Document:

Exhibit 10.3

               SECOND AMENDMENT AND WAIVER TO THE CREDIT AGREEMENT

     SECOND  AMENDMENT  AND WAIVER TO THE CREDIT  AGREEMENT  (the  "Amendment"),
dated as of November 5, 2001,  among TRENWICK  AMERICA  CORPORATION,  a Delaware
corporation (the "Borrower"),  TRENWICK HOLDINGS  LIMITED.,  a company organized
under  the  laws of the  United  Kingdom  (the  "Account  Party"),  the  lending
institutions  from time to time party thereto (each a "Bank" and,  collectively,
the "Banks"),  FIRST UNION NATIONAL BANK, as Syndication Agent (the "Syndication
Agent"),  FLEET  NATIONAL  BANK,  as  Documentation  Agent  (the  "Documentation
Agent"),   and  JPMORGAN  CHASE  BANK  (f/k/a  The  Chase  Manhattan  Bank),  as
Administrative  Agent (the  "Administrative  Agent").  Unless otherwise  defined
herein,  capitalized  terms  used  herein and  defined  in the Credit  Agreement
referred to below are used herein as so defined

                              W I T N E S S E T H :
                              - - - - - - - - - -

     WHEREAS, the Borrower, the Account Party, the Banks, the Syndication Agent,
the  Documentation  Agent  and the  Administrative  Agent  are party to a Credit
Agreement,  dated  as of  November  24,  1999 and  amended  and  restated  as of
September 27, 2000 (as the same has been amended,  modified or supplemented  to,
but not including, the date hereof, the "Credit Agreement");

     WHEREAS,  the Trenwick  Group Ltd., a company  organized  under the laws of
Bermuda  ("Holdings")  and the  Administrative  Agent  entered  into a  Holdings
Guaranty, dated as of September 27, 2000 (as the same has been amended, modified
or supplemented to, but not including, the date hereof, the "Holdings Guaranty")
in order to induce the Banks to make Loans to the Borrower and issue  Letters of
Credit for the  account  of the  Account  Party and  Guaranteed  Creditors  (and
Lending  Affiliates  thereof) to enter into Interest Rate Protection  Agreements
and Other Hedging Agreements with the Borrower and/or the Account Party; and

     WHEREAS,  subject to the terms and conditions set forth below,  the parties
hereto wish to amend the Credit Agreement as provided herein;

     NOW, THEREFORE, it is agreed;

A.   Waivers

     1. The Banks  hereby  waive any Event of Default that may have arisen under
the Credit  Agreement  solely as a result of  Holdings'  failure to comply  with
Sections 4.13, 4.14(b) (solely with respect to Chartwell  Insurance Company) and
4.16 of the Holdings Guaranty for the period from September 30, 2001 through the
Amendment Effective Date (as defined below).

<PAGE>

B.   Amendments

     1. Section  4.02(i)(b)  of the Credit  Agreement  is hereby  amended by (i)
inserting the  reference  "(x)"  immediately  preceding  the  percentage  "100%"
appearing  in said Section and (ii)  inserting  the text "or (y) 50% of the cash
proceeds (net of underwriting  discounts and  commissions  and other  reasonable
fees and costs  associated  therewith)  of such sale or issuance or cash capital
contributions  with the written  consent of the Required Banks prior to any such
sale or issuance or cash capital contributions" immediately following the second
parenthetical clause appearing therein.

     2.  The  definition  of the term  "Applicable  Commitment  Fee  Percentage"
contained  in  Schedule  I to the  Credit  Agreement  is hereby  amended  by (i)
inserting the phrase "Category F Period"  immediately below the phrase "Category
E Period" in the column "Applicable Period" appearing therein and (ii) inserting
the percentage "0.500%"  immediately below the percentage "0.500%" in the column
"Applicable Commitment Fee Percentage" appearing therein.

