AXION POWER INTERNATIONAL, INC.

Securities Purchase Agreement

This Securities Purchase Agreement (this“Agreement”) is dated as of January 14,
2008, by and between Axion Power International, Inc., a Delaware corporation
(the“Company”), and The Quercus Trust (the“Investor”).

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act (as defined below) and Rule 506
promulgated thereunder, the Company desires to issue and sell to the Investor,
and the Investor desires to purchase from the Company certain securities of the
Company, as more fully described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Investor agree as
follows:
 
ARTICLE 1

Definitions

Section 1.1. Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms have the
meanings indicated in this Section 1.1:

“Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation pending
or threatened in writing against or affecting the Company, any Subsidiary or any
of their respective properties before or by any court, arbitrator, governmental
or administrative agency, regulatory authority (federal, state, county, local or
foreign), stock market, stock exchange or trading facility.

“Adjusted Purchase Price” has the meaning set forth in Section 2.2.

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144.

“Board” means the Board of Directors of the Company.

“Business Day” means any day except Saturday, Sunday and any day which is a
federal legal holiday or a day on which banking institutions in the City of New
York are authorized or required by law or other governmental action to close.

“Buy-In” has the meaning set forth in Section 5.1(c).

“Charter Amendment” means a proposed amendment to the Company’s Certificate of
Incorporation that its board of directors intends to submit for consideration by
stockholders at the Company’s 2008 Annual Meeting and will, if approved in
accordance with the DGCL, increase the number of authorized shares of Common
Stock from the current limit of 50 million shares to a proposed limit of not
less than 75 million shares.

“Claim” has the meaning set forth in Section 4.6(c).
 

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“Closing” means each closing of the purchase and sale of Units consisting of
Shares and Warrants pursuant to Article 2.

“Closing Date” means the First Closing Date, the date on which the Second
Closing, if any, occurs pursuant to Section 2.2 hereof, and the date on which
the Third Closing, if any, occurs pursuant to Section 2.3 hereof.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value $0.001 per
share, and any securities into which such common stock may hereafter be
reclassified.

“Common Stock Equivalents” means any securities of the Company or any Subsidiary
which entitle the holder thereof to acquire Common Stock at any time, including
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument or right that is at any time convertible into or exchangeable
for, or otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common
Stock.

“Company Counsel” means Fefer Petersen & Cie with respect to the First Closing
and Andrews Kurth, LLP with respect to the Second and Third Closings.

“Company Deliverables” has the meaning set forth in Section 2.2(a).

“Company Stock Options” has the meaning set forth in Section 3.1(g).

“Compliance Date” means the date the Chief Financial Officer of the Company
certifies in writing to the Investor that, to the knowledge of such officer
after reasonable investigation, the Company is current in its reporting
obligations under the Securities Exchange Act of 1934, that each report filed
complied in form with the applicable requirements of the Commission with respect
to such filing on the date of filing, and that the Company’s filings, taken
together, do not contain any untrue or misleading statements of fact, or fail to
contain any statements necessary to make the statements made therein not
misleading.

“Contingent Obligations” has the meaning set forth in Section 3.1(r).

“Convertible Securities” has the meaning set forth in Section 3.1(g).

“Cut Back Shares” has the meaning assigned thereto in Section 4.1(a).

“Delaware Courts” has the meaning set forth in Section 7.9. 

“Effective Date” means the date that any Registration Statement filed pursuant
to Article 4 is first declared effective by the Commission.

“Effectiveness Period” has the meaning set forth in Section 4.1(b).

“Environmental Law” has the meaning set forth in Section 3.1(aa).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations promulgated thereunder.
 
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“ERISA Affiliate” means any trade or business, whether or not incorporated, that
together with the Company would be deemed to be a single employer for purposes
of Section 4001 of ERISA or Sections 414(b), (c), (m), (n) or (o) of the
Internal Revenue Code of 1986, as amended.
 
“Evaluation Date” has the meaning set forth in Section 3.1(r). 

“Event” has the meaning set forth in Section 4.1(d).

“Event Date” has the meaning set forth in Section 4.1(d).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Exempt Issuance” means the issuance by the Company (a) to employees, officers,
directors of, and consultants to, the Company of shares of Common Stock or
options for the purchase of shares of Common Stock pursuant to stock option or
long-term incentive plans approved by the Board, (b) of shares of Common Stock
upon the exercise of Warrants issued hereunder, (c) of shares of Common Stock
upon exercise of Prior Warrants or conversion of Prior Convertible Securities,
(d) of securities issued pursuant to acquisitions, licensing agreements, or
other strategic transactions, (e) of securities issued in connection with
equipment leases, real property leases, loans, credit lines, guaranties or
similar transactions approved by the Board, (f) of securities issued in
connection with join ventures or similar strategic relationships approved by the
Board, (g) of securities in a merger, or (h) of securities in a public offering
registered under the Securities Act; provided that in the case of securities
issued pursuant clauses (e), (f) and (g), the purpose of such issuance may not
be primarily to obtain cash financing.
 
“Filing Date” means the date that is 30 days after the Second Closing Date. 

“Financing Notice” has the meaning set forth in Section 5.5(b).

“First Closing Date” means the fifth Business Day immediately following the date
on which all of the conditions set forth in Sections 6.1 and 6.2 hereof are
satisfied, or such other date as the parties may agree.

“First Closing Unit” means a Unit consisting of one Share and a Warrant to
purchase one and one-half shares of Common Stock, issued in combination.

“GAAP” means generally accepted accounting principles as in effect from time to
time in the United States of America.

“Governmental Authority” has the meaning set forth in Section 3.1(e).

“Hazardous Substance” has the meaning set forth in Section 3.1(aa).

“Indebtedness” has the meaning set forth in Section 3.1(r).

“Indemnified Party” has the meaning set forth in Section 4.6(c).

“Indemnified Person” has the meaning set forth in Section 4.6(a).

“Indemnifying Party” has the meaning set forth in Section 4.6(c).

“Initial Purchase Price” has the meaning set forth in Section 2.1.
 
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“Intellectual Property Rights” has the meaning set forth in Section 3.1(o).

“Investor Deliverables” has the meaning set forth in Section 2.2(b).

“Lien” means any lien, charge, encumbrance, security interest, right of first
refusal or other restrictions of any kind.

“Liquidated Damages Base” has the meaning set forth in Section 4.1(d).

“Losses” has the meaning set forth in Section 5.7.

“Material Adverse Effect” means any of (i) a material and adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or financial condition of the Company and the Subsidiaries, taken as a
whole, or (iii) a material impairment of the Company’s ability to perform on a
timely basis its obligations under any Transaction Document.

“NASD Rules” has the meaning set forth in Section 4.3(o).

“OFAC” has the meaning set forth in Section 3.1(ee).

“Outside Date” means June 30, 2009.

“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

“Placement Agent” has the meaning set forth in Section 3.1(s).

“Plan of Distribution” has the meaning set forth in Section 4.2(o).

“Post-Effective Amendment” means a post-effective amendment to the Registration
Statement.
 
“Post-Effective Amendment Filing Deadline” means the seventh Business Day after
the Registration Statement ceases to be effective pursuant to applicable
securities laws due to the passage of time or the occurrence of an event
requiring the Company to file a Post-Effective Amendment; provided, however,
that in the event that a Post-Effective Amendment must be filed to include
information contained in an annual report on Form 10-K or Form 10-KSB that is
not otherwise incorporated by reference into the Registration Statement, then
the Company shall have thirty (30) days after the date such annual report is
filed to file such Post-Effective.
 
“Pre-Notice” has the meaning set forth in Section 5.5(b).
 
“Prior Warrants” has the meaning set forth in Section 3.1(g).

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
 
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“Production Contract” means a fully-executed contract between the Company and an
unaffiliated third party battery manufacturer or wholesale battery distributor
(a) pursuant to which the Company agrees to produce, and the third party agrees
to purchase (which agreements shall not be conditional (including, without
limitation as to amounts) except to the extent of customary conditions such as
to quality and delivery dates), and (b) which provides for the production of a
minimum of 60,000 lead-acid batteries to be produced quarterly on a profitable
basis, substantially as set forth in the business plan previously provided by
the Company to the Investor.

“Prospectus” has the meaning set forth in Section 4.3.

“Proposed Financing” has the meaning set forth in Section 5.5(a).

“Proposed Financing Notice” has the meaning set forth in Section 5.5(b).

“Purchase Price” means either the Initial Purchase price or the Adjusted
Purchase Price, as the context indicates.

“Registrable Securities” means the Shares held by and the Warrant Shares
issuable to the Investor on such date or dates as the Company may be required to
file a registration statement pursuant to Article 4 hereof; provided, however,
that the Investor shall not be required to exercise the Warrants in order to
have the Warrant Shares included in any Registration Statement. The term shall
not include the Shares and Warrant Shares included in the Third Closing Units
unless and until the Investor has purchased those units.

“Registration Period” means the period commencing on the date hereof and ending
on the date on which all of the Investor’s remaining Registrable Securities may
be sold to the public during a three month period without registration under the
Securities Act in reliance on Rule 144.

“Registration Statement” means a registration statement filed on the appropriate
Form with, and declared effective by, the Commission under the Securities Act
and covering the resale by the Investor of the Registrable Securities.

