<PAGE>
 
                                                                   EXHIBIT 10.35

                                                                   EXHIBIT A
                                                                   to Securities
                                                                   Purchase
                                                                   Agreement


                          CERTIFICATE OF DESIGNATIONS,
                             RIGHTS AND PREFERENCES
                                       OF
                      SERIES B CONVERTIBLE PREFERRED STOCK
                                       OF
               ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

                         (Pursuant to Section 151 of the
                        Delaware General Corporation Law)


      Advanced Environmental Recycling Technologies, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation pursuant to authority
of the Board of Directors as required by Section 151 of the Delaware General
Corporation Law;

      RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $1.00 per share (the "Preferred Stock"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:

      Series B Convertible Preferred Stock:

                            I. DESIGNATION AND AMOUNT

      The designation of this series, which consists of 900 shares of Preferred
Stock, is the Series B Convertible Preferred Stock (the "Series B Preferred
Stock") and the stated value shall be One Thousand U.S. Dollars ($1,000.00) per
share (the "Stated Value").

                                II. NO DIVIDENDS

      The Series B Preferred Stock will bear no dividends, and the holders of
the Series B Preferred Stock shall not be entitled to receive dividends on the
Series B Preferred Stock.

                            III. CERTAIN DEFINITIONS
<PAGE>
 
      For purposes of this Certificate of Designation, the following terms shall
have the following meanings:

      A. "Closing Bid Price" means, for any security as of any date, the closing
bid price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series B Preferred Stock. If Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
bid price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series B Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.

      B. "Conversion Date" means, for any Optional Conversion, the date on which
the notice of conversion in the form attached hereto (the "Notice of
Conversion") is delivered by fax, as evidenced by a mechanically or
electronically generated confirmation thereof, (or delivered by other means
resulting in notice) to the Corporation on the Conversion Date indicated in the
Notice of Conversion.

      C. "Conversion Price" means the Fixed Conversion Price if no Milestone
Failure has occurred and, if a Milestone Failure has occurred, the lower of the
Fixed Conversion Price and the Variable Conversion Price, each in effect as of
such date and subject to adjustment as provided herein. Notwithstanding the
foregoing, at all times prior to the one (1) year anniversary of the Issuance
Date, the Conversion Price means the Fixed Conversion Price, in effect as of
such date and subject to adjustment as provided herein.

      D. "Fixed Conversion Price" means $1.20.

      E. "Issuance Date" means the date of the Closing (as defined in that
certain Securities Purchase Agreement by and among the Corporation and the
purchasers named therein with respect to the initial issuance of the Series B
Preferred Stock (the "Securities Purchase Agreement").

      F. "Milestone Failure" means the Corporation's failure to achieve one or
more of the following milestones:

            (i) The Corporation's quarterly sales for the Corporation's first
      fiscal quarter in 1999, as reported in the Corporation's Quarterly Report
      on Form 10-Q ("Form 10-Q") for such quarter, shall be not less than
      $4,500,000.



                                       2
<PAGE>
 
            (ii) The Corporation's quarterly sales for each of the Corporation's
      fiscal quarters commencing with the second fiscal quarter of 1999 and for
      each fiscal quarter thereafter, as reported in Form 10-Q or in the
      Corporation's Annual Report on Form 10-K ("Form 10-K"), as applicable, for
      each such quarter, shall be not less than $6,000,000.

            (iii) The Corporation's quarterly cash flow from operations shall be
      positive for each of the Corporation's fiscal quarters, commencing with
      the fourth fiscal quarter of 1998 and for each fiscal quarter thereafter,
      as reported in Form 10-Q or Form 10-K, as applicable.

      G. "N" means the number of days from, but excluding, the Issuance Date.

      H. "Premium" means an amount equal to (.10)x(N/365)x(1,000).

      I. "Variable Conversion Price" means the average of the Closing Bid Prices
for the Common Stock (as defined below) during the ten (10) consecutive trading
days ending on the trading day immediately preceding such date of determination
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during such ten (10) trading day period).


                                 IV. CONVERSION

      A. Conversion at the Option of the Holder. (i) Subject to the limitations
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series B Preferred Stock may, at any time and from time to time on or
after the Issuance Date, convert (an "Optional Conversion") each of its shares
of Series B Preferred Stock into a number of fully paid and nonassessable shares
of the Corporation's Class A Common Stock, $.01 par value per share (the "Common
Stock"), determined in accordance with the following formula if the Corporation
timely redeems the Premium thereon in cash in accordance with subparagraph (ii)
below:

                                      1,000
                               ------------------
                                Conversion Price

or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:

                               1,000 + the Premium
                               ------------------
                                Conversion Price

            (ii) (a) The Corporation shall have the right, in its sole
      discretion, upon receipt of a Notice of Conversion, to redeem the Premium
      subject to such conversion for a sum of cash equal to the amount of the
      Premium being so redeemed. All cash redemption payments hereunder shall be
      paid in lawful money of the United States of America at such address for
      the holder as appears on the record books of the Corporation (or at such
      other address as such holder shall hereafter give to the Corporation by
      written notice). In the event the Corporation so elects to redeem the
      Premium in cash



                                       3
<PAGE>
 
      and fails to pay such holder the applicable redemption amount to which
      such holder is entitled by depositing a check in the U.S. Mail to such
      holder within four (4) business days of receipt by the Corporation of a
      Notice of Conversion (in the case of a redemption in connection with an
      Optional Conversion), the Corporation shall thereafter forfeit its right
      to redeem such Premium in cash and such Premium shall thereafter be
      converted into shares of Common Stock in accordance with Article IV.A(i).

