<PAGE>

                              CERTIFICATE OF AMENDMENT

                                         OF

                            CERTIFICATE OF INCORPORATION

                                         OF

                           ALLIANCE PHARMACEUTICAL CORP.



                 Under Section 805 of the Business Corporation Law

        We, the undersigned, Theodore D. Roth and Lloyd A. Rowland, being
respectively the President and the Secretary of Alliance Pharmaceutical Corp.,
hereby certify:

        1.      The name of the corporation is Alliance Pharmaceutical Corp.
(hereinafter called the "COMPANY").  The name under which the Company was formed
is Otisville Biologics, Inc.

        2.      The Certificate of Incorporation was filed in the office of the
Secretary of State on the 23rd day of February, 1983.

        3.      The Certificate of Incorporation of the Company was first
restated and the Restated Certificate was filed on November 10, 1993.

        4.      The Certificate of Incorporation of the Company, as amended
heretofore, is further amended by the addition of the following provisions that
designate the relative rights, preferences, and limitations of 100,000 shares of
the authorized 5,000,000 shares of preferred stock, $0.01 par value, which
provisions establish an additional series of preferred stock of the Company
designated as "SERIES E-1 PREFERRED STOCK."

        5.      A new Section (f) is added to Article 4 thereof, which 
Section (f) reads in its entirety as follows:


        "(f)    Convertible Preferred Stock, Series E-1.


        Section 1.      DESIGNATION, AMOUNT, PAR VALUE, STATED VALUE AND RANK.
The series of preferred stock shall be designated as Convertible Preferred
Stock, Series E-1 (the "SERIES E-1 PREFERRED STOCK"), and the number of shares
so designated shall be 100,000 (which shall not be subject to increase without
the consent of the holders of the Series E-1 Preferred Stock ("HOLDERS")). Each
share of Series E-1 Preferred Stock shall have a par value of $0.01 per share
and a stated value of $60.00 per share (the "STATED VALUE").

        The Series E-1 Preferred Stock shall rank senior to the Junior
Securities (as defined below) and pari passu with all other series of preferred
stock of the Company issued and outstanding as to distributions and upon
liquidation, dissolution or winding up.

                                          1
<PAGE>

        Section 2.      JUNIOR SECURITIES.  So long as any Series E-1 Preferred
Stock shall remain outstanding, except pursuant to existing agreements of the
Company, neither the Company nor any subsidiary thereof shall redeem, purchase
or otherwise acquire otherwise than upon conversion or exchange directly or
indirectly any Junior Securities (as defined in Section 7), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities.

        Section 3.      VOTING RIGHTS. The holders of Series E-1 Preferred Stock
shall have the right to vote, together with the holders of all the outstanding
shares of Common Stock (and the holders of every other class or series entitled
to vote together with such holders) and not by class, except as otherwise
required by New York law, on all matters on which holders of Common Stock shall
have the right to vote.  Each holder of Series E-1 Preferred Stock shall have
the right to cast ten (10) votes for each share of Preferred Stock held by such
holder.  In addition, so long as any shares of Series E-1 Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not to,
without the affirmative vote of the holders of 66.66% of the shares of the
Series E-1 Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series E-1 Preferred Stock, (b) alter
or amend this Article 4(f), other than to renumber this Article 4(f), (c)
authorize or create any class of stock ranking as to distribution of assets upon
a Liquidation (as defined in Section 4) or otherwise senior to the Series E-1
Preferred Stock, (d) amend its Certificate of Incorporation, bylaws or other
charter documents so as to affect adversely any rights of any Holders, (e)
increase the authorized number of shares of Series E-1 Preferred Stock, and (f)
enter into any agreement with respect to the foregoing.

        Section 4.      LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "LIQUIDATION"),
subject to the provisions of Section 502 of the New York Business Corporation
Law, if applicable, the Holders shall be entitled to receive out of the assets
of the Company, whether such assets are capital or surplus, for each share of
Series E-1 Preferred Stock an amount equal to the Stated Value before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Series E-1
Preferred Stock shall be distributed among the holders of Series E-1 Preferred
Stock and the holders of all securities ranking pari passu to the Series E-1
Preferred Stock ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. A sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written notice of
any such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record holder of Series E-1 Preferred Stock.

                                          2
<PAGE>

        Section 5.      CONVERSION.

        (a)     (i)     Each share of Series E-1 Preferred Stock shall be
        convertible into shares of Common Stock (subject to Section 5(a)(iii)
        and Section 5(a)(iv)) at the Conversion Ratio (as defined in Section 7)
        at the option of the Holder in whole or in part at any time after the
        Original Issue Date. The Holders shall effect conversions by
        surrendering the certificate or certificates representing the shares of
        Series E-1 Preferred Stock to be converted to the Company, together with
        the form of conversion notice attached hereto as EXHIBIT A (the "HOLDER
        CONVERSION NOTICE"). Each Holder Conversion Notice shall specify the
        number of shares of Series E-1 Preferred Stock to be converted and the
        date on which such conversion is to be effected, which date may not be
        prior to the date the holder delivers such Holder Conversion Notice by
        facsimile (the "HOLDER CONVERSION DATE"). If no Holder Conversion Date
        is specified in a Holder Conversion Notice, the Holder Conversion Date
        shall be the date that the Holder Conversion Notice is deemed delivered
        pursuant to Section 5(i). Subject to Sections 5(a)(iii) and 5(b) hereof,
        each Holder Conversion Notice, once given, shall be irrevocable. If the
        Holder is converting less than all shares of Series E-1 Preferred Stock
        represented by the certificate or certificates tendered by the Holder
        with the Holder Conversion Notice, or if a conversion hereunder cannot
        be effected in full for any reason, the Company shall promptly deliver
        to such Holder (in the manner and within the time set forth in Section
        5(b)) a certificate for such number of shares as have not been
        converted.