“Requested Information” has the meaning set forth in Section 4.3(a).

“Required Effectiveness Date” means the earlier of (i) the date that is 150 days
after the First Closing Date, or, in the case of the registration of Cut Back
Shares, 120 days after the Restriction Termination Date or (ii) five Business
Days after receipt by the Company from the Commission of notice of “no review”
of the Registration Statement.

“Restriction Termination Date” has the meaning assigned thereto in Section
4.1(a).

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

“Rule 415 Response Effort” has the meaning assigned thereto in Section 4.1(a).

“Second Closing Date” means the fifth Business Day immediately following the
later of (i) the Compliance Date or (ii) if all other conditions set forth in
Section 6.1 and 6.2 are not satisfied on the Compliance date, the date following
the Compliance Date on which all other conditions set forth in Sections 6.1 and
6.2 hereof are satisfied, or such other date as the parties may agree.
 
“Second Closing Unit” means a Unit consisting of one Share and a Warrant to
purchase one and one-quarter shares of Common Stock, issued in combination.
 
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“SEC Objection” has the meaning assigned thereto in Section 4.1(a).

“SEC Restrictions” has the meaning assigned thereto in Section 4.1(a).

“SEC Reports” has the meaning set forth in Section 3.1(h).

“Securities” means the Shares, the Warrant, and the Warrant Shares.

“Securities Act” means the Securities Act of 1933, as amended.

“Senior Preferred Stock” means the shares of the preferred stock of the Company,
par value $0.0001 per share, that have been designated as “8% Convertible Senior
Preferred Stock” by a Certificate of Designations, Preferences and Rights dated
March 17, 2005.

“Series A Preferred Stock” means the shares of the preferred stock of the
Company, par value $0.0001 per share, that have been designated as “Series A
Convertible Preferred Stock” by an Amended and Restated Certificate of
Designations, Preferences and Rights dated October 26, 2006.

“Shares” means the shares of Common Stock issuable to the Investor at the
Closings.

“Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of
Regulation S-X promulgated by the Commission under the Exchange Act.

“Third Closing Date” means the fifth Business Day immediately following the
later of (i) the date of delivery to the Investor of a copy of the Production
Contract, or (ii) if all other conditions set forth in Section 6.1 and 6.2 are
not satisfied on such date, the date following the date of delivery of the
Production Contract on which all other conditions set forth in Sections 6.1 and
6.2 hereof are satisfied, such other date as the parties may agree.

“Third Closing Unit” means a Unit consisting of one Share and a Warrant to
purchase one share of Common Stock, issued in combination.

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading
Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the Common Stock is not then listed or
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in
the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not
listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
shall mean a Business Day.

“Trading Market” means whichever of the New York Stock Exchange, the American
Stock Exchange, the Nasdaq Capital or Global Markets, or the Over-the-Counter
Market on which the Common Stock is listed or traded on the date in question.

“Transfer Agent” has the meaning set forth in Section 5.1(c).

“Transaction Documents” means this Agreement, the Warrant and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.
 
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“Unit” means a First Closing Unit, a Second Closing Unit or a Third Closing
Unit, as the context indicates.

“Warrant” means any of the Common Stock Purchase Warrants, in the form of
Exhibit A, which are issuable to the Investor at the Closings.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.
 
ARTICLE 2

Purchase and Sale

Section 2.1. Issuance of Securities at the First Closing. Upon the terms and
subject to the conditions set forth in this Agreement, and in accordance with
applicable law, the Company agrees to sell to the Investor, and the Investor
agrees to purchase from the Company, on the First Closing Date, for the purchase
price of $4.0 million, a number of Units equal to the number obtained by
dividing $4.0 million by $2.10 per unit (the “Purchase Price”), each Unit to
consist of (i) one Share and (ii) a Warrant to purchase 1.5 shares of Common
Stock. 

Section 2.2. Issuance of Securities at the Second Closing. Upon the terms and
subject to the conditions set forth in this Agreement, and in accordance with
applicable law, the Company agrees to sell to the Investor, and the Investor
agrees to purchase from the Company, on the Second Closing Date, for the
purchase price $4.0 million, a number of Units equal to the number obtained by
dividing $4.0 million by the Purchase Price, each Unit to consist of (i) one
Share and (ii) a Warrant to purchase 1.25 shares of Common Stock.
 
Section 2.3. Issuance of Securities at the Third Closing. Upon the terms and
subject to the conditions and limitations set forth in this Agreement, the
Company’s Certificate of Incorporation and Delaware law, the Company agrees to
sell to the Investor, and the Investor agrees to purchase from the Company, on
the Third Closing Date, for the purchase price $10.0 million, a number of Units
equal to the number obtained by dividing $10.0 million by the Purchase Price,
each Unit to consist of (i) one Share and (ii) a Warrant to purchase 1.0 shares
of Common Stock. 
 
Section 2.4. Payment of Purchase Price; Delivery of Securities. As consideration
for the issuance of the Securities being purchased at each Closing, the Investor
shall on the respective Closing Date pay to the Company, by wire transfer or
other form of immediately available funds, an amount equal to applicable
Purchase Price for the Securities being purchased at such Closing, and the
Company shall, against payment by the Investor of the applicable Purchase Price,
(i) issue to the Investor the Warrants included in the Units being purchased at
such Closing and (ii) execute and deliver to the transfer agent for the Common
Stock irrevocable instructions to issue to the Investor the number of Shares
included in the Units being purchased at such Closing.
 
Section 2.5. Additional Closing Deliveries. At each Closing, the Company shall
deliver or cause to be delivered to the Investor the following (the“Company
Deliverables”):

 
(i)
The legal opinion of Company Counsel, in substantially the form of Exhibit B
hereto, addressed to the Investor;

 
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(ii)
The Certificate of Incorporation of the Company, together with all amendments
thereto, certified by the Secretary of State of the State of Delaware as of a
date not more than five Business Days prior to the Closing Date;

 
(iii)
Copies of each of the following documents, in each case certified by the
Secretary of the Company to be in full force and effect on the Closing Date:

 
(A)
resolutions of the board of directors of the Company approving the execution,
delivery and performance of the Transaction Documents and the transactions
contemplated thereby;

 
(B)
the By-laws of the Company; and

 
(C)
irrevocable instructions to the Company’s transfer agent as to the reservation
and issuance of the Warrant Shares; and

 
(iv)
A good standing certificate of the Company issued by the Secretary of State of
the State of Delaware dated as of a date no earlier than five Business Days
prior to the Closing Date.

 
(v)
A certificate, signed by the President of the Company, certifying that all of
the conditions set forth in Section 6.1 and Section 6.2 are satisfied upon the
applicable Closing Date.

 
(vi)
In the case of the Second Closing only, a Certificate of the Chief Financial
Officer of the Company, certifying that the Chief Financial Officer is not aware
of any condition or circumstance that would reasonably be expected to cause the
Company not to be able to timely file its 2007 Annual Report on Form 10-K with
the Commission, taking into account any extension to which the Company is
entitled pursuant to Rule 12b-24 of the Commission.

 
ARTICLE 3

Representations and Warranties

Section 3.1. Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Investor:

 
(a)
Subsidiaries. The Company has no direct or indirect Subsidiaries other than as
specified in the SEC Reports. Except as disclosed in the SEC Reports, the
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all Liens other than Liens disclosed in the
SEC Reports, and all the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights.

 
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(b)
Organization and Qualification. Each of the Company and each Subsidiary is duly
incorporated or otherwise organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and each Subsidiary is
duly qualified to conduct its respective business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect, and no proceedings have been
instituted in any such jurisdiction revoking, limiting or curtailing, or seeking
to revoke, such power and authority or qualification.

 
(c)
Authorization; Enforcement. Subject to the qualifications set forth in this
Section 3.1(c), the Company has the requisite corporate power and authority to
enter into and to consummate the transactions contemplated by each of the
Transaction Documents and otherwise to carry out its obligations thereunder. The
execution and delivery of each of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of the Company and no further
action is required by the Company in connection therewith. Each Transaction
Document has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof, will constitute the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application. The
Company has advised the Investor that it has issued approximately 16.8 million
shares of Common Stock, together convertible preferred stock, warrants, options
and convertible debt securities (“Derivative Securities”) that are, in the
aggregate, presently convertible or exercisable to acquire approximately 20.9
million additional shares of common stock. In the aggregate, the Company may
required to issue approximately 20 million additional shares of common stock
under this Agreement (including the Warrant Shares included in the Units and
additional shares issuable to Merriman Curhan Ford & Co. upon exercise of
certain warrants that will be issued to them as compensation for services. In
the aggregate, the number of shares that the Company has issued, is presently
obligated to issue and will become obligated to issue under the provisions of
this Agreement exceeds the 50 million of shares of Common Stock currently
authorized under the Company’s Certificate of Incorporation;. The Company has
obtained the agreement of certain of holders of Derivative Securities that are
presently convertible or exercisable to acquire approximately 9.1 million to
execute and deliver, on or prior to the Closing, an agreement (the “Forbearance
Agreement”) in the form of Exhibit D hereto that requires such holders to
forbear from exercising or converting the Derivative Securities designated in
such agreements (the “Designated Securities”) without the consent of the
Company, and in certain cases, the Investor. The Company agrees that it will not
allow the conversion or exercise of any of the Designated Securities that are
subject to Forbearance Agreements unless after giving effect to such exercise or
conversion there remain sufficient authorized and unissued shares of Common
Stock to allow (a) the conversion and/or exercise of all Derivative Securities
other than the Designated Securities, and (b) all other issuances of Common
Stock which the Company is legally committed to issue. In the event that the
Investors rights to exercise warrants are ever limited by the provisions of the
Company’s Certificate of Incorporation, for any reason, then the expiration date
of any warrants that the Investor is unable to purchase shall be automatically
extended from time to time until one year after the date that a Charter
Amendment increasing the Company’s authorized capital has been proposed to is
stockholders and approved in accordance with the requirements of Delaware law.