     3. The  definition  of the term  "Applicable  Credit  Rating"  contained in
Schedule I to the  Credit  Agreement  is hereby  amended  by  deleting  the text
"BBB-/Baa3" appearing therein and inserting the text "BB+/Ba1" in lieu thereof.

     4. The definition of the term "Applicable  Margin"  contained in Schedule I
to the Credit Agreement is hereby amended to read in its entirety as follows:

          "Applicable  Margin"  shall mean,  for any day, the rate per annum set
     forth below opposite the Applicable Period then in effect:

                                             Applicable Margin
          Applicable Period      Eurodollar Loans       Base Rate Loans

          Category A Period         1.10%                   0.00%
          Category B Period         1.30%                   0.05%
          Category C Period         1.50%                   0.25%
          Category D Period         2.00%                   0.75%
          Category E Period         2.50%                   1.25%
          Category F Period         3.25%                   2.00%

     ; provided that,  solely for the purpose of the Term Loans, each Applicable
     Margin  shall be increased by the rate per annum set forth below during the
     period set forth opposite such rate per annum:

                       Period                              Percentage
         July 1, 2002 through September 30, 2002             0.50%
         October 1, 2002 through December 31, 2002           1.00%
         January 1, 2003 through March 31, 2003              1.50%
         April 1, 2003 and thereafter                        2.00%."

                                      -2-
<PAGE>

     5. The definition of the term "Applicable  Period"  contained in Schedule I
to the Credit Agreement is hereby amended to read in its entirety as follows:

          "Applicable  Period"  shall  mean,  at any time,  the period set forth
     below then in effect:

        Applicable Period                       Criteria
        -----------------                       --------

        Category A Period        The Applicable Credit Rating is A-/A3 or above.

        Category B Period        The Applicable Credit Rating is BBB+/Baa1.

        Category C Period        The Applicable Credit Rating is BBB/Baa2.

        Category D Period        The Applicable Credit Rating is BBB-/Baa3.

        Category E Period        The Applicable Credit Rating is BB+/Ba1

        Category F Period        None of a  Category  A Period,  a Category B
                                 Period,  a Category  C Period,  a Category D
                                 Period  nor a Category E Period is in effect
                                 at such time.

          Notwithstanding  anything to the contrary set forth above,  if neither
     Rating  Agency rates the unsecured  senior debt of the  Borrower,  then the
     Applicable Period shall be a Category F Period."

     6. The definition of the term "Holdings Cash Flow"  contained in Schedule I
to the Credit Agreement is hereby amended to read in its entirety as follows:

          "Holdings  Cash Flow" shall mean,  for any period,  the sum of (i) for
     each  Specified  Regulated  Insurance  Company,  the  aggregate  amount  of
     ordinary dividends which such Specified  Regulated  Insurance Company could
     pay to its parent  corporation under Legal  Requirements as of the last day
     of such period  (determined  as if (x) such Specified  Regulated  Insurance
     Company had not paid any ordinary dividends during such period and (y) each
     Subsidiary  of  such  Specified  Regulated  Insurance  Company  which  is a
     Regulated  Insurance  Company had paid dividends to its parent  corporation
     during such period in an amount  equal to the maximum  amount of  dividends
     payable by such  Subsidiary  during  such  period  under  applicable  Legal
     Requirements)  plus the  aggregate  amount of any  extraordinary  dividends
     actually paid by such Specified  Regulated  Insurance Company to its parent
     corporation  during  such  period,  (ii)  for  each  Specified  Foreign  or
     Non-Regulated  Company,  (x) the  greater of (A) zero and (B) the EBITDA of
     such Specified Foreign or Non-Regulated  Company for such period, minus (y)
     the  amount  of  capital  contributions  and  intercompany  loans  made  by
     Holdings, the Borrower or any Specified Regulated Insurance Company to such
     Specified  Foreign or  Non-Regulated  Company on or after  October 1, 2001,
     (iii) tax sharing payments made by Regulated  Insurance Companies which are
     Domestic Subsidiaries directly to Holdings or

                                      -3-
<PAGE>

     any  Specified  Non-Regulated  Company  during such period (less cash taxes
     paid by Holdings during such period),  and (iv) payments during such period
     of principal  and interest on surplus  notes issued by Regulated  Insurance
     Companies  which are  Domestic  Subsidiaries  to Holdings or any  Specified
     Non-Regulated Company."

