                         ESTIMATES ($000)                                             ACTUAL ($000)
----------------------------------------------------------------------------------------------------------------------
       (1)               (2)              (3)             (4)              (1)              (2)             (3)
  Year (Ending        Eligible       Other Project       Other          Eligible       Other Project       Other
    Mar. 31)       Supported Costs   Related Costs     Investment     Support Costs    Related Costs     Investment
----------------------------------------------------------------------------------------------------------------------
<S>                   <C>              <C>             <C>              <C>              <C>             <C>
      2002              *
----------------------------------------------------------------------------------------------------------------------
      2003              *
----------------------------------------------------------------------------------------------------------------------
      2004              *
----------------------------------------------------------------------------------------------------------------------
      2005              *
----------------------------------------------------------------------------------------------------------------------
TOTAL                 240,000
----------------------------------------------------------------------------------------------------------------------
</TABLE>

* [Subject to a request for confidential treatment; Separately filed with the
Commission]

SIGNATURE OF AUTHORIZED OFFICER:_______________________________

REPORT DATE:___________________

The Proponent certifies that the initial projections presented at the time of
the Agreement, and as may be revised from time to bane per the requirements of
Schedule 5, represent reasonable estimates of the benefits that the Minister can
expect from this Project, as they could be determined at any particular time.
The Minister recognizes that those estimates may vary through time due to
factors over which the Proponent has little or no control.

                                      -46-
<PAGE>

                       SCHEDULE 5 - REPORTING REQUIREMENTS          FORM TPC - 5

                   REPORT ON SUSTAINABLE DEVELOPMENT BENEFIT'S

PROPONENT: March Networks Corporation                    PROJECT NO,: 720-481443
           Mitel Networks Corporation
           Mitel Knowledge Corporation

--------------------------------------------------------------------------------
On a full life cycle basis (from design through manufacture/operation and
decommissioning or disposal/recycling), the technologies that are to be
developed during the course of this R&D Project are expected to provide the
following downstream Sustainable Development benefits (over existing industrial
practices) as they are incorporated into the commercial activities of the firm.
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Benefits                                                      Significant           Moderate           Minor/None
----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                    <C>                 <C>
Reduced energy consumption (i.e. efficiency of use) or                                                      X
increased energy production through sustainable means
(i.e. efficiency of generation)
----------------------------------------------------------------------------------------------------------------------

Increased supply of energy from renewable sources                                                           X
----------------------------------------------------------------------------------------------------------------------

Reduced water consumption or increased supply of clean                                                      X
water
----------------------------------------------------------------------------------------------------------------------

Reduced consumption of raw materials or manufactured                                                        X
materials (reduced material Intensity)
----------------------------------------------------------------------------------------------------------------------

Reduced production and/or release of pollutant species                                                      X
of any kind to the atmosphere
----------------------------------------------------------------------------------------------------------------------

Reduced production and/or release of pollutant species                                                      X
of any kind to receiving waters
----------------------------------------------------------------------------------------------------------------------

Reduced production and/or disposal of solid wastes to                                                       X
the land
----------------------------------------------------------------------------------------------------------------------

Reduced usage and/or production and/or disposal of                                                          X
hazardous/toxic substances
----------------------------------------------------------------------------------------------------------------------

Remediation or rehabilitation of contaminated land or                                                       X
water
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      -47-
<PAGE>

                SCHEDULE 6 - PROJECT FACT SHEET FOR NEWS RELEASE

--------------------------------------------------------------------------------
Program: Technology Partnerships Canada  Project No.: 720-481443

--------------------------------------------------------------------------------
Name & Address of March Networks:        March Networks Contact:
                                         Name: Dr. Donald Mills, Chief Operating
         March Networks Corporation            Officer
         555 Legget Drive                Telephone:
         Ottawa Ontario K2K 2X3          Fax:

--------------------------------------------------------------------------------
Name & Address of Mitel Networks:        Mitel Networks Contact:
                                         Name: Don Smith, thief Executive
         Mitel Networks Corporation            Officer
         350 Legget Drive                Telephone:
         Ottawa, Ontario K2K 2W7         Fax:

--------------------------------------------------------------------------------
Name & Address of Mitel Networks:        Mitel Knowledge Contact:

         Mitel Knowledge Corporation     Name: Jose Medeiros, Chief Financial
         555 Legget Drive - Tower B            Officer
         Suite 534                       Telephone:
         Ottawa, Ontario K2K 2X3         Fax:

--------------------------------------------------------------------------------
Project Location:                        Project Type:
Ottawa, Ontario                          Enabling Technologies

--------------------------------------------------------------------------------
Industrial Sector:                       Project Purpose:

         Information and Communication   Upgrade of legacy products and
         Technologies Industry           development of a Suite of Interactive
                                         Applications and Smart Broadband
                                         Appliances
--------------------------------------------------------------------------------
Authorized Assistance: $60.000.000.

--------------------------------------------------------------------------------
Project Description and Anticipated Results:

      The R&D program will contain three main sections:

      a)    Upgrade of capabilities of legacy TDM products;

      b)    Development of new IP bated appliances, platforms and applications;

      c)    Designing the next generation of converged multimedia appliances and
            applications.

      The four major tasks are:

      1.    Applications

      2.    Interactive Broadband Appliances

      3.    Integrated Communications Platform

      4.    Video Services

While each product development project will result in a distinct product, during
this first year designers will architect systems that are compatible with the
future goal of converged voice, data and video solutions. The product families
are all designed to operate in the IP environment.

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

                                      -48-
<PAGE>

                     SCHEDULE 7 - SPECIAL PURPOSE EQUIPMENT

1.    Definition

"Special Purpose Equipment" means

-equipment, including ancillary systems, instrumentation, or special test
equipment that is purchased, leased, manufactured or otherwise acquired for the
purposes of the Project, the item cost of which exceeds $250,000, excluding
jigs, tools, dies and fixtures, and

-prototypes or pilot plants that are designed and built by the Proponents to
demonstrate the technology to be commercialized.

2.    Treatment of Special Purpose Equipment

      (a)   Disposal

Except in the situation described in section (b) below, if the Proponents
transfer to commercial production, transfers outside of Canada, sells, leases or
otherwise disposes of any Special Purpose Equipment, the Minister will require
the Proponents to repay the greater of an amount equal to that of

(i)   multiplying the proceeds of disposition of the Special Purpose Equipment
      by the ratio of the total amount of the contribution paid by the Minister
      to the total amount paid by the Proponents for Eligible Costs, and

(ii)  multiplying the fair market value of the Special Purpose Equipment on the
      date of the transfer to commercial production, transfer outside of Canada,
      sale, lease or other disposition by the ratio of the total amount of the
      contribution paid by the Minister to the total amount paid by the
      Proponents for Eligible Costs;

but in no event shall the amount payable exceed the amount paid by the Minister
to the Proponents under this Agreement.

The Proponents shall make such repayment within 30 days of the transfer to
commercial production, transfer outside of Canada, sale, lease, or other
disposition of the Special Purpose Equipment.

      (b)   Repayment on Special Purpose Equipment

If the estimated cost as set out in the Statement of Work of ail of the items of
Special Purpose Equipment, other than prototypes and pilot plants, is 30% or
less of the total estimated Eligible Costs, the Proponents will not be obligated
to pay the Minister for those items which are transferred by the Proponents to
commercial production in Canada.

                                      -49-
<PAGE>

3.    Costing Principles

(a)   To be an Eligible Cost, the Special Purpose Equipment must be necessary
      for the performance of the Project, be described in sufficient detail
      heroin so as to be readily identifiable, and the relevant cost be
      specified in the Special Purpose Equipment Form attached.

(b)   If the Special Purpose Equipment is to be modified or integrated by the
      Proponents during the Project, the costs related thereto will be eligible
      only if specifically identified in the Statement of Work in Schedule 2.

(c)   Eligible Costs for Special Purpose Equipment will be the net laid down
      cost to the Proponents, after deducting trade discounts and cash discounts
      for prompt payment.

(d)   Where applicable, periodic payments under a capital lease are Eligible
      Costs, to a maximum equal to the price of the Special Purpose Equipment,
      if it were purchased at the commencement of the lease period; all interest
      and carrying charges are to be excluded. For operating leases, the
      Eligible Cost is the actual lease payments incurred during the performance
      of the Project,

(e)   Labor and material costs required in the modification or adaptation of the
      Special Purpose Equipment, for the purposes of the Project, are eligible
      costs.

(f)   Unless such is otherwise allowed in the Statement of Work, costs of
      construction or alteration of plant facilities to accommodate the Special
      Purpose Equipment or any other item of machinery and equipment, and any
      profit, fees, general and administrative overhead expenses related
      thereto, are not eligible.

4.    Reporting

As mentioned in sections 1 (Claim Reports) and 4 (Annual Information Updates) of
Schedule 5, the Proponents will report to the Minister, using the Special
Purpose Equipment Form attached, on all activities associated with Special
Purpose Equipment.

The Proponents also agree to monitor the location and use of all the items of
equipment that will eventually appear on the list.

                                      -50-
<PAGE>

                         SPECIAL PURPOSE EQUIPMENT FORM

PROPONENTS: March Networks Corporation, Mitel Networks Corporation,
            Mitel Knowledge Corporation

PROJECT NO.: 720-481443

--------------------------------------------------------------------------------
This list is to include all items of Special Purpose Equipment (SPE), as defined
in Schedule 7, purchased by the Proponents for the purposes of carrying out the
Project.