                  (b) Each holder of Series B Preferred Stock shall have the
            right to require the Corporation to provide advance notice to such
            holder stating whether the Corporation will elect to redeem the
            Premium in cash pursuant to the Corporation's redemption rights
            discussed in subparagraph (a) of this Article IV.A(ii). A holder may
            exercise such right from time to time by sending notice (an
            "Election Notice") to the Corporation, by facsimile, requesting that
            the Corporation disclose to such holder whether the Corporation
            would elect to redeem the Premium for cash in lieu of issuing shares
            of Common Stock therefor if such holder were to exercise its right
            of conversion pursuant to this Article IV.A. The Corporation shall,
            no later than the close of business on the second business day
            following receipt of an Election Notice, disclose to such holder
            whether the Corporation would elect to redeem the Premium in
            connection with a conversion pursuant to a Notice of Conversion
            delivered over the subsequent ten (10) business day period. If the
            Corporation does not respond to such holder within such two business
            day period via facsimile, the Corporation shall, with respect to any
            conversion pursuant to a Conversion Notice delivered within the
            subsequent ten (10) business day period, forfeit its right to redeem
            such Premium in accordance with subparagraph (a) of this Article
            IV.A(ii) and shall be required to convert such Premium into shares
            of Common Stock.

      B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series B Preferred Stock being converted (the "Preferred Stock
Certificates"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of the Notice of Conversion by fax from a holder, the
Corporation shall, within one business day, send, via fax, a confirmation (the
"Notice of Conversion Confirmation") to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to
deliver the Common Stock issuable upon such conversion, and the name and
telephone number of a contact person at the Corporation regarding the
conversion. The Corporation shall not be obligated to issue shares of Common
Stock upon a conversion unless either the Preferred Stock Certificates are
delivered to the Corporation or the transfer agent as provided above, or the
holder notifies the Corporation or the transfer agent that such certificates
have been lost, stolen or destroyed and delivers the documentation to the
Corporation required by Article XIV.B hereof.

            (i) Delivery of Common Stock Upon Conversion. Upon the surrender of
      Preferred Stock Certificates from a holder of Series B Preferred Stock
      accompanied by a Notice of Conversion, the Corporation shall, subject to
      the Corporation's redemption rights set forth in Article VIII.D, no later
      than the later of (a) the third business day following the Conversion Date
      and (b) the business day following the date of such surrender (or, in the
      case of lost, stolen or destroyed certificates, after provision of
      documentation pursuant to Article XIV.B) (the "Delivery Period"), issue
      and deliver to the holder or its nominee, (x) that number of shares of
      Common Stock issuable upon conversion of such



                                       4
<PAGE>
 
      shares of Series B Preferred Stock being converted and (y) a certificate
      representing the number of shares of Series B Preferred Stock not being
      converted, if any. If the Corporation's transfer agent is participating in
      the Depository Trust Company ("DTC") Fast Automated Securities Transfer
      program, and so long as the certificates therefor do not bear a legend and
      the holder thereof is not then required to return such certificate for the
      placement of a legend thereon, the Corporation may cause its transfer
      agent to electronically transmit the Common Stock issuable upon conversion
      to the holder by crediting the account of the holder or its nominee with
      DTC through its Deposit Withdrawal Agent Commission system ("DTC
      Transfer"). If the aforementioned conditions to a DTC Transfer are not
      satisfied or a DTC Transfer is otherwise not effected, the Corporation
      shall deliver to the holder physical certificates representing the Common
      Stock issuable upon conversion. Further, a holder may instruct the
      Corporation to deliver to the holder physical certificates representing
      the Common Stock issuable upon conversion in lieu of delivering such
      shares by way of DTC Transfer.

            (ii) Taxes. The Corporation shall pay any and all taxes which may be
      imposed upon the Corporation with respect to the issuance and delivery of
      the shares of Common Stock upon the conversion of the Series B Preferred
      Stock.

            (iii) No Fractional Shares. If any conversion of Series B Preferred
      Stock would result in the issuance of a fractional share of Common Stock,
      such fractional share shall be disregarded and the number of shares of
      Common Stock issuable upon conversion of the Series B Preferred Stock
      shall be the next higher whole number of shares.

            (iv) Conversion Disputes. In the case of any dispute with respect to
      a conversion, the Corporation shall promptly issue such number of shares
      of Common Stock as are not disputed in accordance with subparagraph (i)
      above. If such dispute involves the calculation of the Conversion Price,
      the Corporation shall submit the disputed calculations to an independent
      outside accountant reasonably acceptable to the holder of Series B
      Preferred Stock being converted via facsimile at any time prior to the
      expiration of the Delivery Period. The accountant, at the Corporation's
      sole expense of the party in error, shall audit the calculations and
      notify the Corporation and the holder of the results as soon as
      practicable following the date it receives the disputed calculations. The
      accountant's calculation shall be deemed conclusive, absent manifest
      error. The Corporation shall then issue the appropriate number of shares
      of Common Stock in accordance with subparagraph (i) above.

      C. Limitations on Conversions. The conversion of shares of Series B
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):

            (i) Cap Amount. If, notwithstanding the representations and
      warranties of the Corporation contained in the Securities Purchase
      Agreement, dated as of September 30, 1998, between the Corporation and the
      purchasers of the Series B Preferred Stock named therein, the Corporation
      is prohibited by the rules or regulations of any securities exchange or
      quotation system on which the Common Stock is then listed or traded, from
      listing or issuing a number of shares of Common Stock in excess of a
      prescribed amount (the "Cap Amount") without the approval of the
      Corporation's stockholders, then the Corporation shall not be required to
      list or issue, as applicable, shares in excess of the Cap Amount unless
      the Corporation has obtained the required approvals. The Cap Amount which,
      as of the Issuance Date, shall be 3,582,000 shares, shall be allocated pro
      rata to the holders of



                                       5
<PAGE>
 
      Series B Preferred Stock as provided in Article XIV.C. In the event a
      holder of Series B Preferred Stock submits a Notice of Conversion and the
      Corporation is prohibited from listing or issuing shares of Common Stock
      to satisfy such Notice of Conversion as a result of the operation of this
      subparagraph (i), such holder shall be entitled to the rights set forth in
      Article VII hereof.

