<PAGE>
                                                                     EXHIBIT 3.7
                                                                     -----------
 
                          STATEMENT OF DESIGNATIONS,
                            PREFERENCES AND RIGHTS

                                      OF

                   1997 SERIES A CONVERTIBLE PREFERRED STOCK

                                      OF

                                DATA RACE, INC.

                        Pursuant to Article 2.13 of the
                        Texas Business Corporation Act



     Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act  (the "CORPORATION"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
pursuant to authority of the Board of Directors as required by Article 2.13 of
the Texas Business Corporation Act.

     RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in
accordance with the provisions of its Articles of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, no par value (the "PREFERRED STOCK"), and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions thereof as follows:

     1997 Series A Convertible Preferred Stock:


                          I.  Designation and Amount
                              ----------------------

     The designation of this series, which consists of 7,500 shares of Preferred
Stock, is the 1997 Series A Convertible Preferred Stock (the "SERIES A PREFERRED
STOCK") and the stated value shall be One Thousand Dollars ($1,000.00) per share
(the "STATED VALUE").
<PAGE>
 
                                   II.  Rank
                                        ----

          All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock, no par value (the "COMMON STOCK"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series A Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series A
                                               ---- -----                  
Preferred Stock) (collectively, with the Common Stock, "JUNIOR SECURITIES");
(iii) pari passu with any class or series of capital stock of the Corporation
      ---- -----                                                             
hereafter created (with the consent of the holders of Series A Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series A Preferred Stock (the "PARI PASSU
                                                         ---- -----
SECURITIES"); and (iv) junior to any class or series of capital stock of the
Corporation hereafter created (with the consent of the holders of Series A
Preferred Stock obtained in accordance with Article IX hereof) specifically
ranking, by its terms, senior to the Series A Preferred Stock (the "SENIOR
SECURITIES"), in each case as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.


                              III.  No Dividends
                                    ------------

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


                          IV.  Liquidation Preference
                               ----------------------

          A.   If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State 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 sixty (60) consecutive days and, on account of any such event (a
"LIQUIDATION EVENT"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto the holders of shares of Series A Preferred
Stock shall have received the Liquidation Preference (as defined in Article
IV.C) with respect to each share.  If upon the occurrence of a Liquidation
Event, the assets and funds available for distribution

                                      -2-
<PAGE>
 
among the holders of the Series A 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 A Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares 
        ---- -----
in proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate Liquidation Preference payable on all such shares.

          B.   At the option of each holder of Series A Preferred Stock, the
sale, conveyance or disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the holders of the Company's voting stock immediately prior to
such consolidation, merger or business combination do not own at least at least
fifty percent (50%) of the voting power of the entity surviving such
consolidation, merger or business combination shall either: (i) be deemed to be
a liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV; or (ii) be treated pursuant to Article VI.C hereof.  "PERSON" shall
mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.

          C.   For purposes hereof, the "LIQUIDATION PREFERENCE" with respect to
a share of the Series A Preferred Stock shall mean the Stated Value thereof
divided by the Applicable Percentage (as defined in Article VI.B.) in effect on
the date of final distribution to the holder thereof, or with respect to any
deemed liquidation, dissolution or winding up of the Corporation pursuant to
Article IV.B, on the date of the applicable event.  The Liquidation Preference
with respect to any Pari Passu Securities shall be as set forth in the
                    ---- -----                                        
Certificate of Designation filed in respect thereof.


 V.  Cash Redemption of Premium Amount; Redemption of Series A Preferred Stock
     -------------------------------------------------------------------------

          A.   The Corporation shall have the right, in its sole discretion,
upon receipt of a Notice of Conversion pursuant to Article VI.D, to redeem all
or any portion of the Premium Amount (as defined in Article VI.A below) subject
to such conversion for a sum of cash equal to the amount of the Premium Amount
being so redeemed; provided, however, that upon receipt of a Notice of
                   --------  -------
Conversion, the Corporation shall notify such holder, on or before the second
(2nd) business day following the Corporation's receipt of such Notice of
Conversion, as to whether it will elect to redeem such Premium Amount in cash.
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 elects, pursuant to this Article V.A, to redeem all or any portion
of the Premium Amount in cash and fails to pay such holder the applicable
redemption amount to which such holder is entitled by delivering payment to such
holder within six (6) business days of receipt by the Corporation of the Notice
of Conversion, the Corporation shall

                                      -3-
<PAGE>
 
forfeit its right to redeem in cash such Premium Amount and 110% of such Premium
Amount shall be converted into shares of Common Stock in accordance with Article
VI hereof.