The Proponents agree to provide an up-to-date copy of this list with any claim
that modifies its content as well as with each annual report,. as specified in
Schedule 5.
--------------------------------------------------------------------------------
                                LIST OF EQUIPMENT
--------------------------------------------------------------------------------
      1                 2                       3                 4
--------------------------------------------------------------------------------
  ITEM NO.        DESCRIPTION &                QTY        COST OF THE ITEM(s)
                  SERIAL NUMBER                             TO FIRM (Cdn $)
--------------------------------------------------------------------------------
      1          Plastic Moulding           Not Known          3624000
                 Tools and Telecom
                 Testing Systems
--------------------------------------------------------------------------------
      2
--------------------------------------------------------------------------------
      3
--------------------------------------------------------------------------------
      4
--------------------------------------------------------------------------------
      5
--------------------------------------------------------------------------------

                                      -51-
<PAGE>

                   SCHEDULE 8 - SPECIMEN WARRANT CERTIFICATES

                    Al - WARRANT TO PURCHASE COMMON SHARES OF
                           March Networks Corporation

Certificate No. 1                                                  _____Warrants

                  THIS IS TO CERTIFY THAT, for value received,

  Her Majesty the Queen in Right of Canada, as represented by the Minister of
             Industry through Technology Partnerships Canada (TPC)

(the "Holder") is entitled to receive from March Networks Corporation (the
"Corporation"), a company incorporated under the laws of Canada at the offices
of the Corporation, [address], [x] common shares (the "Shares") in the share
capital of the Corporation all upon and in accordance with the Terms and
Conditions attached hereto.

      IN WITNESS WHEREOF the Corporation has caused this Warrant to be executed
by its duly authorized officer as of the ____ day of _________, 200_.

                                             March Networks Corporation

                                             Per:_______________________________

                                      -52-
<PAGE>

                    A2 - WARRANT TO PURCHASE COMMON SHARES OF
                           Mitel Networks Corporation

Certificate No. 1                                                   ___ Warrants

                  THIS IS TO CERTIFY THAT, for value received,

  Her Majesty the Queen in Right of Canada, as represented by the Minister of
             Industry through Technology Partnerships Canada (TPC)

(the "Holder") is entitled to receive from Mitel Networks Corporation (the
"Corporation"), a company incorporated under the laws of Canada at the offices
of the Corporation, [address], [x] common shares (the "Shares") in the share
capital of the Corporation all upon and in accordance with the Terms and
Conditions attached hereto.

IN WITNESS WHEREOF the Corporation has caused this Warrant to be executed by its
duly authorized officer as of the ____ day of _________, 200_.

                                             Mitel Networks Corporation

                                             Per:_______________________________

                                      -53-
<PAGE>

                                    Article 1

                              TERMS AND CONDITIONS

1.1 Exercise of Warrant

To exercise this warrant ("Warrant") in whole or in part, the Holder shall
deliver to the Corporation at its aforementioned office a written notice, in
substantially the form of the subscription notice attached as an exhibit hereto
(the "Subscription Notice") of the Holder's election to exercise this Warrant in
whole or in part, which Subscription Notice shall specify the number of Shares
to be received.

The Corporation shall, as soon as practicable and in any event within 14 days
thereafter, execute and deliver or cause to be delivered certificates
representing the aggregate number of Shares specified in the Subscription
Notice. The share certificates so delivered shall be issued in the name of the
Holder or such other name or names as shall be designated in the Subscription
Notice. Such certificates shall be deemed to have been issued and the Holder, or
other person designated, shall be deemed for all purposes to have become the
shareholder of record of the Shares as of the date of receipt by the Corporation
of the Subscription Notice.

If this Warrant shall have been exercised only in part, the Corporation shall,
at the time of delivery of the certificates, deliver to the Holder a new Warrant
Certificate evidencing the right to receive the remaining Shares purchasable
under this Warrant Certificate, which new Warrant Certificate shall, in all
other respects, be identical with this Warrant Certificate.

1.2 Shares

All Shares issued upon the exercise of this Warrant shall be deemed fully paid
and non-assessable, validly issued, and free from all taxes, liens and charges
with respect to the issue thereof. During the period within which the rights
represented by the Warrant may be exercised, the Corporation will at all times
have authorized and reserved for the purpose of issuance upon exercise of the
receipt rights evidenced by this Warrant, a sufficient number of common shares
to provide for the exercise of the right represented by this Warrant.

1.3 Stock Splits

In the event of any subdivision, split or change of the common shares of the
Corporation into a greater number of common shares at anytime while this Warrant
is outstanding the Corporation shall thereafter deliver, and the subscribers
under Warrants shall accept, at the time of receipt of common shares pursuant to
the terms of the Warrants, in lieu of the number of common shares in respect of
which the right to receive is being exercised, such greater number of common
shares of the Corporation as would result from said subdivision, split or
change.

1.4 Stock Consolidations

In the event of any consolidation of the common shares of the Corporation into a
lesser number of common shares at any time while this Warrant is outstanding,
the Corporation shall thereafter

                                      -54-
<PAGE>

deliver, and the subscribers under Warrants shall accept, at the time of receipt
of common shares pursuant to the terms of the Warrants, in lieu of the number of
common shares in respect of which the right to receive is then being exercised,
such lesser number of common shares of the Corporation as would result from such
consolidation.

1.5 Reclassifications

(a)   in the event of any reclassification of the common shares of the
      Corporation, resulting from, but not being limited to, the payment of a
      stock dividend other than dividends in the ordinary course, capital
      reorganization, or amalgamation of the Corporation with another
      corporation or the sale or conveyance of the undertakings or assets of the
      Corporation, as an entirety or substantially as an entirety to another
      entity, including pursuant to a take-over bid, at any time while this
      Warrant is outstanding, the Corporation shall thereafter deliver at the
      time of receipt of common shares pursuant to the terms of the Warrants the
      number of common shares of the Corporation or of the appropriate class or
      classes resulting from such reclassification as the subscriber would have
      been entitled to receive in respect of the number of common shares in
      respect of which the right of receipt is then being exercised had the
      right of receipt been exercised before such reclassification; and

(b)   in the case of the amalgamation, merger or transfer of the undertaking or
      assets of the Corporation as an entirety or substantially as an entirety
      to another corporation (a "Successor Corporation"), the Successor
      Corporation resulting from such amalgamation, merger or transfer (if not
      the Corporation) shall be deemed to assume the due and punctual
      performance and observance of each and every covenant and condition
      contained herein to be performed and observed by the Corporation.

1.6 Certificate of Adjustment

The Corporation shall, from time to time immediately after the occurrence of any
event which requires an adjustment or readjustment as provided in sections 1.3
to 1.5, deliver a certificate of the Corporation to the Holder specifying the
nature of the event requiring the same and the amount of the adjustment
necessitated thereby and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, which
certificate shall be supported by a certificate of the Corporation's auditors
verifying such calculation.

1.7 Notice of Special Meetings

The Corporation covenants with the Holder that, so long as this Warrant remains
outstanding, it will give notice to the Holder of its intention to fix the
record date for the issuance of rights, options or warrants (other than the
Warrants) to all or substantially of all the holders of its outstanding common
shares. Such notice shall specify the particulars of such event and the record
date for such event, provided that the Corporation shall only be required to
specify in the notices such particulars of the event as shall have been fixed
and determined on the date on which the notice is given. The notice shall be
given in each case not less than 14 days prior to such applicable record date.

                                      -55-
<PAGE>

1.8 No Action after Notice

The Corporation covenants with the Holder that it will not close its transfer
books or take any other corporate action which might deprive the Holder of the
opportunity to exercise its rights of receipt pursuant thereto during the period
of 14 days after the giving of the certificate or notices set forth in sections
1.6 and 1.7.

1.9 No Fractional Common Shares

Notwithstanding anything contained herein, including without limitation, any
adjustment provided for herein, the Corporation shall not be required, upon the
exercise of this Warrant, to issue fractions of Shares or to distribute
certificates which evidence such fractions of Shares. In lieu of fractional
Shares, the Corporation shall pay to the Holder who would otherwise be entitled
to receive fractional Shares upon an exercise of Warrants, within 10 business
days after the date upon which the fractional Shares would otherwise have been
deemed to be issued, an amount equal to the Current Market Price of the Shares
multiplied by an amount equal to the fractional interest of Shares such Holder
would otherwise be entitled to receive upon such exercise, provided that the
Corporation shall not be required to make any payment, calculated as aforesaid,
that is less than $1.00. In this subsection, "Current Market Price" of the
Shares at any date, means the closing price per Share for such Shares on the
last trading day prior to such date on such exchange upon which such shares are
listed, or, if such shares are not listed on any stock exchange, then on such
over-the-counter market as may be selected for such purpose by the directors of
the Corporation, or, if them is no over-the-counter market then at the price per
Share of the last private placement prior to the date of the adjustment.

                                      -56-
<PAGE>

                                    Article 2

                                    TRANSFER

2.1 Expenses of Delivery

The Corporation shall pay all expenses, taxes and other charges payable in
connection with the preparation, issuance and delivery of the Warrant
Certificate, and share certificate issuable upon the exercise of the Warrant and
any new Warrant Certificate issued under section 1.1 hereof.

2.2 Closing of Transfer Books

The Corporation shall not be required to deliver share certificates while the
transfer books of the Corporation are closed prior to any meeting of
shareholders or for the payment of dividends or for any other purpose, and in
the event of the exercise of the right to subscribe during any such period,
delivery of the certificates may be postponed for a period not exceeding five
days after the date of reopening of the share transfer books provided that the
period for which the share transfer books may be closed shall not be
unreasonable; and provided, however, that any such postponement of delivery of
the certificates shall not be without prejudice to the right of the Holder of
the Warrant to receive such certificates after the share transfer books shall
have been reopened.

2.3 Assignment or Transfer

When requesting consent to any proposed transfer or assignment, the Holder shall
provide the Corporation with all information required by the Corporation
concerning the proposed transfer or assignment.