 
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(d)
No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated thereby do not and will not (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, or result in the imposition of any Lien upon any of
the material properties or assets of the Company or of any Subsidiary pursuant
to, any agreement, credit facility, debt or other instrument (evidencing a
Company or Subsidiary debt or otherwise) or other understanding to which the
Company or any Subsidiary is a party or by which any property or asset of the
Company or any Subsidiary is bound or affected, or (iii) result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect.

 
(e)
Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority (a “Governmental Authority”) or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents and the consummation of the transactions contemplated
thereby, other than (i) the filing of a Notice of Sale of Securities on Form D
with the Commission under Regulation D of the Securities Act (ii) the filing of
one or more current reports on Form 8-K; (iii) filings required under applicable
state securities laws, and (iv) the filing with the Commission of one or more
Registration Statements in accordance with the requirements of Article 4 of this
Agreement.

 
(f)
Issuance of the Securities. Subject to the qualifications set forth in Section
3.1(c), the Securities have been duly authorized. Each Share, when issued and
paid for in accordance with this Agreement, will be duly and validly issued,
fully paid and nonassessable, free and clear of all Liens. Each Warrant, when
issued and paid for in accordance with this Agreement, will be duly and validly
issued. The Company has reserved and set aside from its duly authorized capital
stock a sufficient number of shares of Common Stock to satisfy in full the
Company’s obligations to issue the Warrant Shares upon exercise of the Warrants.
The Warrants Shares, when issued and paid for upon exercise of the Warrants in
accordance with their terms, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens

 
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(g)
Capitalization. The authorized capital stock of the Company presently consists
of 50,000,000 shares of Common Stock and 12,500,000 shares of Preferred Stock,
par value $0.0001 per share. At its 2008 Annual Meeting of Stockholders, the
Company intends to submit the Charter Amendment to its stockholders for their
approval. As of the close of business on the Business Day immediately prior to
the date hereof, (i) 16,834,998 shares of Common Stock were issued and
outstanding, all of which are validly issued, fully-paid and non-assessable,
(ii) no shares of Common Stock were held by the Company in Treasury, (iii)
1,019,832 shares of Common Stock were reserved for issuance upon conversion of
137,500 shares of Senior Preferred Stock; (iv) 8,015,344 shares of Common Stock
were reserved for issuance upon conversion of 822,997 shares of Series A
Preferred Stock; (v) 4,531,320 shares of Common Stock were reserved for issuance
upon exercise of options authorized under the Company’s Incentive Stock Plan and
Directors Stock Option Plan, or previously granted to employees, directors, and
consultants by contracts that provided for the issuance of non-plan options (the
“Company Stock Options”); (vi) 3,777,541 shares of Common Stock were reserved
for issuance upon exercise of outstanding warrants to purchase Common Stock (the
“Prior Warrants”); (vii) 3,142,857 shares of Common Stock were reserved for
issuance upon conversion of other convertible notes, debentures and securities,
including warrants issuable in connection with such conversions (“Prior
Convertible Securities”). No Person has any right of first refusal, preemptive
right, right of participation, or any similar right to participate in the
transactions contemplated by the Transaction Documents.  Except pursuant to (i)
the Company Stock Options, (ii) the Prior Warrants or (iii) the Prior
Convertible Securities, or as a result of the purchase and sale of the
Securities as contemplated by this Agreement, there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock or Common Stock Equivalents.  The issue
and sale of the Securities will not obligate the Company to issue shares of
Common Stock or other securities to any Person (other than the Investor and
Merriman Curhan Ford & Co.) and will not result in a right of any holder of
Company securities to adjust the exercise or conversion price under such
securities. No further approval or authorization of any stockholder, the Board
of Directors of the Company or any other Person is required for the issuance and
sale of the Securities.  There are no stockholders agreements, voting agreements
or other similar agreements with respect to the Company’s capital stock to which
the Company is a party or, to the knowledge of the Company, between or among any
of the Company’s stockholders.

 
(h)
SEC Reports; Financial Statements. The Company has filed all reports required to
be filed by it under the Securities Act and the Exchange Act, including pursuant
to Section 13(a) or 15(d) thereof, for all annual and quarterly periods through
and including the quarterly periods ended September 30, 2006 (the foregoing
materials, being collectively referred to herein as the“SEC Reports”). As of
their respective dates, the SEC Reports complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved, except as may be otherwise specified in such financial
statements or the notes thereto, and fairly present in all material respects the
financial position of the Company and its consolidated Subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. The Company has provided the Investor
with draft financial statements for the year ended December 31, 2006 and the
nine months ended September 30, 2007, and expects that these draft financial
statements will be filed, in substantially the form provided to the Investor,
subject to revisions requested or required by the Company’s independent auditors
prior to filing (the “Draft Financial Statements”) Except as disclosed to the
investor in writing, (i) the financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect on the date hereof, (ii) such financial statements have
been prepared in accordance with GAAP applied on a consistent basis during the
periods involved, except as may be otherwise specified in such financial
statements or the notes thereto, and (iii) fairly present in all material
respects the financial position of the Company and its consolidated Subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject to normal, immaterial, year-end audit
adjustments.

 
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(i)
Financial Statements and Material Changes. Except as set forth in the SEC
Reports, the Draft Financial Statements and as disclosed to the investor in
writing, (i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities or obligations (contingent or
otherwise) other than (A) trade payables, accrued expenses and other liabilities
incurred in the ordinary course of business consistent with past practice since
the date of the latest Draft Financial Statement, and (B) liabilities incurred
in the ordinary course of business not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company stock
option plans. The Company does not have pending before the Commission any
request for confidential treatment of information.

 
(j)
Litigation and Investigations. There is no Action which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) except as disclosed in the SEC Reports,
could, if there were an unfavorable decision, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect. Neither
the Company nor any Subsidiary, nor any director or officer thereof (in his
capacity as such), is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty, except as specifically disclosed in the SEC Reports.
There has not been, and to the knowledge of the Company, there is not pending
any investigation by the Commission involving the Company or any current or
former director or officer of the Company (in his or her capacity as such). The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act. There are no
outstanding comments by the Staff of the Commission on any filing by the Company
or any Subsidiary under the Exchange Act or the Securities Act.

 
(k)
Labor Relations. No material labor dispute exists or, to the knowledge of the
Company, is imminent with respect to any of the employees of the Company.

 
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(l)
Compliance. Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such
default or violation has been waived), (ii) is in violation of any order of any
court, arbitrator or governmental body, or (iii) is or has been in violation of
any statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws relating to environmental
protection, occupational health and safety, product quality and safety and
employment and labor matters, except in each case as could not, individually or
in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

 
(m)
Regulatory Permits. The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses
as described in the SEC Reports, except where the failure to possess such
permits could not, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect, and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such permits.

 
(n)
Title to Assets. The Company and the Subsidiaries have good and marketable title
in fee simple to all real property owned by them that is material to their
respective businesses and good and marketable title in all personal property
owned by them that is material to their respective businesses, in each case free
and clear of all Liens, except for Liens that have been disclosed to the
investor in writing or which do not otherwise materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Company and the Subsidiaries. All real property
and facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in material compliance, except as could not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

 
(o)
Patents and Trademarks. The Company and the Subsidiaries have, or have rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and other similar rights that
are necessary or material for use in connection with their respective businesses
as described in the SEC Reports and which the failure to so have could,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect (collectively, the“Intellectual Property Rights”). No
claims or Actions have been made or filed by any Person against the Company to
the effect that Intellectual Property Rights used by the Company or any
Subsidiary violate or infringe upon the rights of such claimant. To the
knowledge of the Company, after commercially reasonable investigation, all of
the Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.

 
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(p)
Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. The Company has no reason to believe that it will
not be able to renew its and the Subsidiaries’ existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business on terms consistent with
the market for the Company’s and such Subsidiaries’ respective lines of
business.