          B.   In the event (i) the Common Stock (including the shares of Common
Stock issuable hereunder) is suspended from trading on any of, or is not listed
for trading on at least one of, the New York Stock Exchange, the American Stock
Exchange, or the Nasdaq National Market for a period of ten (10) Trading Days
(as defined below) in any nine (9) month period, (ii) the Registration Statement
required to be filed by the Corporation pursuant to Section 2(a) of the
Registration Rights Agreement (as defined below) has not been declared effective
by August 31, 1997 or such Registration Statement, after being so declared
effective, cannot be utilized by the holders of Series A Preferred Stock for the
resale of their Registrable Securities (as defined in the Registration Rights
Agreement) for more than thirty (30) days, (iii) the Corporation breaches the
covenant set forth in Section 4(k) of the Securities Purchase Agreement (as
defined below), or (iv) the Corporation fails (a) for any reason (other than by
operation of Article VI.A.(ii)(c)) to issue shares of Common Stock within seven
(7) business days after the later of the Conversion Date (as defined below) and
the delivery by the holder of the Preferred Stock Certificates (as defined
below) and any agreement and indemnity required by Article VI.D(b) (or makes an
announcement that it will not issue shares of Common Stock) to any holder of
Series A Preferred Stock upon exercise by a holder of its conversion rights in
accordance with the terms of this Certificate of Designation, (b) to transfer
any certificate for shares of Common Stock issued to the holders upon conversion
of the Series A Preferred Stock as and when required by this Certificate of
Designation, the Securities Purchase Agreement or the Registration Rights
Agreement, dated as of January 10, 1997, by and among the Corporation and the
other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") or (c) to remove
any restrictive legend on any certificate or any shares of Common Stock issued
to the holders of Series A Preferred Stock upon conversion of the Series A
Preferred Stock as and when required by this Certificate of Designation, the
Securities Purchase Agreement, dated as of January 10, 1997, by and between the
Corporation and the other signatories thereto with respect to the original
issuance of the Series A Preferred Stock (the "SECURITIES PURCHASE AGREEMENT")
or the Registration Rights Agreement and, in the case of any of the events
described in clause (iv) (other than an announcement by the Corporation that it
will not issue shares of Common Stock pursuant to a conversion of Series A
Preferred Stock for which there shall be no cure period and for which the
Optional Redemption Event shall occur immediately), any such failure shall
continue uncured for seven (7) business days after the Corporation shall have
been notified thereof in writing by the holder (or, with respect to a failure
described in clause (iv)(a) above which is solely as  a result of the
circumstances governed by the second paragraph of Article VI.E. below and the
Corporation is using all commercially reasonable efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable, such failure
continues for a period of at least sixty (60) days (each of the events described
in clauses (i), (ii), (iii) and (iv) above after expiration of the applicable
cure period (if any) being an "OPTIONAL REDEMPTION EVENT"); then, upon the
occurrence and during the continuation of any Optional Redemption Event, at the
option of each holder of shares of Series A Preferred Stock by written notice
(the "OPTIONAL REDEMPTION NOTICE") to the Corporation of such Optional
Redemption Event, the Corporation shall purchase for cash all of the then
outstanding shares of Series A Preferred Stock held by such holder for an amount
per share (the "OPTIONAL REDEMPTION

                                      -4-
<PAGE>
 
AMOUNT") equal to the Redemption Price in effect at the time of the redemption
hereunder. The "REDEMPTION PRICE" with respect to each share of Series A
Preferred Stock shall mean an amount equal to the Stated Value thereof divided
by the Applicable Percentage in effect on the effective date of the redemption
hereunder. Each holder's right to receive the Optional Redemption Amount under
this Article V.B shall be in addition to such holder's right to receive the
Conversion Default Payments pursuant to Article VI.E through the date of
redemption hereunder.

                 If the Corporation fails to pay the Optional Redemption Amount
for each share within five (5) business days of its receipt of an Optional
Redemption Notice, then the holder of Series A Preferred Stock delivering such
Optional Redemption Notice (i) shall be entitled to interest thereon at a rate
per annum equal to the lower of twenty-four percent (24%) and the highest rate
permitted by applicable law until the date of redemption hereunder, and (ii)
shall have the right at any time, so long as the Optional Redemption Event
continues, to require the Corporation, upon written notice, to immediately issue
(in accordance with the terms of Article VI below), in lieu of the Optional
Redemption Amount, with respect to each outstanding share of Series A Preferred
Stock held by such holder, the number of shares of Common Stock of the
Corporation equal to the Stated Value thereof, plus interest as aforesaid,
divided by the Conversion Price then in effect.

          C.   In the event the Corporation is prohibited from issuing shares of
Common Stock to any holder of Series A Preferred Stock upon exercise by a holder
of its conversion rights in accordance with the terms of this Certificate of
Designation by operation of Article VI.A.(ii)(c), the Corporation shall purchase
for cash those shares of Series A Preferred Stock which cannot be converted for
an amount per share (the "MANDATORY REDEMPTION AMOUNT") equal to (i) the
aggregate Stated Value of such shares of Series A Preferred Stock divided by
(ii) the Applicable Percentage in effect at the time of the attempted
conversion.

                If the Corporation fails to pay the Mandatory Redemption Amount
for any share of Series A Preferred Stock within five (5) business days after
its receipt of the Notice of Conversion which results in such Mandatory
Redemption Amount becoming due and payable (the "MANDATORY REDEMPTION NOTICE
DATE"), then the holder entitled to such Mandatory Redemption Amount shall be
entitled to interest thereon at a rate per annum equal to the lower of twenty-
four percent (24%) and the highest rate permitted by applicable law until the
earlier of the date of redemption or conversion hereunder. If the Corporation
fails to pay the Mandatory Redemption Amount, plus all accrued interest thereon,
within fourteen (14) business days after the Mandatory Redemption Notice Date,
the Corporation shall, as soon as practicable thereafter, use its best efforts
to obtain the approval of its shareholders to issue Additional Shares above the
Cap Amount (as such terms are defined in Article VII.A.(ii)(c)) so that such
Additional Shares may be issued without violating Rule 4460(i) promulgated by
the National Association of Securities Dealers (or any successor rule or
regulation) ("NASD RULE 4460(I)") and, if such approval is not so obtained
within ninety (90) days after the Mandatory Redemption Notice Date and holders
of at least fifty (50%) percent of the outstanding Series A Preferred Stock so
request in a writing delivered to the Corporation, voluntarily terminate the
listing of its Common Stock on the Nasdaq National Market and cause its Common
Stock (including the shares of Common Stock issuable upon conversion or
otherwise with respect to the Series A Preferred Stock) to be eligible for
trading on the NASDAQ