                (ii)    On the fifth anniversary of the Original Issue Date, the
        Company may require the conversion of all of the then outstanding and
        unconverted shares of Series E-1 Preferred Stock at the Conversion Ratio
        (subject to reduction pursuant to Section 5(a)(iii)) by delivering to
        the Holder of such shares to be converted a notice in the form attached
        hereto as EXHIBIT B (the "COMPANY CONVERSION NOTICE"), PROVIDED,
        HOWEVER, that no such conversion shall be permitted unless at the time
        of the delivery of the Company Conversion Notice and on the Company
        Conversion Date (as defined below), (a) the shares of Common Stock
        issuable upon such conversion are listed for trading on the Nasdaq
        National Market, the Nasdaq Small Cap Market or are otherwise publicly
        traded and (b) the Company is in material compliance with all of its
        obligations under this Article 4(f), the Purchase Agreement, the Royalty
        Agreement and the Registration Rights Agreement.  In the event that the
        shares are not listed on the Nasdaq National Market or a registered
        national exchange at the time of conversion under this paragraph then
        the Company shall pay to each Holder 3.5% of the aggregate Stated Value
        of the shares of Series E-1 Preferred Stock then held by such Holder, in
        cash, as liquidated damages and not as a penalty, concurrently with the
        delivery of shares of Common Stock to the Holders in connection with
        such conversion.  Each Company Conversion Notice shall specify the
        number of shares of Series E-1 Preferred Stock to be converted and the
        date on which such conversion is to be effected, which date may not be
        prior to the day after the Company delivers such Company Conversion
        Notice by facsimile (the "COMPANY CONVERSION DATE"). If no Company
        Conversion Date is specified in a Company Conversion Notice, the Company
        Conversion Date shall be the date that the Company Conversion Notice is
        deemed delivered pursuant to Section 5(i). A Holder Conversion Date and
        a Company Conversion Date are sometimes referred to herein as the
        "CONVERSION DATE" and a Holder Conversion Notice and a Company
        Conversion Notice are sometimes referred to as a "CONVERSION NOTICE."
        Any conversion pursuant to this Section 5(a)(ii) shall be subject to
        Section 5(b) with respect to consequences of the

                                          3
<PAGE>

        Company's failure to deliver shares of Common Stock in respect of a
        conversion under this Section. If the Company is converting less than
        all shares of Series E-1 Preferred Stock represented by the certificate
        or certificates tendered by the Holder in response to a Company
        Conversion Notice, or if a conversion hereunder cannot be effected in
        full for any reason, the Company shall promptly deliver to such
        tendering Holder (in the manner and within the time set forth in Section
        5(b)) a certificate for such number of shares as have not been
        converted. In the absence of receipt by the Company of Holder's election
        not to receive new certificates, the Company shall deliver such
        certificate(s) as provided herein.

                (iii)   If on the Conversion Date applicable to any conversion,
        (A) the Common Stock is then listed for trading on the Nasdaq National
        Market, the New York Stock Exchange, the American Stock Exchange or the
        Nasdaq Small Cap Market, (B) the Conversion Price then in effect is such
        that the aggregate number of shares of Common Stock that would then be
        issuable upon conversion of all outstanding shares of Series E-1
        Preferred Stock, together with any shares of Common Stock previously
        issued upon conversion of Series E-1 Preferred Stock, would equal or
        exceed 20% of the number of shares of Common Stock outstanding on the
        Original Issue Date (the "ISSUABLE MAXIMUM"), and (C) the Company has
        not previously obtained (or attempted pursuant to clause (1) of this
        subsection to obtain) Shareholder Approval (as defined below), then the
        Company shall issue to any Holder so requesting conversion of Series E-1
        Preferred Stock its pro rata portion of the Issuable Maximum in the same
        ratio that the number of shares of Series E-1 Preferred Stock held by
        any such Holder bears to all shares of Series E-1 Preferred Stock then
        outstanding and, with respect to any shares of Common Stock that
        otherwise would have been issuable to such Holder in respect of the
        Holder Conversion Notice at issue in excess of the Issuable Maximum, the
        Company shall, as promptly as possible, but in no event later than 75
        days after such Conversion Date, at the Company's option, either, (1)
        convene a meeting of the holders of the Common Stock and use its best
        efforts to obtain the Shareholder Approval or a waiver of such approval
        from the Nasdaq National Market, the Nasdaq Small Cap Market or the
        appropriate exchange, or (2) redeem all or a portion of the shares of
        Series E-1 Preferred Stock to which such Holder Conversion Notice
        applies as would cause the number of shares of Common Stock issuable
        upon such conversion to exceed the Issuable Maximum, for an amount, paid
        in cash, equal to the greater of (A) the Stated Value of such shares
        multiplied by 120%, or (B) the applicable Conversion Ratio as of the
        Conversion Date multiplied by the average Per Share Market Value for the
        five Trading Days immediately preceding the Conversion Date or the date
        of payment, whichever is greater. If the Company elects to seek
        Shareholder Approval pursuant to clause (1) of the preceding sentence
        and fails for any reason to obtain such Shareholder Approval within 75
        days after the Conversion Date, then the Company shall be obligated to
        either (x) redeem the Preferred Stock not converted as a result of the
        provisions of this Section in accordance with the provisions of clause
        (2) of the preceding sentence as promptly as possible but in any event
        within seven days after such failure or (y) convert the shares of Series
        E-1 Preferred Stock into Common Stock as requested in such Holder
        Conversion Notice.  "SHAREHOLDER APPROVAL" means the approval by a
        majority of the total votes cast on the proposal, in person or by proxy,
        at a meeting of the shareholders of the Company held in accordance with
        the Company's Certificate of Incorporation and bylaws, of the issuance
        by the Company of shares of Common Stock exceeding the Issuable Maximum
        as a consequence of the conversion of Series E-1 Preferred Stock into
        Common Stock at a

                                          4
<PAGE>

        price less than the greater of the book or market value on the Original
        Issue Date as and to the extent required pursuant to Rule 4460(i) of the
        Nasdaq National Market (or any successor or replacement provision
        thereof).