 
(q)
Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports or as disclosed to the investor in writing, none of the officers or
directors of the Company and, to the knowledge of the Company, none of the
employees of the Company is a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

 
(r)
Sarbanes-Oxley; Internal Accounting Controls.  Except to the extent it has not
filed its quarterly and annual reports for periods ending after September 30,
2006, the Company is in material compliance with all mandatory provisions of the
Sarbanes-Oxley Act of 2002 (including the rules and regulations of the
Commission adopted thereunder) that are applicable to it as of the Closing
Date.  The Company’s certifying officers have evaluated the effectiveness of the
Company’s controls and procedures as of the filing date of the most recently
filed periodic report under the Exchange Act (such date, the “Evaluation
Date”).  The Company presented in its most recently filed periodic report under
the Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date.  Except as has been disclosed to the
Investor, there have, since the Evaluation Date, been no significant adverse
changes in the Company’s internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, to the Company’s knowledge,
in other factors that could significantly affect the Company’s internal
controls. The Company maintains a standard system of accounting established and
administered in accordance with GAAP.

 
(s)
Certain Fees. No brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by this Agreement except to Merriman Curhan Ford & Co.
(the “Placement Agent”). The Investor shall have no obligation with respect to
any fees or with respect to any claims (other than such fees or commissions owed
by the Investor pursuant to written agreements executed by the Investor which
fees or commissions shall be the sole responsibility of the Investor) made by or
on behalf of the Placement Agent or any other Persons for fees of a type
contemplated in this Section that may be due in connection with the transactions
contemplated by this Agreement.

 
(t)
Certain Registration Matters. Assuming the accuracy of the Investor’s
representations and warranties set forth in Section 3.2(b)-(e), no registration
under the Securities Act is required for the offer and sale of the Securities by
the Company to the Investor under the Transaction Documents.

 
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(u)
Investment Company. The Company is not, and is not an Affiliate of, and
immediately following the Closing will not have become, an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.

 
(v)
No Additional Agreements. The Company does not have any agreement or
understanding with the Investor with respect to the transactions contemplated by
the Transaction Documents other than as specified in the Transaction Documents.

 
(w)
Full Disclosure. All written disclosures provided to the Investor regarding the
Company, its business and the transactions contemplated hereby, furnished by or
on behalf of the Company (including the Company’s representations and warranties
set forth in this Agreement) are true and correct in all material respects and
do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.

 
(x)
Environmental Matters. To the Company’s knowledge, after commercially reasonable
investigation: (i) the Company and its Subsidiaries have complied with all
applicable Environmental Laws; (ii) the properties currently owned or operated
by Company (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by Company or its Subsidiaries were not
contaminated with Hazardous Substances during the period of ownership or
operation by Company and its Subsidiaries; (iv) Company and its Subsidiaries are
not subject to liability for any Hazardous Substance disposal or contamination
on any third party property; (v) Company and its Subsidiaries have not been
associated with any release or threat of release of any Hazardous Substance;
(vi) Company and its Subsidiaries have not received any notice, demand, letter,
claim or request for information alleging that Company and its Subsidiaries may
be in violation of or liable under any Environmental Law; and (vii) Company and
its Subsidiaries are not subject to any orders, decrees, injunctions or other
arrangements with any Governmental Authority or subject to any indemnity or
other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances.

 
As used in this Agreement, the term “Environmental Law” means any federal,
state, local or foreign law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,
investigation or restoration of the environment, health and safety, or natural
resources; (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, wetlands, pollution,
contamination or any injury or threat of injury to persons or property.
 
As used in this Agreement, the term “Hazardous Substance” means any substance
that is: (i) listed, classified or regulated pursuant to any Environmental Law;
(ii) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (iii) any other substance which is the subject of
regulatory action by any Governmental Authority pursuant to any Environmental
Law.
 

(y)
Taxes.  The Company and its Subsidiaries have filed all necessary state
franchise tax returns when due (or obtained appropriate extensions for filing)
and have paid or accrued all taxes shown as due thereon. While the Company and
its Subsidiaries have not filed all necessary federal, state and foreign income
tax returns, the Company has had no taxable income during any of the
five preceding years, has retained its independent accountants to prepare the
required returns promptly after the completion of work on the Company's
delinquent Exchange Act reports, and has no knowledge of a tax deficiency that
has been or might be asserted or threatened against it or any Subsidiary which
would have a Material Adverse Effect.

 
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(z)
Private Offering. Assuming the correctness of the representations and warranties
of the Investors set forth in this Agreement, the offer and sale of the Warrants
hereunder are, and upon exercise of the Warrants, the issuance of the Warrant
Shares will be exempt from registration under the Securities Act. The Company
has offered the Warrants for sale only to the Investor.

 

(aa)
ERISA. Neither the Company nor any ERISA Affiliate maintains, contributes to or
has any liability or contingent liability with respect to any employee benefit
plan subject to ERISA.

 

(bb)
Foreign Assets Control Regulations and Anti-Money Laundering.

 
(i)        OFAC. Neither the issuance of the Convertible Note and Warrant to the
Investor, nor the use of the respective proceeds thereof, shall cause the
Investor to violate the U.S. Bank Secrecy Act, as amended, and any applicable
regulations thereunder or any of the sanctions programs administered by the U.S.
Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) of the
United States Department of Treasury, any regulations promulgated thereunder by
OFAC or under any affiliated or successor governmental or quasi-governmental
office, bureau or agency and any enabling legislation or executive order
relating thereto. Without limiting the foregoing, neither the Company nor any
Subsidiary (i) is a person whose property or interests in property are blocked
or subject to blocking pursuant to Section 1 of Executive Order 13224 of
September 23, 200l Blocking Property and Prohibiting Transactions With Persons
Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079
(2001)), (ii) engages in any dealings or transactions prohibited by Section 2 of
such executive order, or is otherwise associated with any such person in any
manner violative of Section 2, or (iii) is a person on the list of Specially
Designated Nationals and Blocked Persons or subject to the limitations or
prohibitions under any other OFAC regulation or executive order.
 
(ii)        Patriot Act. The Company and each of its Subsidiaries are in
compliance, in all material respects, with the USA PATRIOT Act. No part of the
proceeds of the sale of the Shares and the Warrants hereunder will be used,
directly or indirectly, for any payments to any governmental official or
employee, political party, official of a political party, candidate for
political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in violation
of the United States Foreign Corrupt Practices Act of 1977, as amended.

Section 3.2. Representations and Warranties of the Investor. The Investor hereby
represents and warrants to the Company as follows:
 
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(a)
Authority. This Agreement has been duly executed by the Investor, and when
delivered by the Investor in accordance with terms hereof, will constitute the
valid and legally binding obligation of the Investor, enforceable against him in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.

 
(b)
Investment Intent. The Investor is acquiring the Securities as principal for its
own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof, without
prejudice, however, to the Investor’s right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws. The Investor does not have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

 
(c)
Investor Status. The Investor is an “accredited investor” as defined in Rule
501(a) under the Securities Act and a “qualified institutional buyer” as defined
in Rule 144A under the Securities Act. The Investor is not a registered
broker-dealer under Section 15 of the Exchange Act.

 
(d)
Access to Information. The Investor acknowledges that he has reviewed the SEC
Reports and has been afforded (i) the opportunity to ask such questions as he
has deemed necessary of, and to receive answers from, representatives of the
Company concerning the terms and conditions of the offering of the Securities
and the merits and risks of investing in the Securities; (ii) access to
information about the Company and the Subsidiaries and their respective
financial condition, results of operations, business, properties, management and
prospects sufficient to enable him to evaluate his investment; and (iii) the
opportunity to obtain such additional information that the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment.

 
(e)
General Solicitation. The Investor is not purchasing the Securities as a result
of any advertisement, article, notice or other communication regarding the
Securities published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar or any other general
solicitation or general advertisement.

 

 
(f)
Disclosure. The Investor acknowledges and agrees that the Company neither makes
nor has made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section 3.1.

 
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ARTICLE 4

Registration Rights
Section 4.1. Shelf Registration.
 
(a) As promptly as possible, and in any event on or prior to the Filing Date,
the Company shall prepare and file with the Commission a “shelf” Registration
Statement covering the resale of all Registrable Securities for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-3, unless Form S-3 is not available for the registration of
the resale of Registrable Securities hereunder, in which case the Company shall
(i) register the resale of the Registrable Securities on another appropriate
form in accordance herewith and (ii) attempt to register the Registrable
Securities on Form S-3 as soon as such form is available, provided that the
Company shall maintain the effectiveness of the Registration Statements then in
effect until such time as a Registration Statement on Form S-3 covering the
Registrable Securities has been declared effective by the Commission. If at any
time the staff of the Commission takes the position that the offering of some or
all of the Registrable Securities in a Registration Statement is not eligible to
be made on a delayed or continuous basis under the provisions of Rule 415 under
the Securities Act or requires any Investor to be named as an “underwriter” (an
“SEC Objection”), the Company shall promptly notify the Investor of such SEC
Objection and if the Investor shall request, the Company shall use its
commercially reasonable efforts to persuade the staff of the Commission that the
offering contemplated by the Registration Statement is a valid secondary
offering and not an offering “by or on behalf of the issuer” as defined in Rule
415 and that the Investor is not an “underwriter” (a “Rule 415 Response
Effort”). The Investor shall have the right to participate or have its counsel
participate in any meetings or discussions with the staff of the Commission
regarding such position and to comment or have its counsel comment on any
written submission made to the staff of the Commission with respect thereto, and
to have such comments relayed to the staff of the Commission with the consent of
the Company, not to be unreasonably withheld. No such written submission shall
be made to the staff of the Commission to which the Investor’s counsel
reasonably objects. In the event that, despite the Company’s commercially
reasonable efforts and compliance with the terms of this Section 4.1(a), the
staff of the Commission has not altered its position and the Investor provides
notice to the Company to cease any further Rule 415 Response Efforts (the
“Investor Rule 415 Determination”), the Company shall (i) remove from the
Registration Statement such portion of the Registrable Securities (the “Cut Back
Shares”) and/or (ii) agree to such restrictions and limitations on the
registration and resale of the Registrable Securities as the staff of the
Commission may require to assure the Company’s compliance with the requirements
of Rule 415; provided, however, that the Company shall not agree to name any
Investor as an “underwriter” in such Registration Statement without the prior
written consent of such Investor (collectively, the “SEC Restrictions”).
Notwithstanding any other provision of this Agreement to the contrary, no
liquidated damages shall accrue pursuant to Section 4.1(d) (i) during the period
beginning on the date of an SEC Objection and ending on the date that either the
Company receives written notification from the Commission that the Company’s
Rule 415 Response Effort has been successful or the Investor provides the
Company with an Investor Rule 415 Determination or (ii) on or as to any Cut Back
Shares until such time as the Company is able, using commercially reasonable
efforts, to effect the filing of an additional Registration Statement with
respect to the Cut Back Shares in accordance with any SEC Restrictions (such
date, the “Restriction Termination Date”). From and after the Restriction
Termination Date, all of the provisions of this Article 4 (including the
liquidated damages provisions) shall again be applicable to the Cut Back Shares;
provided, however, that for such purposes, references to the Filing Date shall
be deemed to be the date that is 30 days after the Restriction Termination Date.
 
