Document:

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EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT

         EMPLOYMENT AGREEMENT (this "Agreement") dated as of March 1, 2005, by
and between ACE MARKETING & PROMOTIONS, INC., a New York corporation having an
office at 457 Rockaway Avenue, Valley Stream, NY 11581 ("Company") and DEAN
JULIA ("Julia") with an office at 457 Rockaway Avenue, Valley Stream, NY 11581.

                              W I T N E S S E T H:
                              - - - - - - - - - -

         WHEREAS, Company desires to engage the services of Julia and Julia
desires to provide the services to Company in connection with Company's
business; and

         WHEREAS, both parties desire to clarify and specify the rights and
obligations which each have with respect to the other in connection with Julia's
services.

         NOW, THEREFORE, in consideration of the agreements and covenants herein
set forth, the parties hereby agree as follows:

         1.       EMPLOYMENT

         Julia hereby agrees to be employed by Company as the Chief Executive
Officer of Company, and Julia hereby agrees to render his services as Company's
Chief Executive Officer for the Term (as hereinafter defined), all subject to
and on the terms and conditions herein set forth.

         2.       DUTIES AND RESPONSIBILITIES OF JULIA

         (a) Julia will be the Chief Executive Officer of Company, subject to
the other provisions of this Section 2. Although Julia shall be required to
travel from time to time, Julia's primary office shall be based in Valley
Stream, New York City or the surrounding area. Julia shall not be required to
relocate from the New York City metropolitan area without Julia's prior written
consent, which consent may be withheld by Julia in his absolute discretion.

         (b) Julia shall be elected to the Board of Directors of the Company
(the "Board") and during the Term shall be nominated for re-election to the
Board.

         (c) During the term of this Agreement, Julia will exercise such
authority, perform such executive duties and functions and discharge such
responsibilities as he deems appropriate as are customarily vested in an officer
of a public company with said title, including, authority with respect to among
other matters, purchasing, pricing, sales and the hiring, compensating and
discharging of employees, financing arrangements, all subject to the overall
authority of the Board of Directors of the Company consistent with the By-Laws
of the Company. As such, Julia shall be primarily responsible for the direction

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and management of the current and future affairs and business of the Company.
Julia shall use his best efforts to maintain and enhance the business and
reputation of Company and shall perform such other duties commensurate with his
position as may, from time to time, be designated to Julia by the Board.

         3.       EXCLUSIVITY OF SERVICE

         The Company agrees that Julia shall be required to devote the necessary
business time, effort and attention to the business and efforts of the Company
and its subsidiaries as he deems necessary for the performance of his duties.
Julia may pursue other outside business interests that are not related to the
same business as Ace Marketing, as long as it does not interfere with the
everyday responsibilities of Ace Marketing.

         4.       COMPENSATION; BONUS

         (a) In consideration for Julia's services to be performed under this
Agreement and as compensation therefor, Company shall pay to Julia, commencing
as of the date set forth above, in addition to all other benefits provided for
in this Agreement, a base salary at the rate of One Hundred Forty-Four
($144,000) Dollars per annum, (the "Julia Base Salary") which Julia Base Salary
will be increased in accordance with the provisions set forth in Section 6 and
may be further increased in the sole discretion of the Board. All payments of
Julia Base Salary shall be payable in monthly installments or otherwise in
accordance with Company's policies.

         (b) In addition to the Julia Base Salary, Julia shall be entitled to an
annual bonus (the "Annual Bonus") of at least 5% pre-tax earnings (as defined
under generally accepted accounting principles) for the most recently completed
fiscal year before deduction of annual bonuses paid to officers. The Annual
Bonus, if any, shall be paid on the last business day of March of each year
commencing in 2006. Should this Agreement be terminated prior to the end of any
fiscal year for any reason other than that provided in paragraph 9(a), a prorata
portion of the Annual Bonus shall be paid within 30 days of such termination.

         5.       BENEFITS AND INDEMNIFICATION

         Julia shall be entitled to the following during and in respect of the
term of this Agreement:

         (a) Company shall provide Julia with hospitalization, medical and
dental insurance coverage and 401(k) benefits as is customary for other senior
officers of the Company.

         (b) Julia shall be entitled to five weeks paid vacation to be taken at
times mutually and reasonably agreed upon by Julia and Company in addition to
all other holidays established as part of Company's standard practices.

