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                                                                    EXHIBIT 4.01

          CERTIFICATE OF DESIGNATION AND DETERMINATION OF RIGHTS AND
            PREFERENCES OF CUMULATIVE CONVERTIBLE PREFERRED STOCK,
                                   SERIES A,
                                      OF
                         INTEGRATED ORTHOPAEDICS, INC.


     Integrated Orthopaedics, Inc., a Texas corporation (the "Company"), does
hereby certify that:

     FIRST:   The name of the Company is Integrated Orthopaedics, Inc.

     SECOND:  By unanimous vote of the Board of Directors of the Company (the
"Board of Directors") at a meeting duly called and held, the following
resolutions were duly adopted:

          RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, as amended through the date hereof,
of the Company (the "Articles of Incorporation"), a series of the class of
authorized Preferred Stock, with a par value of $0.01 per share, of the Company
be hereby created, and that the designation of amount thereof and the voting
powers, preferences and relative, optional and other special rights of the
shares of such series, and the qualifications, limitations and restrictions of
such series, be as set forth below; and

          RESOLVED FURTHER, that such provisions supersede any prior certificate
of designation filed by the Company with the Secretary of State of the State of
Texas with respect to such series of the class of Preferred Stock authorized
hereby.

          1.  Designation.  The designation of the Series of Preferred Stock
authorized hereby shall be "Cumulative Convertible Preferred Stock, Series A"
("Series A Preferred Stock") with a par value of $0.01 per share, and 26,000
shares are hereby authorized for issuance.

          2.  Ranking.  The Series A Preferred Stock shall rank as to dividends
(i) senior to the Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") and any other class or series of capital stock that by its
express terms provides that it ranks junior to the Series A Preferred Stock as
to dividends or that does not expressly provide for any ranking as to dividends
("Junior Securities"), (ii) on a parity with the Series B Preferred Stock, par
value $0.01 per 
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share, of the Company (the "Series B Preferred Stock") and any other class or
series of capital stock that by its express terms provides that it ranks on a
parity with the Series A Preferred Stock as to payment of dividends ("Parity
Securities") and (iii) junior to any class or series of capital stock that by
its express terms provides that it ranks senior to the Series A Preferred Stock
("Senior Securities").

          3.  Dividends.  The holders of Series A Preferred Stock shall be
entitled to receive cumulative cash dividends at the rate of (i) $8.00 per share
for the period beginning on the date of issuance and ending on June 30, 2001,
(ii) $10.00 per share for the period beginning July 1, 2001 and ending on June
30, 2002, (iii) $12.00 per share for the period beginning July 1, 2002 and
ending on June 30, 2003, and (iv) $16.00 per share after July 1, 2004 (subject
to appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares) per annum,
and no more, payable quarterly on March 31, June 30, September 30 and December
31.  Such dividends shall first be payable on June 30, 1999.  Such dividends
shall be payable in preference and priority to any payment of any cash dividend
on Junior Securities, when and as declared by the Board of Directors of the
Company.  Notwithstanding the foregoing, the Company may defer payment of
accrued dividends to the holders of the Series A Preferred Stock to the extent
the dividends cannot be paid from the Company's "Free Cash Flow" (as hereinafter
defined).  Such dividends may be deferred until the earlier of such times as
Free Cash Flow is available for payment of same or June 30, 2001.

          Free Cash Flow is defined as the Net Increase in Cash and Cash
Equivalents (as expressed in the Company's "Consolidated Statement of Cash
Flows" for the number of months which have passed since the end of the prior
fiscal year, calculated as of the end of the month most recently ended prior to
the due date of a dividend payment), adjusted to eliminate any net cash provided
or used by financing activities, minus any accrued dividends on Series A
Preferred Stock, less $750,000.