      D. Required Conversion at Maturity. If the Corporation does not elect to
exercise its redemption rights set forth in Article VIII.D hereof, subject to
the limitations set forth in Paragraph C(i) of this Article IV and provided all
shares of Common Stock issuable upon conversion of all outstanding shares of
Series B Preferred Stock are then (i) authorized and reserved for issuance, (ii)
registered under the Securities Act of 1933, as amended, for resale by the
holders of such shares of Series B Preferred Stock and (iii) eligible to be
traded on either the Nasdaq SmallCap Market, The Nasdaq National Market, the New
York Stock Exchange or the American Stock Exchange, each share of Series B
Preferred Stock issued and outstanding on the seventh anniversary of the
Issuance Date thereof (the "Maturity Date"), automatically shall be converted
into shares of Common Stock on such date in accordance with the conversion
formulas set forth in Paragraph A of this Article IV (the "Required Conversion
at Maturity"); provided, however, in such case the Conversion Price shall equal
the lower of (i) the average of the Closing Bid Prices for the Common Stock for
the five (5) trading days immediately preceding the Maturity Date and (ii) the
Fixed Conversion Price; provided, further, the Maturity Date shall be extended
for a period equal to the number of days any Conversion Default, Trading Market
Trigger Event, Trading Market Prohibition or Redemption Event is in existence.
If the Required Conversion at Maturity occurs, the Corporation and the holders
of Series B Preferred Stock shall follow the applicable conversion procedures
set forth in Paragraph B of this Article IV; provided, however, that the holders
of Series B Preferred Stock are not required to deliver a Notice of Conversion
to the Corporation or its transfer agent.


                   V.  RESERVATION OF SHARES OF COMMON STOCK

      A. Reserved Amount. On or before January 15, 1999, the Corporation shall
reserve, from the authorized but unissued shares of Common Stock, for issuance
upon conversion of the Series B Preferred Stock, 200% of the number of shares
which would be issuable if the outstanding shares of Series B Preferred Stock
were converted in their entirety on the Issuance Date based on the Conversion
Price in effect on the Issuance Date, and thereafter the number of authorized
but unissued shares of Common Stock so reserved (the "Reserved Amount") shall
not be decreased and shall at all times be sufficient to provide for the
conversion of the Series B Preferred Stock outstanding at the then current
Conversion Price thereof. The Reserved Amount shall be allocated to the holders
of Series B Preferred Stock as provided in Article XIV.C.

      B. Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series B
Preferred Stock, the Corporation shall immediately notify the holders of Series
B Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholders approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion



                                       6
<PAGE>
 
of the outstanding Series B Preferred Stock. In the event the Corporation fails
to so increase the Reserved Amount within 90 days after an Authorization Trigger
Date (such event being the "Reserved Amount Trigger Event"), each holder of
Series B Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series B Preferred Stock
such that, after giving effect to such purchase, the holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of its Series B Preferred Stock.
If the Corporation fails to redeem any of such shares within five (5) business
days after its receipt of such Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.

      C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series B
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series B Preferred
Stock held by any holder (including shares of Series B Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such holder) shall be adjusted as provided in Article VI.B.

                       VI. FAILURE TO SATISFY CONVERSIONS

      A. Conversion Default Payments. If, at any time, (x) a holder of shares of
Series B Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII,
respectively) to deliver, on or prior to the fourth (4th) business day following
the expiration of the Delivery Period for such conversion, such number of
unlegended shares of Common Stock to which such holder is entitled upon such
conversion, or (y) the Corporation provides notice to any holder of Series B
Preferred Stock at any time of its intention not to issue unlegended shares of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount) (each of (x) and (y) being a "Conversion Default"), then the
Corporation shall pay to the affected holder, in the case of a Conversion
Default described in clause (x) above, and to all holders, in the case of a
Conversion Default described in clause (y) above, an amount equal to:

                     (.24) x (D/365) x (the Default Amount)

where:



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      "D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;

      "Default Amount" means (i) the total Stated Value of all shares of Series
B Preferred Stock held by such holder, plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series B Preferred
Stock included in clause (i) of this definition; and

      "Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series B Preferred Stock, and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to issue freely tradeable shares of Common Stock
in satisfaction of all conversions of Series B Preferred Stock in accordance
with Article IV.A, and (iii) with respect to either type of a Conversion
Default, the date on which the Corporation redeems shares of Series B Preferred
Stock held by such holder pursuant to paragraph D of this Article VI.

      The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Conversion Default Payments." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Default through the Conversion Date or
the Default Cure Date, whichever is earlier, with respect to such Conversion
Default Payments. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.E. In the event a holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, the holder shall indicate on a
Notice of Conversion such portion of the Conversion Default Payments which such
holder elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.

      B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series B Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for
which failures the holders shall have the remedies set forth in Articles V and
VII, respectively), then the Fixed Conversion Price in respect of any shares of
Series B Preferred Stock held by such holder (including shares of Series B
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to such holder) shall thereafter be
the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in
the Notice of Conversion which resulted in the Conversion Default and (ii) the
lowest Closing Bid Price for the Common Stock during the period beginning on,
and including, such Conversion Date through and including the earlier of (x) the
day such shares of Common Stock are delivered to the holder and (y) the day on
which the holder regains its rights as a holder of Series B Preferred Stock with
respect to such unconverted shares of Series B Preferred Stock pursuant to the
provisions of Article XIV.F hereof. If there shall occur a Conversion Default of
the type described in clause (y) of Article VI.A, then the Fixed Conversion
Price with respect to any conversion thereafter shall be the lowest Closing Bid
Price for the Common Stock during the period beginning on, and including, the
date of the occurrence of such Conversion Default through and 



                                       8
<PAGE>
 
including the Default Cure Date. The Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI.