         (c) Julia shall each be entitled to reimbursement for all reasonable
travel, reasonable entertainment and other reasonable expenses incurred in
connection with Company's business, provided that such expenses are adequately
documented and vouchered in accordance with Company's policies.

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         (d) The Company shall provide to Julia to the full extent provided for
under the laws of the Company's state of incorporation and the Company's
Certificate of Incorporation and Bylaws, indemnification for any claim or
lawsuit which may be asserted against Julia when acting in such capacity for the
Company and/or any subsidiary or affiliated business. The Company shall use
reasonable best efforts to include Julia as an insured under all applicable
directors' and officers' liability insurance policies maintained by the Company,
and any other subsidiary or affiliated business.

         (e) The Company shall provide Julia with the use of a Company leased or
owned automobile with all expenses paid for by the Company.

         6.       ADDITIONAL COMPENSATION

         On March 1 of each year under this Agreement commencing March 1, 2006,
Julia shall be entitled to receive (i) an increase of $24,000 in his annual
salary and (ii) fully vested 10-year non-statutory options to purchase 50,000
shares of Common Stock at an exercise price to be determined by the board, which
may be discounted if permitted by the Stock Option Plan, but not greater than
100% of fair market value of the Company's Common Stock as of the close of
business on the last business day of February immediately preceding the date of
grant. Julia shall be also entitled to Company paid disability insurance and
term life insurance for the benefit of his family in an amount to be fixed by
the Board of Directors of the Company at a cost not to exceed $10,000 per annum.

         7.       TERM OF EMPLOYMENT

         The term of Julia's employment hereunder shall be from the date hereof
for a period of three (3) years (the "Term"), unless terminated prior thereto in
accordance with Section 9 hereof. The Agreement shall be automatically renewed
for a period of two years thereafter unless Julia gives 60 days prior written
notice of his intention not to renew this Agreement prior to the end of the
initial Term.

         8.       NON-COMPETITION; NON-SOLICITATION

         (a) Julia hereby agrees and covenants that during the Term hereof that
he will not directly or indirectly engage in or become interested (whether as an
owner, principal, agent, stockholder, member, partner, trustee, venturer, lender
or other investor, director, officer, employee, consultant or through the agency
of any corporation, limited liability company, partnership, association or agent
or otherwise) in any business enterprise which is engaged in the current
business of the Company during the Term; PROVIDED, HOWEVER, that ownership of
not more than 15% of the outstanding securities of any class of any entity that
are listed on a national securities exchange or traded in the over-the-counter
market shall not be considered a breach of this Section 8.

         (b) Julia agrees and covenants that during the Term hereof he and his
agents will not (without first obtaining the written permission of Company)
directly or indirectly participate in the solicitation of any business of any
type conducted by Company during the period of this Agreement from any person or
entity which was a client or customer of Company during the period of this
Agreement, or was a prospective customer of Company from which Julia solicited
business or for which a proposal for submission was prepared during the period.

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         (c) Julia agrees and covenants that during the Term of this Agreement
he will not (without first obtaining the written permission of Company) directly
or indirectly recruit for employment, or induce or seek to cause such person to
terminate his or her employment with Company, any person who then is an employee
of Company or who was an employee of Company during the preceding six (6)
months.

         9.       TERMINATION

          (a) TERMINATION BY THE COMPANY WITH CAUSE. Notwithstanding the terms
of this Agreement, Company may terminate this Agreement for cause ("Cause") in
the event (i) of Julia's commission of an act involving fraud, embezzlement, or
theft against the property or personnel of Company, or (ii) Julia shall be
convicted of, or plead nolo contendere to a felony or engages in other criminal
conduct that could reasonably be expected to have a material adverse affect on
the business, assets, properties, prospects, results of operations or financial
condition of Company. In the event this Agreement is terminated pursuant to this
Section 9(a), Julia's Base Salary and any unearned Annual Bonus and all benefits
under Section 5(a) (b) and (c) hereof shall terminate immediately upon such
discharge, and Company shall have no further obligations to Julia except for
payment and reimbursement for any monies due which right to payment or
reimbursement accrued prior to such termination.