          Such dividends shall (even though such dividends are not payable until
beginning June 30, 1999) accrue with respect to each share of Series A Preferred
Stock from the date on which such share is issued and outstanding and thereafter
shall be deemed to accrue from day to day whether or not earned or declared and
whether or not there exists profits, surplus or other funds legally available
for the payment of dividends, and shall be cumulative so that if such dividends
on the Series A Preferred Stock shall not have been paid, or declared and set
apart for payment, the deficiency shall be fully paid or declared and set apart
for payment before any dividend shall be paid or declared or set apart for any
Junior Securities or (other than dividends on Series B Preferred Stock or other
Parity Securities paid in additional shares of Series B Preferred Stock) any
Parity Securities and before any purchase or acquisition of any Junior
Securities or Parity Securities is made by the Company. At the earlier of: (1)
the redemption of the Series A Preferred Stock, (2) the liquidation, sale or
merger
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<PAGE>
 
of the Company or (3) June 30, 2001, any accrued but unpaid dividends shall be
paid to the holders of record of outstanding shares of Series A Preferred Stock.

          The Company shall give written notice, sent by first class certified
mail, postage prepaid and return receipt requested, specifying the date and
amount of each dividend to be paid on Series A Preferred Stock, at least 5 days
in advance of the dividend payment date to all holders of record of the Series A
Preferred Stock as their names and addresses appear on the share register of the
Company on the date of such notice.  Each dividend shall be mailed to the
holders of record of the Series A Preferred Stock as their names and addresses
appear on the share register of the Company on the corresponding dividend
payment date.  Anything contained in this Section 3 to the contrary
notwithstanding, the holders of shares of Series A Preferred Stock with respect
to which dividends are to be paid in accordance with this Section shall have the
right, exercisable at any time up to the close of business on the applicable
dividend payment date to convert all or any part of such shares into shares of
Common Stock pursuant to Section 10 hereof and for such purpose such dividend
shall not be deemed to have been paid or set apart at the date of such
conversion.

          4.  Preference on Liquidation, etc.  In the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, before any
payment or distribution of the assets of the Company (whether capital or
surplus), or proceeds thereof, shall be made to or set apart for the holders of
shares of any Junior Securities, the holders of shares of Series A Preferred
Stock shall be entitled to receive payment of $100 per share held by them, plus
an amount equal to all accrued and unpaid dividends thereon, whether or not
declared to the date of such payment.  If, upon any liquidation, dissolution or
winding-up of the Company, the assets of the Company, or proceeds thereof,
distributed among the holders of shares of Series A Preferred Stock and the
holders of all Parity Securities shall be insufficient to pay in full the
respective preferential amounts on shares of Series A Preferred Stock and all
Parity Securities, then such assets, or the proceeds thereof, shall be
distributed among the holders of Series A Preferred Stock and the holders of
Parity Securities ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full.
After payment of the full amount of the liquidation preference to which the
holders of Series A Preferred Stock are entitled, such holders will not be
entitled to any further participation in any distribution of assets of the
Company.  For the purpose of this Section 4, none of the merger or the
consolidation of the Company into or with another corporation or the merger or
consolidation of any other corporation into or with the Company or the sale,
transfer, or other disposition of all or substantially all of the assets of the
Company, shall be deemed to be a voluntary or involuntary liquidation,
dissolution, or winding-up of the Company.

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<PAGE>
 
          5.   Retirement of Shares.  Shares of Series A Preferred Stock that
have been issued and have been redeemed, repurchased or reacquired in any manner
by the Company shall be retired and not reissued and shall resume the status of
authorized but unissued and non-designated shares of preferred stock of the
Company.