                                      -5-
<PAGE>
 
Small Cap Stock Market, or if the Nasdaq Small Cap Stock Market has a rule or
regulation which prohibits the issuance of the Additional Shares (e.g., a rule
similar to NASD Rule 4460(i)), on the OTC Bulletin Board. Upon the Corporation
becoming eligible to issue the Additional Shares as a result of its receipt of
shareholder approval as described above or the Corporation's Common Stock
(including the Additional Shares) becoming eligible for trading on the NASDAQ
Small Cap Stock Market or the OTC Bulletin Board, as applicable, each holder of
Series A Preferred Stock may, at any time prior to the Corporation's payment of
the Mandatory Redemption Amount and all accrued interest thereon, convert the
Mandatory Redemption Amount and all interest thereon into Common Stock based on
the lower of the Conversion Price in effect on the initial Conversion Date with
respect to such Series A Preferred Stock and the Conversion Price in effect at
the time of the conversion hereunder. For the avoidance of doubt, no actions
taken by the Corporation pursuant to this paragraph shall affect a holder's
right to require the Corporation to redeem such holders shares of Series A
Preferred Stock pursuant to this Article V.

          D.   Nothing in this Article V shall limit the holder's right to
pursue all other remedies available to such holder against the Corporation, at
law or in equity (including a decree of specific performance and/or other
injunctive relief).
 

                  VI.  Conversion at the Option of the Holder
                       --------------------------------------

          A.   (i) Subject to the limitations contained in Article VI.A (ii),
each holder of shares of Series A Preferred Stock may, at its option at any time
and from time to time on or after that date which is ninety (90) days after the
First Closing (as defined in the Securities Purchase Agreement), upon surrender
of the certificates therefor, convert any or all of its shares of Series A
Preferred Stock into shares of Common Stock as follows (an "OPTIONAL
CONVERSION"): (a) on or before the first anniversary of the First Closing, each
share of Series A Preferred Stock shall be convertible into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (x)
the Stated Value thereof by (y) the then effective Conversion Price (as defined
below), and (b) after the first anniversary of the First Closing, each share of
Series A Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (x) the sum of
(I) the Stated Value thereof, plus (II) in the event the Conversion Price is the
Maximum Conversion Price (as defined below) and unless the Corporation has
timely redeemed such Premium Amount in cash in accordance with Article V.A, the
product of the Stated Value, multiplied by .01, multiplied by a fraction, the
numerator of which is "N" and the denominator of which is 365 (where "N" equals
the number of days elapsed from the First Closing to and including the
Conversion Date (as defined below)) (the "PREMIUM AMOUNT") by (y) the then
effective Conversion Price; provided, however, that, except in the case of a
Mandatory Conversion pursuant to Article VII (in which case the remaining
provisions of this Article VI.A.(i) shall be inapplicable), in no event shall a
holder of shares of Series A Preferred Stock be entitled to convert any such
shares in excess of that number of shares upon conversion of which the sum of
(x) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the

                                      -6-
<PAGE>
 
unconverted portion of the shares of Series A Preferred Stock or the unexercised
or unconverted portion of any other securities of the Corporation (including,
without limitation, the Warrants issued pursuant to the Securities Purchase
Agreement (the "WARRANTS")) 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 A Preferred
Stock with respect to which the determination of this proviso is being made
would result in beneficial ownership by the holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso
contained in the immediately preceding sentence, 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) of such proviso. The restriction contained in the proviso of this
Article V.A shall not be altered, amended, deleted or changed in any manner
whatsoever unless the holders of a majority of the Common Stock, voting as a
separate class, and each holder of Series A Preferred Stock shall approve such
alteration, amendment, deletion or change.

               (ii)    Conversion of shares of Series A Preferred Stock shall be
subject to the following limitations (each of which limitations shall be applied
independently and shall be cumulative):

                 (a)    On or before the first anniversary of the First Closing,
unless the Corporation otherwise agrees in writing, a holder of Series A
Preferred Stock may not deliver a Notice of Conversion to the Corporation to
convert any share of Series A Preferred Stock to the extent that the Stated
Value of such share of Series A Preferred Stock together with the aggregate
Stated Value of all shares of Series A Preferred Stock converted into Common
Stock by such holder (I) during the thirty (30) calendar day period ending on
the Conversion Date (as defined below) with respect to the share of Series A
Preferred Stock as to which the determination hereunder is being made exceeds
the product of (y) forty percent (40%) multiplied by (z) the difference between
the aggregate Stated Value of all Series A Preferred Stock held at any time by
such holder (whether or not such shares have been converted into Common Stock)
less the aggregate Stated Value of all Series A Preferred Stock sold or
otherwise transferred by such holder prior to conversion and (II) during the
ninety (90) calendar day period ending on the Conversion Date with respect to
the share of Series A Preferred Stock as to which the determination hereunder is
being made exceeds the product of (y) seventy-five percent (75%) multiplied by
(z) the difference between the aggregate Stated Value of all Series A Preferred
Stock held at any time by such holder (whether or not such shares have been
converted into Common Stock) less the aggregate Stated Value of all Series A
Preferred Stock sold or otherwise transferred by such holder prior to
conversion;

                 (b)    On any date (an "ELIGIBLE RESTRICTION DATE") on which
the Trading Quotient (as defined below) is less than eighty percent (80%), the
Corporation shall have the option, exercisable one time in any 180 day period by
written notice (a "RESTRICTION NOTICE") delivered to the Transfer Agent and each
holder of Series A Preferred Stock by reputable overnight courier at least one
(1) Trading Day prior to the commencement of the Restricted Period set forth in
the Restriction Notice, to prevent the conversion of any shares of Series A
Preferred Stock for a