         (b) DEATH OR DISABILITY. The Company may terminate this Agreement upon
the disability or death of Julia by giving written notice to Julia. In the case
of disability, such termination will become effective immediately upon the
giving of such notice unless otherwise specified by the Company. For purposes of
this Section 9(b), "disability" shall mean that for a period of more than six
consecutive months in any 12-month period Julia is unable to perform the
essential functions of his position because of physical, mental or emotional
incapacity resulting from injury, sickness or disease. Upon any such
termination, the Company shall be relieved of all its obligations under this
Agreement, except for payment of the Julia Base Salary and Annual Bonus earned
and unpaid through the effective date of termination. Nothing in this provision
is intended to violate state or federal laws.

         (c) TERMINATION BY JULIA. Julia may terminate this Agreement at any
time by giving three months' prior written notice to the Company. The Company
shall be relieved of all of its obligations under this Agreement, except for
payment of the Julia Base Salary and Annual Bonus earned and unpaid through the
effective date of termination and those obligations in paragraph 5(d).

         10.      VIOLATION OF OTHER AGREEMENTS AND AUTHORITY

         (a) Julia represents and warrants to Company that he is legally able to
enter into this Agreement; that he is not prohibited by the terms of any
agreement, understanding or policy from entering into this Agreement; that the
terms hereof will not and do not violate or contravene the terms of any
agreement, understanding or policy to which Julia is or may be a party, or by
which Julia may be bound; that Julia is under no physical or mental disability
that would materially interfere with the performance of his duties under this
Agreement. Julia agrees that, as it is a material inducement to Company that
Julia make the foregoing representations and warranties and that they be true in
all material respects.

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         11.      COMPANY AUTHORITY RELATIVE TO THIS AGREEMENT

          The Company has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated by
this Agreement. The Board of Directors of the Company has duly authorized the
execution and delivery of this Agreement by the Company and the consummation by
the Company of the transactions contemplated on its part by this Agreement, and
no other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or for the Company to consummate the transactions
contemplated by it. The Company has duly validly executed and delivered this
Agreement and it is a valid and binding Agreement of the Company, enforceable
against the Company in accordance with its terms, subject to bankruptcy or
insolvency laws affecting creditors' rights generally and to general principles
of equity.

         12.      NOTICES

         Any and all notices, demands or requests required or permitted to be
given under this Agreement shall be given in writing and sent, by registered or
certified U.S. mail, return receipt requested, by hand, or by overnight courier,
addressed to the parties hereto at their addresses set forth above or such other
addresses as they may from time-to-time designate by written notice, given in
accordance with the terms of this Section.

         13.      WAIVERS

         No waiver by any party of any default with respect to any provision,
condition or requirement hereof shall be deemed to be a waiver of any other
provision, condition or requirement hereof; nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.

         14.      PRESERVATION OF INTENT

         Should any provision of this Agreement be determined by a court having
jurisdiction in the premises to be illegal or in conflict with any laws of any
state or jurisdiction or otherwise unenforceable, Company and Julia agree that
such provision shall be modified to the extent legally possible so that the
intent of this Agreement may be legally carried out.

         15.      ENTIRE AGREEMENT

         This Agreement sets forth the entire and only agreement or
understanding between the parties relating to the subject matter hereof and
supersedes and cancels all previous agreements, negotiations, letters of intent,
correspondence, commitments and representations in respect thereof among them,
and no party shall be bound by any conditions, definitions, warranties or
representations with respect to the subject matter of this Agreement except as
provided in this Agreement.

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         16.      INUREMENT; ASSIGNMENT

         The rights and obligations of Company under this Agreement shall inure
to the benefit of and shall be binding upon any successor of Company or to the
business of Company, subject to the provisions hereof. Neither this Agreement
nor any rights or obligations of Julia hereunder shall be transferable or
assignable by Julia.

         17.      AMENDMENT

         This Agreement may not be amended in any respect except by an
instrument in writing signed by the parties hereto.

         18.      HEADINGS

         The headings in this Agreement are solely for convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.

         19.      COUNTERPARTS

         This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which when taken together shall
constitute one and the same instrument.

         20.      GOVERNING LAW

         This Agreement shall be governed by, construed and enforced in
accordance with the internal laws of the State of New York, without giving
reference to principles of conflict of laws. Each of the parties hereto
irrevocably consents to the venue and exclusive jurisdiction of the federal and
state courts located in the State of New York, County of New York. THE PARTIES
HEREBY KNOWINGLY, IRREVOCABLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT
THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, PROCEEDING OR
COUNTERCLAIM BASED ON THIS EMPLOYMENT AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
IN IT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY TO IT.

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         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.

                                     ACE MARKETING & PROMOTIONS, INC.

