EXHIBIT 3.5

                            ARTICLES OF AMENDMENT
                                    TO THE
                          ARTICLES OF INCORPORATION
                                      OF
                           HENLEY HEALTHCARE, INC.


      Henley Healthcare, Inc. (the "Corporation"), pursuant to the provisions of
Article 4.04 of the Texas Business Corporation Act (the "TBCA"), hereby adopts
the following Articles of Amendment to its Articles of Incorporation.

                                  ARTICLE ONE

      The name of the Corporation is Henley Healthcare, Inc.

                                  ARTICLE TWO

      The Articles of Incorporation of the Corporation are amended as follows:
the Statement of Designation of Rights and Preferences of the Series B
Convertible Preferred Stock, Par Value $.10 Per Share, filed with the Secretary
of State on July 1, 1998, as corrected and amended, is deleted in its entirety
and the Amended and Restated Statement of Designation of Rights and Preferences
of the Series B Convertible Preferred Stock attached hereto as Exhibt A is
substituted in its place.

                                 ARTICLE THREE

      These Articles of Amendment were duly adopted by the shareholder of the
Series B Convertible Preferred Stock on August 21, 1998.

                                 ARTICLE FOUR

      The number of shares of Series B Convertible Preferred Stock outstanding
at the time of the adoption of these Articles of Amendment was 4,700; and the
number of shares entitled to consent thereto was 4,700.

                                 ARTICLE FIVE

      The number of shares of the Series B Convertible Preferred Stock which
consented to these Articles of Amended was 4,700; and the number of shares which
did not consent to these Articles of Amendment was 0. The shareholders of all of
the shares of Series B Preferred Stock outstanding and entitled to vote on said
amendment have signed a consent in writing pursuant to Article 9.10(A) of the
TBCA adopting these Articles of Amendment and any written notice required by
Article 9.10(A)(4) of the TBCA has been given.

      IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles of Amendment on this 24th day of August, 1998.

                                      1
<PAGE>
                                    HENLEY HEALTHCARE, INC.

                                    /S/ DAN D. SUDDUTH
                                        Dan D. Sudduth,
                                        Executive Vice President and Chief 
                                        Financial Officer

                                      2
<PAGE>
                                                                       EXHIBIT A
 
                              AMENDED AND RESTATED
                            STATEMENT OF DESIGNATION
                        OF RIGHTS AND PREFERENCES OF THE
                     SERIES B CONVERTIBLE PREFERRED STOCK OF
                             HENLEY HEALTHCARE, INC.

FIRST:

That pursuant to authority expressly granted and vested in the Board of
Directors (the "Board of Directors" or the "Board") of this Corporation by
Article 2.13 of the Texas Business Corporation Act and the provisions of the
Articles of Incorporation, the Board of Directors, on June 30, 1998, adopted the
following resolution setting forth the designations, powers, preferences and
rights of its Series B Convertible Preferred Stock and the amendments and
corrections filed since that date (as amended and corrected, the "STATEMENT OF
DESIGNATION").

RESOLVED: That the designations, powers, preferences and rights of the
Series B Convertible Preferred Stock be, and they hereby are, as set forth
below:

                            I. DESIGNATION AND AMOUNT

      The designation of this series, which consists of 8,000 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

      For purposes of this Statement 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

                                      3
<PAGE>
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 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 before 8:00 p.m., New York City time on the Conversion Date
indicated in the Notice of Conversion. The holder shall confirm, 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 delivery
of the Notice of Conversion to the Corporation on the date on which the Notice
of Conversion is delivered or before 9:00 a.m., New York City time on the
trading day immediately succeeding such date; provided that an overnight courier
delivery which is signed for or refused by the Corporation prior to 12:00 noon,
New York City time on a given day shall be deemed to have been delivered before
9:00 a.m. New York City time on such day. If the Notice of Conversion is not so
faxed or otherwise delivered or the overnight courier, in-person or telephone
confirmation is not so made or deemed to be made before such applicable times,
then the Conversion Date shall be the date as of which both such conditions are
satisfied (i.e., the Notice of Conversion is delivered on or before 8:00 p.m.
New York City time on a given day and the overnight courier, in-person or
telephone confirmation is made or deemed to be made either on such day of
delivery or before 9:00 a.m. New York City time on the immediately succeeding
trading day). Notwithstanding the foregoing, if the Series B Preferred Stock is
being redeemed pursuant to the optional Redemption at Maturity, the Conversion
Date shall be the Maturity Date (as defined below).

