<PAGE>
 
                                                                  EXHIBIT 10.36

                                                                  EXHIBIT A
                                                                  to Securities
                                                                  Purchase
                                                                  Agreement

                          CERTIFICATE OF DESIGNATIONS,
                             RIGHTS AND PREFERENCES
                                       OF
                      SERIES C 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 C Convertible Preferred Stock:

                            I. DESIGNATION AND AMOUNT

     The designation of this series, which consists of 500 shares of Preferred
Stock, is the Series C Convertible Preferred Stock (the "Series C 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 C Preferred Stock will bear no dividends, and the holders of the
Series C Preferred Stock shall not be entitled to receive dividends on the
Series C Preferred Stock.
<PAGE>
 
                            III. CERTAIN DEFINITIONS

     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 C 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 C 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
     C Preferred Stock (the "Securities Purchase Agreement").

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


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               (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.

               (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 C 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 C 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


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               (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 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 C 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 C 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.



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               (i) Delivery of Common Stock Upon Conversion. Upon the surrender
          of Preferred Stock Certificates from a holder of Series C 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 shares of Series C Preferred Stock being converted
          and (y) a certificate representing the number of shares of Series C
          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 C Preferred Stock.

               (iii) No Fractional Shares. If any conversion of Series C
          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 C 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 C Preferred Stock being converted
          via facsimile at any time prior to the expiration of the Delivery
          Period. The accountant, at the 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 C
     Preferred Stock shall be subject to the following limitations (each of
     which limitations shall be applied independently):


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<PAGE>
 
          (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 C 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
     1,990,000 shares, shall be allocated pro rata to the holders of Series C
     Preferred Stock as provided in Article XIV.C. In the event a holder of
     Series C 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.

               (ii) No Ten Percent Holders. Except in connection with a Required
          Conversion at Maturity (as defined below), in no event shall a holder
          of shares of Series C Preferred Stock be entitled to receive shares of
          Common Stock upon a conversion to the extent that the sum of (x) the
          number of shares of Common Stock beneficially owned by the holder and
          its affiliates (exclusive of shares issuable upon conversion of the
          unconverted portion of the shares of Series C Preferred Stock or the
          unexercised or unconverted portion of any other securities of the
          Corporation (including, without limitation, the warrants (the
          "Warrants") issued by the Corporation pursuant to the Securities
          Purchase Agreement) subject to a limitation on conversion or exercise
          analogous to the limitations contained herein) and (y) the number of
          shares of Common Stock issuable upon the conversion of the shares of
          Series C Preferred Stock with respect to which the determination of
          this subparagraph is being made, would result in beneficial ownership
          by the holder and its affiliates of more than 9.99% of the outstanding
          shares of Common Stock. For purposes of this subparagraph, beneficial
          ownership shall be determined in accordance with Section 13(d) of the
          Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
          thereunder, except as otherwise provided in clause (x) above. The
          restriction contained in this subparagraph (ii) shall not be altered,
          amended, deleted or changed in any manner whatsoever unless the
          holders of a majority of the outstanding shares of Common Stock and
          each holder of outstanding shares of Series C Preferred Stock shall
          approve such alteration, amendment, deletion or change.

          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 C 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 C 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 C 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



                                      -6-
<PAGE>
 
     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 C Preferred
     Stock shall follow the applicable conversion procedures set forth in
     Paragraph B of this Article IV; provided, however, that the holders of
     Series C 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 C Preferred Stock, 200% of the
     number of shares which would be issuable if the outstanding shares of
     Series C 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 C Preferred
     Stock outstanding at the then current Conversion Price thereof. The
     Reserved Amount shall be allocated to the holders of Series C 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 C Preferred Stock, the Corporation shall immediately
     notify the holders of Series C Preferred Stock of such occurrence and shall
     take immediate action (including, if necessary, seeking stockholder
     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 of the outstanding Series C 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 C 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 C
     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 C 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.



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<PAGE>
 
          C. Adjustment to Conversion Price. If the Corporation is prohibited,
     at any time, from issuing shares of Common Stock upon conversion of Series
     C 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 C
     Preferred Stock held by any holder (including shares of Series C 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 C 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 C 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:

               "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 C 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 C 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 C Preferred Stock, and (ii) with respect to a Conversion
          Default described in clause (y) of its definition, the date the
          Corporation begins to issue unlegended shares of Common Stock in
          satisfaction of all conversions of Series C 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 C Preferred Stock held by such holder pursuant to paragraph
          D of this Article VI.



                                      -8-
<PAGE>
 
          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 C 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 C Preferred Stock held
     by such holder (including shares of Series C 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 C
     Preferred Stock with respect to such unconverted shares of Series C
     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 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 C
     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


                                      -9-
<PAGE>
 
     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 C 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 C
     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 C 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 C 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.