                                     By:  /s/ Michael Trepeta
                                          ---------------------------
                                          MICHAEL TREPETA, PRESIDENT

                                          /s/ Dean Julia
                                          ---------------------------
                                          DEAN JULIA

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<PAGE>Certificate of Powers, Designations, Preferences and Rights of the 8% Convertible Senior Preferred Stock of Axion Power International, Inc. dated March 17, 2005.

CERTIFICATE
OF POWERS, DESIGNATIONS,

PREFERENCES
AND RIGHTS OF THE

8%
CONVERTIBLE SENIOR PREFERRED STOCK

PAR
VALUE $0.00001 PER SHARE

OF

AXION
POWER INTERNATIONAL, INC.

Axion
Power International, Inc., a corporation organized and existing under the laws
and State of Delaware (the “Corporation”), hereby certifies that the Board of
Directors of the Corporation at a meeting thereof duly called and held on
February 16, 2005, at which meeting a quorum was present and acting throughout,
duly adopted the following resolutions:

WHEREAS, the
Board of Directors of the Corporation is authorized, within the limitations and
restrictions stated in the Certificate of Incorporation of the Corporation
(“Certificate of Incorporation”), to fix by resolution or resolutions the
designation of each series of Preferred Stock, $0.0001 par value per share
(“Preferred Stock”), the number of shares constituting such series and the
relative rights, preferences and limitations thereof, including, without
limiting the generality of the foregoing, such provisions as may be desired
concerning voting, redemption, dividends, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution or resolutions of the Board of Directors under the General
Corporation Law of the State of Delaware (the “GCLD”);

WHEREAS, it is
the desire of the Board of Directors of the Corporation to authorize a series of
Preferred Stock to be designated “8% Convertible Senior Preferred Stock” and the
number of shares constituting such series, for purposes of the private offering
and sale thereof to a limited group of accredited investors.

NOW,
THEREFORE, BE IT RESOLVED that
pursuant to the authority vested in the Board of Directors by the Certificate of
Incorporation there is created a series of Preferred Stock consisting of one
million (1,000,000) shares of 8% Convertible Senior Preferred Stock, par value
$0.01 per share.

1. Designation,
Number of Shares and Stated Value. The
designation of the series of Preferred Stock authorized by this resolution shall
be 8% Cumulative Convertible Senior Preferred Stock (the “Senior Preferred”).
The maximum number of shares of the Senior Preferred shall be one million
(1,000,000) shares and no more. The initial stated value of the Senior Preferred
shall be $10 per share (the “Stated Value”), however the Stated Value shall be
adjusted from time to time in the manner specified herein.

2. Rank. The
Senior Preferred shall, with respect to dividend rights and rights upon
liquidation, winding up and dissolution, rank senior to (a) any other series of
Preferred Stock established by the Board of Directors after the date hereof, the
terms of which specifically shall provide that such shares rank junior to the
Senior Preferred; (b) all classes and series of Preferred Stock established
by the Board of Directors, unless the holders of the Senior Preferred shall
agree pursuant to Section 7(b) hereof that such shares shall rank pari passu
with or senior to the shares of Senior Preferred; and (c) all other equity
securities of the Corporation, including the common stock, par value $.00001 per
share (the “Common Stock”), of the Corporation (all of the securities of the
Corporation which rank junior to the Senior Preferred are at times collectively
referred to herein as the “Junior Securities”).

3. Dividends. (a) The
holders of the shares of the Senior Preferred shall be entitled to receive
dividends at the annual rate of 8% of the stated value of the Senior Preferred.
Such dividends shall be payable in equal quarterly payments (or such prorated
amount as may be applicable with respect to the first such payment), on the last
day of March, June, September and December of each year commencing April 30,
2005 (each of such dates being a “Dividend Payment Date”). Such dividends shall
be paid to the holders of record at the close of business on the date specified
by the Board of Directors of the Corporation at the time the dividend is
declared; provided, however, that such date shall not be less than 10 nor more
than 30 days prior to the Dividend Payment Date. Each quarterly dividend shall
be fully cumulative and shall accrue, whether or not declared, from the first
day of the quarter (or, with respect to the first such dividend, from the
closing date for the original issuance and sale of the shares of Senior
Preferred (the “Closing Date”)) in which such dividend may be payable through
the Dividend Payment Date with respect to such quarter as herein provided. If
the Dividend Payment Date is not a business day, 

 

the
Dividend Payment Date shall be the next succeeding business day. 