          6.   Voting.  Each holder of Series A Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Common
Stock into which such shares of Series A Preferred Stock could be converted
pursuant to the provisions of Section 10 hereof at the record date for the
determination of the shareholders entitled to vote on such matters or, if no
such record date is established, the date such vote is taken or any written
consent of shareholders is solicited.  Each holder of Series A Preferred Stock
shall have full voting rights and powers equal to the voting rights and powers
of the holders of Common Stock, and shall be entitled to notice of any
shareholders' meeting in accordance with the bylaws of the Company (as in effect
at the time in question) and applicable law, and shall be entitled to vote,
together with the holders of Common Stock, with respect to any question upon
which holders of Common Stock have the right to vote, except for the election of
directors and as may be otherwise provided by applicable law.  Except as
otherwise expressly provided herein or as required by law, and except for the
vote of the Series A Preferred Stock provided for in Section 7 and Section 8
hereof, the holders of Series A Preferred Stock and the holders of Common Stock
shall vote together and not as separate classes.

          7.   Special Voting Rights.  After June 30, 2001, the number of
directors constituting the Board of Directors of the Company shall be increased
by one, and the holders of Series A Preferred Stock, voting as a separate series
shall be entitled by written consent or at the next annual meeting of
stockholders or the next special meeting of stockholders, or at a special
meeting of holders of Series A Preferred Stock called as hereinafter provided,
to elect a director to fill such newly created directorship, without diminution
of their right to participate with holders of Common Stock and holders, if any,
of any other capital stock of the Company entitled to vote for the election of
directors in the election of any other directors.

          Whenever such voting right shall vest, it may be exercised initially
by consent in writing of the holders of two-thirds of the Series A Preferred
Stock at the time outstanding or at a special meeting of holders of Series A
Preferred Stock or at any annual or special stockholders' meeting, but
thereafter it shall be exercised only at annual stockholders' meetings.  A
special meeting for the exercise of such right shall be called by the Secretary
of the Company within ten days after receipt of a written request therefor,
signed by the holders of record of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock; however, no such special meeting
shall be held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.

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<PAGE>
 
          Any director who shall have been elected by holders of Series A
Preferred Stock as a series pursuant to this subsection shall hold office for a
term expiring (subject to the earlier termination of arrearages) at the next
annual meeting of stockholders, and during such term may be removed at any time,
either for or without cause, only by the affirmative votes of holders of record
of a majority of the votes of the then outstanding shares of Series A Preferred
Stock given at a special meeting of such stockholders called for the purpose or
by written consent of two-thirds.  Any vacancy created by such removal may also
be filled at such meeting or by such a consent.  A meeting for the removal of a
director elected by holders of Series A Preferred Stock as a series and the
filling of the vacancy created thereby shall be called by the Secretary of the
Company within ten days after receipt of a written request therefor, signed by
the holders of not less than 25% of the votes of the then outstanding shares of
Series A Preferred Stock.  Such meeting shall be held at the earliest
practicable date thereafter.

          Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of arrearages) of a director who shall have been
elected by the holders of Series A Preferred Stock as a series pursuant to this
subsection may be filled only by the holders of Series A Preferred Stock by
written consent of two-thirds, at any annual or special stockholders' meeting,
or at a meeting called for such purpose.  Such meeting of the holders of Series
A Preferred Stock shall be called by the Secretary of the Company at the
earliest practicable date after any such death or resignation and in any event
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding shares of
Series A Preferred Stock.

          If any meeting of the holders of Series A Preferred Stock required by
this subsection to be called shall not have been called within ten days after
personal service of a written request therefor upon the Secretary of the Company
or within 15 days after mailing the same within the United States of America by
registered mail addressed to the Secretary of the Company at its principal
office, then holders of record of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock may designate in writing one of
their number to call such a meeting may be called by such person so designated
upon the notice required for annual meetings of stockholders.  Any holder of
Series A Preferred Stock so designated shall have access to the stock books of
the Company for the purpose of causing meetings of stockholders to be called
pursuant to these provisions.

          Any meetings of holders of Series A Preferred Stock to vote as a
series for the election or removal of directors shall be held at such place or
places designated in the Company's Bylaws for meeting of its stockholders or at
such other place as the holders of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock may designate.  At such meeting,
the presence in person or 

                                       5
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by proxy of holders of a majority of the votes of the then outstanding shares of
Series A Preferred Stock shall be required to constitute a quorum; in the
absence of a quorum, a majority of the holders present in person or by proxy
shall have power to adjourn the meeting from time to time without notice, other
than announcement at the meeting, until a quorum shall be present.