                (iv)    In no event shall a Holder be permitted to convert any
        shares of Series E-1 Preferred Stock in excess of the number of such
        shares upon the conversion of which, (x) the number of shares of Common
        Stock beneficially owned by such Holder (other than shares of Common
        Stock issuable upon conversion of shares of Series E-1 Preferred Stock)
        plus (y) the number of shares of Common Stock issuable upon the
        conversion of such shares of Series E-1 Preferred Stock, would be equal
        to or exceed (z) 4.999% of the number of shares of Common Stock then
        issued and outstanding, including shares issuable on conversion of the
        Series E-1 Preferred Stock held by such Holder after application of this
        Section 5(a)(iv). As used herein, beneficial ownership shall be
        determined in accordance with Section 13(d) of the Exchange Act and the
        rules thereunder. To the extent that the limitation contained in this
        paragraph 5(a)(iv) applies, the determination of whether shares of
        Series E-1 Preferred Stock are convertible (in relation to other
        securities owned by a Holder) and of which shares of Series E-1
        Preferred Stock are convertible shall be in the sole discretion of such
        Holder, and the submission of shares of Series E-1 Preferred Stock for
        conversion shall be deemed to be such Holder's determination of whether
        such shares of Series E-1 Preferred Stock are convertible (in relation
        to other securities owned by a Holder) and of which shares of Series E-1
        Preferred Stock are convertible, in each case subject to such aggregate
        percentage limitation, and the Company shall have no obligation to
        verify or confirm the accuracy of such determination. Nothing contained
        herein shall be deemed to restrict the right of a Holder to convert such
        shares of Series E-1 Preferred Stock at such time as such conversion
        will not violate the provisions of this paragraph. The provisions of
        this Section 5(a)(iv) may be waived by a Holder of Series E-1 Preferred
        Stock as to itself (and solely as to itself) upon not less than 75 days
        prior notice to the Company, and the provisions of this Section 5(a)(iv)
        shall continue to apply until such 75th day (or later, if stated in the
        notice of waiver). The limitations of this Section 5(a)(iv) shall not
        apply to any conversion pursuant to Section 5(a)(ii).  Each conversion
        by a Holder shall be deemed to be accompanied by the representation that
        such conversion is in accordance with the provisions of this paragraph.
        No conversion in violation of this paragraph but otherwise in accordance
        with this Article 4(f) shall affect the status of the securities issued
        upon such conversion as validly issued, fully-paid and nonassessable.

        (b)     (i)     Not later than three (3) Trading Days after any
        Conversion Date, the Company will deliver to the holder (A) a
        certificate or certificates which shall be free of restrictive legends
        and trading restrictions (other than those required by SECTION 3. l(b)
        of the Purchase Agreement) representing the number of shares of Common
        Stock being acquired upon the conversion of shares of Series E-1
        Preferred Stock (subject to reduction pursuant to Section 5(a)(iii) and
        Section 5(a)(iv)), and (B) one or more certificates representing the
        number of shares of Series E-1 Preferred Stock not converted; PROVIDED,
        HOWEVER, that the Company shall not be obligated to issue the
        certificates set forth in (A) and (B) above until two Trading Days after
        certificates evidencing such shares of Series E-1 Preferred Stock are
        either delivered for conversion to the Company or the holder of such
        Series E-1 Preferred Stock notifies the Company that such certificates
        have been lost, stolen or destroyed and provides a bond (or other
        adequate security) reasonably satisfactory to the Company to indemnify
        the Company from any loss incurred by it in

                                          5
<PAGE>

        connection therewith.  Failure of a Holder to deliver such Series E-1
        Preferred Stock certificate or affidavit of loss and indemnity to the
        Company within ten (10) Trading Days of the Conversion Date shall enable
        the Company, upon written notice to the Holder, to rescind the
        conversion.  Upon request of the holder, any certificate or certificates
        required to be delivered under this Section shall be electronically
        delivered through a direct or indirect participant of the Depository
        Trust Company or another established clearing corporation performing
        similar functions. If in the case of any Conversion Notice such
        certificate or certificates are not delivered to or as directed by the
        applicable holder by the third Trading Day after the Conversion Date,
        the holder shall be entitled by written notice to the Company at any
        time on or before its receipt of such certificate or certificates
        thereafter, to rescind such conversion, in which event the Company shall
        immediately return the certificates representing the shares of Series
        E-1 Preferred Stock tendered for conversion.

                (ii)    If the Company fails to deliver to the Holder such
        certificate or certificates pursuant to this Section hereunder by the
        later of the third Trading Day after the Conversion Date or the second
        Trading Day after the Company receives the certificate representing the
        shares of Series E-1 Preferred Stock to be converted or an affidavit of
        loss and indemnity, the Company shall pay to such Holder, in cash,
        $5,000 per Trading Day for each Trading Day until such certificates are
        delivered. If the Company fails to deliver to the Holder such
        certificate or certificates pursuant to this Section prior to the 15th
        Trading Day after the Conversion Date, the Company shall, at the
        Holder's option redeem, from funds legally available therefor at the
        time of such redemption, such number of shares of Series E-1 Preferred
        Stock then held by such Holder, as requested by such Holder, in cash.
        The redemption price shall be equal to  the number of shares of Series
        E-1 Preferred Stock then held by such Holder multiplied by the average
        Per Share Market Value for the five Trading Days immediately preceding
        (A) the Conversion Date or (B) the date of payment in full by the
        Company of such prepayment price, whichever is greater, multiplied by
        the Conversion Ratio calculated on the Conversion Date. If the Holder
        has requested that the Company redeem shares of Series E-1 Preferred
        Stock pursuant to this Section and the Company fails for any reason to
        pay the redemption price, as calculated pursuant to the immediately
        preceding sentence, within seven days after such notice is deemed
        delivered pursuant to Section 5(i), the Company will pay interest on the
        redemption price at a rate of 15% per annum, in cash to such Holder,
        accruing from such seventh day until the redemption price and any
        accrued interest thereon is paid in full. Nothing herein shall limit a
        Holder's right to pursue actual damages for the Company's failure to
        deliver certificates representing shares of Common Stock upon conversion
        within the period specified herein (including, without limitation,
        damages relating to any purchase of shares of Common Stock by such
        Holder to make delivery on a sale effected in anticipation of receiving
        certificates representing shares of Common Stock upon conversion, such
        damages to be in an amount equal to (A) the aggregate amount paid by
        such holder for the shares of Common Stock so purchased minus (B) the
        aggregate amount of net proceeds, if any, received by such Holder from
        the sale of the shares of Common Stock issued by the Company pursuant to
        such conversion), and such Holder shall have the right to pursue all
        remedies available to it at law or in equity (including, without
        limitation, a decree of specific performance and/or injunctive relief).