      C. "CONVERSION PRICE" means 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, so long as the
Company has revenue and net income equal to or greater than the amounts set
forth below in each period set forth opposite such amounts (such amounts being
the "Performance Milestone" for such period):

FOR THE
FISCAL YEAR ENDED                             ANNUAL REVENUE   ANNUAL NET INCOME
-----------------                             --------------   -----------------
  December 31, 1998 .......................   $   60,000,000   $       3,912,000
  December 31, 1999 .......................   $   83,906,000   $       6,168,000

                                      4
<PAGE>
  December 31, 2000 .......................   $   89,995,000   $       4,989,000
  December 31, 2001 .......................   $   94,535,000   $       5,685,000


  FOR THE QUARTERLY                                               QUARTERLY NET
     PERIOD ENDED                             QUARTERLY REVENUE      INCOME
-------------------------------------------   -----------------   --------------
September 30, 1998 ........................   $      12,291,000   $      900,000

  March 31, 1999 ..........................   $      20,976,500   $    1,542,000
  June 30, 1999 ...........................   $      20,976,500   $    1,542,000
September 30, 1999 ........................   $      20,976,500   $    1,542,000

  March 31, 2000 ..........................   $      22,498,750   $    1,247,250
  June 30, 2000 ...........................   $      22,498,750   $    1,247,250
September 30, 2000 ........................   $      22,498,750   $    1,247,250

  March 31, 2001 ..........................   $      23,633,750   $    1,421,250
  June 30, 2001 ...........................   $      23,633,750   $    1,421,250
September 30, 2001 ........................   $      23,633,750   $    1,421,250

then, the Conversion Price in effect on any Conversion Date after the Filing
Date (defined below) for such period and prior to the Filing Date (defined
below) for the subsequent period shall not be less than the Floor Price in
effect on such Conversion Date, provided, however, that no Floor Price shall be
in effect (a) whenever a Reserved Amount Trigger Event (as defined in Article V
hereof), a Conversion Default (as defined in Article VI hereof), a Trading
Market Trigger Event (as defined in Article VII hereof) or a Redemption Event
(as defined in Article VIII.A hereof) shall have occurred and be then
continuing, (b) after an Announcement Date (as defined in Article XI.C hereof)
and prior to the sixth (6th) trading day following (i) the consummation of the
proposed transaction or tender offer, exchange offer or other transaction to
which the Announcement Date relates or (ii) the Abandonment Date (as defined in
Article XI.C hereof), (c) until the determination has been made as to whether
the Performance Milestone set forth above for the quarterly period ended
September 30, 1998 has been met or (d) at any time after the Company fails to
meet the Performance Milestone for any period set forth above. The term "FILING
DATE" means, with respect to any period, the date

                                      5
<PAGE>
the Company's Quarterly Report on Form 10-QSB (each a "10-QSB") or Annual Report
on Form 10-KSB (each a "10-KSB"), as the case may be, is filed with the
Securities and Exchange Commission for such period. The determination as to
whether the Performance Milestone for any period has been met shall be made by
comparing the revenue and net income for such period disclosed in the 10-QSB or
10-KSB, as the case may be, for such period, with the Performance Milestone for
such period and shall be made as of the Filing Date of such 10-QSB or 10-KSB, as
the case may be; provided, however, for purposes of making such a determination
of net income, net income shall be increased by an amount equal to the amount of
any non-cash charges and expenses taken by the Company, as reflected in its
financial statements, relating to the issuance of shares of its Series A
Preferred Stock, Series B Preferred Stock and warrants in connection therewith.
In the event the Company meets all the Performance Milestones for all the
periods set forth above, thereafter the Floor Price shall remain in effect.

      D. "FIRST CONVERSION DATE" means the earliest of (i) the date the
Registration Statement required to be filed by the Corporation pursuant to those
certain Registration Rights Agreements (the "REGISTRATION RIGHTS AGREEMENTS") by
and among the Corporation and the other signatories thereto entered into in
connection with the Securities Purchase Agreement dated as of July 1, 1998 by
and among the Corporation and the other signatory thereto (the "FIRST SECURITIES
PURCHASE AGREEMENT") and the Securities Purchase Agreement dated as of August
10, 1998 by and among the Corporation and the other signatories thereto (the
"SECOND SECURITIES PURCHASE AGREEMENT" and, together with the First Securities
Purchase Agreement, the "SECURITIES PURCHASE AGREEMENTS") is declared effective,
(ii) the date the Corporation makes a public announcement that it intends to
merge or consolidate 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,
(iii) the date any person, group or entity (including the Corporation) publicly
announces a tender offer, exchange offer or another transaction to purchase 50%
or more of the Corporation's outstanding Common Stock or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging proxy battle or otherwise, or (iv) the date on which a
Redemption Event described in Article VIII.A(iv) occurs.