     7.  The  definition  of the  term  "Trust  Preferred  Securities  Purchase"
contained in Schedule I to the Credit Agreement is hereby amended to read in its
entirety as follows:

          "Trust Preferred  Securities  Purchase" shall mean the purchase by one
     or more Subsidiaries of Holdings of approximately $23,700,000 of face value
     Trust Preferred Securities for approximately $18,000,000 in cash during the
     fiscal  quarter  ending  December 31, 2000,  and the fiscal  quarter ending
     March 31, 2001.

     8.  Schedule I to the Credit  Agreement is hereby  amended by inserting the
following definition in the appropriate alphabetical order:

          "Quarterly Compliance Date" shall mean the earlier of (i) May 15, 2002
     and (ii) the date on which  Holdings  delivers to each Bank the  compliance
     certificate  for the fiscal  quarter  ending March 31, 2002,  in accordance
     with Section 3.01(d) of the Holdings Guaranty."

C.   Miscellaneous Provisions

     1. In order to induce the Banks to enter into this  Amendment,  each of the
Borrower  and the  Account  Party  hereby  represent  and  warrant  on behalf of
themselves and their respective  Subsidiaries that (i) the  representations  and
warranties  of  contained  in Section 2 of the  Holdings  Guaranty  are true and
correct in all material  respects on and as of the Amendment  Effective Date (as
defined  below)  (except  with  respect to any  representations  and  warranties
limited by their  terms to a specific  date,  which shall be true and correct in
all  material  respects  as of such date),  and (ii) there  exists no Default or
Event of Default under the Credit Agreement on the Amendment  Effective Date, in
each case after giving effect to this Amendment.

     2. This  Amendment  is limited as  specified  and shall not  constitute  an
amendment,  modification,  acceptance  or waiver of any other  provision  of the
Credit Agreement or any other Credit Document.

     3. THIS AMENDMENT AND THE RIGHTS AND  OBLIGATIONS OF THE PARTIES  HEREUNDER
SHALL BE  CONSTRUED IN  ACCORDANCE  WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.

     4. This  Amendment  shall  become  effective  on the date  (the  "Amendment
Effective Date") when (i) the Borrower, the Account Party and the Required Banks
shall  have  signed  a  counterpart   hereof  (whether  the  same  or  different
counterparts) and shall have delivered (including by way of telecopier) the same
to the  Administrative  Agent and (ii)  Holdings  and the  Required  Banks  have
consented to the Second  Amendment to the Holdings  Guaranty  dated  November 5,
2001 (the "Holdings Guaranty Amendment").

                                      -4-
<PAGE>

     5. The Borrower  hereby agrees to pay each Bank which  delivers an executed
copy of this  Amendment  and the Holdings  Guaranty  Amendment  (by hard copy or
facsimile) to the  Administrative  Agent by no later than 12:00 (Noon) (New York
time) on November 12, 2001,  a fee (the  "Amendment  Fee") in an amount equal to
0.25% of the  outstanding  principal  amount of Term Loans and L/C Commitment of
such Bank,  which  Amendment Fee shall be due and payable on the first  Business
Day  following  the date on which the  Required  Banks shall have  executed  and
delivered this Amendment and the Holdings Guaranty Amendment.

     6. From and after the  Amendment  Effective  Date,  all  references  in the
Credit  Agreement  and in the  other  Credit  Documents  shall be  deemed  to be
referenced to the Credit Agreement as modified hereby.

                                      * * *

                                      -5-
<PAGE>

         IN WITNESS  WHEREOF,  the undersigned  have caused this Amendment to be
duly executed and delivered as of the date first above written.