      C. Buy-In Cure. Unless the Corporation has notified the applicable holder
in writing prior to the delivery by such holder of a Notice of Conversion that
the Corporation is unable to honor conversions, if (i) (a) the Corporation fails
for any reason to deliver during the Delivery Period shares of Common Stock to a
holder upon a conversion of shares of Series B Preferred Stock or (b) there
shall occur a Legend Removal Failure (as defined in Article VIII.A(ii) below)
and (ii) thereafter, such holder purchases (in an open market transaction or
otherwise) shares of Common Stock to make delivery in satisfaction of a sale by
such holder of the unlegended shares of Common Stock (the "Sold Shares") which
such holder anticipated receiving upon such conversion (a "Buy-In"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification indicating any amounts payable to such holder pursuant to
this Paragraph C. The Corporation shall make any payments required pursuant to
this Paragraph C in accordance with and subject to the provisions of Article
XIV.E.

      D. Redemption Right. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII, respectively) to issue shares of Common Stock within 10
business days after the expiration of the Delivery Period with respect to any
conversion of Series B Preferred Stock, then the holder may elect at any time
and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Redemption Notice to the Corporation, to have all of
such holder's shares of Series B Preferred Stock which were submitted for
conversion purchased by the Corporation for cash, at an amount per share equal
to the Redemption Amount (as defined in Article VIII.B). If the Corporation
fails to redeem any of such shares within five business days after its receipt
of such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.

      E. Void Notice of Conversion. If for any reason a holder has not received
all of the shares of Common Stock prior to the tenth (10th) business day after
the expiration of the Delivery Period with respect to a conversion of Series B
Preferred Stock and (i) such shares have not been called for redemption pursuant
to Article VIII.D, provided the Redemption Amount therefor has been or may be
paid within the time limits set forth in Article VIII.D, and (ii) such shares
are not subject to a redemption notice from the holder thereof, then the holder,
upon written notice to the Corporation's transfer agent, with a copy to the
Corporation, may void its Notice of Conversion with respect to, and retain or
have returned, as the case may be, any shares of Series B Preferred Stock that
have not been converted pursuant to such holder's Notice of Conversion; provided
that the voiding of a holder's Notice of Conversion shall not affect such
holders rights and remedies which have accrued prior to the date of such notice
pursuant to Article VI hereof or otherwise.



                                       9
<PAGE>
 
             VII.  INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT

      A. Obligation to Cure. If at any time after the Initial Issuance Date the
then unissued portion of any holder's Cap Amount is less than 135% of the number
of shares of Common Stock then issuable upon conversion of such holder's shares
of Series B Preferred Stock (a "Trading Market Trigger Event"), the Corporation
shall immediately notify the holders of Series B Preferred Stock of such
occurrence and shall take immediate action (including, if necessary, seeking the
approval of its stockholders to authorize the listing or issuance of the full
number of shares of Common Stock which would be issuable upon the conversion of
the then outstanding shares of Series B Preferred Stock but for the Cap Amount)
to eliminate any prohibitions under applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its securities on
the Corporation's ability to list or issue shares of Common Stock in excess of
the Cap Amount ("Trading Market Prohibitions"). In the event the Corporation
fails to eliminate all such Trading Market Prohibitions within 120 days after
the Trading Market Trigger Event, then each holder of Series B Preferred Stock
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time until such date that all such Trading Market Prohibitions
are eliminated, by delivery of a Redemption Notice (as defined in Article
VIII.C) to the Corporation, to require the Corporation to purchase for cash, at
an amount per share equal to the Redemption Amount, a number of the holder's
shares of Series B Preferred Stock such that, after giving effect to such
redemption, the then unissued portion of such holder's Cap Amount exceeds 135%
of the total number of shares of Common Stock issuable upon conversion of such
holder's shares of Series B Preferred Stock. If the Corporation fails to redeem
any of such shares within five (5) business days after its receipt of such
Redemption Notice, then such holder shall be entitled to the remedies provided
in Articles VII.B and VIII.C.

      B. Remedies. If the Corporation fails to redeem any shares of Series B
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series B Preferred Stock to any holder because
such listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, any holder who is so
prohibited from converting its Series B Preferred Stock because the shares of
Common Stock underlying such Series B Preferred Stock may not be listed or
issued, may elect either or both of the following additional remedies:

            (i) to require, with the consent of holders of at least fifty
      percent (50%) of the outstanding shares of Series B Preferred Stock
      (including any shares of Series B Preferred Stock held by the requesting
      holder), the Corporation to terminate the listing of its Common Stock on
      the AMEX (or any other stock exchange, interdealer quotation system or
      trading market) and to cause its Common Stock to be eligible for trading
      on the over-the-counter electronic bulletin board; or



                                       10
<PAGE>
 
            (ii) to require the Corporation to issue shares of Common Stock in
      accordance with such holder's Notice of Conversion at a conversion price
      equal to the average of the Closing Bid Prices for the Common Stock during
      the five consecutive trading days ending on the trading day immediately
      preceding the date of the holder's written notice to the Corporation of
      its election to receive shares of Common Stock pursuant to this
      subparagraph (ii) (subject to equitable adjustment for any stock splits,
      stock dividends, reclassifications or similar events during such five
      trading day period).