      E. "FIXED CONVERSION PRICE" means the amount obtained by multiplying 1.1
by the average of the Closing Bid Prices for the Corporation's common stock, par
value $.01 per share ("Common Stock") during the five (5) consecutive trading
days ending on the Issuance Date, and shall be subject to adjustment as provided
herein.

      F. "ISSUANCE DATE" means the date of the relevant Closing under the
Securities Purchase Agreements and shall mean, with respect to Series B
Preferred Stock issued pursuant to the First Securities Purchase Agreement, July
1, 1998, and, with respect to Series B Preferred Stock issued pursuant to the
Second Securities Purchase Agreement, August 10, 1998.

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

                                      6
<PAGE>
      H. "VARIABLE CONVERSION PRICE" means, as of any date of determination, the
amount obtained by multiplying 0.87 by the average of the Closing Bid Prices for
the Common Stock for any three (3) consecutive trading days chosen by the holder
of Series B Preferred Stock during the period beginning on the twentieth trading
day prior to the Conversion Date for such Conversion and ending on such
Conversion Date (subject to equitable adjustment for any stock splits, stock
dividends, reclassifications or similar events during such 20 trading day
period), and shall be subject to adjustment as provided herein.

      I. "FLOOR PRICE" means, with respect to any Conversion Date, $3.50, and
shall be subject to adjustment as provided herein.

      J. "PREMIUM" means an amount equal to (X)x(N/365) x (1,000), where "X"
means four hundredths (.04), provided, however, that X shall mean ten hundredths
(.10) for the period beginning as of the last day of any TRADING VOLUME
VALUATION PERIOD (defined below) and thereafter in which the Trading Volume
Value (defined below) shall not equal or exceed $250,000, in which event X shall
remain four hundredths (.04) with respect to calculating the amount of the
Premium accrued prior to such day. The term "TRADING VOLUME VALUATION PERIOD"
shall mean any twenty (20) consecutive trading day period during the period
beginning on the twentieth trading day prior to August 10, 1999 and continuing
thereafter. The term "TRADING VOLUME VALUE" shall mean, for any Trading Volume
Valuation Period, the average of the products obtained by multiplying (i) the
Closing Bid Price for the Common Stock on a trading day by (ii) the total number
of shares of Common Stock traded on such trading day for each trading day in
such Trading Volume Valuation 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 First Conversion Date, convert (an "OPTIONAL CONVERSION") each of its
shares of Series B Preferred Stock into a number of fully paid and nonassessable
shares of 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

                                     7
<PAGE>
            (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 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. The
holder shall confirm 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 delivery of the Notice of Conversion to the
Corporation on the date on which the Notice of Conversion is delivered or before
9:00 a.m. New York City time on the trading day immediately succeeding such
date; provided that an overnight courier delivery which is signed for or refused
by the Corporation prior to 12:00 noon, New York City time on a given day shall
be deemed to have been delivered before 9:00 a.m. New York City time on such
day. Upon receipt by the Corporation of the Notice of Conversion by fax from a
holder, the Corporation shall, within one business day, following the later of
the Corporation's receipt of such Notice of

                                      8
<PAGE>
Conversion and the holder's overnight courier, in-person or telephone
confirmation of the delivery of such Notice of Conversion, 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,
the name and telephone number of a contact person at the Corporation regarding
the conversion and, if applicable, the language required to effect a Redemption
in Lieu of Conversion (as defined in Article VIII.D). The Corporation shall not
be obligated to issue shares of Common Stock upon a

                                      9
<PAGE>
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, after registration of the resale of such shares under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), or delivery of documentation
reasonably satisfactory to the Corporation that the registration of such shares
is not required, to such holder's nominee, (x) that number of shares of Common
Stock issuable upon conversion of such 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 other
than transfer taxes due upon conversion, if such holder has transferred to
another party the Series B Preferred Stock or the right to receive Common Stock
upon the holder's conversion thereof.