                                      -57-
<PAGE>

                                    Article 3

                                 REPRESENTATIONS

3.1 Representations of the Corporation

The Corporation represents to the Holder that:

(a)   this Warrant has been duly authorized and executed by the Corporation and
      when delivered will be the valid and binding obligation of the Corporation
      enforceable in accordance with its terms;

(b)   the common shares to be received upon the exercise hereof have been duly
      authorized and reserved for issuance by the Corporation and when issued in
      accordance with the terms hereof, will be validly issued, fully paid and
      non-assessable;

(c)   the execution and delivery of this Warrant (i) are not, and the issuance
      of the Common shares upon exercise of this Warrant in accordance with the
      terms hereof will not be, inconsistent with the Corporation's articles or
      by-laws, (ii) do not and will not contravene any law, governmental rule or
      regulation, judgment or order applicable to the Corporation, (iii) do not
      and will not contravene any provision of, or constitute a default under,
      any indenture, mortgage, contract or other instrument of which the
      Corporation is a party or by which it is bound and (iv) do not and will
      not require the consent or approval of, the giving of notice to, the
      registration with or the taking of any action in respect of or by, any
      federal, provincial or local government authority or agency or other
      person.

                                      -58-
<PAGE>

                                    Article 4

                                  MISCELLANEOUS

4.1 No Impairment

The Corporation will not, by amendment of its articles or through any
reorganization, recapitalization, 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 Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4.1 and in
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Holder against impairment.

4.2 Entire Agreement

This Warrant and TPC Agreement no. 720-481443 contain the entire agreement
between the Holder and the Corporation with respect to the subject matter hereof
and the related transactions and supersedes all prior arrangements or
understandings with respect thereto.

4.3 Governing Law

This Warrant shall be governed by and construed in accordance with the laws of
the Province of Ontario and the laws of Canada applicable therein.

4.4 Waiver and Amendment

Any term or provision of this Warrant may be waived at any time by the party
entitled to the benefits thereof and any term or provision of this Warrant may
be amended or supplemented at any time by agreement of the Holder and the
Corporation, except that any waiver of any term or condition, or any amendment
or supplementation of this Warrant, must be in writing. A waiver of any breach
of failure to enforce any of the terms or conditions of this Warrant shall not,
in any way, affect or limit or act as a waiver of the parties' rights hereunder
at any time to enforce strict compliance thereafter with any term or condition
of this Warrant.

4.5 Filing of Warrant Certificate

A copy of this Warrant Certificate shall be filed in the minute book of the
Corporation.

4.6 Loss, Destruction, Etc. of Warrant Certificate

Upon receipt of evidence satisfactory to the Corporation of loss, theft,
mutilation or destruction of this Warrant Certificate and, in the case of any
such loss, theft or destruction, upon delivery of a bond of indemnity in such
form and amount as shall be reasonably satisfactory to the Corporation or, in
the event of such mutilation, upon surrender and cancellation of the Warrant
Certificate, the Corporation will make and deliver a new Warrant Certificate of
like tenor in lieu of such lost, stolen, mutilated or destroyed Warrant
Certificate.

                                      -59-
<PAGE>

4.7 Rights as Shareholders

The Holder shall not be entitled to vote or receive dividends and shall not be
deemed the holder of common shares, nor shall anything contained herein be
construed to confer upon the Holder, any of the rights of a shareholder of the
Corporation or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the common shares receivable upon the
exercise hereof shall have become deliverable, as provided herein.

4.8 Notices

Any notice, request or other document required or permitted to be given or
delivered to the Holder or the Corporation shall be delivered, or shall be sent
by certified or registered mail, postage prepaid or shall be sent by facsimile
transmission to such Holder or the Corporation at the address or facsimile
number as set forth below.

         Director, Enabling Technologies
         Technology Partnerships Canada
         10th Floor, 300 Slater Street
         Ottawa, Ontario KIA OC8

         Fax No: (613) 954-9117

         Dr. Donald Mills
         Chief Operating Officer
         March Networks Corporation
         555 Legget Drive
         Ottawa, Ontario K2K 2X3

         Fax No: (613) 591-7337

         Don Smith
         Chief Executive Officer
         Mitel Networks Corporation
         350 Legget Drive
         Ottawa, Ontario K2K 2W7

         Fax.: (613) 592-7838

                                      -60-
<PAGE>

EXHIBIT

SUBSCRIPTION NOTICE

SHARE PURCHASE WARRANT

March Networks Corporation

The undersigned, holder of a Warrant issued by March Networks Corporation. (the
Corporation), dated as of ______________, 200_ (the Warrant), hereby elects to
receive common shares (Shares) of the Corporation and hereby instructs the
Corporation to issue the certificate representing the Shares in the name of the
undersigned at the address below.

DATED the ____ day of _________, 200_

                                          Signature of Holder

                                          Name of Holder - please print

                                          Street Address

                                          City, Province, Postal Code

                                      -61-
<PAGE>

EXHIBIT

SUBSCRIPTION NOTICE

SHARE PURCHASE WARRANT

Mitel Networks Corporation

The undersigned, holder of a Warrant issued by Mitel Networks Corporation (the
Corporation), dated as of _________, 200_ (the Warrant), hereby elects to
receive common shares (Shares) of the Corporation and hereby instructs the
Corporation to issue the certificate representing the Shares in the name of the
undersigned at the address below.

DATED the ____ day of _________, 200_

                                          Signature of Holder

                                          Name of Holder - please print

                                          Street Address

                                          City, Province, Postal Code

                                      -62-<PAGE>
                                                                    EXHIBIT 10.1

                               ARADIGM CORPORATION

                          SECURITIES PURCHASE AGREEMENT

                                FEBRUARY 10, 2003
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                  PAGE
<S>                                                                                                               <C>
ARTICLE 1 AUTHORIZATION AND SALE OF COMMON SHARES AND WARRANTS..................................................     1

         1.1 Authorization......................................................................................     1

         1.2 Sale of Common Shares and Warrants.................................................................     2

ARTICLE 2 CLOSING DATE; DELIVERY................................................................................     2

         2.1 Closing Date.......................................................................................     2

         2.2 Delivery...........................................................................................     2

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................................     2

         3.1 Organization and Standing..........................................................................     2

         3.2 Corporate Power; Authorization.....................................................................     2

         3.3 Issuance and Delivery of the Shares................................................................     3

         3.4 SEC Documents; Financial Statements................................................................     3

         3.5 Governmental Consents..............................................................................     3

         3.6 No Material Adverse Change.........................................................................     4

         3.7 Authorized Capital Stock...........................................................................     4

         3.8 Litigation.........................................................................................     4

         3.9 Eligibility to Use Form S-3........................................................................     4

         3.10 Company not an Investment Company.................................................................     4

         3.11 NASDAQ Compliance.................................................................................     5

         3.12 Use of Proceeds...................................................................................     5

         3.13 Brokers and Finders...............................................................................     5

         3.14 No Directed Selling Efforts or General Solicitation...............................................     5

         3.15 No Integrated Offering............................................................................     5

         3.16 Private Placement.................................................................................     5

         3.17 Intellectual Property.............................................................................     5

         3.18 Questionable Payments.............................................................................     6

         3.19 Transactions with Affiliates......................................................................     6

         3.20 Disclosure........................................................................................     6

ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS...........................................     6

         4.1 Authorization......................................................................................     7
</TABLE>

i.
<PAGE>
                                TABLE OF CONTENTS
                                   (CONTINUED)
<TABLE>
<CAPTION>
                                                                                                                  PAGE
<S>                                                                                                               <C>
         4.2 Investment Experience..............................................................................     7

         4.3 Investment Intent..................................................................................     7

         4.4 Registration or Exemption Requirements.............................................................     7

         4.5 Dispositions.......................................................................................     7

         4.6 No Legal, Tax or Investment Advice.................................................................     8

         4.7 Confidentiality....................................................................................     8

         4.8 Residency..........................................................................................     8

         4.9 Governmental Review................................................................................     8

         4.10 Legend............................................................................................     8

         4.11 Foreign Investors.................................................................................     9

ARTICLE 5 CONDITIONS TO CLOSING OBLIGATIONS OF PURCHASERS.......................................................     9

         5.1 Representations and Warranties.....................................................................     9

         5.2 Covenants..........................................................................................     9

         5.3 Certificates.......................................................................................     9

         5.4 Legal Opinion......................................................................................    10

         5.5 Shareholder Approval...............................................................................    10

         5.6 Listing............................................................................................    10

         5.7 Warrant Repricing Agreement Approval...............................................................    10

         5.8 Officer's Certificate..............................................................................    10

         5.9 Judgments..........................................................................................    10

         5.10 Secretary's Certificate...........................................................................    10

         5.11 Stop Orders.......................................................................................    10

ARTICLE 6 CONDITIONS TO CLOSING OBLIGATIONS OF COMPANY..........................................................    10

         6.1 Receipt of Payment.................................................................................    10

         6.2 Representations and Warranties.....................................................................    11

         6.3 Covenants..........................................................................................    11

         6.4 Delivery of Purchaser Questionnaire................................................................    11

         6.5 Shareholder Approval...............................................................................    11

ARTICLE 7 COVENANTS.............................................................................................    11

         7.1 Definitions........................................................................................    11

         7.2 Registration Procedures and Expenses...............................................................    11
</TABLE>

                                      ii.
<PAGE>
                                TABLE OF CONTENTS
                                   (CONTINUED)
<TABLE>
<CAPTION>
                                                                                                                  PAGE
<S>                                                                                                               <C>
         7.3 Delay in Effectiveness.............................................................................    13

         7.4 Indemnification....................................................................................    13

         7.5 Prospectus Delivery................................................................................    15

         7.6 Termination of Obligations.........................................................................    16

         7.7 Reporting Requirements.............................................................................    16

         7.8 Shareholder Approval...............................................................................    16

         7.9 Blue Sky...........................................................................................    16

ARTICLE 8 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT.........................    17