      C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from listing shares of Common Stock or from issuing shares of Common
Stock upon conversion of Series B Preferred Stock to any holder because such
listing or issuance would exceed the then unissued portion of such holder's Cap
Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, then the Fixed
Conversion Price in respect of any shares of Series B Preferred Stock held by
any holder (including shares of Series B Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued) shall be adjusted as provided in Article VI.A.


                                VIII. REDEMPTION

      A. Redemption by Holder. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "Redemption Event"):

            (i) the Common Stock (including, from and after the Issuance Date,
      any of the shares of Common Stock issuable upon conversion of the Series B
      Preferred Stock) is suspended from trading on any of, or is not listed
      (and authorized) for trading on at least one of, the NASDAQ Small Cap
      Market, the NASDAQ National Market, the New York Stock Exchange or the
      American Stock Exchange for an aggregate of 10 trading days in any nine
      month period;

            (ii) the Corporation fails to remove any restrictive legend on any
      certificate or any shares of Common Stock issued to the holders of Series
      B Preferred Stock upon conversion of the Series B Preferred Stock as and
      when required by this Certificate of Designation, the Securities Purchase
      Agreement or the Registration Rights Agreement (as defined below) (a
      "Legend Removal Failure"), and any such failure continues uncured for ten
      business days after the Corporation has been notified thereof in writing
      by the holder;

            (iii) the Registration Statement required to be filed by the
      Corporation pursuant to Section 2(a) of the Registration Rights Agreement
      by and among the Corporation and the other signatories thereto entered
      into in connection with the Securities Purchase Agreement (the
      "Registration Rights Agreement") has not been declared effective by April
      17, 1999, or such Registration Statement, after being declared effective,
      cannot be utilized by the holders of Series B Preferred Stock for the
      resale of all of their Registrable Securities (as defined in the
      Registration Rights Agreement) for an aggregate of more than thirty (30)
      days



                                       11
<PAGE>
 
            (iv) the Corporation provides notice to any holder of Series B
      Preferred Stock, including by way of public announcement, at any time, of
      its intention not to issue, or otherwise refuses to issue, shares of
      Common Stock to any holder of Series B Preferred Stock upon conversion in
      accordance with the terms of this Certificate of Designation (other than
      due to the circumstances contemplated by Articles V or VII for which the
      holders shall have the remedies set forth in such Articles);

            (v) the Corporation shall:

                  (a) sell, convey or dispose of all or substantially all of its
            assets (the presentation of any such transaction for stockholder
            approval being conclusive evidence that such transaction involves
            the sale of all or substantially all of the assets of the
            Corporation);

                  (b) merge, consolidate or engage in any other business
            combination with any other entity (other than pursuant to a
            migratory merger effected solely for the purpose of changing the
            jurisdiction of incorporation of the Corporation and other than
            pursuant to a merger in which the Corporation is the surviving or
            continuing entity and the voting capital stock of the Corporation
            immediately prior to such merger represents at least 50% of the
            voting power of the capital stock of the Corporation after the
            merger); or

                  (c) have fifty percent (50%) or more of the voting power of
            its capital stock is owned beneficially by one person, entity or
            "group" (as such term is used under Section 13(d) of the Securities
            Exchange Act of 1934, as amended) (other than Marjorie Brooks,
            Steven Brooks, Joseph Brooks, Douglas Brooks and members of their
            immediate family); or

            (vi) the Corporation otherwise shall breach any material term
      hereunder or under the Securities Purchase Agreement or the Registration
      Rights Agreement.

then, upon the occurrence of any such Redemption Event, each holder of shares of
Series B Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series B Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iii), (iv)
or (v) above shall immediately constitute a Redemption Event and there shall be
no cure period. Upon the Corporation's receipt of any Redemption Notice
hereunder (other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as defined below) to all of
the holders in response to the Corporation's initial receipt of a Redemption
Notice from a holder of Series B Preferred Stock), the Corporation shall
promptly (and in any event within two business days following such receipt)
deliver a written notice (a "Redemption Announcement") to all holders of Series
B Preferred Stock stating the date upon which the Corporation received such
Redemption Notice and the amount of Series B Preferred Stock covered thereby.
Subject to Article VIII.D, the Corporation shall not redeem any shares of Series
B Preferred Stock during the three trading day period following the delivery of
a required Redemption Announcement hereunder. At any time and from time to time



                                       12
<PAGE>
 
during such three trading day period, each holder of Series B Preferred Stock
may request (either orally or in writing) information from the Corporation with
respect to the instant redemption (including, but not limited to, the aggregate
number of shares of Series B Preferred Stock covered by Redemption Notices
received by the Corporation) and the Corporation shall furnish (either orally or
in writing) as soon as practicable such requested information to such requesting
holder.

      B. Definition of Redemption Amount. The "Redemption Amount" with respect
to a share of Series B Preferred Stock means an amount equal to the greater of:

            (a)    V      x  M
                --------
                  C P

and

            (b) The product of (x) one hundred and fifteen percent (115%), times
      (y) the sum of (I) Stated Value thereof, plus (II) the accrued Premium
      thereon, plus (III) all unpaid Conversion Default Payments owing (if any)
      with respect thereto through the Effective Date of Redemption (as defined
      in subparagraph (iii) below).

where:

      "V" means the Stated Value thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;

      "CP"  means  the  Conversion  Price in  effect  on the date on which the
Corporation receives the Redemption Notice; and

      "M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Redemption Notice and ending on the date immediately
preceding the date of payment of the Redemption Amount and (ii) with respect to
redemptions pursuant to Article VIII.A(v) hereof, the greater of (a) the amount
determined pursuant to clause (i) of this definition or (b) the fair market
value, as of the date on which the Corporation receives the Redemption Notice,
of the consideration payable to the holder of a share of Common Stock pursuant
to the transaction which triggers the redemption. For purposes of this
definition, "fair market value" for any consideration other than cash (in which
case the fair market value shall equal the amount thereof) or any registered
security (in which case the fair market value shall equal the Closing Bid Price
thereof) shall be determined by the mutual agreement of the Corporation and
holders of a majority-in-interest of the shares of Series B Preferred Stock then
outstanding, or if such agreement cannot be reached within five business days
prior to the date of redemption, by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority-in-interest of
the then outstanding shares of Series B Preferred Stock, with the costs of such
appraisal to be borne by the Corporation.