(b) The Company shall use its best efforts to cause each Registration Statement
filed hereunder to be declared effective by the Commission as promptly as
possible after the filing thereof, but in any event prior to the Required
Effectiveness Date, and shall use its best efforts to keep the Registration
Statement continuously effective under the Securities Act until the earlier of
(i) the fifth anniversary of the Effective Date, (ii) the date when all
Registrable Securities covered by such Registration Statement have been sold
publicly, or (iii) the date on which the Registrable Securities are eligible for
sale without volume limitation pursuant to subparagraph (k) of Rule 144 (the
“Effectiveness Period”). The Company shall notify the Investor in writing
promptly (and in any event within one Business Day) after receiving notification
from the Commission that the Registration Statement has been declared effective.
 
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(c) As promptly as possible, and in any event no later than the Post-Effective
Amendment Filing Deadline, the Company shall prepare and file with the
Commission a Post-Effective Amendment. The Company shall use its best efforts to
cause the Post-Effective Amendment to be declared effective by the Commission as
promptly as possible after the filing thereof. The Company shall notify the
investor in writing promptly (and in any event within one Business Day) after
receiving notification from the Commission that the Post-Effective Amendment has
been declared effective.
 
(d) If: (i) any Registration Statement is not filed on or prior to the Filing
Date (or the Restriction Termination Date, as applicable) or a Post-Effective
Amendment is not filed on or prior to the Post-Effective Amendment Filing
Deadline, or (ii) the Company fails to file with the Commission a request for
acceleration of effectiveness in accordance with Rule 461 promulgated under the
Securities Act, within five Business Days after the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be “reviewed,” or will not be subject to further
review, or (iii) the Company fails to respond to any comments made by the
Commission within 15 Business Days after the receipt of such comments, or (iv) a
Registration Statement filed hereunder is not declared effective by the
Commission by the Required Effectiveness Date (which date shall be extended by
30 days in the case of a comment regarding Rule 415), or a Post-Effective
Amendment is not declared effective on or prior to the fifteenth Business Day
following the Post-Effective Amendment Filing Deadline, or (v) after a
Registration Statement is filed with and declared effective by the Commission,
such Registration Statement ceases to be effective as to all Registrable
Securities to which it is required to relate at any time prior to the expiration
of the Effectiveness Period for a period of more than 60 days in any twelve
month period without being succeeded by an amendment to such Registration
Statement or by a subsequent Registration Statement filed with and declared
effective by the Commission, or (vi) an amendment to a Registration Statement is
not filed by the Company with the Commission within 15 Business Days after the
Commission’s having notified the Company that such amendment is required in
order for such Registration Statement to be declared effective (any such failure
or breach being referred to as an “Event” and the date on which such Event
occurs being referred to as “Event Date”), then: (x) on each such Event Date the
Company shall pay to the Investor an amount in cash, as liquidated damages and
not as a penalty, equal to 1% of the aggregate Purchase Price paid by the
Investor pursuant to this Agreement for Registrable Securities that are not
covered under an effective Registration Statement (the “Liquidated Damages
Base”); and (y) on the same day of each successive month following such Event
Date (so long as the applicable Event shall not have been cured by such date)
until the applicable Event is cured, the Company shall pay to the Investor an
amount in cash, as liquidated damages and not as a penalty, equal to 1% of the
Liquidated Damages Base. Such payments shall be the Investor’s sole and
exclusive remedy for such Events. If the Company fails to pay any liquidated
damages pursuant to this Section in full within seven Business Days after the
date payable, the Company will pay interest thereon at a rate of 18% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to the Investor, accruing daily from the date such liquidated damages are due
until such amounts, plus all such interest thereon, are paid in full.
 
(e) The Company shall not, prior to the Effective Date of the Registration
Statement, prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities.
 
(f) If the Company issues to the Investor any Common Stock pursuant to the
Transaction Documents that is not included in the initial Registration
Statement, then the Company shall file an additional Registration Statement
covering such number of shares of Common Stock on or prior to the Filing Date
and shall use it best efforts, but in no event later than the Required
Effectiveness Date, to cause such additional Registration Statement to be
declared effective by the Commission.
 
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Section 4.2. Registration Process. In connection with the registration of the
Registrable Securities pursuant to Section 4.1, the Company shall:
 
(a) Prepare and file with the Commission the Registration Statement and such
amendments (including post-effective amendments) to the Registration Statement
and supplements to the prospectus included therein (a “Prospectus”) as the
Company may deem necessary or appropriate and take all lawful action such that
the Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, not misleading and that the Prospectus forming part of the Registration
Statement, and any amendment or supplement thereto, does not at any time during
the Registration Period include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.;
 
(b) Comply with the provisions of the Securities Act with respect to the
Registrable Securities covered by the Registration Statement until the earlier
of (i) such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the Investor as set forth
in the Prospectus forming part of the Registration Statement or (ii) the date on
which the Registration Statement is withdrawn;
 
(c) Prior to the filing with the Commission of the Registration Statement
(including any amendments thereto) and the distribution or delivery of any
Prospectus (including any supplements thereto), provide draft copies thereof to
the Investor and reflect in such documents all such comments as the Investor
(and its counsel) reasonably may propose and furnish to the Investor and its
legal counsel identified to the Company (i) promptly after the same is prepared
and publicly distributed, filed with the Commission, or received by the Company,
one copy of the Registration Statement, each Prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of the Prospectus and all
amendments and supplements thereto and such other documents, as the Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities;
 
(d) (i) register or qualify the Registrable Securities covered by the
Registration Statement under such securities or “blue sky” laws of such
jurisdictions as the Investors reasonably request, (ii) prepare and file in such
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify, (B) subject
itself to general taxation in any such jurisdiction or (C) file a general
consent to service of process in any such jurisdiction;
 
(e) As promptly as practicable after becoming aware of such event, notify the
Investor of the occurrence of any event, as a result of which the Prospectus
included in the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and promptly prepare
an amendment to the Registration Statement and supplement to the Prospectus to
correct such untrue statement or omission, and deliver a number of copies of
such supplement and amendment to each Investor as such Investor may reasonably
request;
 
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(f) As promptly as practicable after becoming aware of such event, notify the
Investor (or, in the event of an underwritten offering, the managing
underwriters) of the issuance by the Commission of any stop order or other
suspension of the effectiveness of the Registration Statement and take all
lawful action to effect the withdrawal, rescission or removal of such stop order
or other suspension;
 
(g) Take all such other lawful actions reasonably necessary to expedite and
facilitate the disposition by the Investor of his Registrable Securities in
accordance with the intended methods therefor provided in the Prospectus which
are customary under the circumstances;
 
(h) Make generally available to its security holders as soon as practicable, but
in any event not later than 18 months after the Effective Date of the
Registration Statement, an earnings statement of the Company and its
subsidiaries complying with Section 11(a) of the Securities Act and the rules
and regulations of the Commission thereunder;
 
(i) In the event of an underwritten offering, promptly include or incorporate in
a Prospectus supplement or post-effective amendment to the Registration
Statement such information as the underwriters reasonably agree should be
included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;
 
(j) Make reasonably available for inspection by the Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by such Investors or any such
underwriter all relevant financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
Company’s officers, directors and employees to supply all information reasonably
requested by the Investor or any such underwriter, attorney, accountant or agent
in connection with the Registration Statement, in each case, as is customary for
similar due diligence examinations; provided, however, that all records,
information and documents that are designated in writing by the Company, in good
faith, as confidential, proprietary or containing any nonpublic information
shall be kept confidential by such Investors and any such underwriter, attorney,
accountant or agent (pursuant to an appropriate confidentiality agreement in the
case of any such holder or agent), unless such disclosure is made pursuant to
judicial process in a court proceeding (after first giving the Company an
opportunity promptly to seek a protective order or otherwise limit the scope of
the information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and provided, further, that, if the foregoing inspection and information
gathering would otherwise disrupt the Company’s conduct of its business, such
inspection and information gathering shall, to the maximum extent possible, be
coordinated on behalf of the Investors and the other parties entitled thereto by
one firm of counsel designated by and on behalf of the majority in interest of
Investors and other parties;
 