                                      -7-
<PAGE>
 
period of up to ten (10) consecutive Trading Days beginning on the first (1st)
Trading Day following the Eligible Restriction Date (the "RESTRICTED PERIOD").
Each Restriction Notice shall specify the Restricted Period and the Eligible
Restriction Date and provide a detailed calculation of the basis upon which the
Corporation may issue such Restriction Notice. "TRADING QUOTIENT" for any day
shall mean the quotient obtained by dividing (I) the average of the Closing Bid
Prices (as defined in Article VI.B.) for the Common Stock for the five (5)
consecutive Trading Days ending one Trading Day prior to the date on which the
determination is being made hereunder by (II) the average of the Closing Bid
Prices for the Common Stock for the ten (10) consecutive Trading Days ending one
Trading Day prior to the date on which the determination is being made
hereunder. Notwithstanding anything herein to the contrary, a holder may convert
Series A Preferred Stock during a Restricted Period to the extent necessary to
obtain a sufficient number of shares of Common Stock to cover any sales
transaction effectuated by such holder prior to the commencement of the
Restricted Period.

                 (c)    Except as provided in Article V.C., in no event shall
the aggregate number of shares of Common Stock issued upon conversion or
otherwise with respect to any share of Series A Preferred Stock, together with
the aggregate number of shares of Common Stock issued upon exercise of any
warrants issued by the Corporation pursuant to the Securities Purchase Agreement
(the "WARRANTS"), exceed 965,625, subject to equitable adjustments from time to
time for the events described in Article VI.C.(a) (the "CAP AMOUNT"), unless,
prior to any issuance of shares of Common Stock which causes the Cap Amount to
be reached, (i) the Corporation shall have obtained the approval of its
shareholders for issuance in excess of such amount (the "ADDITIONAL SHARES") and
such approval is sufficient to satisfy any requirements imposed by NASD Rule
4460(i) and (ii) the resale of the Additional Shares by the holders of the
Series A Preferred Stock shall have been registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), pursuant to an effective registration
statement. Until such shareholder approval of the Additional Shares and
registration thereof shall have been effected, no Initial Investor (as defined
in the Registration Rights Agreement) shall be issued upon conversion or
exercise or otherwise with respect to shares of Series A Preferred Stock or the
Warrants, in the aggregate, more than that number of shares of Common Stock
equal to product of the Cap Amount multiplied by a fraction, the numerator of
which is the number of shares of Series A Preferred Stock issued to such Initial
Investor at the First Closing and the denominator of which is the aggregate
number of shares of Series A Preferred Stock issued at the First Closing (the
"ALLOCATION AMOUNT"). In the event any Initial Investor shall sell or otherwise
transfer any of such Initial Investor's shares of Series A Preferred Stock, each
such transferee shall be allocated a pro rata portion of the transferor Initial
Investor's Allocation Amount. In the event any holder shall convert all of such
holder's shares of Series A Preferred Stock and exercise all of such holder's
Warrants into a number of shares of Common Stock which, in the aggregate, is
less than such holder's Allocation Amount, then the difference between such
holder's Allocation Amount and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Allocation Amounts of
the remaining holders of shares of Series A Preferred Stock, pro rata based on
the number of shares of Series A Preferred Stock then held by each such holder.
In the event the Corporation is prohibited from issuing shares of Common Stock
as a result of the operation of this Article VI.A. (ii)(c), the Corporation
shall redeem for cash those shares of Series A Preferred Stock which cannot be

                                      -8-
<PAGE>
 
converted or otherwise issued in accordance with Article V.C. (and take such
other action as may be required by Article V.C.).

     Notwithstanding the foregoing, at any time after the delivery to the
Corporation of an Optional Redemption Notice pursuant to Article V.B hereof, the
restrictions contained in subsections (a) and (b) of this Article VI.A(ii) shall
not be applicable and the holder may convert the Series A Preferred Stock
without restriction.

          B.  The "CONVERSION PRICE" with respect to any conversion of Series A
Preferred Stock having a Conversion Date prior to the first anniversary of the
First Closing shall be the Applicable Percentage (as hereinafter defined) of the
average of the closing bid prices for the Common Stock as reported by the Nasdaq
National Market, or on the principal securities market on which the Common Stock
is then being traded (the "CLOSING BID PRICE"), for the Trading Day Period (as
defined below) ending one Trading Day prior to the Conversion Date (the
"DISCOUNTED CONVERSION PRICE"), and the "CONVERSION PRICE" with respect to any
conversion of Series A Preferred Stock having a Conversion Date on or after the
first anniversary of the First Closing shall be the lesser of (i) the Discounted
Conversion Price and (ii) the average of the Closing Bid Prices for the Common
Stock for all of the Trading Days during the thirty (30) calendar days ending on
the calendar day immediately preceding the first anniversary of the First
Closing (the "MAXIMUM CONVERSION PRICE") (subject to equitable adjustments from
time to time pursuant to the antidilution provisions of Article VI.C below).
"TRADING DAY" shall mean any day on which the Common Stock is traded for any
period on the Nasdaq National Market or on the principal securities exchange or
other securities market on which the Common Stock is then being traded.  The
"APPLICABLE PERCENTAGE" shall be determined in accordance with the following
schedule:
<TABLE> 
<CAPTION> 

          Number of Days After First Closing         Applicable Percentage
     -------------------------------------------     ---------------------
     <S>                                             <C>
             0                 X  less than   90             100%
            90  less than or   X  less than  180              85%
                 equal to                                           
           180  less than or   X  less than  360              80%
                 equal to                            
           360  less than or   X                              75%
                 equal to 
          
</TABLE> 

Where X represents the Conversion Date.