         8.1 Restrictions on Transferability....................................................................    17

         8.2 Instruction Sheet..................................................................................    17

         8.3 Transfer of Securities.............................................................................    17

         8.4 Purchaser Information..............................................................................    18

ARTICLE 9 MISCELLANEOUS.........................................................................................    18

         9.1 Termination........................................................................................    18

         9.2 Waivers and Amendments.............................................................................    19

         9.3 Broker's Fee.......................................................................................    19

         9.4 Governing Law......................................................................................    19

         9.5 Survival...........................................................................................    19

         9.6 Successors and Assigns.............................................................................    19

         9.7 Entire Agreement...................................................................................    19

         9.8 Notices, etc.......................................................................................    19

         9.9 Severability of this Agreement.....................................................................    20

         9.10 Counterparts......................................................................................    20

         9.11 Further Assurances................................................................................    20

         9.12 Expenses..........................................................................................    20

         9.13 Currency..........................................................................................    20

         9.14 Waiver of Conflicts...............................................................................    20

         9.15 Voting Agreement..................................................................................    21

Exhibit A - Schedule of Purchasers
Exhibit B - Form of Warrant
Exhibit C - Form of Purchaser's Questionnaire
</TABLE>

                                      iii.
<PAGE>
                                TABLE OF CONTENTS
                                   (CONTINUED)
<TABLE>
<CAPTION>
                                                                                                                  PAGE
<S>                                                                                                               <C>
Exhibit D - Form of Company Counsel Opinion
Exhibit E - Instruction Sheet
Exhibit F - Form of Purchaser's Certificate of Subsequent Sale
Exhibit G - Form of Voting Agreement
</TABLE>

                                      iv.
<PAGE>
                               ARADIGM CORPORATION

                          SECURITIES PURCHASE AGREEMENT

      THIS SECURITIES PURCHASE AGREEMENT (this "AGREEMENT") is made as of
February 10, 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

      WHEREAS, concurrent with the execution and delivery of this Agreement, as
a material inducement to the Purchasers to enter into this Agreement, certain
principal stockholders of the Company are entering into Voting Agreements, in
the form attached hereto as EXHIBIT G, with New Enterprise Associates 10,
Limited Partnership ("NEA-10").

      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 eighteen million nine hundred ninety-two thousand three hundred ninety-one
(18,992,391) 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 four million two hundred seventy-three thousand
two hundred seventy-two (4,273,272) shares of the Company's Common Stock (the
"COMMON STOCK") pursuant to this Agreement.

1.
<PAGE>
      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

            (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 $1.07 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 the date one (1) business day following the
Company's receipt of Shareholder Approval (as defined herein), 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

                                       2.
<PAGE>
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 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

                                       3.
<PAGE>
consummation of the transactions contemplated by this Agreement except for (a)
the Shareholder Approval, (b) 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, (c) 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 (d) the
filing of the Nasdaq National Market Notification Form with the Nasdaq National
Market.

      3.6 NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed herein or in
the SEC Documents, since September 30, 2002, 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 January 31, 2003, thirty-one million one hundred
fifty-seven thousand six hundred twelve (31,157,612) 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 February 10, 2003, two million one thousand two
hundred thirty-six (2,001,236) 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.

                                       4.
<PAGE>
      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

      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

                                       5.
<PAGE>
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 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 and the Warrant
Repricing Agreement of even date herewith, by and among the Company and the
persons listed on the Schedule of Holders attached thereto as Exhibit A, 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

                                       6.
<PAGE>
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 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 Effectiveness Deadline
Date (as defined below) of the Registration Statement, 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

                                       7.
<PAGE>
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.

      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

                                       8.
<PAGE>
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 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.

                                       9.
<PAGE>
      5.5 SHAREHOLDER APPROVAL. The Company shall have obtained the Shareholder
Approval.

      5.6 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.

      5.7 WARRANT REPRICING AGREEMENT. The Company shall have executed and
delivered the Warrant Repricing Agreement in the form attached hereto as EXHIBIT
H.

      5.8 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.

      5.9 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.

      5.10 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.

      5.11 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.

      5.12 MINIMUM INVESTMENT. The Company shall receive a minimum 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.

                                      10.
<PAGE>
      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.

      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.

      6.5 SHAREHOLDER APPROVAL. The Company shall have obtained the Shareholder
Approval.

                                   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 sixty (60) days following the Closing
Date; provided, however, that in the event that a Registration Statement is
reviewed by

                                      11.
<PAGE>
the SEC, then the Effectiveness Deadline Date shall mean, with respect to any
Registration Statement, the date that is one hundred (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 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

                                      12.
<PAGE>
            (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 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

                                      13.
<PAGE>
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),
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

                                      14.
<PAGE>
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 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

                                      15.
<PAGE>
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.

      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.

      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 SHAREHOLDER APPROVAL. The Company shall use best efforts to call, give
notice of and hold, no later than 30 days after the date hereof, a meeting of
the holders of Company Common Stock to vote on the approval of the authorization
and issuance of the Common Shares and the Warrants and the issuance of the
Warrant Shares upon exercise of or otherwise pursuant to the Warrants in
compliance with Rule 4350(i) of the Marketplace Rules of the National
Association of Securities Dealers, Inc. (the "SHAREHOLDER APPROVAL"), to the
extent required by the Nasdaq National Market. The term "Shareholder Approval"
shall specifically include a determination by the Nasdaq National Market that
approval of the holders of Company Common Stock is not required for the
authorization and issuance of the Common Shares and the Warrants and the
issuance of the Warrants Shares upon exercise of or otherwise pursuant to the
Warrants.

      7.9 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.

                                      16.
<PAGE>
      7.10 MASSACHUSETTS BUSINESS TRUSTS. A copy of the Agreement and
Declaration of Trust of each Purchaser that is a fund or series investment
company (each, a "Fund") organized as a Massachusetts business trust (each, a
"Trust") is on file with the Secretary of the Commonwealth of Massachusetts. The
Company and the other Purchasers acknowledge and agree that this Agreement is
not executed on behalf of or binding upon any of the trustees, officers,
directors or shareholders of a Trust individually, but is binding upon the
applicable Fund and its assets and property. The Company agrees that no trustee,
officer, director or shareholder of a Trust or the applicable Fund may be held
personally liable or responsible for any obligations of a Fund arising out of
this Agreement. With respect to all obligations of the Fund arising out of this
Agreement, the Company shall look for payment or satisfaction of any claim
solely to the assets and property of the Fund. The Company is expressly put on
notice that the rights and obligations of each series of shares of a Trust under
its Agreement and Declaration of Trust are separate and distinct from those of
any and all other series.

                                   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

                  (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.

                                      17.
<PAGE>
            (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 submitted to the Company's transfer agent
evidencing such Securities is accompanied by a separate certificate executed by
an officer of, or other person duly authorized by, the Purchaser in the form
attached hereto as EXHIBIT F.

      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:

                  (i) by written agreement of (A) the Company and (B) Purchasers
purchasing a majority of the Common Shares;

                  (ii) if the SEC has determined not to review the proxy
statement filed with the SEC by the Company in connection with obtaining the
Shareholder Approval (the "PROXY STATEMENT"), by written notice of any
individual Purchaser if the Shareholder Approval has not been obtained within 30
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;

                  (iii) if the Proxy Statement is reviewed by the SEC, by
written notice of any individual Purchaser if the Shareholder Approval has not
been obtained within 45 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

                                      18.
<PAGE>
Shares and the Warrants shall be applicable only to such Purchaser providing
such written notice;

                  (iv) by written notice of any individual Purchaser if (i)
there is a material breach of any representation or warranty of the Company,
provided written notice of such breach has been given to the Company and the
Company has not cured such breach within 30 days of such notice, or (ii) the
Purchaser reasonably determines that the timely satisfaction of any condition
set forth in Article 5 has become impossible (other than as a result of any
failure on the part of the Purchaser to comply with or perform its covenants and
obligations under this Agreement);

                  (v) by written notice of the Company if (i) there is a
material breach of any representation or warranty of any Purchaser, provided
written notice of such breach has been given to such Purchaser and the Purchaser
has not cured such breach within 30 days of such notice or (ii) the Company
reasonably determines that the timely satisfaction of any condition set forth in
Article 6 has become impossible (other than as a result of any failure on the
part of the Company to comply with or perform any covenant or obligation set
forth in this Agreement); provided, however, that the abandonment of the sale
and purchase of the Common Shares and the Warrants pursuant to clause (i) of
this paragraph shall be applicable only with respect to such Purchaser to whom
the material breach applies; or

                  (vi) by written notice of the Company if Purchasers purchasing
seventy-five percent (75%) or more of the Common Shares have terminated this
Agreement.

            (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) 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. Except as set forth in Section 9.1 and 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.

                                      19.
<PAGE>
      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 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 counsel for NEA-10 for its
reasonable fees and expenses (in an amount not to exceed twenty-five thousand
dollars ($25,000)) incurred by them with respect to

                                      20.
<PAGE>
this Agreement and the transactions contemplated hereby. Each party to this
Agreement acknowledges that with respect to the transactions contemplated
herein, Testa, Hurwitz & Thibeault LLP has represented NEA and not any other
party hereto.

      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.

      9.15 VOTING AGREEMENT. The Company agrees that it has no rights to require
NEA-10 to enforce the terms of that certain Voting Agreement, of even date
herewith, by and between NEA-10 and certain persons and entities listed on
Exhibit A thereto.

                                      21.
<PAGE>
      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:      President and CEO

                              PURCHASERS:

                              NEW ENTERPRISE ASSOCIATES 10, LIMITED PARTNERSHIP

                              By:     NEA Partners 10, Limited Partnership
                                      Its General Partner

                                 By:      /s/ Eugene A. Trainor, III
                                    --------------------------------------------

                                 Name:    Eugene A. Trainor, III
                                          Administrative General Partner &
                                          Chief Operating Officer

                                 Title:   General Partner

                              SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Director

                              SPECIAL SITUATIONS CAYMAN FUND, L.P.

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Director

                 SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
<PAGE>
                              SPECIAL SITUATIONS FUND III, L.P.