            (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 rounded up or
down to the nearest whole share, it being understood that .5 of one share shall
be rounded up to the next highest share.

            (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 the Company's outside auditors
reasonably acceptable to the holder of Series B Preferred Stock being converted
via

                                      10
<PAGE>
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 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 Agreements,
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
shareholders, 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 shall be allocated pro rata to
the holders of 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.

            (ii) No Five Percent Holders. Unless a holder of shares of Series B
Preferred Stock delivers a waiver in accordance with the last sentence of this
subparagraph (ii), except in connection with a Required Conversion at Maturity
(as defined below), in no event shall a holder of shares of Series B 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 B 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 Agreements) 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 B 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 4.99% 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. Except as provided in the immediately succeeding
sentence, 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 B Preferred Stock shall approve such alteration,
amendment, deletion or change. Notwithstanding the foregoing, a holder of shares
of Series B Preferred Stock may, by providing written notice to the Corporation,
adjust the restriction set forth in this subparagraph (ii) so that the
limitation on beneficial ownership

                                      11
<PAGE>
of 4.99% of the outstanding shares of Common Stock referred to above shall be
increased to 9.99%, which adjustment shall not take effect until the 61st day
after the date of such notice.

            (iii) TIME LIMITATIONS. (a) So long as no Conversion Default (as
defined in Article VI hereof) or Redemption Event (as defined in Article VIII.A
hereof) has occurred and is then continuing, and except as otherwise provided
below, a holder of Series B Preferred Stock may not convert shares of Series B
Preferred Stock to the extent that the total number of shares of Series B
Preferred Stock previously converted by such holder (excluding for purposes of
this calculation any shares of Series B Preferred Stock converted by such holder
following the occurrence and during the continuation of a Conversion Default or
Redemption Event) together with the number of shares of Series B Preferred Stock
which such holder is attempting to convert exceeds the Maximum Conversion
Percentage (as defined herein) multiplied by the total number of shares of
Series B Preferred Stock purchased by such holder pursuant to the Securities
Purchase Agreements (with respect to each such holder, the "Original Share
Amount"). A holder's Original Share Amount shall be increased or decreased, as
applicable, upon any sale or purchase by such holder of shares of Series B
Preferred Stock occurring after the Issuance Date. "Maximum Conversion
Percentage" means:


      IF THE CONVERSION DATE IS:      THEN THE MAXIMUM CONVERSION PERCENTAGE IS:

      On or after the 30th day 
      following July 1, 1998 
      (the "Initial Issuance 
      Date") and before the
      60th day following the
      Initial Issuance Date                           15%

      On or after the 60th day
      following the Initial
      Issuance Date and before
      the 90th day following 
      the Initial Issuance Date                       30%

      On or after the 90th day
      following the Initial 
      Issuance Date and before 
      the 120th day following 
      the Initial Issuance Date                       45%

      On or after the 120th day
      following the Initial 
      Issuance Date and before 
      the 150th day following 
      the Initial Issuance Date                       60%

      On or after the 150th day
      following the Initial 
      Issuance Date and before 
      the 180th day following 
      the Initial Issuance Date                       75%

                                      12
<PAGE>
      On or after the 180th day
      following the Initial 
      Issuance Date and before 
      the 210th day following 
      the Initial Issuance Date                       90%

      On or after the 210th day
      following the Initial 
      Issuance Date                                  100%

      (b)  Notwithstanding the foregoing, the restrictions on conversion set
forth in this Article IV.C. (iii) shall terminate (i) on or after the date the
Corporation makes a public announcement that it intends to merge or consolidate
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 to sell or
transfer all or substantially all of the assets of the Corporation or (ii) on or
after the date any person, group or entity (including the Corporation) 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.

      D. REQUIRED CONVERSION AT MATURITY. 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, 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
fifth anniversary of the Issuance Date thereof Date (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"). 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. Upon the initial issuance of the shares of Series B
Preferred Stock, the Corporation shall reserve 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 Initial Issuance Date based on the
Conversion Price in effect on the First Conversion Date of the authorized but
unissued shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock 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.

                                      13
<PAGE>
      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 shareholder 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 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.A.