                                       13
<PAGE>
 
      C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series B Preferred Stock within
five business days after its receipt of a notice requiring such redemption (a
"Redemption Notice"), then the holder of Series B Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at a Conversion Price equal to the lowest Closing Bid Price for the
Common Stock during the period beginning on the date on which the Corporation
receives the Redemption Notice and ending on the Conversion Date with respect to
the conversion of such Redemption Amount. In the event the Corporation is not
able to redeem all of the shares of Series B Preferred Stock subject to
Redemption Notices delivered prior to the date upon which such redemption is to
be effected, the Corporation shall redeem shares of Series B Preferred Stock
from each holder pro rata, based on the total number of shares of Series B
Preferred Stock outstanding at the time of redemption included by such holder in
all Redemption Notices delivered prior to the date upon which such redemption is
to be effected relative to the total number of shares of Series B Preferred
Stock outstanding at the time of redemption included in all of the Redemption
Notices delivered prior to the date upon which such redemption is to be
effected.

D.    Redemption by Corporation.

            (i) The Corporation shall have the right at any time and from time
      to time to redeem any shares which are the subject of a Notice of
      Conversion for an amount of cash equal to the Redemption Amount as
      determined pursuant to clause (a) of its definition (a "Redemption in Lieu
      of Conversion"), in its sole discretion by delivery of an Optional
      Redemption Notice in accordance with the redemption procedures set forth
      below.

            (ii) Within ten (10) calendar days prior to the beginning of any
      calendar month during which the Corporation elects to effect a Redemption
      in Lieu of Conversion, the Corporation shall provide written notice to the
      holders of Series B Preferred Stock by facsimile and overnight courier
      stating that the Corporation will redeem any conversions of Series A
      Preferred Stock in such calendar month (an "Optional Redemption Notice").
      In the event the Corporation fails to provide an Optional Redemption
      Notice to the holders of Series B Preferred Stock within such ten (10) day
      period, the Corporation shall not be permitted to so redeem any
      conversions of Series A Preferred Stock during such calendar month. In the
      event a timely Optional Redemption Notice is provided as aforesaid, upon
      the Corporation's receipt of a Notice of Conversion the Corporation shall
      be obligated to redeem on or before the fifth business day after the
      receipt of the Notice of Conversion, the entire number of shares of the
      Series B Preferred Stock which are the subject of the Notice of Conversion
      for the Redemption Amount as determined pursuant to clause (a) of its
      definition.



                                       14
<PAGE>
 
            (iii) After the two (2) year anniversary of the Issuance Date, the
      Corporation shall have the right, on one occasion and on 10 business days
      prior written notice, to redeem all, but not less than all, of the then
      outstanding shares of Series B Preferred Stock by paying to each holder an
      amount per share of Series B Preferred Stock equal to 150% of the sum of
      (x) the Stated Value thereof, plus (y) accrued Premium thereon. At all
      times prior to redemption pursuant to this Article VIII.D (including after
      receipt of the notice required by this Article), each holder of Series B
      Preferred Stock shall remain entitled to convert shares of Series B
      Preferred Stock into shares of Common Stock in accordance with the terms
      of Article IV hereof.

      E. Void Redemption. In the event that the Corporation does not pay the
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays
such unpaid applicable Redemption Amount in full, a holder of Series B Preferred
Stock shall have the option (the "Void Optional Redemption Option") to, in lieu
of redemption, require the Corporation to promptly return to such holder any or
all of the shares of Series B Preferred Stock that were submitted for redemption
by such holder under this Article VIII and for which the applicable Redemption
Amount (together with any interest thereon) has not been paid, by sending
written notice thereof to the Corporation via facsimile and confirmed by
overnight courier, in person (by courier or otherwise) or by telephone (to an
authorized officer of the Corporation or his or her administrative assistant)
(the "Void Optional Redemption Notice"). Upon the Corporation's receipt of such
Void Optional Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with respect
to those shares of Series B Preferred Stock subject to the Void Optional
Redemption Notice, and (ii) the Corporation shall immediately return any shares
of Series B Preferred Stock subject to the Void Optional Redemption Notice

                                    IX. RANK

      The Series B Preferred Stock shall rank (i) prior to all classes of the
Corporation's common stock and any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series B
Preferred Stock (collectively, "Junior Securities"); (ii) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series B Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series B
Preferred Stock ("Senior Securities"); and (iii) pari passu with the Series A
Preferred Stock of the Corporation, Series C Preferred Stock of the Corporation
and any class or series of capital stock of the Corporation hereafter created
(with the consent of the holders of the Series B Preferred Stock obtained in
accordance with Article XIII hereof) specifically ranking by its terms on parity
with the Series B Preferred Stock (collectively, the "Pari Passu Securities"),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.



                                       15
<PAGE>
 
                            X. LIQUIDATION PREFERENCE

      A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event (a "Liquidation Event"), the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate,
dissolve or wind up, no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities and Pari Passu
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series B Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series B Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series B Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.

      B. At the option of any holder of Series B Preferred Stock, the occurrence
of any event enumerated in Article VIII.A(v) hereof shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation for purposes
of this Article X; or (ii) be treated pursuant to Article XI hereof. "Person"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.