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Director

                              CAMDEN PARTNERS STRATEGIC FUND II-A, L.P.

                              By:     Camden Partners Strategic II, LLC, its
                                      general partner

                                 By:      /s/ Richard M. Johnston
                                    --------------------------------------------

                                 Name:    Richard M. Johnston

                                 Title:   Managing Member

                              CAMDEN PARTNERS STRATEGIC FUND II-B, L.P.

                              By:     Camden Partners Strategic II, LLC, its
                                      general partner

                                 By:      /s/ Richard M. Johnston
                                    --------------------------------------------

                                 Name:    Richard M. Johnston

                                 Title:   Managing Member

                              CASTLE CREEK HEALTHCARE PARTNERS, LLC

                              By:     Castle Creek Partners, LLC

                                 By:      /s/ Thomas A. Frei
                                    --------------------------------------------

                                 Name:    Thomas A. Frei

                                 Title:   Investment Manager

                 Signature Page to Securities Purchase Agreement

                                       2.
<PAGE>
                             CC LIFESCIENCE, LTD.

                             By:     Castle Creek Lifescience Partners, LLC

                                By:      /s/ Thomas A. Frei
                                   ---------------------------------------------

                                Name:    Thomas A. Frei

                                Title:   Investment Manager

                             THE CONUS FUND L.P.

                             By:         /s/ [illegible]
                                ------------------------------------------------

                             Name:       [illegible]

                             Title:      Managing Member, G.P.

                             EAST HUDSON INC. (BVI)

                             By:         /s/ [illegible]
                                ------------------------------------------------

                             Name:       [illegible]

                             Title:      Managing Director, Investment Manager

                             THE CONUS FUND OFFSHORE LTD.

                             By:         /s/ [illegible]
                                ------------------------------------------------

                             Name:       [illegible]

                             Title:      Director, Managing Director, Investment
                                         Manager

                             DEUTSCHE BANK, AG

                             By:         /s/ Tracy Fu
                                ------------------------------------------------

                             Name:       Tracy Fu

                             Title:      Authorized Signatory

                 Signature Page to Securities Purchase Agreement

                                       3.
<PAGE>
                              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

                              BAYSTAR INTERNATIONAL II, LTD., a British Virgin
                              Islands exempt company

                              By:     BayStar Capital Management, LLC, its
                                      investment advisor

                                 By:      /s/ Steven M. Lamar
                                    --------------------------------------------

                                 Name:    Steven M. Lamar

                                 Title:   Managing Member

                              CRESTVIEW CAPITAL FUND I, LP

                              By: /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Partner

                              CRESTVIEW OFFSHORE FUND, INC.

                              By: /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Secretary

                 Signature Page to Securities Purchase Agreement

                                       4.
<PAGE>
                              CRESTVIEW CAPITAL FUND II, LP

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Partner

                              DOMAIN PUBLIC EQUITY PARTNERS LP

                              By:     Domain Public Equity Associates LP, its
                                      general partner

                                 By:      /s/ Nicole Vitullo
                                    --------------------------------------------

                                 Name:    Nicole Vitullo

                                 Title:   Managing Member

                              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

                              URSUS CAPITAL, L.P.

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      General Partner

                 Signature Page to Securities Purchase Agreement

                                       5.
<PAGE>
                              URSUS OFFSHORE LTD.

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Managing Director

                              STATE STREET RESEARCH HEALTH SCIENCES FUND, A
                              SERIES OF THE STATE STREET RESEARCH FINANCIAL
                              TRUST

                              By:         /s/ [illegible]
                                 -----------------------------------------------

                              Name:       [illegible]

                              Title:      Vice President

                              RICHARD PAUL THOMPSON

                              By:         /s/ Richard Paul Thompson
                                 -----------------------------------------------

                              Name:       Richard Paul Thompson

                              Title:      _______________

                              NORMA L. MILLIGIN

                              By:         /s/ Norma L. Milligin
                                 -----------------------------------------------

                              Name:       Norma L. Milligin

                              Title:      Vice President, Human Resources

                              V. BRYAN LAWLIS, JR.

                              By:         /s/ V. Bryan Lawlis, Jr.
                                 -----------------------------------------------

                              Name:       V. Bryan Lawlis, Jr.

                              Title:      Chief Operating Officer

                 Signature Page to Securities Purchase Agreement

                                       6.
<PAGE>
                              THOMAS C. CHESTERMAN

                              By:         /s/ Thomas C. Chesterman
                                 -----------------------------------------------

                              Name:       Thomas C. Chesterman

                              Title:

                 Signature Page to Securities Purchase Agreement

                                       7.
<PAGE>
                                    EXHIBIT A

                             SCHEDULE OF PURCHASERS

<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES      WARRANTS
<S>                                                   <C>                 <C>           <C>
New Enterprise Associates 10, Limited Partnership     $ 4,199,999.45      5,316,455     1,196,202
1119 St. Paul Street
Baltimore, Maryland 21202
Tel: (410) 244-0115
Fax: (410) 752-7721
Attn: John Nehra

State or Country of Residence: Maryland

Special Situations Private Equity Fund L.P.           $   899,999.60      1,139,240      256,329
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.                  $   699,999.25        886,075      199,366
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.                     $ 1,399,999.29      1,772,151      398,733
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

Camden Partners Strategic Fund II-A, L.P.             $   943,999.44      1,194,936      268,860
c/o Camden Partners Holdings, LLC
One South Street, Suite 2150
Baltimore, Maryland 21202
</TABLE>

                                      A-1.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES     WARRANTS
<S>                                                   <C>                 <C>           <C>
Tel: (410) 895-3800
Fax: (410) 895-3805
Attn: Richard M. Johnston

State or Country of Residence:
Maryland

Camden Partners Strategic Fund II-B, L.P.             $    55,999.94         70,886       15,949
c/o Camden Partners Holding, LLC
One South Street, Suite 2150
Baltimore, Maryland 21202
Tel: (410) 895-3800
Fax: (410) 895-3805
Attn: Richard M. Johnston

State or Country of Residence:
Maryland

Castle Creek Healthcare Partners LLC                  $   499,999.69        632,911      142,404
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

CC Lifescience, Ltd.                                  $   499,999.69        632,911      142,404
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
</TABLE>

                                      A-2.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES     WARRANTS
<S>                                                   <C>                 <C>           <C>
The Conus Fund L.P.                                   $   775,999.62        982,278      221,012
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)                                $   132,999.66        168,354       37,879
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.                          $    90,999.31        115,189       25,917
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

Deutsche Bank, AG                                     $   999,999.38      1,265,822      284,809
31 West 52nd Street, 16th Floor
New York, New York 10019
Tel: (212) 469-5800
Fax: (212) 469-5787
Attn: Tracy Fu

State or Country of Residence: New York

BayStar Capital II, LP                                $   674,999.70        854,430      192,246
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
</TABLE>

                                      A-3.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES     WARRANTS
<S>                                                   <C>                 <C>           <C>
BayStar International II, Ltd.                        $    74,999.44         94,936       21,360
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: British Virgin
Islands

Crestview Capital Fund I, LP                          $   172,499.66        218,354       49,129
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

Crestview Capital Offshore Fund, Inc.                 $    59,999.71         75,949       17,088
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

Crestview Capital Fund II, LP                         $   517,498.98        655,062      147,388
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

Domain Public Equity Partners L.P.                    $   629,999.72        797,468      179,430
One Palmer Square, Suite 515
Princeton, New Jersey 08542
Tel: (609) 683-5656
Fax: (609) 683-4581
Attn: Nicole Vitullo

State or Country of Residence:
New Jersey
</TABLE>

                                      A-4.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES     WARRANTS
<S>                                                   <C>                 <C>           <C>
Capital Ventures International                        $   359,999.84        455,696      102,531
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.                                     $   599,999.47        759,493      170,885
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

Ursus Capital, L.P.                                   $   217,645.00        275,500       61,987
156 W. 56th  Street, 16th Floor
New York, New York 10019
Tel: (212) 541-8200
Fax: (212) 541-8288
Attn: Evan Sturza

State or Country of Residence: New York

Ursus Offshore Ltd.                                   $   256,355.00        324,500       73,012
P.O. Box 896 GT
Harbour Center 2nd Floor
North Church Street
Grand Cayman, Cayman Islands
Tel: (212) 541-8200
Fax: (212) 541-8288
Attn: Evan Sturza

State or Country of Residence: Cayman Islands
</TABLE>

                                      A-5.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES     WARRANTS
<S>                                                   <C>                 <C>           <C>
State Street Research Health Sciences Fund: a         $    99,999.78        126,582       28,480
series of State Street Research Financial Trust
c/o State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
Tel: (617) 988-7734
Fax: (617) 261-7785
Attn: John Borzilleri
w/a copy to: Dan Bradford
Tel: (617) 357-1113
Fax: (617) 988-7243

State or Country of Residence: Massachusetts

Richard Paul Thompson                                 $    69,999.53         88,607       19,936
c/o Aradigm Corporation
3929 Point Eden Way
Hayward, California 94545
Tel: (510) 265-9000
Fax: (510) 265-0277

State or Country of Residence: California

V. Bryan Lawlis, Jr                                   $    29,999.46         37,974        8,544
c/o Aradigm Corporation
3929 Point Eden Way
Hayward, California 94545
Tel: (510) 265-9000
Fax: (510) 265-0277

State or Country of Residence: California

Norma L. Milligin                                     $    29,999.46         37,974        8,544
c/o Aradigm Corporation
3929 Point Eden Way
Hayward, California 94545
Tel: (510) 265-9000
Fax: (510) 265-0277

State or Country of Residence: California

Thomas Chesterman                                     $     9,999.82         12,658        2,848
c/o Aradigm Corporation
3929 Point Eden Way
</TABLE>

                                      A-6.
<PAGE>
<TABLE>
<CAPTION>
PURCHASER                                                   PURCHASE         COMMON
                                                               PRICE         SHARES      WARRANTS
<S>                                                   <C>                 <C>           <C>
Hayward, California 94545
Tel: (510) 265-9000
Fax: (510) 265-0277

State or Country of Residence: California

TOTAL                                                 $15,003,988.89     18,992,391     4,273,272
</TABLE>

                                      A-7.
<PAGE>
                                    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

                                                            ______________, 2003

                         VOID AFTER _____________, 2007

      THIS CERTIFIES THAT, for value received, ___________________________, with
its principal office at __________________________, 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 $1.07 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,
(ii) by cancellation of indebtedness, or (iii) pursuant to Section 2.1 below;
and

                                       1.
<PAGE>
            (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,
if 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 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

                                       2.
<PAGE>
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.