                                          6
<PAGE>

                (iii)   In addition to any other rights available to the Holder,
        if the Company fails to deliver to the Holder such certificate or
        certificates pursuant to Section 5(b)(i), by the later of the third
        Trading Day after the Conversion Date or the second Trading Day after
        the Company receives the certificate or certificates representing the
        shares of Series E-1 Preferred Stock to be converted or an affidavit of
        loss and indemnity, and if after such third Trading Day the Holder
        purchases (in an open market transaction or otherwise) shares of Common
        Stock to deliver in satisfaction of a sale by such Holder of the
        Underlying Shares which the Holder anticipated receiving upon such
        conversion (a "BUY-IN"), then the Company shall pay in cash to the
        Holder (in addition to any remedies available to or elected by the
        Holder) the amount by which (A) the Holder's total purchase price
        (including brokerage commissions, if any) for the shares of Common Stock
        so purchased exceeds (B) the aggregate Stated Value of the shares of
        Preferred Stock for which such conversion was not timely honored.  For
        example, if the Holder purchases shares of Common Stock having a total
        purchase price of $11,000 to cover a Buy-In with respect to an attempted
        conversion of $10,000 aggregate stated value of the shares of Preferred
        Stock, the Company shall be required to pay the Holder $1,000.  The
        Holder shall provide the Company written notice indicating the amounts
        payable to the Holder in respect of the Buy-In.

        (c)     (i)     The conversion price for each share of Series E-1
        Preferred Stock (the "CONVERSION PRICE") in effect on any Conversion
        Date shall be (A) at all times prior to January 4, 1999, a fixed amount
        (the "INITIAL CONVERSION PRICE") equal to 120% of the Per Share Market
        Value on the Trading Day immediately prior to the Series E-1 Closing
        Date (as defined in the Purchase Agreement), PROVIDED, that if the Per
        Share Market Value on such date is at least $4.50 and no more than $5.50
        on such date, then the Initial Conversion Price shall be $6.00, and (B)
        on or after January 4, 1999, the lesser of  (1) the Initial Conversion
        Price or (2) 100% of the lowest average Per Share Market Value for
        fifteen (15) consecutive Trading Days during the sixty-four (64) Trading
        Days (the "LOOK-BACK PERIOD") prior to the Conversion Date (the
        "VARIABLE CONVERSION PRICE"), except that any Trading Day on which a
        Holder shall have consummated a short sale or sales of the Common Stock
        in an amount equal to at least 5% of the aggregate pro rata amount of
        the Series E-1 Purchase Price, Series E-2 Purchase Price and Series E-3
        Purchase Price (as such terms are defined in the Purchase Agreement)
        paid by such Holder shall not be included in such fifteen-day or
        sixty-four day period with respect to such Holder, and such fifteen-day
        period shall be extended by adding a number of days immediately prior
        thereto or thereafter, as appropriate, and the sixty-four day period
        shall be extended by adding a number of days immediately prior thereto,
        equal to the total number of days excluded for short sales in order to
        achieve a full fifteen-day period average at the lowest price average,
        and similarly, if during any period (a "BLACK-OUT PERIOD"), a Holder is
        unable to trade any Common Stock issued or issuable upon conversion of
        Preferred Stock immediately due to the postponement of filing or delay
        or suspension of effectiveness of a registration statement or because
        the Company has otherwise informed such Holder that an existing
        prospectus cannot be used at that time in the sale or transfer of such
        Common Stock, such Holder shall have the option but not the

                                          7
<PAGE>

        obligation on any Conversion Date within ten Trading Days following the
        expiration of the Black-out Period of using the Conversion Price
        applicable on such Conversion Date or any Conversion Price selected by
        such Holder that would have been applicable had such Conversion Date
        been at any earlier time during the Black-out Period or within the ten
        Trading Days thereafter.  If, during the period after the later of (i)
        January 4, 1999, or (ii) January 4, 1999 plus the length of any
        Black-out Period that occurred prior to such date, or (iii) if a
        Black-out Period is still in effect on January 4, 1999, the expiration
        of a ten day period following such Black-out Period plus the number of
        days in any Black-out Period occurring before January 4, 1999, the Per
        Share Market Value has exceeded 150% of the Initial Conversion Price for
        at least twenty (20) of thirty (30) consecutive Trading Days, then
        provided the Company has given notice to the Holders no later than ten
        (10) Trading Days after such thirty (30) consecutive Trading Day period,
        the Initial Conversion Price shall be applied to any remaining
        conversion of the Series E-1 Preferred Stock. Notwithstanding the
        foregoing, if (a) the Underlying Shares Registration Statement is not
        filed on or prior to the 30th day after the Original Issue Date, or (b)
        the Company fails to file with the Commission a request for acceleration
        in accordance with Rule 12d1-2 promulgated under the Exchange Act within
        five (5) Trading Days of the date that the Company is notified (orally
        or in writing, whichever is earlier) by the Commission that an
        Underlying Shares Registration Statement will not be "reviewed," or not
        subject to further review, or (c) the Underlying Shares Registration
        Statement is not declared effective by the Commission on or prior to the
        90th day after the Original Issue Date, or (d) such Underlying Shares
        Registration Statement is filed with and declared effective by the
        Commission but thereafter ceases to be effective as to all Registrable
        Securities (as such term is defined in the Registration Rights
        Agreement) at any time prior to the expiration of the "EFFECTIVENESS
        PERIOD" (as such term as defined in the Registration Rights Agreement),
        without being succeeded within fifteen Trading Days by a subsequent
        Underlying Shares Registration Statement filed with and declared
        effective by the Commission, or (e) trading in the Common Stock shall be
        suspended or if the Common Stock is delisted for any reason for more
        than three Trading Days in the aggregate, or (f) the conversion rights
        of the Holders are suspended for any reason except as a result of
        Section 5(a)(iv) hereof, or (g) the Company breaches in a material
        respect any covenant or other material term or condition to this Article
        4(f), the Purchase Agreement (other than a representation or warranty
        contained therein), the Registration Rights Agreement or any other
        agreement, document, certificate or other instrument delivered in
        connection with the transactions contemplated thereby, and such breach
        continues for a period of thirty days after written notice thereof to
        the Company, or (h) the Company elects to convene a shareholders meeting
        pursuant to Section 5(a)(iii) and fails to convene a meeting of
        shareholders within the time periods specified in Section 5(a)(iii) or
        does so convene a meeting of shareholders within such time period but
        fails to obtain Shareholder Approval at such meeting, or (i) the Company
        has breached Section 3(p) of the Registration Rights Agreement (any such
        failure or breach being referred to as an "EVENT," and for purposes of
        clauses (a), (c) and (f) the date on which such Event occurs, or for
        purposes of clause (b) the date on which such five day period is
        exceeded, or for purposes of clause (d) the date which such fifteen
        Trading Day-period is exceeded, or for purposes of clause (e) the date
        on which such three Trading Day period is