          8.   Other Rights and Amendments.  Except as otherwise provided by
law, without the written consent of two-thirds of the outstanding shares of
Series A Preferred Stock or the vote of holders of two-thirds of the outstanding
shares of Series A Preferred Stock (voting as a class) at a meeting of the
holders of Series A Preferred Stock called for such purpose, the Company will
not (i) create, authorize or issue any Parity Securities or Senior Securities,
(ii) increase the authorized number of shares of Series A Preferred Stock or
(iii) amend, alter, repeal or waive any provision of the bylaws, the Articles of
Incorporation or this Certificate of Designation so as to adversely affect the
preferences, rights, powers or other terms of the Series A Preferred Stock.

          9.   Issuance.  The Company will not issue more than 26,000 shares of
Series A Preferred Stock.

          10.  Conversion.  The outstanding shares of Series A Preferred Stock
shall be convertible into Common Stock as follows:

          10.1 Optional Conversion.

               (a) At the option of the holder thereof, each share of Series A
Preferred Stock shall be convertible, at any time or from time to time, into
fully paid and nonassessable shares of Common Stock as provided herein.

               (b) Each holder of Series A Preferred Stock who elects to convert
the same into shares of Common Stock shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or any
transfer agent for the Series A Preferred Stock or Common Stock, and shall give
written notice to the Company at such office that such holder elects to convert
the same and shall state therein the number of shares of Series A Preferred
Stock being converted. Thereupon the Company shall promptly issue and deliver at
such office to such holder a certificate or certificates for the number of
shares of Common Stock to which such holder is entitled upon such conversion.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate or certificates
representing the shares of Series A Preferred Stock to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.

                                       6
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          10.2 Mandatory Conversion.

               (a) Mandatory Conversion Event.  The Company may, at its option,
require all (and not less than all) holders of shares of Series A Preferred
Stock then outstanding to convert their shares of Series A Preferred Stock into
shares of Common Stock, at the then effective Conversion Price if the average
daily trading volume of Common Stock for the 30 consecutive days of trading
ending not more than 5 calendar days immediately preceding the date of the
notice described in this subsection 10(a) equals or exceeds 16,500 shares
(33,000 if the principal trading market for Common Stock is a NASDAQ or other
over-the-counter market and such market includes, or "double counts," both buy
and sell transactions with respect to the same shares in reporting volume) and
the Company's  Common Stock shall have had an average closing market price on
the principal stock exchange on which it is listed (or, if not listed on any
stock exchange, a last sale price on the NASDAQ National Market System, or if
not listed or admitted to trading on such system, a closing bid price in the
over-the-counter market) of not less than $5.50 (subject to appropriate
adjustments in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares) on the same period of 30
consecutive trading days.  All holders of record of shares of Series A Preferred
Stock then outstanding will be given at least 10 days' prior written notice of
the date fixed and the place designated for mandatory or special conversion of
all such shares of Series A Preferred Stock pursuant to this Section 10.2.  Such
notice will be sent by first class or registered mail, postage prepaid, to each
record holder of Series A Preferred Stock at such holder's address last shown on
the records of the Company.

               (b) Effect of Mandatory Conversion.  Upon the date filed for
conversion in accordance with Section 10.2(a) hereof, the outstanding shares of
Series A Preferred Stock shall be converted into Common Stock automatically
without the need for any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Company or its transfer agent; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless the certificates evidencing such shares of Series A
Preferred Stock are either delivered to the Company or its transfer agent as
provided below, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates.  Upon the occurrence of such mandatory
conversion of the Series A Preferred Stock, the holders of Series A Preferred
Stock shall surrender the certificates representing such shares at the office of
the Company or any transfer agent for the Series A Preferred Stock or Common
Stock.  Thereupon, there shall be issued and delivered to such holder promptly
at such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of Common
Stock 

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into which the shares of Series A Preferred Stock surrendered were convertible
on the date on which such mandatory conversion occurred.