      D. LIMITATIONS ON REDEMPTION RIGHT. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series B Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series B Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below that number of shares of Common Stock computed as set
forth in Article V.A.; (ii) the Corporation shall have taken immediate action
following the applicable Authorization Trigger Date (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 B Preferred
Stock; and (iii) the Corporation continues to use its commercially reasonable
good faith best efforts (including the resolicitation of 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 B Preferred Stock. The Corporation
will be deemed to be using "its commercially reasonable good faith best efforts"
to increase the Reserved Amount so long as it solicits stockholder approval to
authorize the issuance of additional shares of Common Stock not less than three
(3) times during each twelve month period following the applicable Authorization
Trigger Date during which any shares of Series B Preferred Stock remain
outstanding.

                                      14
<PAGE>
                      VI.  FAILURE TO SATISFY CONVERSIONS

      A. CONVERSION DEFAULTS. The following shall constitute a "CONVERSION
DEFAULT": (i) following the submission by a holder of shares of Series B
Preferred Stock of a Notice of Conversion, the Corporation fails for any reason
(other than because of an event described in clause (iii) below) to deliver, on
or prior to the tenth business day following the expiration of the Delivery
Period for such conversion, such number of shares of Common Stock without a
restrictive legend covered by an effective registration statement to which such
holder is entitled upon such conversion, (ii) the Corporation provides notice to
any holder of Series B Preferred Stock at any time of its intention not to issue
freely tradeable shares of Common Stock upon exercise by any holder of its
conversion rights in accordance with the terms of this Statement of Designation
(other than because of an event described in clause (iii) below), or (iii) 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 the Corporation (A) does not at the date of such
conversion have available a sufficient number of authorized and reserved shares
of Common Stock or (B) such listing or issuance would exceed the then unissued
portion of such holder's Cap Amount. In the case of a Conversion Default
described in clause (i) or (iii) above, 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 (x) the Fixed Conversion Price on the date of the
Conversion Default and (y) the lowest Conversion Price in effect during the
period beginning on, and including, such date through and including (A) in the
case of a Conversion Default referred to in clause (i) above, the earlier of (1)
the day such shares of Common Stock are delivered to the holder and (2) 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, and (B) in the case of a Conversion
Default referred to in clause (iii) above, the date on which the prohibition on
listing or issuance of Common Stock terminates. In the case of a Conversion
Default described in clause (ii) above, the Fixed Conversion Price with respect
to any conversion thereafter shall be the lowest Conversion Price in effect at
any time during the period beginning on, and including, the date of the
occurrence of such Conversion Default through and including the Default Cure
Date (as defined below). Following any adjustment to the Fixed Conversion Price
pursuant to this Article VI.A, the Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI. Upon the
occurrence of each reset of the Fixed Conversion Price pursuant to this
Paragraph A, the Corporation, at its expense, shall promptly compute the new
Fixed Conversion Price and prepare and furnish to each holder of Series B
Preferred Stock a certificate setting forth such new Fixed Conversion Price and
showing in detail each Conversion Price in effect during such reset period.

      "DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series B Preferred Stock, (ii) with
respect to a Conversion Default described in clause (ii) of its definition, the
date the Corporation issues shares of Common Stock without a restrictive legend
covered by an effective registration statement in satisfaction of all
conversions of Series B Preferred Stock in accordance with Article IV.A, and
(iii) with respect to a Conversion Default described in clause (i) or clause
(ii) of its definition, the date on which the Corporation redeems shares of
Series B Preferred Stock held by such holder pursuant to paragraph C of this
Article VI.

                                      15
<PAGE>
      B.    Intentionally Omitted.

      C. 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.

      D. 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(i)(y), provided the Redemption Amount therefor has been or may
be paid within the time limits set forth in Article VIII.D(iv), 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.

             VII.  INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT

      A. OBLIGATION TO CURE. If at any time after September 30, 1998 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 shareholders 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

                                      16
<PAGE>
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

            (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

                                      17
<PAGE>
      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 First Conversion
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 full 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 Statement of Designation, the Securities Purchase Agreements or
the Registration Rights Agreements (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 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 Statement 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);

            (iv) 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) and its
capital stock is unchanged; or

                  (c) have fifty percent (50%) or more of the voting power of
its capital stock 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); or

            (vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreements or the Registration Rights
Agreements and such breach continues for 5 business days after the Corporation
has been notified thereof in writing by the holder;

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

                                      18
<PAGE>
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), (iii) or (iv) 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 immediately (and in any event within one business day
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 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:

                          V
                        ----- x M
                         C P

provided, however, if the Conversion Price is equal to or greater than the Floor
Price, Redemption Amount shall mean the greater of:

                          V
                        ----- x M
                         C P

      and   (ii)  V   x   1.13

where:

      "V" means the Face Amount 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

                                      19
<PAGE>
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" 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.