                                          8
<PAGE>

        exceeded, or for clause (g) the date on which such thirty day period is
        exceeded, being referred to as "EVENT DATE"), then the Conversion Price
        shall be decreased by 2% as of the Event Date and shall be decreased an
        additional 2% as of each monthly anniversary of the Event Date until the
        earlier to occur of the second month anniversary after the Event Date
        and such time as the applicable Event is cured. Commencing the second
        month anniversary after the Event Date, the Company shall pay to the
        Holders $70,000 per month until the applicable Event is cured (each
        holder being entitled to receive such portion of such amount as equals
        its pro rata portion of the Series E-1 Preferred Stock). Any decrease in
        the Conversion Price pursuant to this Section shall continue
        notwithstanding the fact that the Event causing such decrease has been
        subsequently cured. Additionally, if the Company has failed to file a
        registration statement as required by the Registration Rights Agreement
        within 30 days after the date (the "FILING DATE") it was required to
        file such registration statement pursuant to the Registration Rights
        Agreement or if any registration statement required to be filed by the
        Company pursuant to the Registration Rights Agreement has not been
        declared effective by the Commission within 120 days of the date it was
        required to be filed pursuant to the Registration Rights Agreement, or
        if the Company has allowed any registration statement required to be
        filed pursuant to the Registration Rights Agreement to lapse for a
        period of 60 consecutive days, then the Conversion Price shall,
        immediately after such 30th, 120th or 60th day, as applicable, be
        decreased by an additional 2% and shall be further decreased by an
        additional .07% for each subsequent day thereafter until such time as
        such registration statement is filed, declared effective or had its
        effectiveness reinstated, as applicable; PROVIDED, that if any such
        registration statement is not effective within 180 days after the Filing
        Date, then the Conversion Price shall be decreased by an additional
        1.25% for each seven calendar days following such 180th day and
        continuing until any such registration statement is effective. The
        Company shall have the option, exercisable at any time after the 30th
        day but prior to the 60th day following such 30th, 120th or 60th day, as
        applicable, upon notice to all Holders to redeem all outstanding Series
        E-1 Preferred Stock, in cash, at a redemption price equal to the number
        of shares of Series E-1 Preferred Stock then outstanding and held by
        such holder multiplied by the average Per Share Market Value for the
        five Trading Days immediately preceding (x) the date of the redemption
        notice or (y) the date of payment in full by the Company of such
        prepayment price, whichever is greater, multiplied by the Conversion
        Ratio calculated on the date of the payment in full by the Company of
        the redemption price.  Any such redemption shall take place within
        fifteen days after the giving of such notice of redemption by the
        Company.  For each day after the 90th day from the Filing Date that such
        registration statement is not effective, a day will be added to the
        Look-Back Period. If the Company elects to redeem shares of Series E-1
        Preferred Stock pursuant to this Section and the Company fails for any
        reason to pay the redemption price as calculated above within five days
        after such notice is given, the Company will pay interest on the
        redemption price at a rate of 15% per annum, in cash, accruing from such
        fifth day until the redemption price and any accrued interest thereon is
        paid in full. The provisions of this Section are not exclusive and shall
        in no way limit the Company's obligations under the Registration Rights
        Agreement.

                                          9
<PAGE>

                (ii)    If the Company, at any time while any shares of Series
        E-1 Preferred Stock are outstanding, (a) shall pay a stock dividend or
        otherwise make a distribution or distributions on shares of its Junior
        Securities (other than with respect to the Subsequent Preferred) payable
        in shares of Common Stock, (b) subdivide outstanding shares of Common
        Stock into a larger number of shares, (c) combine outstanding shares of
        Common Stock into a smaller number of shares, or (d) issue by
        reclassification of shares of Common Stock any shares of capital stock
        of the Company, the applicable Conversion Price shall be multiplied by a
        fraction of which the numerator shall be the number of shares of Common
        Stock (excluding treasury shares, if any) outstanding before such event
        and of which the denominator shall be the number of shares of Common
        Stock outstanding after such event. Any adjustment made pursuant to this
        Section 5(c)(ii) shall become effective immediately after the record
        date for the determination of shareholders entitled to receive such
        dividend or distribution and shall become effective immediately after
        the effective date in the case of a subdivision, combination or
        re-classification.

                (iii)   If the Company, at any time while any shares of Series
        E-1 Preferred Stock are outstanding, shall sell or issue additional
        shares of Common Stock or rights or warrants to acquire shares of Common
        Stock at a price per share less than the Per Share Market Value of
        Common Stock at the record date mentioned below, excluding any rights of
        the holder of the Series D Preferred Stock to acquire Common Stock, the
        applicable Conversion Price shall be multiplied by a fraction, of which
        the denominator shall be the number of shares of Common Stock (excluding
        treasury shares, if any) outstanding on the date of issuance of such
        shares, rights or warrants plus the number of additional shares of
        Common Stock offered for subscription or purchase, and of which the
        numerator shall be the number of shares of Common Stock (excluding
        treasury shares, if any) outstanding on the date of issuance of such
        shares, rights or warrants plus the number of shares which the aggregate
        offering price of the total number of shares so offered would purchase
        at such Per Share Market Value. Such adjustment shall be made whenever
        such shares, rights or warrants are issued, and shall become effective
        immediately after the issuance of such shares, rights or warrants or, if
        such rights or warrants are issued to stockholders of the Company, the
        record date for the determination of shareholders entitled to receive
        such rights or warrants. However, upon the expiration of any right or
        warrant to purchase Common Stock the issuance of which resulted in an
        adjustment in the applicable Conversion Price pursuant to this Section
        5(c)(iii), if any such right or warrant shall expire and shall not have
        been exercised, the applicable Conversion Price shall immediately upon
        such expiration be re-computed and effective immediately upon such
        expiration be increased to the price which it would have been (but
        reflecting any other adjustments in the applicable Conversion Price made
        pursuant to the provisions of this Section 5 after the issuance of such
        rights or warrants) had the adjustment of the applicable Conversion
        Price made upon the issuance of such rights or warrants been made on the
        basis of offering for subscription or purchase only that number of
        shares of Common Stock actually purchased upon the exercise of such
        rights or warrants actually exercised.