          10.3 Conversion Price.  Each share of Series A Preferred Stock shall
be convertible in accordance with Section 10.1 or 10.2 hereof into the number of
shares of Common Stock that results from dividing the liquidation value for
Series A Preferred Stock (including the stated liquidation preference and
accrued but unpaid dividends) by the conversion price for Series A Preferred
Stock that is in effect at the time of conversion (the "Conversion Price").  The
initial Conversion Price for the Series A Preferred Stock shall be the lesser of
(a) $3.50 per share and (b) the average closing sales price for the twenty days
immediately preceding the conversion of the Series A Preferred Stock.  The
Conversion Price of the Series A Preferred Stock shall be subject to adjustment
from time to time as provided below.

          10.4 Adjustment Upon Common Stock Event.  Upon the happening of a
Common Stock Event (as hereinafter defined), the Conversion Price of the Series
A Preferred Stock shall, simultaneously with the happening of such Common Stock
Event, be adjusted by multiplying the Conversion Price of Series A Preferred
Stock in effect immediately prior to such Common Stock Event by a fraction, (a)
the numerator of which shall be the number of shares of Common Stock issued and
outstanding immediately prior to such Common Stock Event, and (b) the
denominator of which shall be the number of shares of Common Stock issued and
outstanding immediately after such Common Stock Event, and the product so
obtained shall thereafter be the Conversion Price for Series A Preferred Stock.
The Conversion Price for Series A Preferred Stock shall be readjusted in the
same manner upon the happening of each subsequent Common Stock Event.  As used
herein, the term "Common Stock Event" means (i) the issue by the Company of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock, (ii) a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock or (iii) a combination of
the outstanding shares of Common Stock into a smaller number of shares of Common
Stock.

          10.5 Adjustment for Other Dividends and Distributions.  If at any time
or from time to time after the Original Issue Date the Company pays a dividend
or makes any other distribution to the holders of the Common Stock payable in
securities of the Company other than shares of Common Stock, then in each such
event provision shall be made so that the holders of the Series A Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable upon conversion thereof, the amount of securities of
the Company that they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event (or such record date,
as applicable) and had they thereafter, during the period from the date of such
event (or such record date, as applicable) to and including the conversion date,
retained such securities receivable by 

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them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section 10 with respect to the rights of the
holders of the Series A Preferred Stock or with respect to such other securities
by their terms.

          10.6 Adjustment for Reclassification, Exchange and Substitution.  If
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series A Preferred Stock is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than by a Common Stock
Event or a stock dividend, reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section 10), then in any such event each
holder of Series A Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of Series
A Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.  The Company shall give each holder of Series A Preferred Stock
at least 30 days prior written notice of any event requiring adjustment pursuant
to this Section 10.6.

          10.7 Sale of Shares Below Conversion Price.

               (a) Adjustment Formula. If at any time or from time to time after
the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this Section 10.7 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in Section 10.4 hereof, a dividend or
distribution as provided in Section 10.5 hereof or a recapitalization,
reclassification or other change as provided in Section 10.6 hereof, for an
Effective Price (as hereinafter defined) that is less than the Conversion Price
for Series A Preferred Stock in effect immediately prior to such issue or sale,
then, and in each such case, the Conversion Price for Series A Preferred Stock
shall be reduced, as of the close of business on the date of such issue or sale,
to the price obtained by multiplying such Conversion Price by a fraction:

                   (1) The numerator of which shall be the sum of (A) the number
     of Common Stock Equivalents Outstanding (as hereinafter defined)
     immediately prior to such issue or sale of Additional Shares of Common
     Stock plus (B) the quotient obtained by dividing the Aggregate
     Consideration Received (as hereinafter defined) by the Company for the
     total number of Additional Shares of Common Stock so issued or sold (or
     deemed so issued and sold pursuant to the provisions of Section 10.7(c)
     hereof) by the 