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(k) In connection with any offering, make such representations and warranties to
the Investor and to the underwriters if an underwritten offering, in form,
substance and scope as are customarily made by a company to underwriters in
secondary underwritten offerings;
 
(l) In connection with any underwritten offering, deliver such documents and
certificates as may be reasonably required by the underwriters; 
 
(m) Cooperate with the Investor to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold pursuant
to the Registration Statement, which certificates shall, if required under the
terms of this Agreement, be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any Investor may request and maintain a transfer agent for the Common Stock;
 
(n) Use its commercially reasonable efforts to cause all Registrable Securities
covered by the Registration Statement to be listed or qualified for trading on
the principal Trading Market, if any, on which the Common Stock is traded or
listed on the Effective Date of the Registration Statement; and
 
(o) Include in each Prospectus and Registration the Plan of Distribution
attached hereto as Exhibit C (the “Plan of Distribution”), unless and to the
extent that such Plan of Distribution requires modification due to inaccuracy or
due to a change in the Commission’s rules and regulations under the Securities
Act.
 
Section 4.3. Obligations and Acknowledgements of the Investor. In connection
with the registration of the Registrable Securities, the Investor shall have the
following obligations and hereby make the following acknowledgements:
 
(a) It shall be a condition precedent to the obligations of the Company to
include the Registrable Securities in the Registration Statement that the
Investor (i) shall furnish to the Company such information regarding itself, the
Registrable Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect the
registration of such Registrable Securities and (ii) shall execute such
documents in connection with such registration as the Company may reasonably
request. At least five Business Days prior to the first anticipated filing date
of a Registration Statement, the Company shall notify the Investor of the
information the Company requires from the Investor (the “Requested Information”)
if the Investor elects to have any of its Registrable Securities included in the
Registration Statement. If at least two Business Days prior to the anticipated
filing date the Company has not received the Requested Information from the
Investor, then the Company may file the Registration Statement without including
any Registrable Securities of the Investor and the Company shall have no further
obligations under this Article 4 to the Investor after such Registration
Statement has been declared effective. If the Investor notifies the Company and
provides the Company the information required hereby prior to the time the
Registration Statement is declared effective, the Company will file an amendment
to the Registration Statement that includes the Registrable Securities of the
Investor; provided, however, that the Company shall not be required to file such
amendment to the Registration Statement at any time less than 5 Business Days
prior to the Effectiveness Date.
 
(b) The Investor agrees to cooperate with the Company in connection with the
preparation and filing of a Registration Statement hereunder, unless the
Investor has notified the Company in writing of its election to exclude all of
its Registrable Securities from such Registration Statement;
 
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(c) The Investor agrees that, upon receipt of any notice from the Company of the
occurrence of any event of the kind described in Section 4.2(e) or 4.2(f), the
Investor shall immediately discontinue its disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until the Investor’s receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 4.2(e) and, if so directed by the Company,
the Investor shall deliver to the Company (at the expense of the Company) or
destroy (and deliver to the Company a certificate of destruction) all copies in
the Investor’s possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice; and
 
(d) The Investor acknowledges that it may be deemed to be a statutory
underwriter within the meaning of the Securities Act with respect to the
Registrable Securities being registered for resale by it, and if the Investor
includes Registrable Securities for offer and sale within a Registration
Statement the Investor hereby consents to the inclusion in such Registration
Statement of a disclosure to such effect.
 
Section 4.4. Expenses of Registration. All expenses (other than underwriting
discounts and commissions and the fees an expenses of the Investor’s counsel)
incurred in connection with registrations, filings or qualifications pursuant to
this Article 4, including, without limitation, all registration, listing, and
qualifications fees, printing and engraving fees, accounting fees, and the fees
and disbursements of counsel for the Company, shall be borne by the Company.
 
Section 4.5 Accountant’s Letter. If the Investor proposes to engage in an
underwritten offering of any Registrable Shares, the Company shall deliver to
the Investor, at the Company’s expense, a letter dated as of the effective date
of each Registration Statement or Post-Effective Amendment thereto, from the
independent public accountants retained by the Company, addressed to the
underwriters and to the Investor, in form and substance as is customarily given
in an underwritten public offering, provided that the Investor has made such
representations and furnished such undertakings as the independent public
accountants may reasonably require;
 
Section 4.6. Indemnification and Contribution
 
(a) Indemnification by the Company. The Company shall indemnify and hold
harmless the Investor and each underwriter, if any, which facilitates the
disposition of Registrable Securities, and each of their respective officers and
directors and each Person who controls such underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (each such
Person being sometimes hereinafter referred to as an“Indemnified Person”) from
and against any losses, claims, damages or liabilities, joint or several, to
which such Indemnified Person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement or
an omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, not misleading, or
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Prospectus or an omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company hereby agrees to
reimburse such Indemnified Person for all reasonable legal and other expenses
incurred by them in connection with investigating or defending any such action
or claim as and when such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or an
omission or alleged omission from, such Registration Statement or Prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the case
of the occurrence of an event of the type specified in Section 4.3(e), the use
by the Indemnified Person of an outdated or defective Prospectus after the
Company has provided to such Indemnified Person an updated Prospectus correcting
the untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, claim, damage or liability.
 
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(b) Indemnification by the Investor and Underwriters. The Investor agrees, as a
consequence of the inclusion of any of its Registrable Securities in a
Registration Statement, and each underwriter, if any, which facilitates the
disposition of Registrable Securities shall agree, severally and not jointly, as
a consequence of facilitating such disposition of Registrable Securities to
(i) indemnify and hold harmless the Company, its directors (including any person
who, with his or her consent, is named in the Registration Statement as a
director nominee of the Company), its officers who sign any Registration
Statement and each Person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities to which the Company or such
other persons may become subject, under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in such Registration Statement or Prospectus or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein (in light of the circumstances under which they were made, in
the case of the Prospectus), not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Investor or underwriter
expressly for use therein, and (ii) reimburse the Company for any legal or other
expenses incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred; provided, however, that
the Investor shall not be liable under this Section 4.6(b) for any amount in
excess of the net proceeds paid to the Investor in respect of Registrable
Securities sold by it.
 
(c) Notice of Claims, etc.  Promptly after receipt by a Person seeking
indemnification pursuant to this Section 4.6 (an “Indemnified Party”) of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a “Claim”), the Indemnified Party
promptly shall notify the Person against whom indemnification pursuant to this
Section 4.6 is being sought (the“Indemnifying Party”) of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (i) the Indemnifying Party shall have agreed to pay such fees, costs
and expenses, (ii) the Indemnified Party shall reasonably have concluded that
representation of the Indemnified Party by the Indemnifying Party by the same
legal counsel would not be appropriate due to actual or, as reasonably
determined by legal counsel to the Indemnified Party, potentially differing
interests between such parties in the conduct of the defense of such Claim, or
if there may be legal defenses available to the Indemnified Party that are in
addition to or disparate from those available to the Indemnifying Party, or
(iii) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in the
preceding sentence, the fees, costs and expenses of such legal counsel shall be
borne exclusively by the Indemnified Party. Except as provided above, the
Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of
counsel for the Indemnified Party (together with appropriate local counsel). The
Indemnified Party shall not, without the prior written consent of the
Indemnifying Party (which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnifying Party from all liabilities
with respect to such Claim or judgment or contain any admission of wrongdoing.
 
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(d) Contribution. If the indemnification provided for in this Section 4.6 is
unavailable to or insufficient to hold harmless an Indemnified Party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party in connection with the statements or omissions or alleged
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 4.6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 4.6(d).
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
 
(e) Limitation on Investor’s and Underwriters’ Obligations. Notwithstanding any
other provision of this Section 4.6, in no event shall (i) the Investor have any
liability under this Section 4.6 for any amounts in excess of the dollar amount
of the proceeds actually received by the Investor from the sale of Registrable
Securities (after deducting any fees, discounts and commissions applicable
thereto) pursuant to any Registration Statement under which such Registrable
Securities are registered under the Securities Act and (ii) any underwriter be
required to undertake liability to any Person hereunder for any amounts in
excess of the aggregate discount, commission or other compensation payable to
such underwriter with respect to the Registrable Securities underwritten by it
and distributed pursuant to the Registration Statement.
 
(f) Other Liabilities. The obligations of the Company under this Section 4.6
shall be in addition to any liability which the Company may otherwise have to
any Indemnified Person and the obligations of any Indemnified Person under this
Section 4.6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 4.6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
 
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Section 4.7. Rule 144. With a view to making available to the Investor the
benefits of Rule 144, the Company agrees to use its best efforts to:
 
(i) comply with the provisions of paragraph (c)(1) of Rule 144; and
 
(ii) file with the Commission in a timely manner all reports and other documents
required to be filed by the Company pursuant to Section 13 or 15(d) under the
Exchange Act; and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it will, upon the
request of any Investor, make available other information as required by, and so
long as necessary to permit sales of, its Registrable Securities pursuant to
Rule 144.
 