      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 the lowest Conversion Price in effect 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 (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 B Preferred Stock in such
calendar month (an "OPTIONAL REDEMPTION NOTICE"). In the event the Corporation
fails to provide

                                     20
<PAGE>
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 B Preferred Stock during such calendar month. In the
event a timely Optional Redemption Notice is provided as aforesaid, upon
Corporation's receipt of a Notice of Conversion the Corporation shall be
obligated to redeem 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
defined in Article VIII.B).

      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 the Corporation's
Common Stock; (ii) prior to any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series B
Preferred Stock ("JUNIOR SECURITIES"); (iii) 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 (iv) pari passu with the Series A Preferred
Stock and any other 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 ("PARI PASSU SECURITIES"),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.

                          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

                                      21
<PAGE>
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, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up, including, but not limited to, the sale or
transfer of all or substantially all of the Corporation's assets in one
transaction or in a series of related transactions (a "LIQUIDATION EVENT"), 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. 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. 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.

      C. 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 Statement of Designation filed in respect thereof.

                   XI.  ADJUSTMENTS TO THE CONVERSION PRICE

      The Conversion Price and the Floor 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
Initial 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 and the Floor 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 and the Floor 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.

                                      22
<PAGE>
      B. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time after the
Initial 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), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) -(iv) 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 and the Floor Price so that
the Fixed Conversion Price and the Floor 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 Floor 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.H 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 shareholders 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 Statement 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 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 Initial Issuance Date (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 its capital
stock is unchanged) 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) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the

                                      23
<PAGE>
Corporation's Common Stock or otherwise publicly announces an intention to
replace a majority of the Corporation's Board of Directors by waging or 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 tenth trading day following 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 Initial
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 shareholders 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 shareholders 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 shareholders entitled to such Distribution.

      E. ISSUANCE OF OTHER SECURITIES. If at any time after the Initial 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
Dilutive Price (as defined in this subparagraph) on the date of issuance (a
"DILUTIVE ISSUANCE"), then effective immediately upon the Dilutive Issuance, the
Conversion Price will be adjusted in accordance with one of the two formulas
below. For purposes of this subparagraph, "DILUTIVE PRICE" means (i) the Floor
Price if, prior to the date of the Dilutive Issuance, the Company has met all
Performance Milestones or (ii) otherwise, the Market Price (as hereinafter
defined). If the Company has met all Performance Milestones (as defined in the
Statement of Designation), the Conversion Price will be adjusted in accordance
with the following formula:


                       O + P/F         
            C' = C x  -------------- ;  
                        CSDO

                                      24
<PAGE>
or otherwise in accordance with the following formula:

                        O + P/M       
            C' =  C  x --------- ;
                          CSDO

where:

            C'    =  the adjusted Conversion Price;
            C     =  the then current Conversion Price;
            M     =  the then current Market Price;
            F     =  the Floor 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 Initial 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 Floor 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
Floor 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.

                                     25
<PAGE>
                              XII.  VOTING RIGHTS

      The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Texas Business Corporation Act
(the "BUSINESS CORPORATION ACT") and in Article XIII below.

      Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its shareholders
for the purpose of determining shareholders 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 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 shareholders 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 a majority in interest
of the holders 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;

                                     26
<PAGE>
                  (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 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");

                  (e) increase the authorized number of shares of Series B
Preferred Stock;

                  (f)   issue any shares of Senior Securities;

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

                  (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.

                                      27
<PAGE>
      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 remains allocated to any person or entity which does not
hold any Series B Preferred Stock shall be 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 Agreements 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 Statement 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

                                      28
<PAGE>
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
Statement 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 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 Statement of
Designation shall be cumulative and in addition to all other remedies available
under this Statement 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 Statement 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.

                                      29
<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 HENLEY HEALTHCARE, INC. (the "CORPORATION") according
to the conditions of the Statement of Designation, Rights and Preferences of the
Series B Convertible Preferred Stock of Henley Healthcare, Inc. (the "STATEMENT
OF DESIGNATION"), 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: _______________________________________________

                                 _______________________________________________
            
                                 _______________________________________________

                                       30