      C. The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Except as provided
in Paragraph B above, neither the consolidation or merger of the Corporation
with or into any other entity nor the sale or transfer by the Corporation of
less than substantially all of its assets shall, for the purposes hereof, be
deemed to be a liquidation, dissolution or winding up of the Corporation.

      D. The "Liquidation Preference" with respect to a share of Series B
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.



                                       16
<PAGE>
 
                     XI. ADJUSTMENTS TO THE CONVERSION PRICE

      The Conversion Price shall be subject to adjustment from time to time as
follows:

      A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.

      B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the
Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged) or
(iii) any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property (each of (i) -
(iii) above being a "Corporate Change"), then the holders of Series B Preferred
Stock shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable in such Corporate
Change with respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion (without giving effect to the
limitations contained in Article IV.C) had such Corporate Change not taken
place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the holders of a majority of the Series B Preferred
Shares then outstanding) shall be made with respect to the rights and interests
of the holders of the Series B Preferred Stock to the end that the economic
value of the shares of Series B Preferred Stock are in no way diminished by such
Corporate Change and that the provisions hereof (including, without limitation,
in the case of any such consolidation, merger or sale in which the successor
entity or purchasing entity is not the Corporation, an immediate adjustment of
the Fixed Conversion Price so that the Fixed Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to the value
of the surviving entity's common stock that existed between the Fixed Conversion
Price and the value of the Corporation's Common Stock immediately prior to such
Corporate Change and an immediate revision to the Variable Conversion Price so
that it is determined as provided in Article III.I but based on the price of the
common stock of the surviving entity and the market in which such common stock
is traded) shall thereafter be applicable, as nearly as may be practicable in
relation to any shares of stock or securities thereafter deliverable upon the
conversion thereof. The Corporation shall not effect any Corporate Change unless
(i) each holder of Series B Preferred Stock has received written notice of such
transaction along with the notice sent to the holders of the Common Stock of the
Corporation, but in no event later than 20 days prior to the record date for the
determination of stockholders entitled to vote with respect thereto, and (ii)
the resulting, successor or acquiring entity (if not the Corporation) assumes by
written instrument (in form and substance reasonably satisfactory to the holders
of a majority of the Series B Preferred Shares then outstanding) the obligations
of this Certificate of Designation. The above provisions shall apply regardless
of whether or not there would have been a sufficient number of shares



                                       17
<PAGE>
 
of Common Stock authorized and available for issuance upon conversion of the
shares of Series B Preferred Stock outstanding as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.

      C. Adjustment Due to Major Announcement. In the event the Corporation at
any time after the Issuance Date and after the occurrence of a Milestone Failure
(i) makes a public announcement that it intends to consolidate or merge with any
other entity (other than a merger in which the Corporation is the surviving or
continuing entity and the voting capital stock of the Corporation immediately
prior to such merger represents at least 50% of the voting power of the capital
stock of the Corporation after the merger) or to sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person, group or
entity (including the Corporation, but excluding the holders of Series B
Preferred Stock and their affiliates) publicly announces a tender offer,
exchange offer or another transaction to purchase 50% or more of the
Corporation's Common Stock or otherwise publicly announces an intention to
replace a majority of the Corporation's Board of Directors by waging a proxy
battle or otherwise (the date of the announcement or commencement referred to in
clause (i) or (ii) of this Paragraph C is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the earlier of the consummation of the
proposed transaction or tender offer, exchange offer or another transaction or
the Abandonment Date (as defined below) (the earlier of such dates being the
"Adjusted Conversion Price Termination Date"), be equal to the lower of (x) the
Conversion Price which would have been applicable for an Optional Conversion
occurring on the Announcement Date and (y) the Conversion Price determined in
accordance with Article III.C on the Conversion Date set forth in the Notice of
Conversion for the Optional Conversion. After the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in
Article III.C. "Abandonment Date" means with respect to any proposed transaction
or tender offer, exchange offer or another transaction for which a public
announcement or an action contemplated by this Paragraph C has been made or
commenced, the date upon which the Corporation (in the case of clause (i) above)
or the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer, exchange offer or another transaction which caused this Paragraph C to
become operative.

      D. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's common stockholders in shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.

      E. Issuance of Other Securities. If at any time after the Issuance Date
the Company issues or sells any shares of Common Stock or any securities which
are convertible into or exchangeable for Common Stock ("Convertible Securities")
for no consideration or for a consideration per share less than the Closing Bid
Price in effect on the date of issuance of such securities (a "Dilutive
Issuance"),



                                       18
<PAGE>
 
then effective immediately upon the Dilutive Issuance, the Fixed Conversion
Price will be adjusted in accordance with the formula below.

            F'  = F x      O + P/CBP        
                        ------------
                            CSDO

where:

            F'    =     the adjusted Fixed Conversion Price;
            F     =     the then current Fixed Conversion Price;
            CBP   =     the then current Closing Bid Price;
            O     =     the  number  of shares  of  Common  Stock  outstanding
                        immediately prior to the Dilutive Issuance;
            P     =     the aggregate  consideration,  calculated as set forth
                        herein,  received  by the Company  upon such  Dilutive
                        Issuance; and
            CSDO  =     the total number of shares of Common Stock deemed
                        outstanding immediately after the Dilutive Issuance.


      F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any securities which are convertible into or exchangeable for
Common Stock, or rights to purchase stock, warrants, securities or other
property (the "Purchase Rights") pro rata to the record holders of any class of
Common Stock, then the holders of Series B Preferred Stock will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Series B Preferred Stock (without giving effect to the limitations contained in
Article IV.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.

      G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or the Fixed Conversion Price pursuant
to this Article XI, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series B Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price and/or the
Fixed Conversion Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Series B Preferred
Stock.