      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.

      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.

      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 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.

      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

                                       3.
<PAGE>
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 Securities
Purchase Agreement dated as of February 10, 2003 by and among the Company and
the purchasers name therein (the "Securities 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 Securities 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.

      DISPOSITION OF WARRANT AND EXERCISE SHARES.

            (d) 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:

                  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

                  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

                  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.

            (e) 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

                                       4.
<PAGE>
      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.

      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

                                       5.
<PAGE>
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.
<PAGE>
      IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer as of ____________, 2003.

                               ARADIGM CORPORATION

                               By:
                                  ----------------------------------------------

                               Name: Richard P. Thompson

                               Title: President and Chief Executive Officer

                               Address: 3929 Point Eden Way, Hayward, CA  94545
<PAGE>
                               NOTICE OF EXERCISE

TO:  ARADIGM CORPORATION

      (1) | | 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.

          | | 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 February 10, 2003 by and among the Company and the
purchasers named therein (the "Securities 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 Securities 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
<PAGE>
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)
<PAGE>
                                 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.
<PAGE>
                                    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.
<PAGE>
                                   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.
<PAGE>
                                   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?

                                 | | Yes | | 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.
<PAGE>
      1. As of FEBRUARY ___, 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 FEBRUARY ___, 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:

<TABLE>
<CAPTION>
         ------------------------------------------------------------------------------------------

              NUMBER OF SHARES             WITH WHOM SHARED             NATURE OF RELATIONSHIP
         ------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>

         ------------------------------------------------------------------------------------------
</TABLE>

         SHARED INVESTMENT POWER:

<TABLE>
<CAPTION>
         ------------------------------------------------------------------------------------------

              NUMBER OF SHARES             WITH WHOM SHARED             NATURE OF RELATIONSHIP
         ------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>

         ------------------------------------------------------------------------------------------
</TABLE>

      As of APRIL ___, 2003, 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).

<TABLE>
<CAPTION>

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

                                           OPTIONS AND WARRANTS
                             CLASS                                   NUMBER OF SHARES
         ------------------------------------------------------------------------------------------
<S>                                                                  <C>

         ------------------------------------------------------------------------------------------
</TABLE>

                                     C-2-2.
<PAGE>
      (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.
<PAGE>
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 member(4) 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.
<PAGE>
      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.
<PAGE>
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.
<PAGE>
                                   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 worth(1), either individually or
jointly with such person's spouse exceeds $1,000,000;

      _____ (2) A natural person who had an income(2) 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.
<PAGE>
                                   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:

                  | |     Limited Partnership

                  | |     General Partnership

                  | |     Corporation

                  | |     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.)

                  | |     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.)

                                     C-3-3.
<PAGE>
                  | |     Other form of organization (indicate form of
                          organization (______________).

      (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

                                     C-3-4.
<PAGE>
      matters that such person is capable of evaluating the merits and risks of
      investing in the Company;

                  _______ (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.
<PAGE>
                                    EXHIBIT D

                           OPINION OF COMPANY COUNSEL

March ___, 2003

TO THE PURCHASERS LISTED
ON EXHIBIT A HERETO

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 February ____, 2003 (the
"Agreement"), by and among the Company and the purchasers named therein (each, a
"Purchaser" and collectively, the "Purchasers"), of an aggregate of ___________
shares of the Company's common stock (the "Common Shares") and warrants to
purchase an aggregate of up to _________ shares of the Company's common stock
(the "Warrants") and the cancellation and reissuance, pursuant to the terms of
the Warrant Repricing Agreement dated as of February ___, 2003 (the "Repricing
Agreement"), by and among the Company and certain Purchasers, of Common Stock
Warrants (as reissued, the "New Common Warrants") held by certain Purchasers and
issued pursuant to the Securities Purchase Agreement (the "Preferred Agreement")
dated December 11, 2001 by and among the Company and certain persons listed on
the Schedule of Purchasers attached to the Preferred Agreement as Exhibit A. 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, the Warrants, the Repricing Agreement and the
New Common
<PAGE>
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 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,
<PAGE>
      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, the Warrants and the New Common Warrants have been duly
      authorized, and upon issuance and delivery against payment therefor in
      accordance with the terms of the Agreement, the Common Shares, the
      Warrants and the New Common 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 and the New
      Common Warrants have been duly authorized and reserved for issuance, and
      upon issuance and delivery upon exercise of the Warrants and the New
      Common Warrants in accordance with the terms of the Warrants and the New
      Common Warrants, respectively, 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 and the
      cancellation and reissuance of the New Common Warrants pursuant to the
      Agreement and the Reprising Agreement do not violate or contravene (a) any
      governmental statute, rule or regulation applicable to the 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 and the cancellation and reissuance of the
      New Common 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 and the
      cancellation and reissuance of the New Common 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.
<PAGE>
                                    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.
<PAGE>
                                    EXHIBIT F

                   PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE

To:   [INSERT TRANSFER AGENT]

      ATTENTION: [________________]

      The undersigned, the Purchaser or an officer of, or other person duly
authorized by the Purchaser, hereby certifies that____________________________
institution was the                               [FILL IN NAME OF INSTITUTION]

Purchaser of the shares evidenced by the attached certificate, and as such,
proposes to transfer such shares on or about _________________ either (i) in
accordance with the registration                  [DATE]

statement, file number [_______________] in which case the Purchaser 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
Purchaser certifies that it has complied with or will comply with the
requirements of Rule 144.

Print or type:

        Name of Purchaser:
                                          --------------------------------------

        Name of Individual representing
        Purchaser (if an Institution):
                                          --------------------------------------

        Title of Individual representing
        Purchaser (if an Institution):
                                          --------------------------------------
Signature by:

        Purchaser or Individual
        representing Purchaser:
                                          --------------------------------------

                                      F-1.
<PAGE>
                                    EXHIBIT G

                                VOTING AGREEMENT

      THIS VOTING AGREEMENT (the "Agreement") is made and entered into as of
this ______ day of February, 2003, by and among New Enterprise Associates
("NEA") and those certain persons and entities listed on Exhibit A hereto (the
"Shareholders").

                                   WITNESSETH

      WHEREAS, NEA and certain other investors are purchasing shares of Common
Stock (the "Common Stock") of Aradigm Corporation (the "Company") and warrants
(the "Warrants") to purchase Common Stock, pursuant to that certain Securities
Purchase Agreement (the "Purchase Agreement") of even date herewith and the
Company is canceling and reissuing certain Common Stock Warrants, previously
issued pursuant to the Securities Purchase Agreement dated December 11, 2001, to
NEA and certain other investors, pursuant to that certain Warrant Repricing
Agreement (the "Warrant Agreement") of even date herewith (collectively, the
"Financing");

      WHEREAS, each Shareholder is a holder of record and the "beneficial owner"
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of
certain shares of capital stock of the Company; and

      WHEREAS, in connection with the consummation of the Financing, and in
order to induce NEA to enter into the Purchase Agreement and the Warrant
Agreement, the Shareholders have agreed to provide for the future voting of
their shares of the Company's capital stock as set forth below.

      NOW, THEREFORE, in consideration of these premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

                                    AGREEMENT

SECTION 1. Voting.

      1.1 SHAREHOLDER SHARES. The Shareholders each agree to hold all shares of
voting capital stock of the Company registered in their respective names or
beneficially owned by them as of the date hereof and any and all other
securities of the Company legally or beneficially acquired by each of the
Shareholders after the date hereof and on or prior to the date of the
Shareholder Meeting (as defined below) (hereinafter collectively referred to as
the "Shareholder Shares") subject to, and to vote the Shareholder Shares in
accordance with, the provisions of this Agreement.

      1.2 PURCHASE AGREEMENT AND FINANCING. At any meeting of shareholders of
the Company, however called (the "Shareholder Meeting"), the Shareholders shall
vote all of their respective Shareholder Shares to be voted in favor of the
approval of the Financing, the

                                       1.
<PAGE>
execution, delivery and performance by the Company of the Purchase Agreement,
the execution, delivery and performance by the Company of the Warrant Agreement
and the adoption and approval of the terms thereof and in favor of each of the
other actions contemplated by the Purchase Agreement and the Warrant Agreement
and any action required in furtherance thereof. The foregoing notwithstanding,
if the terms of the Financing, the Purchase Agreement or the Warrant Agreement
are materially changed or amended after the date hereof, no Shareholder shall
have any obligations under the provisions of Section 1.1 or this Section 1.2 if
such Shareholder reasonably believes that such change or amendment is adverse to
the rights or interests of the Company or such Shareholder.

      1.3 SUCCESSORS. The provisions of this Agreement shall be binding upon the
successors in interest to any of the Shareholder Shares.

      1.4 OTHER RIGHTS. Except as provided by this Agreement or any other
agreement entered into in connection with the Financing, each Shareholder shall
exercise the full rights of a holder of capital stock of the Company with
respect to the Shareholder Shares, respectively.

SECTION 2. Termination.

      2.1 This Agreement shall continue in full force and effect from the date
hereof through the earliest of the following dates, on which date it shall
terminate in its entirety:

            (a) the Closing Date (as defined in the Purchase Agreement);

            (b) the date as of which the parties hereto terminate this Agreement
by written consent of (i) NEA and (ii) a majority in interest of the
Shareholders;

            (c) the termination of the Purchase Agreement pursuant to Section
9.1 thereof; or

            (d) April 30, 2003.