                                     TRENWICK AMERICA CORPORATION

                                     By: DAvid M. Finkelstein
                                        ----------------------------------------
                                          Name:  David M. Finkelstein
                                          Title: Vice President & Treasurer

                                     TRENWICK HOLDINGS LIMITED

                                     By:  /s/ Ginette Handfield
                                        ----------------------------------------
                                          Name:  Ginette Handfield
                                          Title:  Finance Director

                                            [Bank Signature Pages Omitted]<PAGE>
                                                                     EXHIBIT 4.3

                               ARADIGM CORPORATION

                              AMENDED AND RESTATED

                   CERTIFICATE OF DETERMINATION OF PREFERENCES

                                       OF

                      SERIES A CONVERTIBLE PREFERRED STOCK

     The undersigned, Richard P. Thompson and Michael Molkentin, hereby certify
that:

     A.   They are the duly elected and acting President and Chief Executive '
Officer, and Acting Chief Financial Officer, respectively, of Aradigm
Corporation, a California corporation (the "COMPANY").

     B.   Pursuant to authority conferred by the Company's Amended and Restated
Articles of Incorporation (the "ARTICLES OF INCORPORATION"), the board of
directors of the Company (the "BOARD OF DIRECTORS") has duly adopted the
following recitals and resolutions:

     WHEREAS, the Articles of Incorporation of the Company authorize a class of
shares of stock known as "PREFERRED STOCK" comprising Five Million (5,000,000)
shares, issuable from time to time in one or more series; and

     WHEREAS, the Board of Directors is authorized to fix the number of shares
of any series of Preferred Stock and to determine the designation of any such
series and to determine or alter the rights, preferences, privileges, and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and, within the limits and restrictions stated in any resolution of the
Board of Directors originally fixing the number of shares constituting any
series, to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any such series subsequent to
the issuance of shares of that series;

     WHEREAS, the Board of Directors has previously adopted resolutions to
provide for the issuance of a Series A Convertible Preferred Stock of the
Company and to fix and determine the rights, preferences, privileges,
restrictions, and other matters relating to the said Series A Convertible
Preferred Stock;

     WHEREAS, the Board of Directors now wishes to amend and restate such
resolutions;

     WHEREAS, none of the shares of Series A Convertible Preferred Stock has
been issued;

     NOW, THEREFORE, BE IT RESOLVED that the resolutions providing for the
issuance of a Series A Convertible Preferred Stock of the Company and fixing and
determining the rights, preferences, privileges, restrictions, and other matters
relating to said Series A Convertible Preferred Stock are hereby amended and
restated to read as follows.

     Section 1. Designation of Series Preferred. Two Million Fifty Thousand
(2,050,000) shares of Preferred Stock are designated Series A Convertible
Preferred Stock (the "SERIES

                                       1
<PAGE>

PREFERRED") with the rights, preferences, privileges and restrictions specified
herein. Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number of shares
of Series Preferred to a number less than the number of shares then outstanding
plus the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Company convertible into Series Preferred.

     Section 2. Dividend Rights.

          a. During the two (2) year period beginning the date that the first
share of Series Preferred is issued (the "ORIGINAL ISSUE DATE"), the holders of
Series Preferred, in preference to the holders of Common Stock of the Company
("COMMON STOCK") and the Series A Junior Participating Preferred Stock (the
"JUNIOR PREFERRED STOCK") and any other stock ranking junior to the Series
Preferred (collectively with the Common Stock and Junior Preferred Stock, the
"JUNIOR STOCK"), shall be entitled to receive, when, as and if declared by the
Board of Directors, but only out of funds that are legally available therefor,
dividends at the rate of six percent (6%) of the Original Issue Price (as
defined below) per annum on each outstanding share of Series Preferred (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares after the Original Issue Date). Such
dividends shall be payable only when, as and if declared by the Board of
Directors, but they shall be cumulative and will accrue, whether or not
declared. At the option of the Company, such dividends may be paid in either
cash or stock (at a price equal to the then current market price). For purposes
of this Section 2(a), the current market price of the Company's Common Stock on
any dividend payment date shall be based on the closing price of the Company's
Common Stock as quoted on the Nasdaq Stock Market, or, if on any day the Common
Stock is not so listed, the average of the highest bid and the lowest asked
price on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each case averaged over a period of ten (10) trading days consisting of the
day as of which the current fair value of Common Stock is being determined and
the nine (9) consecutive trading days prior to such day. If at any time the
Common Stock is not listed on any securities exchange or quoted in the
over-the-counter market, the current fair market value of Common Stock shall be
used, and shall be determined in good faith by the Board of Directors.