Section 4.8. Common Stock Issued Upon Stock Split, etc. The provisions of this
Article 4 shall apply to any shares of Common Stock or any other securities
issued as a dividend or distribution in respect of the Shares or the Warrant
Shares.

ARTICLE 5

Other Agreements of the Parties

Section 5.1. Certificates; Legends.

(a)  The Securities may only be transferred in compliance with state and federal
securities laws. In connection with any transfer of the Securities other than
(i) pursuant to an effective registration statement, (ii) to the Company, or
(iii) to an Affiliate of the Investor, the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act. In the event of a private transfer of the Securities,
the transferee shall be required to execute a counterpart to this Agreement,
agreeing to be bound by (and shall have the benefits of) the terms hereof other
than those set forth in Article 2 hereof, and such transferee shall be deemed to
be an “Investor” for purposes of this Agreement.

(b)  The certificates representing the Shares and the Warrants to be delivered
at the Closings and the certificates evidencing the Warrant Shares to be
delivered upon exercise of the Warrants will contain appropriate legends
referring to restrictions on transfer relating to the registration requirements
of the Securities Act and applicable state securities laws.

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(c) In connection with any sale or disposition of the Securities by the Investor
pursuant to Rule 144 or pursuant to any other exemption under the Securities Act
such that the purchaser acquires freely tradable shares and upon compliance by
the Investor with the requirements of this Agreement, the Company shall, or, in
the case of Common Stock, shall cause the transfer agent for the Common Stock
(the “Transfer Agent”) to, issue replacement certificates representing the
Securities sold or disposed of without restrictive legends. Upon the earlier of
(i) registration of any Securities for resale pursuant Article 4 or (ii) Rule
144 becoming available with respect to any Securities, the Company shall (A)
deliver to the Transfer Agent irrevocable instructions that the Transfer Agent
shall reissue a certificate representing such Securities without legends upon
receipt by such Transfer Agent of the legended certificates, together with
either (1) a customary representation by the Investor that Rule 144 applies to
the shares of Common Stock represented thereby, (2) a statement by the Investor
that the Investor has sold the shares of Common Stock represented thereby in
accordance with the Plan of Distribution contained in the Registration
Statement, or (3) a statement by the Investor that the securities will be sold
in compliance with the volume limitations of Rule 144, if any, and (B) cause its
counsel to deliver to the Transfer Agent one or more blanket opinions to the
effect that the removal of such legends in such circumstances may be effected
under the Securities Act. From and after the earlier of such dates, upon the
Investor’s written request, the Company shall promptly cause certificates
evidencing the Investor’s Securities to be replaced with certificates which do
not bear such restrictive legends, and Warrant Shares subsequently issued upon
due exercise of the Warrants shall not bear such restrictive legends provided
the provisions of either clause (i) or clause (ii) above, as applicable, are
satisfied with respect to such Warrant Shares. When the Company is required to
cause an unlegended certificate to replace a previously issued legended
certificate, if: (1) the unlegended certificate is not delivered to an Investor
within five Business Days after submission by the Investor of a legended
certificate and supporting documentation to the Transfer Agent as provided above
and (2) prior to the time such unlegended certificate is received by the
Investor, the Investor, or any third party on behalf of such Investor or for the
Investor’s account, purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Investor of
shares represented by such certificate (a “Buy-In”), then the Company shall pay
in cash to the Investor (for costs incurred either directly by such Purchaser or
on behalf of a third party) the amount by which the total purchase price paid
for Common Stock as a result of the Buy-In (including brokerage commissions, if
any) exceeds the proceeds received by such Investor as a result of the sale to
which such Buy-In relates. The Investor shall provide the Company written notice
indicating the amounts payable to the Investor in respect of the Buy-In.
 
Section 5.2. Integration. The Company has not and shall not, and shall use its
best efforts to ensure that no Affiliate of the Company shall, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Investor, or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market in a manner that
would require stockholder approval of the sale of the securities to the
Investor.

Section 5.3. Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York time)
on the Trading Day following the execution of this Agreement, and by 5:00 p.m.
(New York time) on the First Closing Date, the Company shall issue press
releases disclosing the transactions contemplated hereby and the Closing. On the
Trading Day following the execution of this Agreement the Company will file a
Current Report on Form 8-K disclosing the material terms of the Transaction
Documents (and attach the Transaction Documents as exhibits thereto), and on
each Closing Date the Company will file an additional Current Report on Form 8-K
to disclose the Closing. In addition, the Company will make such other filings
and notices in the manner and time required by the Commission and the Trading
Market on which the Common Stock is listed.
 
Section 5.4. Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities hereunder (i) for working capital purposes (including if
necessary repayment of up to $3 million of the convertible short-term bridge
notes disclosed to the investor in writing), (ii) to purchase fixed assets used
in the development or production of the Company’s products or (iii) for
investment in new technologies related to the Company’s business (including
without limitation through the acquisition of other companies).

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Section 5.5. Investor’s Right of First Refusal.
 
(a) Proposed Financings. In the event that, during the period commencing on the
First Closing Date and continuing to the earlier of (i) the second anniversary
of the Second Closing Date or (ii) the second anniversary of the Outside Date,
the Company seeks to raise additional funds through a private placement of its
securities (a “Proposed Financing”), other than Exempt Issuances, the Investor
shall have the right to participate in the Proposed Financing on a pro rata
basis, based on the percentage that (a) the number of shares of Common Stock
then held by the Investor plus the number of shares of Common Stock issuable
upon conversion of the Warrants bears to (b) the total number of shares of
Common Stock outstanding plus the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the Prior Convertible Securities
and exercise of the Company Stock Options, the Warrants and the Prior Warrants.
 
(b) Pre-Notice of Proposed Financings. At least 15 Business Days prior to the
closing of any Proposed Financing, the Company shall deliver to each Investor a
written notice of its intention to effect a Proposed Financing (“Pre-Notice”).
If within 10 Business Days after receipt of the Pre-Notice, the Investor
delivers to the Company a written request for detailed information regarding the
Proposed Financing, the Company shall promptly, but no later than the Business
Day immediately following its receipt of such request, deliver to the Investor a
notice (a “Proposed Financing Notice”) which shall describe in reasonable detail
the proposed terms of such Proposed Financing, the amount of proceeds intended
to be raised thereunder, and the Person with whom such Proposed Financing is
proposed to be effected, and shall have attached thereto be a term sheet or
similar document relating to the Proposed Financing. The Investor shall notify
the Company no later than 6:30 p.m. (Little Rock time) on the fifth Business Day
after receipt of the Proposed Financing Notice of its willingness to participate
in the Proposed Financing on the terms described in the Proposed Financing
Notice, subject to completion of mutually acceptable documentation and diligence
investigation. The Company shall promptly provide to the Investor such diligence
materials as it may reasonably request, subject to execution of a non-disclosure
agreement, in reasonable form, mutually acceptable to the parties.
 
(c) Investment Terms. The terms on which the Investor shall purchase securities
pursuant to the Proposed Financing shall be the same as such securities are
purchased by other investors in such Proposed Financing. In the event that the
terms of the Proposed Financing are changed, the Borrower shall provide the
Investor with the same notice of the revised terms that is provided to the other
investors in such Proposed Financing in reasonably sufficient time to allow the
Investor to review the Proposed Financing and the Company’s financial condition
and prospects in light of the changed terms. 
 
(d)  Financings. In the event that the Investor does not exercise, within 12
Business Days after receipt of the Financing Notice, its right to participate in
the Proposed Financing, the Company may sell the securities in the Proposed
Financing at a price and on terms which are no more favorable to the investors
in such Proposed Financing than the terms offered to the Investor. If the
Company subsequently changes the price or terms so that the terms are at a price
or more favorable to the investors in the Proposed Financing, the Company shall
re-offer the securities to the Investor as provided in this Section 5.5. 

Section 5.6. Company’s Right of First Refusal.
 
(a) Proposed Sales. In the event that the Investor plans to resell shares of the
Company’s stock in open market transactions at prevailing prices, the Investor
shall consult with the Company so as not to negatively affect the value of the
Company’s shares in the public market. In the event that the Investor plans to
resell a substantial number shares of the Company’s stock in one or more
transactions that are neither an open market resale at prevailing prices or
effected in connection with an underwritten transaction involving a sale to the
general public, then at least thirty (30) days before a disposition of more than
1,000,000 shares of stock, the Investor shall notify the Company in writing (the
“Notice”) of its intention. After the date of such Notice (the “Notice Date”),
the Company may inform the Investor that the Company intends to exercise its
right to acquire all or a portion of the shares which are the subject of the
Notice only as follows:

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(i) If the number of shares referred to in the Notice is more than 1,000,000 but
less than 2,000,000, the Company shall have the right to advise the Investor in
writing within ten (10) days of the Notice Date of its commitment to buy all of
said shares, and the Company shall conclude for cash the share purchase
transaction within ten (10) days of the Notice Date;

(ii) If the number of shares referred to in the Notice is between 2,000,000 and
5,000,000, the Company shall have the right to advise the Investor in writing
within twenty (20) days of the Notice Date of its commitment to buy all of said
shares, and the Company shall conclude for cash the share purchase transaction
within thirty (30) days of the Notice Date;

(iii) If the number of shares referred to in the Notice is more than 5,000,000,
the Company shall have the right to advise the appropriate trustee in writing
within thirty (30) days of the Notice Date of its commitment to buy all of said
shares, and the Company shall conclude for cash the share purchase transaction
within forty-five (45) days of the Notice Date.