(b) Notwithstanding
anything contained herein to the contrary, no cash dividends on shares of the
Senior Preferred shall be declared by the Board of Directors or paid or set
apart for payment by the Corporation with respect to any fiscal quarter where
the Corporation reasonably expects to show a net loss for the quarterly period
or the fiscal year to date period then ended. Accrued dividends that are not
paid in cash within 10 days of a Dividend Payment Date shall, without further
action by the Corporation or the Board of Directors, be added to the Stated
Value of the Senior Preferred and from that date forward, the Stated Value of
the Senior Preferred shall be the initial Stated Value specified in Section 1 as
adjusted for accrued but unpaid dividends.

(c) Notwithstanding
anything contained herein to the contrary, no cash dividends on shares of the
Senior Preferred shall be declared by the Board of Directors or paid or set
apart for payment by the Corporation at such time as the terms and provisions of
any agreement of the Corporation, including any agreement relating to its
indebtedness, prohibits such declaration, payment or setting apart for payment
or provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, unless the Corporation has
obtained the consent of the requisite holders of such indebtedness to the
payment of setting apart for payment of such dividends, provided, however,
that nothing herein contained shall in any way or under any circumstances be
construed or deemed to require the Board of Directors to declare or the
Corporation to pay or set apart for payment any dividends on shares of the
Senior Preferred at any time, whether permitted by any of such agreements or
not.

(d) If at any
time the Corporation shall have failed to pay all dividends which have accrued
on any outstanding shares of any series of Preferred Stock having cumulative
dividend rights ranking pari passu with or senior to the shares of the Senior
Preferred at the times such dividends are payable, no cash dividend shall be
declared by the Board of directors or paid or set apart for payment until, (i)
all accrued and unpaid dividends on all outstanding shares of any other series
of Preferred Stock having cumulative dividend rights ranking senior to the
Senior Preferred shall have been or be declared, paid or set apart for payment
without interest, and (ii) all accrued and unpaid dividends on all outstanding
shares of any other series of Preferred Stock having cumulative dividend rights
ranking pari passu with the Senior Preferred shall have been or be declared,
paid or set apart for payment, without interest, pro
rata with all
accrued and unpaid dividends on all outstanding shares of the Senior Preferred,
so that the amounts of any cash dividends declared, paid or set apart for
payment on shares of the Senior Preferred and shares of such other series of
Preferred Stock having cumulative dividend rights ranking pari passu with the
Senior Preferred shall in all cases bear to each other the same ratio that, at
the time of such declaration, payment or setting apart for payment, all accrued
but unpaid cash dividends on shares of the Senior Preferred and shares of such
other series of the Preferred Stock having cumulative dividend rights ranking
pari passu with the Senior Preferred bear to each other.

(e) (i)
Holders of shares of the Senior Preferred shall be entitled to receive the
dividends provided for in paragraph 3(a) hereof in preference to and in priority
over any dividends upon any of the Junior Securities.

(ii) So long
as any shares of the Senior Preferred are outstanding, the Corporation shall not
declare, pay or set apart for payment any dividend on any of the Junior
Securities or make any payment on account of, or set apart for payment money for
a sinking or other similar fund for, the purchase, redemption or other
retirement of, any of the Junior Securities or any warrants, rights, calls or
options exercisable for any of the Junior Securities, or make any distribution
in respect thereof, either directly or indirectly, and whether in cash,
obligations or shares of the Corporation or other property (other than
distributions or dividends in stock to the holders of such stock), and shall not
permit any corporation or other entity directly or indirectly controlled by the
Corporation to purchase or redeem any of the Junior Securities or any warrants,
rights, calls or options exercisable for any of the Junior Securities, unless
prior to or concurrently with such declaration, payment or setting apart for
payment, purchase or distribution, as the case may be, all accrued and unpaid
cash dividends on shares of the Senior Preferred not paid on the dates provided
for in paragraph 3(a) hereof (including if not paid pursuant to paragraph 3(b),
paragraph 3(c) or paragraph 3(d) hereof) shall have been or, concurrently
therewith, shall be paid.

(iii) The
Corporation may temporarily or permanently reduce the exercise price of any
warrant outstanding on the date hereof which is exercisable to purchase Excluded
Stock as defined herein, provided, 

 

however,
that a temporary or permanent reduction in the exercise price of any warrant
shall automatically reduce the Conversion Price of the Senior Preferred on a
proportional basis for a like period of time.