"TRADING DAY PERIOD" shall mean ten (10) consecutive Trading Days; provided,
however, that the Trading Day Period for purposes of determining any Conversion
Price on a Conversion Date occurring during any thirty (30) calendar day period
immediately following a thirty (30) calendar day period in which the Trading
Quotient for each day in such period is less than 1.00 shall be either five (5)
or ten (10) consecutive Trading Days, whichever generates the lower Conversion
Price.

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

                                      -9-
<PAGE>
 
                 (a) Adjustment to Maximum Conversion Price Due to Stock Split,
                     ---------------------------------------------------------
Stock Dividend, Etc. If at any time on or after the first anniversary of the
-------------------
First Closing when any Series A Preferred Stock is issued and outstanding, the
number of outstanding shares of Common Stock is increased by a stock split,
stock dividend, combination, reclassification or other similar event, the
Maximum Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the Maximum
Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.

                 (b) Adjustment to Conversion Price. If at any time when any
                     -------------------------------   
Series A Preferred Stock is issued and outstanding, the number of outstanding
shares of Common Stock is increased or decreased by a stock split, stock
dividend, combination, reclassification, below-Market Price (as defined in
Article VI.G) rights offering to all holders of Common Stock or other similar
event, which event shall have taken place during the reference period for
determination of the Conversion Price for any Optional Conversion or Mandatory
Conversion of the Series A Preferred Stock, then the Discounted Conversion Price
or Maximum Conversion Price, as the case may be, shall be calculated giving
appropriate and equitable effect to the stock split, stock dividend,
combination, reclassification or other similar event for all Trading Days
utilized to calculate the Conversion Price.

                 (c) Adjustment Due to Merger, Consolidation, Etc. If, at any
                     ---------------------------------------------
time when any Series A Preferred Stock is issued and outstanding, 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 corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation 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, then the holders of Series A
Preferred Stock shall thereafter have the right to receive upon conversion of
Series A Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such shares of stock and/or securities
and/or other property as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore purchasable and
receivable upon the conversion of Series A Preferred Stock held by such holders
had such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of the Series A Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) 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
transaction described in this subsection (c) unless (i) each holder of Series A
Preferred Stock has received written notice of such transaction at least thirty

                                      -10-
<PAGE>
 
(30) days prior thereto and in no event later than ten (10) 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 the obligations of this subsection
(c). 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 A Preferred Stock
outstanding as of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or share
exchanges.

                 (d) Adjustment Due to Distribution. In case 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 shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e. a spin-off) but other than a distribution of
Rights described in subparagraph (e) below) (a "DISTRIBUTION"), then, after the
date of record for determining shareholders entitled to such Distribution, but
prior to the date of Distribution, the holders of Series A Preferred Stock shall
be entitled, upon conversion of shares of Series A Preferred Stock, to receive
the amount of such assets which would have been payable to the holder 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. The Maximum
Conversion Price for shares of Series A Preferred Stock not converted prior to
the date of Distribution will be reduced to a price determined by decreasing the
Maximum Conversion Price in effect immediately prior to the record date of the
Distribution by an amount equal to the fair market value of the assets so
distributed per share of Common Stock (calculated as if all shares of Common
Stock issuable upon conversion of outstanding shares of Series A Preferred Stock
had been converted as of the record date of the Distribution). For purposes of
determining the fair market value of any assets so distributed, the fair market
value of any cash distributed shall be the amount of such cash, the fair market
value of any security distributed shall be the Market Price of such security as
determined pursuant to Article VI.G. and the fair market value of any other
assets so distributed shall be determined by an expert of national reputation in
appraising the value of assets of the type so distributed, which expert shall be
selected by the Corporation and be reasonably acceptable to holders of a
majority of the shares of Series A Preferred Stock then outstanding, with the
costs of such expert to be borne by the Corporation.

                 (e)    Adjustment Due to Rights Issue. If, at any time when
                        -------------------------------  
Series A Preferred Stock is issued and outstanding, the Corporation shall
distribute any rights, options or warrants ("RIGHTS") to all holders of its
Common Stock entitling them for a period beginning on or after the record date
for such distribution to purchase shares of Common Stock at a price per share
less than the Market Price (as defined in Article VI.G) as of the date such
Right first becomes exercisable (the "EXERCISABILITY DATE"), then the Maximum
Conversion Price for shares of Series A Preferred Stock not converted prior to
such Exercisability Date shall be reduced to a price determined by multiplying
the Maximum Conversion Price in effect immediately prior to the Exercisability
Date by a fraction, (i) the numerator of which is an amount equal to the sum of
(x) the number of shares of Common Stock actually outstanding immediately prior
to the Exercisability Date plus (y) the

                                      -11-
<PAGE>
 
aggregate minimum consideration receivable by the Corporation upon the exercise
of all such Rights, divided by the Market Price in effect immediately prior to
the Exercisability Date and (ii) the denominator of which is the total number of
shares of Common Stock Deemed Outstanding (as defined below) immediately after
the Exercisability Date. For purposes of this Article VI.C.(e), "COMMON STOCK
DEEMED OUTSTANDING" shall mean the number of shares of Common Stock actually
outstanding plus the maximum total number of shares of Common Stock issuable
upon the exercise, conversion or exchange of all Rights or securities issuable
upon exercise of Rights.