SECTION 3. Miscellaneous.

      3.1 OWNERSHIP. Each Shareholder represents and warrants to NEA that (a)
such Shareholder now owns, or will own upon the Shareholder Meeting, the
Shareholder Shares, free and clear of liens or encumbrances, and has not, prior
to or on the date of this Agreement, executed or delivered any proxy or entered
into any other voting agreement or similar arrangement other than one which has
expired or terminated prior to the date hereof, and (b) such Shareholder has
full power and capacity to execute, deliver and perform this Agreement, which
has been duly executed and delivered by, and evidences the valid and binding
obligation of, such Shareholder enforceable in accordance with its terms.

      3.2 SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is
impossible to measure in money the damages which will accrue to a party hereto
or to their heirs, personal representatives, or assigns by reason of a failure
to perform any of the obligations under this Agreement and agree that the terms
of this Agreement shall be specifically enforceable. If any party hereto or his
heirs, personal representatives, or assigns institutes any action or proceeding

                                       2.
<PAGE>
to specifically enforce the provisions hereof, any person against whom such
action or proceeding is brought hereby waives the claim or defense therein that
such party or such personal representative has an adequate remedy at law, and
such person shall not offer in any such action or proceeding the claim or
defense that such remedy at law exists.

      3.3 GOVERNING LAW. This Agreement, and the rights of the parties hereto,
shall be governed by and construed in accordance with the laws of the State of
California as such laws apply to agreements among California residents made and
to be performed entirely within the State of California.

      3.4 AMENDMENT OR WAIVER. This Agreement may be amended (or provisions of
this Agreement waived) only by an instrument in writing signed by (i) NEA and
(ii) a majority in the interest of the Shareholders. Any amendment or waiver so
effected shall be binding upon each of the parties hereto and any assignee of
any such party.

      3.5 SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

      3.6 TRANSFERS TO AFFILIATES. In the event a Shareholder transfers any of
its Shareholder Shares to an affiliate of such Shareholder, such Shareholder
shall cause such affiliate to do all things and execute and deliver all
documents, as may be necessary to have such affiliate execute a written
agreement, substantially in the form of this Agreement, pursuant to which such
person becomes a party to this Agreement and agrees to be bound by all the
provisions hereof as if such affiliate were a Shareholder.

      3.7 ADDITIONAL SHARES. In the event that subsequent to the date of this
Agreement any shares or other securities are issued on, or in exchange for, any
of the Shareholder Shares by reason of any stock dividend, stock split,
combination of shares, reclassification or the like, such shares or securities
shall be deemed to be Shareholder Shares, as the case may be, for purposes of
this Agreement.

      3.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same agreement.

      3.9 WAIVER. No waivers of any breach of this Agreement extended by any
party hereto to any other party shall be construed as a waiver of any rights or
remedies of any other party hereto or with respect to any subsequent breach.

      3.10 ATTORNEY'S FEES. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

                                       3.
<PAGE>
      3.11 NOTICES. Any notices required in connection with this Agreement shall
be in writing and shall be deemed effectively given: (i) upon personal delivery
to the party to be notified, (ii) when sent by confirmed electronic mail or
facsimile if sent during normal business hours of the recipient; if not, then on
the next business day, (iii) five (5) days after having been sent by registered
or certified mail, return receipt requested, postage prepaid, or (iv) one (1)
day after deposit with a nationally recognized overnight courier, specifying
next day delivery, with written notification of receipt. All notices shall be
addressed to the holder appearing on the books of the Company or at such address
as such party may designate by ten (10) days advance written notice to the other
parties hereto.

      3.12 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, along with
the Purchase Agreement and each of the Exhibits thereto, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof and no party shall be liable or bound to any other
in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein

      3.13 MASSACHUSETTS BUSINESS TRUSTS. A copy of the Agreement and
Declaration of Trust of each Purchaser that is a fund or series investment
company (each, a "Fund") organized as a Massachusetts business trust (each, a
"Trust") is on file with the Secretary of the Commonwealth of Massachusetts. NEA
and the other Shareholders acknowledge and agree that this Agreement is not
executed on behalf of or binding upon any of the trustees, officers, directors
or shareholders of a Trust individually, but is binding upon the applicable Fund
and its assets and property. NEA agrees that no trustee, officer, director or
shareholder of a Trust or the applicable Fund may be held personally liable or
responsible for any obligations of a Fund arising out of this Agreement. With
respect to all obligations of the Fund arising out of this Agreement, NEA shall
look for payment or satisfaction of any claim solely to the assets and property
of the Fund. NEA is expressly put on notice that the rights and obligations of
each series of shares of a Trust under its Agreement and Declaration of Trust
are separate and distinct from those of any and all other series.

                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       4.
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this VOTING AGREEMENT
as of the date first above written.

                                          NEW ENTERPRISE ASSOCIATES:

                                          By:
                                             -----------------------------------

                                          Name:
                                               ---------------------------------

                                          Title:
                                                --------------------------------

                                VOTING AGREEMENT
                                 SIGNATURE PAGE
<PAGE>
                                                   [NAME OF SHAREHOLDER]

                                          By:
                                             -----------------------------------

                                          Name:
                                               ---------------------------------

                                          Title:
                                                --------------------------------

                                VOTING AGREEMENT
                                 SIGNATURE PAGE
<PAGE>
                                    EXHIBIT A

                              LIST OF SHAREHOLDERS

                                      A-1.
<PAGE>
                                    EXHIBIT H

                               ARADIGM CORPORATION

                           WARRANT REPRICING AGREEMENT

      THIS WARRANT REPRICING AGREEMENT (this "AGREEMENT") is made as of February
10, 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 Holders attached hereto as
EXHIBIT A (the "HOLDERS"). Capitalized terms used but not defined in this
Agreement shall have the meanings given to them in the Purchase Agreement (as
defined below).

                                    RECITALS

      WHEREAS, the Company, the Holders and certain other investors listed on
the Schedule of Purchasers attached to the Purchase Agreement as Exhibit A
(together with the Holders, the "INVESTORS") have entered into that certain
Securities Purchase Agreement (the "PURCHASE AGREEMENT"), of even date herewith,
pursuant to which the Company has agreed to sell and issue and the Investors
have agreed to purchase Common Shares and Warrants;

      WHEREAS, at the Closing (as defined below), as a material inducement to
the Holders to enter into the Purchase Agreement, the Company desires to issue
and each Holder desires to acquire the New Common Warrants (as defined herein),
in exchange for and upon cancellation of Common Stock Warrants ("COMMON
WARRANTS") held by the Holders and issued pursuant to the Securities Purchase
Agreement (the "PREFERRED AGREEMENT") dated December 11, 2001 by and among the
Company and certain persons listed on the Schedule of Purchasers attached to the
Preferred Agreement as Exhibit A, and the Company desires to assumer certain
other obligations with respect to the Holders, all upon the terms and conditions
stated in this Agreement.

      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

                         ISSUANCE OF NEW COMMON WARRANTS

      1.1 REPRICING OF COMMON WARRANTS. At the Closing, subject to the terms and
conditions of this Agreement, the Company agrees to cancel and reissue the
Common Warrants held by the Holders, such that the exercise price per share of
the Common Warrants shall be $1.12 and Section 2.1 of each Common Warrant,
providing for net issue exercise, shall be amended such that it is available in
certain limited circumstances, in the form attached hereto as EXHIBIT B (the
reissued Common Warrants referred to herein as the "NEW COMMON WARRANTS") and
each Holder agrees to cancel and surrender to the Company its Common Warrants.
The
<PAGE>
New Common Warrants and the shares of Common Stock of the Company ("COMMON
STOCK") issuable upon exercise of the New Common Warrants (the "SHARES") 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 the Purchase Agreement, the issuance of the New
Common Warrants (the "CLOSING") shall occur on the Closing Date as defined in
the Purchase Agreement.

      2.2 DELIVERY. At the Closing, the Company will deliver a duly executed New
Common Warrant to each Holder entitled to receive a New Common Warrant pursuant
to Section 1.1 of this Agreement, upon delivery to the Company by such Holder of
the Common Warrant held by such Holder.

                                   ARTICLE 3

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company represents and warrants to the Holders:

      3.1 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 issue the New Common 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 New Common Warrants, the
New Common 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 performance of this Agreement, the compliance with
the provisions hereof and the issuance of the New Common 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.

      3.2 ISSUANCE AND DELIVERY OF THE NEW COMMON WARRANTS. Upon exercise of the
New Common Warrants in accordance with the terms thereof, the Shares will be
validly issued, fully paid and nonassessable. The issuance and delivery of the
New Common Warrants is not subject to preemptive or any other similar rights of
the shareholders of the Company or any liens or encumbrances.
<PAGE>
                                   ARTICLE 4

            REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE HOLDERS

      Each Holder hereby severally represents and warrants to the Company:

      4.1 AUTHORIZATION. Holder represents and warrants to the Company that: (a)
Holder 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, 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 Holder, 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. Holder is an "accredited investor" as defined
in Rule 501(a) under the Securities Act. Holder is aware of the Company's
business affairs and financial condition and has had access to and has acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the New Common Warrants. Holder has such business and
financial experience as is required to give it the capacity to protect its own
interests in connection with the acquisition of the New Common Warrants.