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     Conversion Price for Series A Preferred Stock in effect immediately prior
     to such issue or sale; and

                   (2) The denominator of which shall be the sum of (A) the
     number of Common Stock Equivalents Outstanding immediately prior to such
     issue or sale plus (B) the number of Additional Shares of Common Stock so
     issued or sold (or deemed so issued and sold pursuant to the provisions of
     Section 10.7(c) hereof).

               (b) Certain Definitions.  For the purpose of making any
adjustment required under this Section 10.7:

                   (1) "Additional Shares of Common Stock" shall mean all shares
     of Common Stock issued by the Company, whether or not subsequently
     reacquired or retired by the Company and whether or not restricted at the
     time of issuance or sale (or deemed issuance or sale), other than (A)
     shares of Common Stock issued or issuable upon conversion of Series A
     Preferred Stock and (B) Excluded Securities.

                   (2) The "Aggregate Consideration Received" by the Company for
     any issue or sale (or deemed issue or sale) of securities shall (A) to the
     extent it consists of cash, be computed at the gross amount of cash
     received by the Company after deduction of any underwriting or similar
     commissions, compensation or concessions paid or allowed by the Company in
     connection with such issue or sale and any expenses payable by the Company;
     (B) to the extent it consists of property other than cash, be computed at
     the fair value of that property as determined in good faith by the Board of
     Directors; and (C) if Additional Shares of Common Stock, Convertible
     Securities or Rights or Options to purchase either Additional Shares of
     Common Stock or Convertible Securities are issued or sold together with
     other stock or securities or other assets of the Company for a
     consideration that covers both, be computed as the portion of the
     consideration so received that may be reasonably determined in good faith
     by the Board of Directors to be allocable to such Additional Shares of
     Common Stock, Convertible Securities or Rights or Options.

                   (3) "Common Stock Equivalents Outstanding" shall mean the
     number of shares of Common Stock that is equal to the sum of (A) all shares
     of Common Stock of the Company that are outstanding at the time in
     question, plus (B) all shares of Common Stock of the Company issuable upon
     conversion of all shares of Series A Preferred Stock or other Convertible
     Securities that are outstanding at the time in question, plus (C) all
     shares of Common Stock of the Company that are issuable upon the exercise
     of vested

                                       10
<PAGE>
 
     Rights or Options that are outstanding at the time in question assuming the
     full conversion or exchange into Common Stock of all such vested Rights or
     Options that are vested Rights or Options to purchase or acquire
     Convertible Securities into or for Common Stock.

                   (4) "Convertible Securities" shall mean stock or other
     securities convertible into or exchangeable for shares of Common Stock,
     other than Excluded Securities.

                   (5) The "Effective Price" of Additional Shares of Common
     Stock shall mean the quotient determined by dividing the total number of
     Additional Shares of Common Stock issued or sold, or deemed to have been
     issued or sold, by the Company under this Section 10.7, into the Aggregate
     Consideration Received, or deemed to have been received, by the Company
     under this Section 10.7, for the issue of such Additional Shares of Common
     Stock.

                   (6) "Excluded Securities" shall mean, collectively (i) shares
     of Common Stock issued or issuable upon conversion of the Series B
     Preferred Stock (including additional shares of Series B Preferred Stock
     that may have been heretofore issued or may be issued after the date hereof
     as a stock dividend in the Series B Preferred Stock) and (ii) the Common
     Stock issuable by the Company upon exercise of stock options to acquire
     shares of Common Stock that have been granted by the Company prior to the
     Original Issue Date.

                   (7) "Rights or Options" shall mean warrants, options or other
     rights to purchase or acquire shares of Common Stock or Convertible
     Securities, other than Excluded Securities.