          D.  In order to convert Series A Preferred Stock into full shares of
Common Stock, a holder shall: (i) fax a copy of the fully executed notice of
conversion in the form attached hereto ("NOTICE OF CONVERSION") to the
Corporation at the office of the Corporation that the holder elects to convert
the same, which notice shall specify the number of shares of Series A Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (assuming
conversion of the Premium Amount, if any) prior to Midnight, New York City time
(the "CONVERSION NOTICE DEADLINE") on the Conversion Date; and (ii) surrender
the original certificates representing the Series A 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 office of
the Corporation or the Transfer Agent, if any, for the Series A Preferred Stock.
The Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Corporation or its Transfer Agent as
provided above, or the holder notifies the Corporation or its Transfer Agent
that such certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (a) below).  In the case of a dispute as to the
calculation of the Conversion Price, the Corporation shall promptly issue such
number of shares of Common Stock that are not disputed in accordance with
subparagraph (b) below.  The Corporation shall submit the disputed calculations
to its outside accountant via facsimile within two (2) business days of receipt
of the Notice of Conversion.  The accountant shall audit the calculations and
notify the Corporation and the holder of the results no later than 48 hours from
the time it receives the disputed calculations.  The accountant's calculation
shall be deemed conclusive, absent manifest error.

                 (a) Lost or Stolen Certificates. Upon receipt by the
                     ----------------------------      
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series A Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Corporation, and upon surrender and cancellation
of the Preferred Stock Certificate(s), if mutilated, 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 A Preferred Stock.

                 (b) Delivery of Common Stock Upon Conversion. Upon the
                     -----------------------------------------
surrender of Preferred Stock Certificates as described above from a holder of
Series A Preferred Stock accompanied by a Notice of Conversion, the Corporation
shall issue and, within two (2) business days after the later of the Conversion
Date and the date of such surrender (or, in the case of lost,

                                      -12-
<PAGE>
 
stolen or destroyed certificates, after provision of agreement and
indemnification pursuant to subparagraph (a) above) (the "DELIVERY PERIOD"),
deliver to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of Series A Preferred Stock converted as
shall be determined in accordance herewith and (ii) a certificate representing
the balance of the shares of Series A Preferred Stock not converted, if any.

     In the event (x) the Corporation fails for any reason to deliver during the
Delivery Period shares of Common Stock to a holder upon a conversion of shares
of Series A Preferred Stock in accordance with the provisions of this Article
VI.D. (after giving effect to any limitations contained herein) and (y) after
the applicable Delivery Period with respect to such conversion, such holder
purchases shares of Common Stock to deliver to satisfy a sale by such holder of
shares of Common Stock which such holder anticipated receiving upon such
conversion (a "BUY-IN"), such holder shall be entitled to (in addition to any
other remedies available to the holder) a payment equal to the amount, if any,
by which the Aggregate Buy-In Price Differential (as defined below) exceeds the
aggregate payments made to such holder pursuant to Article VI.E. as a result of
such conversion default. The "AGGREGATE BUY-IN DIFFERENTIAL" with respect to any
Buy-In shall mean the amount, if any, by which (I) the holder's aggregate
purchase price for the shares of Common Stock constituting the Buy-In exceeds
(II) the aggregate net proceeds received by such holder from the sale of the
shares of Common Stock issued upon the effectuation of the conversion which gave
rise to the Buy-In (the "BUY-IN CONVERSION SHARES"). For example, if a holder
purchases 10 shares of Common Stock at a price of $20 per share in a Buy-In and
later sells 10 shares of Common Stock received upon conversion of the shares of
Series A Preferred Stock giving rise to the Buy-In at a price of $18 per share,
the Aggregate Buy-In Price Differential with respect to such Buy-In would equal
$20 (i.e., $200 - $180). Such cash amount shall be paid to such holder by the
fifth (5th) day of the month following the month in which it has accrued. Each
holder of Series A Preferred Stock shall use all commercially reasonable efforts
to sell Buy-In Conversion Shares in an expeditious manner after its receipt of
such Conversion Shares, it being understood that a holder's ability to so effect
such sales shall be dependent upon market conditions then in effect.

                 (c) No Fractional Shares. If any conversion of Series A
                     --------------------
Preferred Stock would result in 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 A Preferred Stock shall be the next
higher number of shares.

                 (d) Conversion Date. The "CONVERSION DATE" shall be the date
                     ---------------
specified in the Notice of Conversion, provided that if the advance copy of the
Notice of Conversion is not submitted by facsimile (or by other means resulting
in notice) to the Corporation before Midnight, New York City time, on the
Conversion Date indicated in the Notice of Conversion, then the Conversion Date
shall be the date the Corporation receives the Notice of Conversion. Upon
submission by a holder of Series A Preferred Stock of a Notice of Conversion
with respect to shares of Series A Preferred Stock, such shares shall be deemed
converted into shares of Common Stock and the holder's rights as a holder of
such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
in

                                      -13-
<PAGE>
 
accordance with and subject to this Article VI.D. Notwithstanding the foregoing,
if the holder has not received certificates for such shares of Common Stock
prior to the tenth (10th) day after the later of the Conversion Date and the
delivery by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b) above, then the holder may notify the
Corporation in writing of such failure and if the holder has not received
certificates for such shares of Common Stock prior to the tenth (10th) day after
the date of such notice, then (i) the holder shall regain the rights of a holder
of Series A Preferred Stock with respect to the shares to which the Notice of
Conversion relates and shall retain all of such holder's rights and remedies
(including, without limitation, the right to receive cash payments pursuant to
Article VI.D(b) above and VI.E below to the extent required thereby) with
respect to the Corporation's failure to deliver such shares of Common Stock and
(ii) the Conversion Price in respect of each of the shares identified in the
Notice of Conversion shall thereafter be the lesser of (A) the Conversion Price
on the Conversion Date set forth in the initial Notice of Conversion and (B) the
Conversion Price on the Conversion Date subsequently selected by the holder in
respect thereof by submission to the Corporation of a subsequent Notice of
Conversion.