          b. The Original Issue Price of the Series Preferred shall be
Twenty-Four Dollars and Twenty Cents ($24.20) per share (the "ORIGINAL ISSUE
PRICE").

          c. So long as any shares of Series Preferred are outstanding, the
Company shall not pay or declare any dividend, whether in cash or property, or
make any other distribution on the Common Stock, or purchase, redeem or
otherwise acquire for value any shares of Common Stock unless and until all
accrued and unpaid dividends on the Series Preferred shall have first been paid
or declared and set apart, except for:

               (i) acquisitions of Common Stock by the Company pursuant to
agreements which permit the Company to repurchase such shares at cost (or the
lesser of cost or fair market value) upon termination of services to the
Company;

                                       2
<PAGE>

               (ii) acquisitions of Common Stock in exercise of the Company's
right of first refusal to repurchase such shares; or

               (iii) any repurchase of any outstanding securities of the Company
that is approved by the Board of Directors; or

               (iv) dividends payable in Common Stock that are approved by the
Board of Directors.

          d. In the event dividends are paid on any share of Common Stock, the
Company shall pay an additional dividend on all outstanding shares of Series
Preferred in a per share amount equal (on an as-if-converted to Common Stock
basis) to the amount paid or set aside for each share of Common Stock.

          e. The holders of the Series Preferred expressly waive their rights,
if any, as described in California Code Sections 502, 503 and 506 as they relate
to repurchases of shares of Common Stock upon termination of employment or
service as a consultant or director.

     Section 3.  Liquidation Rights.

          a. Upon any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, before any distribution or payment shall be
made to the holders of any Junior Stock, the holders of Series Preferred shall
be entitled to be paid out of the assets of the Company legally available for
distribution, or the consideration received in such transaction, an amount per
share of Series Preferred equal to the Original Issue Price plus all accrued and
unpaid dividends on the Series Preferred (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such shares
after the Original Issue Date) for each share of Series Preferred held by them.
If, upon any such liquidation, dissolution, or winding up, the assets of the
Company (or the consideration received in such transaction) shall be
insufficient to make payment in full to all holders of Series Preferred of the
liquidation preference set forth in this Section 3(a), then such assets (or
consideration) shall be distributed among the holders of Series Preferred at the
time outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled. After payment of the full liquidation
preference of the Series Preferred as aforesaid, the assets of the Company
legally available for distribution (or the consideration received in such
transaction), if any, shall be distributed to the holders of any Junior Stock in
accordance with the Articles of Incorporation and any other Certificate of
Determination of Preferences creating a series of Preferred Stock or any similar
stock.

          b. An Acquisition (as defined below) or Asset Transfer (as defined
below) shall be deemed a liquidation for purposes of this Section 3. An
"ACQUISITION" shall mean (i) any consolidation or merger of the Company with or
into any other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Company immediately prior to
such consolidation, merger or reorganization, own less than fifty percent (50%)
of the voting power of the surviving entity immediately after such
consolidation, merger or reorganization; or (ii) any transaction or series of
related transactions to which the Company is a party in which in excess of fifty
percent (50%) of the Company's voting power is transferred; provided that an
Acquisition shall not include (x) any consolidation or merger effected

                                       3
<PAGE>

exclusively to change the domicile of the Company, or (y) any transaction or
series of transactions principally for bona fide equity financing purposes in
which cash is received by the Company or indebtedness of the Company is
cancelled or converted or a combination thereof; and "ASSET TRANSFER" shall mean
a sale, lease or other disposition of all or substantially all of the assets of
the Company.