                                       19
<PAGE>
 
                               XII. VOTING RIGHTS

      Each holder of shares of Series B Preferred Stock shall have the right to
one vote for each share of Common Stock into which such holder's shares of
Series B Preferred Stock could then be converted (with any fractional share
determined on an aggregate conversion basis being rounded to the nearest whole
share), and with respect to such vote, such holder shall have full voting rights
and powers equal to the voting rights and powers of the holders of Common Stock,
and shall be entitled to notice of any stockholder's meeting in accordance with
the by-laws of this Corporation, and shall be entitled to vote, together with
the holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote.

      To the extent that under the Business Corporation Act the vote of the
holders of the Series B Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series B Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series B Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series B Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series B Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.

                           XIII. PROTECTION PROVISIONS

      So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of the holders of 80% of
the then outstanding shares of Series B Preferred Stock:

            (a) alter or change the rights, preferences or privileges of the
      Series B Preferred Stock;

            (b) alter or change the rights, preferences or privileges of any
      previously issued shares of capital stock of the Corporation so as to
      affect adversely the Series B Preferred Stock;

            (c) create any new class or series of capital stock having a
      preference over the Series B Preferred Stock as to distribution of assets
      upon liquidation, dissolution or winding up of the Corporation (as
      previously defined in Article IX hereof, "Senior Securities");

            (d) create any new class or series of capital stock (other than the
      Series A Preferred Stock and Series C Preferred Stock) ranking pari passu
      with the Series B Preferred Stock as to distribution of assets upon
      liquidation, dissolution or winding up of the Corporation (as previously
      defined in Article IX hereof, "Pari Passu Securities");



                                       20
<PAGE>
 
            (e) increase the authorized number of shares of Series B Preferred
      Stock;

            (f) issue any shares of Senior Securities or Pari Passu Securities,
      other than an aggregate of up to 1,500 shares of Series A Preferred Stock
      and an aggregate of up to 500 Series C Preferred Stock pursuant to Robert
      Mackie, Sr., Robert Mackie, Jr., Mr. and Mrs. Delbert Allen, Jr., Mr. and
      Mrs. Fritz Friday, Allen & Co. and Millenco LLP;

            (g) issue any shares of Series B Preferred Stock other than pursuant
      to the Securities Purchase Agreement;

            (h) redeem, or declare or pay any cash dividend or distribution on,
      any Junior Securities; or

            (i) increase the par value of the Common Stock.

Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series B Preferred Stock then outstanding.

                              XIV. MISCELLANEOUS

      A. Cancellation of Series B Preferred Stock. If any shares of Series B
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series B Preferred Stock.

      B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series B Preferred Stock.

      C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series B
Preferred Stock based on the number of shares of Series B Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series B Preferred Stock based on the
number of shares of Series B Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series B Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which is allocated to any person or entity which does not hold
any Series B Preferred



                                       21
<PAGE>
 
Stock shall be re-allocated to the remaining holders of shares of Series B
Preferred Stock, pro rata based on the number of shares of Series B Preferred
Stock then held by such holders.

      D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreement is declared effective and
thereafter so long as any shares of Series B Preferred Stock are outstanding,
the Corporation shall deliver (or cause its transfer agent to deliver) to each
holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series B Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series B Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series B Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be listed or issued by the Corporation upon conversion of
the Series B Preferred Stock before the Corporation would exceed the Cap Amount
and the Reserved Amount. The Corporation (or its transfer agent) shall deliver
the report for each quarter to each holder prior to the tenth day of the
calendar month following the quarter to which such report relates. In addition,
the Corporation (or its transfer agent) shall provide, within 15 days after
delivery to the Corporation of a written request by any holder, any of the
information enumerated in clauses (i) - (iv) of this Paragraph D as of the date
of such request.

      E. Payment of Cash; Defaults. Whenever the Corporation is required to make
any cash payment to a holder under this Certificate of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.

      F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series B Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder's rights as a holder of such converted shares of Series B Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth business day after the expiration of
the Delivery Period with respect to a conversion of Series B Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series B Preferred Stock with respect to such unconverted
shares of Series B Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the holder. In all cases, the
holder shall retain all of its rights and remedies (including, without



                                       22
<PAGE>
 
limitation, the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.A) for the Corporation's
failure to convert Series B Preferred Stock.

      G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series B Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series B Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.



                                       23
<PAGE>
 
      IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 9th day of November, 1998.


                                    ADVANCED ENVIRONMENTAL RECYCLING
                                    TECHNOLOGIES, INC.


                                    By:/s/ Joe G. Brooks
                                       --------------------------
                                       Name:  Joe. G. Brooks
                                       Title: President







                                       24
<PAGE>
 
                              NOTICE OF CONVERSION

                   (To be Executed by the Registered Holder
               in order to Convert the Series B Preferred Stock)

The undersigned hereby irrevocably elects to convert ____________ shares of
Series B Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of common
stock ("Common Stock") of Advanced Environmental Recycling Technologies, Inc.
(the "Corporation") according to the conditions of the Certificate of
Designation, Rights and Preferences of the Series B Convertible Preferred Stock
of the Corporation as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).

The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC Transfer").

The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series B Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.

|_|   In lieu of receiving the shares of Common Stock issuable pursuant to this
      Notice of Conversion by way of DTC Transfer, the undersigned hereby
      requests that the Corporation issue and deliver to the undersigned
      physical certificates representing such shares of Common Stock.


                              Date of Conversion:______________________________

                              Applicable Conversion Price:_____________________

                              Number of Shares of Common
                              Stock to be Issued:______________________________

                              Signature:_______________________________________

                              Name:____________________________________________

                              Address:_________________________________________

                                      _________________________________________

                                      _________________________________________