      4.3 INVESTMENT INTENT. Holder is acquiring the New Common 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 hereof. Holder understands that its acquisition of the New Common
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 Holder's investment intent as expressed herein. Holder has completed
or caused to be completed the Holder Questionnaire attached to the Purchase
Agreement as Exhibit D 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. Holder has, in connection with its decision to acquire the New Common
Warrants, relied solely upon the SEC Documents and the representations and
warranties of the Company contained herein and in the Purchase Agreement. Holder
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. Holder 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. Holder will not, prior to the effectiveness of the
Registration Statement, if then prohibited by law or regulation, sell, offer to
sell, solicit offers to buy, dispose of, loan, pledge or grant any right with
respect to (collectively, a "DISPOSITION") the Securities, nor will such Holder
engage in any hedging or other transaction which is designed or could
<PAGE>
reasonably be expected to lead to or result in a Disposition of Securities by
such Holder or any person or entity. In addition, the Holder agrees that for so
long as it owns any Shares, it will not enter into any Short Sales. For such
purposes, a "Short Sale" by the Holder means a short sale of Shares executed at
a time when the Holder has no equivalent offsetting long position in the Common
Stock. For purposes of determining whether the Holder has an equivalent
offsetting long position in the Shares, shares that the Holder 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
Holder.

      4.6 NO LEGAL, TAX OR INVESTMENT ADVICE. Holder understands that nothing in
this Agreement or any other materials presented to Holder in connection with the
acquisition of the New Common Warrants constitutes legal, tax or investment
advice. Holder has consulted such legal, tax and investment advisors as it, in
its sole discretion, has deemed necessary or appropriate in connection with its
acquisition of the New Common Warrants.

      4.7 CONFIDENTIALITY. Holder 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
two (2) days of the Closing.

      4.8 RESIDENCY. Holder's principal executive officers are in the
jurisdiction set forth immediately below Holder's name of the signature pages
hereto.

      4.9 GOVERNMENTAL REVIEW. Holder 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 New Common Warrants.

      4.10 LEGEND. Holder 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
<PAGE>
            EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS."

      4.11 FOREIGN INVESTORS. If Holder is not a United States person (as
defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended), Holder hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any invitation to
acquire the New Common Warrants or any use of this Agreement, including (a) the
legal requirements within its jurisdiction for the acquisition of the New Common
Warrants, (b) any foreign exchange restrictions applicable to such 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. Holder's
acquisition and continued beneficial ownership of the Securities will not
violate any applicable securities or other laws of Holder's jurisdiction.

                                   ARTICLE 5

                  CONDITIONS TO CLOSING OBLIGATIONS OF HOLDERS

      Each Holder's obligation to acquire the New Common Warrants at the Closing
is, at the option of such Holder, subject to the fulfillment or waiver as of the
Closing Date of the following conditions:

      5.1 REPRESENTATIONS AND WARRANTIES. The representations made by the
Company in Article 3 hereof shall be true and correct in all material respects
when made, and shall be true and correct in all material respects on the Closing
Date with the same force and effect as if they had been made on and as of such
date.

      5.2 COVENANTS. All covenants 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 and the sale and issuance of the Common
Shares and the Warrants pursuant to the Purchase Agreement shall have been
consummated.

                                   ARTICLE 6

                  CONDITIONS TO CLOSING OBLIGATIONS OF COMPANY

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

      6.1 REPRESENTATIONS AND WARRANTIES. The representations made by the
Holders in Article 4 hereof shall be true and correct in all material respects
when made, and shall be true and correct in all material respects on the Closing
Date with the same force and effect as if they had been made on and as of such
date.

      6.2 COVENANTS. All covenants contained in this Agreement to be performed
by the Holders on or prior to the Closing Date shall have been performed or
complied with in all
<PAGE>
material respects and the sale and issuance of the Common Shares and the
Warrants pursuant to the Purchase Agreement shall have been consummated.

                                   ARTICLE 7

                                   COVENANTS

      7.1 REGISTRATION RIGHTS OF SHARES. The Company and the Holders shall
comply with the provisions of Article 7 of the Purchase Agreement as if the term
"Registrable Shares" defined in Section 7.1(b) of the Purchase Agreement
includes the Shares.

      7.2 REGISTRATION RIGHTS FOR PRIOR ISSUANCES. The Company hereby covenants
and agrees that:

            (a) with respect to the Holders, to the extent the obligations of
the Company pursuant to Section 7.2 of that certain Securities Purchase
Agreement, dated August 12, 2001 (the "AUGUST 2001 PURCHASE AGREEMENT"), by and
among the Company and certain persons listed on the Schedule of Purchasers
attached to the August 2001 Purchase Agreement as Exhibit A, would otherwise
cease and terminate due to the operation of part (c) of Section 7.6 of the
August 2001 Purchase Agreement, such obligations shall not cease or terminate
until the earlier to occur of (a) such time as all of the Registrable Shares (as
defined in the August 2001 Purchase Agreement) have been resold, (b) such time
as all of the Registrable Shares (as defined in the August 2001 Purchase
Agreement) may be resold in a three-month period pursuant to Rule 144, or (c)
the third anniversary of the Closing Date (as defined in the Purchase
Agreement);

            (b) with respect to the Holders, to the extent the obligations of
the Company pursuant to Section 7.2 of the Preferred Agreement would otherwise
cease and terminate due to the operation of part (c) of Section 7.6 of the
Preferred Agreement, such obligations shall not cease or terminate until the
earlier to occur of (a) such time as all of the Registrable Shares (as defined
in the Preferred Agreement) have been resold, (b) such time as all of the
Registrable Shares (as defined in the Preferred Agreement) may be resold in a
three-month period pursuant to Rule 144, or (c) the third anniversary of the
Closing Date (as defined in the Purchase Agreement); and

            (c) to the extent the indemnification obligations of the Company
pursuant to Section 7.4 of the Purchase Agreement are broader in scope than the
indemnification obligations of the Company pursuant to Section 7.4 of the August
2001 Purchase Agreement or pursuant to Section 7.4 of the Preferred Agreement
(the "PRIOR AGREEMENTS"), with respect to the Holders, the indemnification
obligations of the Company pursuant to Section 7.4 of the Purchase Agreement
shall apply to the Prior Agreements.

                                   ARTICLE 8

                                  MISCELLANEOUS

      8.1 WAIVERS AND AMENDMENTS. The terms of this Agreement may be waived or
amended with the written consent of the Company and each Holder.
<PAGE>
      8.2 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.

      8.3 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. No Holder shall assign this
Agreement without the prior written consent of the Company.

      8.4 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
thereof.

      8.5 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.

      8.6 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.

      8.7 CURRENCY. All references to "dollars" or "$" in this Agreement shall
be deemed to refer to United States dollars.

                  [REMAINDER OF THIS PAGE INTENTIONALLY BLANK.]

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

                                  ARADIGM CORPORATION, a California corporation

                                  By: _________________________________________

                                  Name: _______________________________________

                                  Title: ______________________________________

                                  HOLDER:

                                  By: _________________________________________

                                  Name: _______________________________________

                                  Title: ______________________________________
<PAGE>
                                    EXHIBIT A

                               SCHEDULE OF HOLDERS

<TABLE>
<CAPTION>
HOLDER                                                            WARRANTS
<S>                                                              <C>
New Enterprise Associates 10, Limited Partnership                2,685,948
1119 St. Paul Street
Baltimore, Maryland 21202
Tel: (410) 244-0115
Fax: (410) 752-7721
Attn: John Nehra

State or Country of Residence: Maryland

Domain Public Equity Partners L.P.                                 402,890
One Palmer Square, Suite 515
Princeton, New Jersey 08542
Tel: (609) 683-5656
Fax: (609) 683-4581
Attn: Nicole Vitullo

State or Country of Residence:
New Jersey

Camden Partners Strategic Fund II-A, L.P.                          368,160
c/o Camden Partners, Inc.
One South Street, Suite 2150
Baltimore, Maryland 21202
Tel: (410) 895-3800
Fax: (410) 895-3805
Attn: Richard M. Johnston

State or Country of Residence:
Maryland

Camden Partners Strategic Fund II-B, L.P.                           21,840
c/o Camden Partners, Inc.
One South Street, Suite 2150
Baltimore, Maryland 21202
Tel: (410) 895-3800
Fax: (410) 895-3805
Attn: Richard M. Johnston

State or Country of Residence:
Maryland
</TABLE>
<PAGE>
<TABLE>
<S>                                                                <C>
Castle Creek Healthcare Partners LLC                               268,593
c/o Castle Creek Healthcare Partners, LLC
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:
Illinois

CC Lifescience, Ltd.                                               268,593
c/o Castle Creek Healthcare Partners, LLC
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:
Illinois
</TABLE>
<PAGE>
                                    EXHIBIT B

                           FORM OF NEW COMMON 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

                                                             _____________, 2003

                          VOID AFTER DECEMBER 14, 2006

      THIS CERTIFIES THAT, for value received, ___________________________, with
its principal office at __________________________, 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
of this Warrant and ending on December 14, 2006, unless sooner terminated as
provided below.

            (b) "Exercise Price" shall mean $1.12 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
<PAGE>
            (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 date on which a Registration Statement (as defined in Section 7.1 of
the Securities Purchase Agreement dated February 10, 2003, by and among the
Company and the persons listed on the Schedule of Purchasers attached thereto as
Exhibit A) has first gone effective, if (i) 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 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
<PAGE>
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.

      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.

      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.

      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 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.
<PAGE>
      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.

            (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 that certain Warrant Repricing Agreement dated February ___, 2003.

            (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.

      DISPOSITION OF WARRANT AND EXERCISE SHARES.

            (d) 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:

                  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

                  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

                  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.

            (e) 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
<PAGE>
      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.

            (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, 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 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 after 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.

      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
<PAGE>
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.
<PAGE>
      IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer as of _____________, 2003.

                                ARADIGM CORPORATION, a California corporation

                                By: _________________________________________

                                Name: _______________________________________

                                Title: ______________________________________
<PAGE>
                               NOTICE OF EXERCISE

TO: ARADIGM CORPORATION

      (1)   | | 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.

            | | 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 Warrant Repricing
Agreement dated as of February ___, 2003 by and among the Company and holders
named therein; (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 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
<PAGE>
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)
<PAGE>
                                 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.

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