               (c) Deemed Issuances. For the purpose of making any adjustment to
the Conversion Price of the Series A Preferred Stock required under this Section
10.7, if the Company issues or sells any Rights or Options or Convertible
Securities and if the Effective Price of the shares of Common Stock issuable
upon exercise of such Rights or Options and/or the conversion or exchange of
Convertible Securities (computed without reference to any additional or similar
protective or antidilution clauses) is less than the Conversion Price, then the
Company shall be deemed to have issued, at the time of the issuance of such
Rights, Options or Convertible Securities, that number of Additional Shares of
Common Stock that is equal to the maximum number of shares of Common Stock
issuable upon exercise or conversion of such Rights, Options or Convertible
Securities upon their issuance and to have received, as the Aggregate
Consideration Received for the issuance of such shares, an amount equal to the
total amount of the consideration, if any, received by 

                                       11
<PAGE>
 
the Company for the issuance of such Rights or Options or Convertible
Securities, plus, in the case of such Rights or Options, the minimum amounts of
consideration, if any, payable to the Company upon the exercise in full of such
Rights or Options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange thereof; provided that:

               (a) if the minimum amounts of such consideration cannot be
     ascertained, but are a function of antidilution or similar protective
     clauses, then the Company shall be deemed to have received the minimum
     amounts of consideration without reference to such clauses;

               (b) if the minimum amount of consideration payable to the Company
     upon the exercise of Rights or Options or the conversion or exchange of
     Convertible Securities is reduced over time or upon the occurrence or non-
     occurrence of specified events other than by reason of antidilution or
     similar protective adjustments, then the Effective Price shall be
     recalculated using the figure to which such minimum amount of consideration
     is reduced; and

               (c) if the minimum amount of consideration payable to the Company
     upon the exercise of such Rights or Options or the conversion or exchange
     of Convertible Securities is subsequently increased, then the Effective
     Price shall again be recalculated using the increased minimum amount of
     consideration payable to the Company upon the exercise of such Rights or
     Options or the conversion or exchange of such Convertible Securities.

No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of any such Convertible Securities.  If
any such Rights or Options or the conversion rights represented by any such
Convertible Securities shall expire without having been fully exercised, then
the Conversion Price as adjusted upon the issuance of such Rights or Options or
Convertible Securities shall be readjusted to the Conversion Price that would
have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any, that
were actually issued or sold on the exercise of such Rights or Options or rights
of conversion or exchange of such Convertible Securities, and such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise, plus the consideration, if any,
actually received by the Company for the granting of any such 

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<PAGE>
 
Rights or Options, whether or not exercised, plus the consideration received for
issuing or selling all such Convertible Securities actually converted or
exchanged, plus the consideration, if any, actually received by the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion or exchange of such Convertible
Securities, provided that such readjustment shall not apply to prior conversions
of Series A Preferred Stock.

          10.8 Certificate of Adjustment.  In each case of an adjustment or
readjustment of the Conversion Price for Series A Preferred Stock, the Company,
at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
the Series A Preferred Stock at the holder's address as shown in the Company's
books.

          10.9 Fractional Shares.  No fractional shares of Common Stock shall be
issued upon any conversion of Series A Preferred Stock.  In lieu of any
fractional share to which the holder would otherwise be entitled, the Company
shall pay the holder cash equal to the product of such fraction multiplied by
the Common Stock's fair market value as determined in good faith by the Board of
Directors as of the date of conversion.

          10.10  Reservation of Stock Issuable Upon Conversion.  The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.

          10.11  Notices.  Any notice required by the provisions of this Section
10 to be given to the holders of shares of the Series A Preferred Stock shall be
deemed given upon the earlier of actual receipt or deposit in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, addressed to each holder of record at the address of such holder
appearing on the books of the Company.

          10.12  No Impairment.  The Company shall not avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed

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<PAGE>
 
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
Stock against impairment.