     Section 4. Conversion. The holders of the Series Preferred shall have
conversion rights as follows (the "CONVERSION RIGHTS"):

          a. Optional Conversion. Subject to and in compliance with the
provisions of this Section 4, any shares of Series Preferred may, at the option
of the holder, be converted at any time into fully-paid and nonassessable shares
of Common Stock. The number of shares of Common Stock to which a holder of
Series Preferred shall be entitled upon conversion shall be the product obtained
by multiplying the Conversion Rate then in effect (determined as provided in
Section 4(b) by the number of shares of Series Preferred being converted.

          b. Conversion Rate. The Conversion Rate for Series Preferred in effect
at any time for conversion of the Series Preferred (the "CONVERSION RATE") shall
be the quotient obtained by dividing the Original Issue Price by the Conversion
Price, calculated as provided in Section 4(c).

          c. Conversion Price. The Conversion Price for the Series Preferred
shall initially be Six Dollars and Five Cents ($6.05) (the "CONVERSION PRICE").
Such initial Conversion Price shall be adjusted from time to time in accordance
with this Section 4. All references to the Conversion Price herein shall mean
the Conversion Price as so adjusted.

          d. Mechanics of Conversion. Each holder of Series Preferred who
desires to convert the same into shares of Common Stock pursuant to this Section
4 shall surrender its certificate or certificates therefor, duly endorsed, at
the office of the Company or of any transfer agent for the Series Preferred, and
shall give written notice to the Company at such office that it elects to
convert the same. Such notice shall state the number of shares of Series
Preferred being converted. Thereupon, the Company shall promptly issue and
deliver at such office to such holder of Series Preferred a certificate or
certificates, registered in such names as are specified by the holder, for the
number of shares of Common Stock to which such holder is entitled and shall
promptly pay in cash (at the Common Stock's fair market value determined by the
Board of Directors as of the date of conversion) the value of any fractional
share of Common Stock otherwise issuable to any holder of Series Preferred. Such
conversion shall be deemed to have been made at the close of business on the
date of such surrender of the certificates representing the the shares of Series
Preferred to be converted, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.

          e. Adjustment for Stock Splits and Combinations. If at any time or
from time to time after the Original Issue Date the Company effects a
subdivision of the outstanding Common Stock without a corresponding subdivision
of the Preferred Stock, the Conversion Price in effect immediately before that
subdivision shall be proportionately decreased. Conversely, if at any time or
from time to time after the Original Issue Date the Company

                                       4
<PAGE>

combines the outstanding shares of Common Stock into a smaller number of shares
without a corresponding combination of the Preferred Stock, the Conversion Price
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 4(e) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

          f. Adjustment for Common Stock Dividends and Distributions. If at any
time or from time to time after the Original Issue Date the Company pays a
dividend or other distribution in additional shares of Common Stock, the
Conversion Price that is then in effect shall be decreased as of the time of
such issuance, as provided below:

               i. The Conversion Price shall be adjusted by multiplying the
Conversion Price then in effect by a fraction equal to:

                    (A) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance, and

                    (B) the denominator of which is the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance plus the number of shares of Common Stock issuable in payment of such
dividend or distribution;

               ii. If the Company fixes a record date to determine which holders
of Common Stock are entitled to receive such dividend or other distribution, the
Conversion Price shall be fixed as of the close of business on such record date
and the number of shares of Common Stock shall be calculated immediately prior
to the close of business on such record date; and

               iii. If such record date is fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed therefor, the
Conversion Price shall be recomputed accordingly as of the close of business on
such record date and thereafter the Conversion Price shall be adjusted pursuant
to this Section 4(f) to reflect the actual payment of such dividend or
distribution.