(iv) Subject
to the foregoing provisions of this paragraph 3(e), the Board of Directors may
declare and the Corporation may pay or set apart for payment dividends and other
distributions on any of the Junior Securities, and may purchase or otherwise
redeem any of the Junior Securities or any warrants, rights or options
exercisable for any of the Junior Securities, and the holders of the shares of
the Senior Preferred shall not be entitled to share therein.

4. Liquidation
Preference. (a) In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, the holders
of shares of the Senior Preferred then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders, for each share held, an amount in cash equal to the Stated Value
of the Senior Preferred (adjusted in accordance with paragraph 3(a) and
paragraph 3(b) hereof) plus an amount in cash equal to all accrued but unpaid
dividends thereon from the last Dividend Payment Date through the date fixed for
liquidation (“Liquidation Value”), before any payment shall be made or any
assets distributed to the holders of the Junior Securities. If the assets of the
Corporation are not sufficient to pay in full the Liquidation Value payable to
the holders of outstanding shares of Senior Preferred or any other series of
Preferred Stock having liquidation rights ranking pari passu with the shares of
Senior Preferred, then the holders of all such shares shall share ratably in
such distribution of assets in accordance with the respective amounts which
would be payable on such distribution if the amounts to which the holders of
outstanding shares of Senior Preferred and of such other series of Preferred
Stock are entitled were paid in full.

(b) For the
purposes of this Section 4, neither the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property or assets of the Corporation nor the
consolidation or merger of the Corporation with one or more other corporations
shall be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, unless such voluntary sale, conveyance, exchange or transfer shall
be in connection with a dissolution or winding up of the business of the
Corporation.

5. Optional
Redemption. (a) To
the extent the Corporation shall have funds legally available for that purpose;
the Corporation may partially redeem shares of the Senior Preferred at a
redemption price per share equal to the then current Liquidation Value of the
Senior Preferred according to the following schedule:

(i)  if for
any 30 trading days within a period of 45 consecutive trading days immediately
preceding the notice of redemption, the Market Price (as defined below) of a
share of Common Stock equals or exceeds $5.00 per share, then twenty percent
(20%) of the shares of Senior Preferred initially issued to a particular holder
may be redeemed by the Corporation;

(ii)  if for
any 30 trading days within a period of 45 consecutive trading days immediately
preceding the notice of redemption, the Market Price (as defined below) of a
share of Common Stock equals or exceeds $6.00 per share, then an additional
twenty percent (20%) of the shares of Senior Preferred initially issued to a
particular holder may be redeemed by the Corporation;

(iii)  if for
any 30 trading days within a period of 45 consecutive trading days immediately
preceding the notice of redemption, the Market Price (as defined below) of a
share of Common Stock equals or exceeds $7.00 per share, then an additional
twenty percent (20%) of the shares of Senior Preferred initially issued to a
particular holder may be redeemed by the Corporation;

(iv)  if for
any 30 trading days within a period of 45 consecutive trading days immediately
preceding the notice of redemption, the Market Price (as defined below) of a
share of Common Stock equals or exceeds $6.00 per share, then an additional
twenty percent (20%) of the shares of Senior Preferred initially issued to a
particular holder may be redeemed by the Corporation;

(v)  if for
any 30 trading days within a period of 45 consecutive trading days immediately
preceding the notice of redemption, the Market Price (as defined below) of a
share of Common Stock equals or exceeds $6.00 per share, then an additional
twenty percent (20%) of the shares of Senior Preferred initially issued to a
particular holder may be redeemed by the Corporation;

The term
“Market Price” with respect to a share of Common Stock shall mean for each
trading day the reported closing sale price, or, if there were no sales on such
day, the average of the reported closing bid and asked prices, as reported by
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or the National Association of Securities Dealers
Automated Quotation (“Nasdaq”) System or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted on the Nasdaq
System, the average of the closing bid and asked prices in the over-the-counter
market as reported by the NASD OTC Bulletin Board. “Trading day” shall mean a
day on which a national securities exchange or the Nasdaq System, as the case
may be, is open for the transaction of business or the reporting of
trades.