     11.  Redemption of the Series A Preferred Stock.

          (a)  Optional Redemption; Notice.  If, on June 30, 2001, any shares of
Series A Preferred Stock shall be then outstanding, the Company may redeem
(unless otherwise prevented by law) all (but not less than all) such outstanding
shares at any amount per share equal to $100.00 plus an amount equal to accrued
but unpaid dividends, if any, to the date of redemption of such share (the
"Redemption Price").  60 days' prior notice by the Company of such redemption
shall be sent by first-class certified mail, postage prepaid and return receipt
requested, by the Company to the holders of the shares of Series A Preferred
Stock to be redeemed at their respective addresses as the same shall appear on
the books of the Company.

          (b)  Deposit.  On or prior to the date of redemption contained in a
notice pursuant to Section 11(a) hereof (the "Redemption Date"), the Company
shall deposit the Redemption Price of all shares of Series A Preferred Stock
with a bank or trust corporation having aggregate capital and surplus in excess
of $100,000 as a trust fund for the benefit of the respective holders of Series
A Preferred Stock, with irrevocable instructions and authority to the bank or
trust corporation to pay the Redemption Price for such shares to their
respective holder on or after the Redemption Date upon receipt of his share
certificate or notification from the Company that such holder has surrendered
his share certificate to the Company.  As of the Redemption Date, the deposit
shall constitute full payment of the Redemption Price to their holders, and from
and after the Redemption Date the shares so called for redemption shall be
redeemed and shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be stockholders with respect to such shares and shall
have no rights with respect thereto except the rights to receive from the bank
or trust corporation payment of the Redemption Price of the shares, without
interest, upon surrender of their certificates therefor.  Such instructions
shall also provide that any moneys deposited by the Company pursuant to this
Section 11(b) for the redemption of the shares thereafter converted into shares
of the Company's Common Stock pursuant to Section 10 hereof prior to Redemption
Date shall be returned to the Company forthwith upon such conversion.  The
balance of any moneys deposited by the Company pursuant to this Section 11(b)
remaining unclaimed at the expiration of six (6) months following the Redemption
Date shall thereafter be returned to the Company upon its request expressed in a
resolution of its Board of Directors.  The Company will be responsible for costs
and expenses to be incurred in connection with such deposit arrangement, such
amounts to be offset by any interest earned on the deposit, with any excess
interest to be payable to the Company.

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<PAGE>
 
          (c)  Repurchase Prohibited.  The Company will not, and will not permit
any affiliate (as defined in the Securities Exchange Act of 1934, as amended) of
the Company to, purchase or acquire any shares of Series A Preferred Stock
otherwise than pursuant to (i) the terms of this Section 11, or (ii) an offer
made on the same terms to all holders of Series A Preferred Stock at the time
outstanding.

          (d)  Right to Convert Unaffected.  Anything contained in this Section
11 to the contrary notwithstanding, the holders of shares of Series A Preferred
Stock to be redeemed in accordance with this Section 11 shall have the right,
exercisable at any time up to the close of business on the applicable redemption
date (unless the Company is legally prohibited from redeeming such shares on
such date, in which event such right shall be exercisable until the removal of
such legal disability), to convert all or any part of such shares to be redeemed
as herein provided into shares of Common Stock pursuant to Section 10 hereof.

     12.  General Provisions.

          (a)  The term "Person" as used herein means any corporation,
partnership, trust, organization, association, or other entity or individual.

          (b)  The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Company or a
subsidiary.

          (c)  The headings of the paragraphs, subparagraphs, clauses and
subclauses of this Certificate of Designation are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.

     THIRD:  The foregoing resolutions were duly adopted as of December 1, 1997
by all necessary action on the part of the Company.

Dated:  December 12, 1997              INTEGRATED ORTHOPAEDICS, INC.


                                       By: /s/ JEFF R. CASEY
                                          _____________________
                                          Jeff R. Casey,
                                          Senior Vice President

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