          g. Adjustment for Reclassification, Exchange and Substitution. If at
any time or from time to time after the Original Issue Date, the Common Stock
issuable upon the conversion of the Series Preferred is changed into the same or
a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition or
Asset Transfer as defined in Section 3(b) or a subdivision or combination of
shares or stock dividend or a reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section 4), in any such event each holder
of Series Preferred shall then have the right to convert such stock into the
kind and amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the maximum
number of shares of Common Stock into which such shares of Series Preferred
could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided herein
or with respect to such other securities or property by the terms thereof.

                                       5
<PAGE>

          h. Reorganizations, Mergers or Consolidations. If at any time or from
time to time after the Original Issue Date, there is a capital reorganization of
the Common Stock or the merger or consolidation of the Company with or into
another corporation or another entity or person (other than an Acquisition or
Asset Transfer as defined in Section 3(b) or a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section 4), as a part of such capital reorganization,
provision shall be made so that the holders of the Series Preferred shall
thereafter be entitled to receive upon conversion of the Series Preferred the
number of shares of stock or other securities or property of the Company to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, subject to
adjustment in respect of such stock or securities by the terms thereof. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of Series
Preferred after the capital reorganization to the end that the provisions of
this Section 4 (including adjustment of the Conversion Price then in effect and
the number of shares issuable upon conversion of the Series Preferred) shall be
applicable after that event and be as nearly equivalent as practicable.

          i. Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for the number of shares of Common Stock or
other securities issuable upon conversion of the Series Preferred, if the Series
Preferred is then convertible pursuant to this Section 4, the Company, at its
expense, shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid, to each registered holder of Series Preferred at the holder's address
as shown in the Company's books. The certificate shall set forth such adjustment
or readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (i) the Conversion Price at the
time in effect and (ii) the type and amount, if any, of other property which at
the time would be received upon conversion of the Series Preferred.

          j. Notices of Record Date. Upon (i) 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 or other
distribution, or (ii) any Acquisition (as defined in Section 3(b)) or other
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company, any merger or consolidation of the Company
with or into any other corporation, or any Asset Transfer (as defined in Section
3(b)), or any voluntary or involuntary dissolution, liquidation or winding up of
the Company, the Company shall mail to each holder of Series Preferred at least
ten (10) days prior to the record date specified therein (or such shorter period
approved by the holders of a majority of the outstanding Series Preferred) a
notice specifying (A) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (B) the date on which any such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up is expected to become effective, and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up. The Company shall also
use its reasonable efforts to furnish to the

                                       6
<PAGE>

holders of Series Preferred information that is reasonably sufficient to enable
such holders to make a determination as to whether it would be to their
advantage to convert their shares of Series Preferred to shares of Common Stock
pursuant to this Section 4 prior to any transaction listed in (ii) above.

          k. Automatic Conversion.

               i. Each share of Series Preferred shall automatically be
converted into shares of Common Stock, based on the then-effective Conversion
Rate, upon either (A) the closing of an underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Company with gross proceeds to the Company (before underwriting discounts,
commission and fees) of not less than Twenty-Five Million Dollars ($25,000,000),
or (B) the date on which the Common Stock closing bid price has been at least
seventy-five percent (75%) greater than the Conversion Price for at least twenty
(20) consecutive trading days; provided, however, that if either of the events
described in clause (A) or (B) of this Section 4(k)(i) occurs at a time when
insufficient authorized Common Stock is available for issuance of all shares of
Common Stock issuable upon such conversion or prior to the effective date of the
registration statement to be filed with the Securities and Exchange Commission
registering for resale the shares of Common Stock issuable upon such conversion,
then automatic conversion of the Series Preferred shares shall not immediately
occur but instead shall occur at such time as sufficient authorized Common Stock
is available and such registration has been declared effective.