                                      -10-
<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 C Preferred Stock (a "Trading Market Trigger
     Event"), the Corporation shall immediately notify the holders of Series C
     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 C 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 C 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 C 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 C 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 C
     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 C 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 C Preferred Stock because the shares of Common Stock
     underlying such Series C 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 C Preferred Stock
          (including any shares of Series C 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



                                      -11-
<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 C 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 C Preferred Stock held by any holder (including shares of Series C
     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 C 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 C Preferred Stock upon conversion of the Series C 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
          C 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



                                      -12-
<PAGE>
 
               (iv) the Corporation provides notice to any holder of Series C
          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 C 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 C 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 C 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 C 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
C Preferred Stock stating the date upon which the Corporation received such
Redemption Notice


                                      -13-
<PAGE>
 
and the amount of Series C Preferred Stock covered thereby. Subject to Article
VIII.D, the Corporation shall not redeem any shares of Series C 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 during such
three trading day period, each holder of Series C 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 C 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 C 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 C Preferred Stock then
     outstanding, or if such agreement cannot be reached within



                                      -14-
<PAGE>
 
     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
     C Preferred Stock, with the costs of such appraisal to be borne by the
     Corporation.

          C. Redemption Defaults. If the Corporation fails to pay any holder the
     Redemption Amount with respect to any share of Series C Preferred Stock
     within five business days after its receipt of a notice requiring such
     redemption (a "Redemption Notice"), then the holder of Series C 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 C 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 C Preferred Stock from each holder pro rata,
     based on the total number of shares of Series C 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 C 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 C Preferred Stock by facsimile
          and overnight courier stating that the Corporation will redeem any
          conversions of Series C 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 C
          Preferred Stock within such ten (10) day period, the Corporation shall
          not be permitted to so redeem any conversions of Series C 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



                                      -15-
<PAGE>
 
          of the Series C Preferred Stock which are the subject of the Notice of
          Conversion for the Redemption Amount as determined pursuant to clause
          (a) of its definition.

               (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 C Preferred Stock by
          paying to each holder an amount per share of Series C 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 C Preferred Stock shall remain
          entitled to convert shares of Series C 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 C
     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 C 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 C Preferred Stock subject to the Void
     Optional Redemption Notice, and (ii) the Corporation shall immediately
     return any shares of Series C Preferred Stock subject to the Void Optional
     Redemption Notice

                                    IX. RANK

     The Series C 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 C
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 C Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series C
Preferred Stock ("Senior Securities"); and (iii) pari passu with the Series A
Preferred Stock of the Corporation, Series B 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 C Preferred Stock obtained in
accordance with Article XIII hereof) specifically ranking by its terms on parity
with the Series C 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.



                                      -16-
<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 C
     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 C
     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 C 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 C 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 C
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.



                                      -17-
<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 C 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 C Preferred Shares
     then outstanding) shall be made with respect to the rights and interests of
     the holders of the Series C Preferred Stock to the end that the economic
     value of the shares of Series C 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 C 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



                                      -18-
<PAGE>
 
     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 C 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 of
     Common Stock authorized and available for issuance upon conversion of the
     shares of Series C 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 C 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 C Preferred
     Stock shall be entitled, upon any conversion of shares of Series C
     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




                                      -19-
<PAGE>
 
     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"), 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 C
     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 C 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 C 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 C Preferred Stock,
     furnish to such holder



                                      -20-
<PAGE>
 
     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 C Preferred Stock.


                               XII. VOTING RIGHTS

     The holders of the Series C Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "Business Corporation Act") and in Article XIII below.

     Notwithstanding the above, the Corporation shall provide each holder of
Series C Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its stockholders
for the purpose of determining stockholders entitled to (a) receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger consolidation or recapitalization)
any share of any class or any other securities or property, or to receive any
other right, or (b) to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Corporation, or any
proposed merger, consolidation, liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each holder, at least 20
days prior to the record date specified therein (but in no event earlier than
public announcement of such proposed transaction), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.

     To the extent that under the Business Corporation Act the vote of the
holders of the Series C 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 C 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 C 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 C Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series C 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. 



                                      -21-
<PAGE>
 
                           XIII. PROTECTION PROVISIONS

     So long as any shares of Series C 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 C Preferred Stock:

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

          (c) create any new class or series of capital stock having a
     preference over the Series C 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 B Preferred Stock) ranking pari passu
     with the Series C 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");

          (e) increase the authorized number of shares of Series C 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 900 shares of Series B Preferred Stock Preferred
     Stock to Marjorie Brooks, Ike Tull, Michael Tull, Mr. and Mrs. Delbert
     Allen, Jr. and Mr. and Mrs. Fritz Friday;

          (g) issue any shares of Series C 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 C Preferred Stock then outstanding.



                                      -22-
<PAGE>
 
                               XIV. MISCELLANEOUS

     A. Cancellation of Series C Preferred Stock. If any shares of Series C
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 C 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 C 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 C
Preferred Stock based on the number of shares of Series C 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 C Preferred Stock based on the
number of shares of Series C 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 C 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 remains allocated to any person or entity which does not
hold any Series C Preferred Stock shall be allocated to the remaining holders of
shares of Series C Preferred Stock, pro rata based on the number of shares of
Series C 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 C 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 C 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 C 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 C 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 C 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



                                      -23-
<PAGE>
 
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 C 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 C 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 C 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 C Preferred Stock with respect to such unconverted
shares of Series C 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
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 C 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 C 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 C 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.



                                      -24-
<PAGE>
 
                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



                                      -25-
<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



                                      -26-
<PAGE>
 
                              NOTICE OF CONVERSION

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

The undersigned hereby irrevocably elects to convert ____________ shares of
Series C 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 C 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 C 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:________________________________________________
                        ________________________________________________
                        ________________________________________________