                (iv)    If the Company, at any time while shares of Series E-1
        Preferred Stock are outstanding, shall distribute to all holders of
        Common Stock (and not to holders of Series E-1 Preferred Stock)
        evidences of its indebtedness or assets or rights or warrants to
        subscribe for or purchase any security (excluding those referred to in
        Sections 5(c)(ii) and (iii) above), then in each such case the
        applicable Conversion Price at which each share of

                                          10
<PAGE>

        Series E-1 Preferred Stock shall thereafter be convertible shall be
        determined by multiplying the Conversion Price in effect immediately
        prior to the record date fixed for determination of shareholders
        entitled to receive such distribution by a fraction of which the
        denominator shall be the Per Share Market Value determined as of the
        record date mentioned above, and of which the numerator shall be such
        Per Share Market Value on such record date less the then fair market
        value at such record date of the portion of such assets or evidence of
        indebtedness so distributed applicable to one outstanding share of
        Common Stock as determined by the Board of Directors in good faith;
        PROVIDED, HOWEVER, that in the event of a distribution exceeding ten
        percent of the net assets of the Company, such fair market value shall
        be determined by a nationally recognized or major regional investment
        banking firm or firm of independent certified public accountants of
        recognized standing (which may be the firm that regularly examines the
        financial statements of the Company) (an "APPRAISER") selected in good
        faith by the holders of a majority in interest of the shares of Series
        E-1 Preferred Stock then outstanding; and PROVIDED, FURTHER, that the
        Company, after receipt of the determination by such Appraiser shall have
        the right to select an additional Appraiser, in good faith, in which
        case the fair market value shall be equal to the average of the
        determinations by each such Appraiser. In either case the adjustments
        shall be described in a statement provided to the holders of Series E-1
        Preferred Stock of the portion of assets or evidences of indebtedness so
        distributed or such subscription rights applicable to one share of
        Common Stock. Such adjustment shall be made whenever any such
        distribution is made and shall become effective immediately after the
        record date mentioned above.

                (v)     All calculations under this Section 5 shall be made to
        the nearest cent or the nearest l/l00th of a share, as the case may be.

                (vi)    Whenever the applicable Conversion Price is adjusted
        pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly
        mail to each holder of Series E-1 Preferred Stock, a notice setting
        forth the Conversion Price after such adjustment and setting forth a
        brief statement of the facts requiring such adjustment.

                (vii)   In case of any reclassification of the Common Stock, any
        consolidation or merger of the Company with or into another person,
        which reclassification, consolidation or merger has been properly
        approved by the Board of Directors of the Company and pursuant to which
        (i) a majority of the Board of Directors will not constitute a majority
        of the board of directors of the surviving entity or (ii) less than 50%
        of the outstanding shares of the capital stock of the surviving entity
        will be held by the same shareholders of the Company prior to such
        reclassification, consolidation or merger, the sale or transfer of all
        or substantially all of the assets of the Company or any compulsory
        share exchange pursuant to which the Common Stock is converted into
        other securities, cash or property, the holders of the Series E-1
        Preferred Stock then outstanding shall have the right thereafter to
        convert such shares only into the shares of stock and other securities,
        cash and property receivable upon or deemed to be held by holders of
        Common Stock following such reclassification, consolidation, merger,
        sale, transfer or share exchange, and the holders of the Series E-1
        Preferred Stock shall be entitled upon such event to receive such amount
        of securities, cash or property as the shares of the Common Stock of the
        Company into which such shares of Series E-1 Preferred Stock could have
        been converted immediately prior to such reclassification,
        consolidation, merger, sale, transfer or share exchange would have been
        entitled; provided, however, that each Holder shall

                                          11
<PAGE>

        have the option to require the Company to redeem, from funds legally
        available therefor at the time of such redemption, its shares of Series
        E-1 Preferred Stock at a price per share equal to the product of (i) the
        average Per Share Market Value for the five Trading Days immediately
        preceding (1) the effective date, the date of the closing or the date of
        the announcement, as the case may be, of the reclassification,
        consolidation, merger, sale, transfer or share exchange the triggering
        such redemption right or (2) the date of payment in full by the Company
        of the redemption price hereunder, whichever is greater, and (ii) the
        Conversion Ratio calculated on the date of the closing or the effective
        date, as the case may be, of the reclassification, consolidation,
        merger, sale, transfer or share exchange triggering such redemption
        right, as the case may be. The entire redemption price shall be paid in
        cash, and the terms of payment of such redemption price shall be subject
        to the provisions set forth in Section 6(b). The terms of any such
        consolidation, merger, sale, transfer or share exchange shall include
        such terms so as to continue to give to the holder of Series E-1
        Preferred Stock the right to receive the securities, cash or property
        set forth in this Section 5(c)(vii) upon any conversion or redemption
        following such consolidation, merger, sale, transfer or share exchange.
        This provision shall similarly apply to successive reclassifications,
        consolidations, mergers, sales, transfers or share exchanges.

                (viii)  If:

                        A.      the Company shall declare a dividend (or any
                                other distribution) on its Common Stock; or

                        B.      the Company shall declare a special nonrecurring
                                cash dividend on or a redemption of its Common
                                Stock; or

                        C.      the Company shall authorize the granting to all
                                holders of the Common Stock rights or warrants
                                to subscribe for or purchase any shares of
                                capital stock of any class or of any rights; or

                        D.      the approval of any shareholders of the Company
                                shall be required in connection with any
                                reclassification of the Common Stock of the
                                Company, any consolidation or merger to which
                                the Company is a party, any sale or transfer of
                                all or substantially all of the assets of the
                                Company, of any compulsory share of exchange
                                whereby the Common Stock is converted into other
                                securities, cash or property; or

                        E.      the Company shall authorize the voluntary or
                                involuntary dissolution, liquidation or winding
                                up of the affairs of the Company;

        then the Company shall cause to be filed at each office or agency
        maintained for the purpose of conversion of Series E-1 Preferred Stock,
        and shall cause to be mailed to the Holders of Series E-1 Preferred
        Stock at their last addresses as they shall appear upon the stock books
        of the Company, at least 30 calendar days prior to the applicable record
        or effective date hereinafter specified, a notice stating (x) the date
        on which a record is to be taken for the purpose of such dividend,
        distribution, redemption, rights or warrants, or if a