               ii. Upon a conversion in accordance with Section 4(k)(i) above,
the outstanding shares of Series Preferred shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Series Preferred
are either delivered to the Company or its transfer agent as provided below, or
the holder notifies the Company or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Company to indemnify the Company from any loss incurred by it in connection
with such certificates. Upon the occurrence of such automatic conversion of the
Series Preferred, the holders of Series Preferred shall surrender the
certificates representing such shares at the office of the Company or any
transfer agent for the Series Preferred. Thereupon, there shall be issued and
delivered to such holder promptly at such office and in its name as shown on
such surrendered certificate or certificates, a certificate or certificates for
the number of shares of Common Stock into which the shares of Series Preferred
surrendered were convertible on the date on which such automatic conversion
occurred.

          l. Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series Preferred by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of any fractional share, the Company shall, in lieu of
issuing any fractional share, pay

                                       7
<PAGE>

cash equal to the product of such fraction multiplied by the Common Stock's fair
market value (as determined by the Board of Directors) on the date of
conversion.

          m. Reservation of Stock Issuable Upon Conversion. The Company shall
use its commercially reasonable efforts at all times to reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series Preferred,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series
Preferred. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series Preferred, 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 purpose.

          n. Notices. Any notice required by the provisions of this Section 4
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 verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Company.

          o. Payment of Taxes. The Company will pay all taxes (other than taxes
based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series Preferred, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series Preferred
so converted were registered.

          p. No Dilution or Impairment. Without the consent of the holders of a
majority of the then outstanding Series Preferred, the Company shall not amend
its Amended and Restated Articles of Incorporation or participate in any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or take any other voluntary action, for the purpose of
avoiding or seeking to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Company, but shall at all times in
good faith assist in carrying out all such action as may be reasonably necessary
or appropriate in order to protect the conversion rights of the holders of the
Series Preferred against dilution or other impairment.

     Section 5. No Reissuance of Series Preferred. No shares of Series Preferred
acquired by the Company by reason of redemption, purchase, conversion or
otherwise shall be reissued.

     Section 6. Voting Rights. Each holder of shares of Series Preferred shall
have a number of votes equal to the number of shares of Common Stock issuable
upon conversion of such holder's shares of Series Preferred and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock. The holder of each share of Series Preferred shall be

                                       8
<PAGE>

entitled to notice of any shareholders' meeting in accordance with the Amended
and Restated Bylaws of the Company and shall vote with holders of the Common
Stock at any annual or special meeting of the shareholders and not as a separate
class, except those matters required by law to be submitted to a class vote.

     RESOLVED FURTHER, that the officers are hereby authorized and directed to
prepare and file an Amended and Restated Certificate of Determination of
Preferences of Series Preferred in accordance with the foregoing resolutions and
the provisions of California law.

     C. The authorized number of shares of Preferred Stock of the Company is
Five Million (5,000,000) shares and the number of shares constituting Series
Preferred, none of which has been issued, is Two Million Fifty Thousand
(2,050,000).

                                       9
<PAGE>

     IN WITNESS WHEREOF, the undersigned have executed this Certificate as of
December 12, 2001.

                                        /s/ Richard P. Thompson
                                        ----------------------------------------
                                        Richard P. Thompson
                                        President and Chief Executive Officer

                                        /s/ Michael Molkentin
                                        ----------------------------------------
                                        Michael Molkentin
                                        Acting Chief Financial Officer

     The undersigned, Richard P. Thompson and Michael Molkentin, the President
and Chief Executive Officer, and Acting Chief Financial Officer, respectively,
of ARADIGM CORPORATION, declare under penalty of perjury that the matters set
out in the foregoing Certificate are true of their own knowledge.

     Executed at Hayward, California on December 12, 2001.

                                        /s/ Richard P. Thompson
                                        ----------------------------------------
                                        Richard P. Thompson

                                        /s/ Michael Molkentin
                                        ----------------------------------------
                                        Michael Molkentin

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