(b) Purchase Terms. With each Notice, the Investor shall provide the Company
with the Investor’s best estimate of the minimum and maximum consideration that
the Investor anticipates receiving from the proposed disposition. As the
condition to the exercise by the Company of its right of first refusal, the
Company agrees to pay the minimum consideration that the Investor estimates
receiving from the proposed disposition. If the Company does not timely exercise
its right to purchase shares described in a particular Notice as provided
herein, then it shall have no further rights to acquire the shares that are the
subject of the Notice, provided however, that the Investor conclude the proposed
disposition for no less than the minimum consideration within 30 days of the
last day the Company had to exercise the right of first refusal or else the
shares the subject of the Notice will be subject to a new right of first refusal
as provided for herein. If the Company exercises its right to purchase the
shares described in a particular Notice but fails to conclude the transaction
within the time provided herein, the Investor’s sole remedy shall be the right
to seek damages from the Company for the difference between the exercise price
and the proceeds ultimately received by the Investor from the sale of said
shares.

Section 5.7. No Disclosure of Material Non-Public Information. The Company will
not disclose to the Investor any material non-public information concerning the
Company except (a) with the consent of the Investor and (b) if such consent is
given, pursuant to a non-disclosure agreement which provides, among other
things, that the Investor will not disclose the material non-public information
to any person and the Investor or the Agent will not engage in any transactions
involving the Company’s securities while in possession of material non-public
information.

ARTICLE 6

Conditions Precedent to Closing

Section 6.1. Conditions Precedent to the Obligations of the Investor to Purchase
Securities. The obligation of the Investor to acquire Securities at any Closing
is subject to the satisfaction or waiver by the Investor, at or before Closing,
of each of the following conditions:
 
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(a)
Representations and Warranties. The Company shall have delivered a certificate
of the Company’s Chief Executive Officer certifying that the representations and
warranties of the Company contained herein are true and correct in all material
respects as of the date when made and as of the Closing Date as though made on
and as of such Closing Date, provided that at the Second Closing and Third
Closings any representations and warranties made as of a specific date shall be
deemed to be made as of such date and not as of the date of the Second Closing
or the Third Closing, as the case may be;

 
(b)
Performance. The Company shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by it at or
prior to the Closing;

 
(c)
No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents;

 
(d)
No Adverse Changes. Since the date of execution of this Agreement, no event or
series of events shall have occurred that reasonably could have or result in a
Material Adverse Effect;

 
(e)
Company Deliverables. The Company shall have delivered to Investor the
Forbearance Agreement and the Company Deliverables in accordance with Section 2.

Section 6.2. Conditions Precedent to the Obligations of the Company to Sell
Securities. The obligation of the Company to sell Securities at any Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:

 
(a)
Representations and Warranties. The representations and warranties of the
Investor contained herein shall be true and correct in all material respects as
of the date when made and as of the Closing Date as though made on and as of
such date;

 
(b)
Performance. The Investor shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by such
Investor at or prior to the Closing;

 
(c)
No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents; and

 
(d)
Purchase Price. The Investor shall have paid the Purchase Price payable at such
Closing in accordance with Section 2.3.

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ARTICLE 7

Miscellaneous
 
Section 7.1. Fees and Expenses. Each party shall pay the fees and expenses of
its advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of the Transaction Documents; provided,
however, that, if but only if Securities are sold hereunder at the First
Closing, the Company shall, at the First Closing, reimburse the Investor for its
reasonable legal fees and expenses of its legal counsel, up to a maximum of
$30,000, incurred in connection with the Investor’s due diligence and the
negotiation and preparation of the Agreement. The Company shall pay all stamp
and other taxes and duties levied in connection with the sale of the Shares.

Section 7.2. Entire Agreement. The Transaction Documents, together with the
Exhibits thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents and exhibits.

Section 7.3. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 4:30 p.m. (Eastern time) on
a Business Day, or via email (with a confirmation of successful transmission),
(b) the next Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Business Day or later than 4:30 p.m.
(Eastern time) on any Business Day, (c) the Business Day following the date of
transmission, if sent by a nationally recognized overnight courier service, or
(d) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as follows:

If to the Company:  Axion Power International, Inc.
Attn.: Thomas Granville, Chief Executive Officer
1601 Clover Lane
New Castle, Pennsylvania 16105

Telephone: (724) 654-9300
Facsimile: (724) 654-3300
Email: tgranville@axionpower.com

With a copy to:            Andrews Kurth LLP
Attn.: Quentin Faust, Esq.
1717 Main Street, Suite 4100
Dallas, Texas 75201

Telephone: (214) 659-4589
Facsimile: (214) 659-4828
Email: quentinfaust@andrewskurth.com

If to the Investor:                The Quercus Trust
1835 Newport Blvd
A109 - PMB 467
Costa Mesa, CA 92627

Telephone: (949) 646-3785
Facsimile: (949) 903-1598
Email: xaixai@pacbell.net

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With a copy to:                    Greenberg Glusker Fields Claman & Machtinger,
LLP
Attn.: Joseph P. Bartlett, Esq.
1900 Avenue of the Stars, Suite 2100
Los Angeles, CA 90067

Telephone: (310) 201-7481
Facsimile: (310) 201-2380
Email: jbartlett@ggfirm.com

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

Section 7.4. Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived or amended except in a written instrument signed by
the Company and the Investor. No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.

Section 7.5 Termination. This Agreement may be terminated prior to the First
Closing:

 
(a)
by written agreement of the Investor and the Company; or

 
(b)
by the Company or the Investor, upon written notice to the other, if the Closing
shall not have taken place by 6:30 p.m., Little Rock time, on the Outside Date;
provided, that the right to terminate this Agreement under this Section 7.5(b)
shall not be available to any Person whose failure to comply with its
obligations under this Agreement has been the cause of or resulted in the
failure of the Closing to occur on or before such time, to the extent such delay
is caused by such Person.

Upon a termination in accordance with this Section 7.5, the Company and the
Investor shall have no further obligation or liability (including as arising
from such termination) to the other, provided that any liabilities arising prior
to such termination shall not be affected by the termination.

Section 7.6. Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

Section 7.7. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
Neither party may assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other party.

Section 7.8. No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.6 (with respect
to rights to indemnification and contribution).

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Section 7.9. Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware, without regard to the principles of conflicts of law thereof. Each
party agrees that all Proceedings concerning the interpretations, enforcement
and of the transactions contemplated by this Agreement and any other Transaction
Documents (whether brought against a party hereto or its respective Affiliates,
employees or agents) shall be commenced exclusively in the state or federal
courts sitting in, or having jurisdiction over, the State of Delaware (the
“Delaware Courts”). Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the Delaware Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of the any
of the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such Delaware Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
for its reasonable attorneys’ fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such Proceeding.
 
Section 7.10. Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closings and the delivery of the
Securities.

Section 7.11. Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof, notwithstanding any subsequent failure or refusal of
the signatory to deliver an original executed in ink.

Section 7.12. Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

Section 7.13. Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities. If a replacement
certificate or instrument evidencing any Securities is requested due to a
mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

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Section 7.14. Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Investors and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that, except as expressly set forth
herein with respect to liquidated damages, monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for
specific performance of any such obligation the defense that a remedy at law
would be adequate.

Section 7.15 Attorney’s Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of any of the
Transaction Documents, the prevailing party shall be entitled to reasonable
attorney’s fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 
The Quercus Trust
 
Axion Power International, Inc.
          By:
 
/s/ David Gelbaum 
  By: Axion power Logo [logo.jpg]  
David Gelbaum
   
Thomas Granville
 
Trustee
   
Chief Executive Officer

 
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EXHIBIT A

FORM OF WARRANT
 
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EXHIBIT B

OPINION OF COUNSEL
 
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EXHIBIT C

Plan of Distribution

The selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.

The selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:

- ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

- block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;

- purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

- an exchange distribution in accordance with the rules of the applicable
exchange;

- privately negotiated transactions;

- short sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;

- through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;

- broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share; and

- a combination of any such methods of sale.

The selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

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The aggregate proceeds to the selling stockholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.

The selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.

The selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of
the selling stockholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.

We have advised the selling stockholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling stockholders and their affiliates. In
addition, to the extent applicable we will make copies of this prospectus (as it
may be supplemented or amended from time to time) available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the shares against
certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling stockholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this prospectus.

We have agreed with the selling stockholders to keep the registration statement
of which this prospectus constitutes a part effective until the earlier of (1)
such time as all of the shares covered by this prospectus have been disposed of
pursuant to and in accordance with the registration statement or (2) the date on
which the shares may be sold pursuant to Rule 144 of the Securities Act.

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