                                          12
<PAGE>

        record is not to be taken, the date as of which the holders of Common
        Stock of record to be entitled to such dividend, distributions,
        redemption, rights or warrants are to be determined or (y) the date on
        which such reclassification, consolidation, merger, sale, transfer or
        share exchange is expected to become effective or close, and the date as
        of which it is expected that holders of Common Stock of record shall be
        entitled to exchange their shares of Common Stock for securities, cash
        or other property deliverable upon such reclassification, consolidation,
        merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the
        failure to mail such notice or any defect therein or in the mailing
        thereof shall not affect the validity of the corporate action required
        to be specified in such notice. Holders are entitled to convert shares
        of Series E-1 Preferred Stock during the 30-day period commencing the
        date of such notice to the effective date of the event triggering such
        notice.

                (ix)    If the Company (A) makes a public announcement that it
        intends to enter into a Change of Control Transaction or (B) any person,
        group or entity (including the Company, but excluding a Holder or any
        affiliate of a Holder) publicly announces a bona fide tender offer,
        exchange offer or other transaction to purchase 50% or more of the
        Common Stock (such announcement being referred to herein as a "MAJOR
        ANNOUNCEMENT" and the date on which a Major Announcement is made, the
        "ANNOUNCEMENT DATE"), then, in the event that a Holder seeks to convert
        shares of Series E-1 Preferred Stock on or following the Announcement
        Date, the Conversion Price shall, effective upon the Announcement Date
        and continuing through the earlier to occur of the consummation of the
        proposed transaction or tender offer, exchange offer or other
        transaction and the Abandonment Date (as defined below), be equal to the
        lower of (1) the average Per Share Market Value on the five (5) Trading
        Days immediately preceding (but not including) the Announcement Date and
        (2) the Conversion Price in effect on the Conversion Date for such
        Series E-1 Preferred Stock. "ABANDONMENT DATE" means with respect to any
        proposed transaction or tender offer, exchange offer or other
        transaction for which a public announcement as contemplated by this
        paragraph has been made, the date upon which the Company (in the case of
        clause (A) above) or the person, group or entity (in the case of clause
        (B) above) publicly announces the termination or abandonment of the
        proposed transaction or tender offer, exchange offer or another
        transaction which caused this paragraph to become operative.

        (d)     If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Series E-1 Preferred Stock (different than
or distinguished from the effect generally on rights of holders of any class of
the Company's capital stock) or if at any time any such conditions are expected
to arise by reason of any action contemplated by the Company, the Company shall
mail a written notice briefly describing the action contemplated and the
material adverse effects of such action on the rights of the holders of Series
E-1 Preferred Stock at least 10 calendar days prior to the effective date of
such action, and an Appraiser selected by the holders of majority in interest of
the Series E-1 Preferred Stock shall give its opinion as to the adjustment, if
any (not inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Series E-1 Preferred Stock may thereafter be convertible)
and any distribution which is or would be required to preserve without diluting
the rights of the holders of shares of Series E-1 Preferred Stock; PROVIDED,
HOWEVER, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an

                                          13
<PAGE>

additional Appraiser, in good faith, in which case the adjustment shall be equal
to the average of the adjustments recommended by each such Appraiser. The Board
of Directors shall make the adjustment recommended forthwith upon the receipt of
such opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.

        (e)     The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Series E-1 Preferred Stock free from preemptive
rights or any other actual contingent purchase rights of persons other than the
holders of Series E-1 Preferred Stock, not less than such number of shares of
Common Stock as shall (subject to any additional requirements of the Company as
to reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5(c)) upon the
conversion of all outstanding shares of Series E-1 Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and
freely tradable.

        (f)     Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the holder of a share of
Series E-1 Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.

        (g)     The issuance of certificates for shares of Common Stock on
conversion of Series E-1 Preferred Stock shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate.

        (h)     Shares of Series E-1 Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares of
undesignated preferred stock.

        (i)     Any and all notices or other communications or deliveries to be
provided by the holders of the Series E-1 Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight courier
service, addressed to the attention of the President and to the Secretary of the
Company at the facsimile telephone number or address of the principal place of
business of the Company as set forth in the Purchase Agreement. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile or sent by
a nationally recognized overnight courier service, addressed to each Holder of
Series E-1 Preferred Stock at the facsimile telephone number or address of such
holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earlier of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 7:00 p.m. (Eastern Time), (ii) the date after
the date of transmission, if such notice or communication is delivered via
facsimile at

                                          14
<PAGE>

the facsimile telephone number specified in this Section later than 7:00 p.m.
(New York Time) on any date and earlier than 11:59 p.m. (Eastern Time) on such
date, (iii) receipt, if sent by a nationally recognized overnight courier
service, or (iv) actual receipt by the party to whom such notice is required to
be given.

        Section 6.      REDEMPTIONS.

        (a)     At the Company's option, all outstanding and unconverted shares
of Series E-1 Preferred Stock on the fifth anniversary of the Original Issue
Date not converted pursuant to Section 5(a)(ii) shall be redeemed by the Company
pursuant to this Section 6(a), from funds legally available therefor at a price
per share equal to the product of (i) the average Per Share Market Value for the
five Trading Days immediately preceding (1) the fifth anniversary of the
Original Issue Date or (2) the date of payment in full by the Company of the
redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the fifth anniversary of the Original Issue Date. Thereafter, all
shares of Series E-1 Preferred Stock shall cease to be outstanding and shall
have the status of authorized but undesignated preferred stock. The entire
redemption price shall be paid in cash within five (5) business days after the
fifth anniversary of the Original Issue Date.