          E.   A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Series A Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion. If the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series A Preferred Stock shall be convertible at the then
current Conversion Price, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series A Preferred Stock on the new basis. If, at
any time, a holder of shares of Series A Preferred Stock submits a Notice of
Conversion and the Corporation does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article VI, the Corporation shall issue to the holder all
of the shares of Common Stock which are available to effect such conversion
(including, with the holder's written consent, any shares underlying outstanding
Warrants held by such Holder ("BORROWED SHARES")) and shall thereafter use its
best efforts to obtain, as soon as practicable, shareholder approval to
authorize the issuance of sufficient shares of Common Stock to effect conversion
of the Series A Preferred Stock outstanding.

                 If, at any time, a holder of shares of Series A Preferred Stock
submits a Notice of Conversion and the Corporation fails to deliver, within
seven (7) business days after the later of the Conversion Date and the delivery
by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b), shares of Common Stock (or makes an
announcement that it will not issue shares of Common Stock) in accordance with
the provisions of this Article VI (a "CONVERSION DEFAULT"), the Corporation
shall pay to the holder payments ("CONVERSION DEFAULT PAYMENTS") for a
Conversion Default in the amount of (a) (N/365), multiplied by (b) the aggregate
Stated Value of all shares of Series A Preferred Stock held by such holder
(together with the aggregate Stated Value of all shares of Series A Preferred
Stock held by such

                                      -14-
<PAGE>
 
holder which were included in the Notice of Conversion that would not have been
converted but for the Borrowed Shares) on the first day of the Conversion
Default (the "CONVERSION DEFAULT DATE"), multiplied by (c) .24, where (i) N =
the number of days from the expiration of the Delivery Period to the date that
the Corporation effects the conversion of the full number of shares of Series A
Preferred Stock (or, with respect to any shares so converted using Borrowed
Shares, the date the Corporation authorizes a sufficient number of shares of
Common Stock to permit the issuance of the Borrowed Shares).

                 If, at any time, a holder of shares of Series A Preferred Stock
submits a Notice of Conversion and the Corporation fails to deliver, within
fourteen (14) business days after the later of the Conversion Date and the
delivery by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b), shares of Common Stock (or makes an
announcement that it will not issue shares of Common Stock, in which case there
shall be no fourteen (14) business day grace period) in accordance with the
provisions of this Article VI), the Conversion Price in respect of any shares of
Series A Preferred Stock not so converted shall thereafter be the lesser of (i)
the Conversion Price on the Conversion Date specified in the Notice of
Conversion and (ii) the Conversion Price on the Conversion Date subsequently
elected by the holder in respect thereof (which remedy shall be in addition to
all other remedies such holder may have under this Certificate of Designation or
otherwise for such Conversion Default).

     The accrued Conversion Default Payment for each calendar month shall be
paid in cash or shall be convertible into Common Stock at the Conversion Price,
at the holder's option, as follows:

                 (a)    In the event holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth (5th) day of the month
following the month in which it has accrued; and

                 (b)    In the event holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of conversion) at any time after
the fifth (5th) day of the month following the month in which it has accrued in
accordance with the terms of this Article VI.

          Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock or to otherwise effect a conversion of the Series A
Preferred Stock as required pursuant to the terms of this Article VI.E or to
cause a redemption pursuant to Article V.B, and each holder shall have the
right to pursue all remedies available at law or in equity (including a decree
of specific performance and/or other injunctive relief).

          F.     Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and

                                      -15-
<PAGE>
 
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 A Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series A Preferred Stock.

          G.   "MARKET PRICE," as of any date, (i) means the average of the
closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Stock Market for the ten (10) Trading Days immediately preceding such
date, or (ii) if the Nasdaq National Market is not the principal trading market
for the shares of Common Stock, the average of the last reported bid prices on
the principal trading market for the Common Stock during the same period, or, if
there is no bid price for such period, the last reported sales price for such
period, or (iii) if market value cannot be calculated as of such date on any of
the foregoing bases, the Market Price shall be the average 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 A Preferred Stock, with the costs of the appraisal to be borne
by the Corporation. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.


                          VII.  Mandatory Conversion
                                --------------------

     Provided all shares of Common Stock issuable upon conversion of all
outstanding shares of Series A Preferred Stock are then registered under the
Securities Act for resale by the holders of such Series A Preferred Stock and
are then eligible to be traded on the Nasdaq National Market, each share of
Series A Preferred Stock issued and outstanding on January 10, 1999 (the
"MANDATORY CONVERSION DATE"), automatically shall be converted into shares of
Common Stock on such date at the then effective Conversion Price in accordance
with the provisions of Article VI hereof, subject to the limitations set forth
in Article VI.A.(ii)(c) (the "MANDATORY CONVERSION"). The Mandatory Conversion
Date shall be the Conversion Date for purposes of determining the Conversion
Price and the time within which certificates representing the Common Stock must
be delivered to the holder.


                             VIII.  Voting Rights
                                    -------------

     The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Texas Business Corporation Act
("TBCA"), and in this Article VIII, and in Article IX below.

     Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and

                                      -16-
<PAGE>
 
other information sent to shareholders). In the event of any taking by the
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to 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 for
the purpose of determining shareholders who are entitled 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 liquidation, dissolution or winding
up of the Corporation, the Corporation shall mail a notice to each holder, at
least twenty (20) days prior to the record date specified therein (or 30 days
prior to the consummation of the transaction or event, whichever is earlier), 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 TBCA the vote of the holders of the Series A
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 shares of the Series A
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series A Preferred Stock
(except as otherwise may be required under the TBCA) shall constitute the
approval of such action by the class. To the extent that under the TBCA holders
of the Series A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series A 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 using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series A Preferred Stock shall be entitled to
notice of (and copies of proxy materials and other information sent to
shareholders) all shareholder meetings or written consents with respect to which
they would be entitled to vote, which notice would be provided pursuant to the
Corporation's by-laws and the TBCA.


                           IX.  Protection Provisions
                                ---------------------

     So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the TBCA) of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock and, provided such holder
then owns at least one thousand (1,000) shares of Series A Preferred Stock, any
holder which purchased from the Corporation shares of Series A Preferred Stock:

                 (a)   alter or change the rights, preferences or privileges of
the Series A Preferred Stock or any other capital stock of the Corporation so as
to affect adversely the Series A Preferred Stock;

                                      -17-
<PAGE>
 
                 (b)   create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "SENIOR SECURITIES");

                 (c)   create any new class or series of capital stock ranking
pari passu with the Series A Preferred Stock as to distribution of assets upon
---- -----
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "PARI PASSU SECURITIES");
            ---- -----              

                 (d)   increase the authorized number of shares of Series A
Preferred Stock; or

                 (e)   issue any shares of Series A Preferred Stock other than
pursuant to the Securities Purchase Agreement.

     In the event holders of at least a majority of the then outstanding shares
of Series A Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series A Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series A Preferred Stock,
then the Corporation will deliver notice of such approved change to the holders
of the Series A Preferred Stock that did not agree to such alteration or change
(the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a
period of thirty (30) days to convert pursuant to the terms of this Certificate
of Designation as they exist prior to such alteration or change or continue to
hold their shares of Series A Preferred Stock.


                 X.  Cancellation of Series A Preferred Stock
                     ----------------------------------------

     In the event any shares of Series A Preferred Stock shall be converted
pursuant to Article VI, the shares so converted shall be canceled, shall return
to the status of unauthorized, but unissued preferred stock of no designated
series, and shall not be issuable by the Corporation as Series A Preferred
Stock.

                         XI.  Limitations on Transfer
                              -----------------------

     Prior to the delivery of an Optional Redemption Notice to the Corporation
pursuant to Article V.B., no "Subject Holder" (as defined below) may sell or
otherwise transfer shares of Series A Preferred Stock, except (i) to the
Corporation or to a shareholder or a group of shareholders who immediately prior
to the sale control a majority of the Corporation's voting shares (a
"CONTROLLING SHAREHOLDER" or "CONTROLLING GROUP", as applicable); (ii) to an
affiliate of such holder; (iii) in connection with any merger, consolidation,
reorganization, tender offer or sale of more than 50% of the outstanding Common
Stock of the Corporation (a "REORGANIZATION"); (iv) in a registered public
offering or a public sale pursuant to Rule 144 or other applicable exemption
from the registration requirements of the Securities Act (or any successor rule
or regulation); or (v) in a private sale (otherwise than to the Corporation, to
a Controlling Shareholder or a Controlling Group, to an

                                      -18-
<PAGE>
 
affiliate of such holder, or in a Reorganization), provided that the holder
shall not sell or otherwise transfer in a private sale not described in clause
(i) - (iii) of this Article XI, during any ninety (90) day period, a number of
shares of Series A Preferred Stock, a portion(s) of the Warrants or any other
securities of the Corporation subject to a limitation on sale or transfer
analogous to the limitation contained herein, which, if exercised for or
converted into Common Stock at the time of the transfer, would represent, in the
aggregate (together with any other shares of Common Stock transferred),
beneficial ownership by the transferee(s) of more than 4.9% of the Common Stock
then outstanding.  "SUBJECT HOLDER" means any holder who, but for Article VI.A
hereof and this Article XI., may be deemed to beneficially own 5% or more of the
outstanding Common Stock of the Corporation.  The restriction contained in the
proviso of this Article XI. shall not be altered, amended, deleted or changed in
any manner whatsoever unless the holders of a majority of the Common Stock
(voting as a separate class) and each holder of Series A Preferred Stock shall
approve such alteration, amendment, deletion or change.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -19-
<PAGE>
 
     IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 10th day of January, 1997.


                                      DATA RACE, INC.


                                      By: /s/ Gregory T. Skalla
                                         ------------------------------
                                         Vice President - Finance
                                         and Chief Financial Officer
                                      -20-
<PAGE>
 
                             NOTICE OF CONVERSION

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

The undersigned hereby irrevocably elects to convert shares of Series A
Preferred Stock (the "CONVERSION"), represented by stock certificate Nos(s).
___________ (the "PREFERRED STOCK CERTIFICATES") into shares of common stock
("COMMON STOCK") of Data Race, Inc. (the "CORPORATION") according to the
conditions of the Statement of Designations, Preferences and Rights of 1997
Series A Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATION"), as of
the date written below.  If shares 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 and is delivering herewith such certificates.  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 represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Series A 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.


                            Date of Conversion:
                                               ---------------------------------
                            
                            Applicable Conversion Price:
                                                        ------------------------
                            
                            Number of Shares of
                            Common Stock to be Issued:
                                                      --------------------------

                            Signature:
                                      ------------------------------------------
                            
                            Name:
                                 -----------------------------------------------
                            
                            Address:
                                    --------------------------------------------

* The Corporation is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent.  The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant  to the Certificate of Designation for the number of business
days such issuance and delivery is late.