        (b)     If any portion of the applicable redemption price under Section
6(a) shall not be paid by the Company within five calendar days after the date
due, interest shall accrue thereon at the rate of 15% per annum until the
redemption price plus all such interest is paid in full (which amount shall be
paid as liquidated damages and not as a penalty). In addition, if any portion of
such redemption price remains unpaid for more than ten (10) calendar days after
the date due, the holder of the Series E-1 Preferred Stock subject to such
redemption may elect, by written notice to the Company given within 30 days
after the date due, to either (i) demand conversion in accordance with the
formula and the time frame therefor set forth in Section 5 of all of the shares
of Series E-1 Preferred Stock for which such redemption price, plus accrued
liquidated damages thereof, has not been paid in full (the "UNPAID REDEMPTION
SHARES"), in which event the Conversion Ratio for such shares shall be the
higher of the Conversion Ratio calculated on the date such redemption price was
originally due and the Conversion Ratio as of the holder's written demand for
conversion, or (ii) invalidate AB INITIO such redemption, notwithstanding
anything herein contained to the contrary. If the holder elects option (i)
above, the Company shall within five Trading Days of its receipt of such
election deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such holder conversion
demand and otherwise perform its obligations hereunder with respect thereto; or,
if the Holder elects option (ii) above, the Company shall promptly, and in any
event not later than five Trading Days from receipt of holder's notice of such
election, return to the holder all of the Unpaid Redemption Shares.

        Section 7.      DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:

        "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Section 13(d)(3) of the Exchange Act) of in excess of 50% of
the voting securities of the Company, (ii) a replacement of more than one-half
of the members of the Company's board of directors which is not approved by
those individuals who are members of the board of directors on the date hereof,
or their duly elected successors who are directors immediately prior to such
transaction, in one or a series of

                                          15
<PAGE>

related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions, unless following such
transaction, the holders of the Company's securities continue to hold at least
50% of such securities following such transaction, or (iv) the execution by the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).

        "COMMON STOCK" means the common stock, $0.01 par value per share, of the
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.

        "CONVERSION RATIO" means, at any time, a fraction, of which the
numerator is Stated Value and of which the denominator is the Conversion Price
at such time.

        "JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Series E-1 Preferred Stock.

        "NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.

        "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Series E-1 Preferred Stock regardless of the number of transfers
of any particular shares of Series E-1 Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Series E-1 Preferred
Stock.

        "PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other registered national stock exchange on which the Common Stock is
then listed or if there is no such price on such date, then the closing bid
price on such exchange or quotation system on the date nearest preceding such
date, or (b) if the Common Stock is not listed then on the Nasdaq National
Market or any registered national stock exchange, the closing bid price for a
share of Common Stock in the over-the-counter market, as reported by the Nasdaq
National Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the holders of a majority in interest of the shares of the
Series E-1 Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select an
additional Appraiser, in which case, the fair market value shall be equal to the
average of the determinations by each such Appraiser; and PROVIDED, FURTHER that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period.

        "PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.

                                          16
<PAGE>

        "PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Company and the
original holders of the Series E-1 Preferred Stock.

        "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Company and the original
Holders.

        "ROYALTY AGREEMENT" means the Royalty Rights Agreement dated as of the
Original Issue Date by and among the Company and the original Holders.

        "TRADING DAY" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or other registered national stock exchange on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on the
Nasdaq National Market or any registered national stock exchange, a day or which
the Common Stock is traded in the over-the-counter market, as reported by the
OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.

        "UNDERLYING SHARES" means the number of shares of Common Stock into
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement."

                    [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                              SIGNATURE PAGE FOLLOWS]



                                          17
<PAGE>

        The manner in which the foregoing Amendment of the Certificate of
Incorporation was authorized is as follows:  The Board of Directors of the
Corporation authorized the Amendment under the authority vested in said Board of
Directors under the provisions of the Certificate of Incorporation and of
Section 502 of the Business Corporation Law.

IN WITNESS WHEREOF, we have subscribed this document on the date set opposite
each of our names below and do hereby affirm, under the penalties of perjury,
that the statements contained therein have been examined by us and are true and
correct.


Date:                , 1998
     ----------------

                                -----------------------------------------------
                                Name:  Theodore D. Roth
                                Title: President and Chief Operating Officer

                                -----------------------------------------------
                                Name:  Lloyd A. Rowland
                                Title: General Counsel and Secretary



                                          18
<PAGE>

                                      EXHIBIT A

                                NOTICE OF CONVERSION
                             AT THE ELECTION OF HOLDER

(TO BE EXECUTED BY THE REGISTERED HOLDER IN
ORDER TO CONVERT SHARES OF SERIES E-1 PREFERRED
STOCK)

        The undersigned hereby elects to convert the number of shares of Series
E-1 Convertible Preferred Stock indicated below, into shares of common stock,
par value $0.01 per share, of Alliance Pharmaceutical Corp. (the "COMPANY")
according to the conditions hereof, as of the date written below. The
undersigned hereby represents and warrants that it has not consummated any short
sales of the Common Stock on any of the days used for calculation of the
Conversion Price. A calculation of the fifteen-day period used to determine the
Conversion Price is attached hereto as SCHEDULE I.  If shares are to be issued
in the name of a person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.

Conversion calculations:

                                        ----------------------------------------
                                        Date to Effect Conversion

                                        ----------------------------------------
                                        Number of shares of Series E-1 Preferred
                                        Stock to be Converted

                                        ----------------------------------------
                                        Number of shares of Common Stock to be
                                        Issued

                                        ----------------------------------------
                                        Applicable Conversion Price

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

                                        ----------------------------------------
                                        Name

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


<PAGE>

                                      EXHIBIT B

                              NOTICE OF CONVERSION AT
                            THE ELECTION OF THE COMPANY

        The undersigned in the name and on behalf of Alliance Pharmaceutical
Corp. (the "COMPANY") hereby notifies the addressee hereof that the Company
hereby elects to exercise its right to convert ____ shares of its Series E-1
Convertible Preferred Stock held by the Holder into shares of the Company's
common stock, par value $0.01 per share, according to the terms hereof, as of
the date written below. No fee will be charged to the Holder for any conversion
hereunder, except for such transfer taxes, if any which may be incurred by the
Company if shares are to be issued in the name of a person other than the person
to whom this notice is addressed.

Conversion calculations:

                                        ----------------------------------------
                                        Date to Effect Conversion

                                        ----------------------------------------
                                        Number of shares of Series E-1 Preferred
                                        Stock to be Converted

                                        ----------------------------------------
                                        Number of shares of Common Stock to be
                                        Issued

                                        ----------------------------------------
                                        Applicable Conversion Price

                                        ----------------------------------------
                                        Name of Holder

                                        ----------------------------------------
                                        Address of Holder