(b) Shares of
Senior Preferred which remain unissued on the Closing Date, and shares of Senior
Preferred which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred stock undesignated as to series and may be redesignated and
reissued as part of any series of the Preferred Stock; provided, however, that
no such issued and reacquired shares of Senior Preferred shall be reissued or
re-sold as Senior Preferred.

(c) The
Corporation shall not be required to make any sinking fund payments in
connection with the redemption of the Senior Preferred pursuant to this Section
5.

6. Procedure
for Redemption. (a) In
the event that fewer than all of the then outstanding shares of the Senior
Preferred are to be redeemed, the shares of Senior Preferred to be redeemed
shall be determined by lot or pro rata as may be determined by the Board of
Directors or any other method selected by the Board of Directors which is not
inconsistent with applicable law.

(b) In the
event the Corporation shall redeem shares of the Senior Preferred, notice of
such redemption shall be given by first class mail, postage prepaid, mailed not
less than 30 days nor more than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed at such holder’s address as the
same appears on the stock register of the Corporation. Each such notice shall
state: (i) the redemption date; (ii) the number of shares of the Senior
Preferred to be redeemed and, if less than all the shares held by such holder
are to be redeemed from such holder, he number of shares to be redeemed from
such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.

(c) Notice
having been mailed as provided in Section 6(b), from and after the redemption
date (unless default shall be made by the Corporation in providing money for the
payment of the redemption price of the shares called for redemption) dividends
on the shares of Senior Preferred so called for redemption shall cease to
accrue, and such shares shall no longer be deemed to be outstanding and shall
have the status of authorized but unissued shares of Preferred Stock,
unclassified as to series, and all rights of the holders thereof as stockholders
of the Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender in accordance with said notice of
the certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Corporation shall so require and the
notice shall so state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In the event that fewer than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder
thereof.

7. Voting
Rights. (a)
Except as otherwise required by law, the holders of Senior Preferred shall (i)
be entitled to cast the number of votes equal to the number of shares of Common
Stock into which such shares of Senior Preferred could be converted pursuant to
paragraph 8 hereof, at the record date for the determination of stockholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken or any written consent of the stockholders is
solicited, (ii) have voting rights and powers equal to the voting rights and
powers of the Common Stock except as otherwise stated herein, and (iii) be
entitled to notice of any stockholders’ meeting in accordance with the by-laws
of the Corporation. Fractional votes shall not be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Senior Preferred held by each holder could be converted)
shall be rounded to the nearest whole number (with one-half being rounded
upward). Except as otherwise provided below or by law, the holders of Senior
Preferred and the 

 

holders
of Common Stock shall vote together as a single class and not as separate
classes on all matters submitted to a vote of the Corporation’s
stockholders.

(b) The
holders of Senior Preferred shall have the right to vote as a separate class
with respect to the election of directors. Within 5 days prior to the fixing of
a record date for the determination of the stockholders entitled to vote with
respect to the election of directors, the board of directors shall calculate the
number of common shares that would be issuable upon full conversion of the
Preferred Stock, compare that number with the number of common shares that would
be outstanding if all shares of Preferred Stock were converted into common
stock, and designate a proportional number of seats on the board of directors
that will be separately elected by the holders of Preferred Stock voting as a
class. All calculations that result in a fractional number of directors shall be
rounded to the nearest whole number.

(c) The
holders of Senior Preferred shall have the right to vote as a separate class on
the following additional matters: (i) any proposed amendment of the principal
terms of the Senior Preferred; (ii) the authorization, creation, issuance or
sale of any class of capital stock ranking senior to or on parity with the
Senior Preferred as to dividends or liquidation preference; or (iii) the merger
of the Corporation into, or consolidation of the Corporation with, or sale of
all or substantially all of the assets of the Corporation to, another entity.
The affirmative vote of the holders of not less than two-thirds (66.67%) of the
outstanding shares of Senior Preferred shall be necessary to authorize any
transaction referenced in subsection (c)(i) through (iii) above.

8. Conversion
Rights, Adjustments. (a) The
shares of Senior Preferred shall be convertible at the option of the holders of
record thereof, in whole or in part, at any time and from time to time, as
hereinafter provided, into that number of fully paid and nonassessable shares of
Common Stock (as such shares may be constituted on the Conversion Date, as
hereinafter defined) as shall be obtained by dividing the Liquidation Value on
the conversion date by the Conversion Price (as hereinafter defined) and
multiplying the resulting quotient by the number of shares of Senior Preferred
to be converted. As used herein, the “Conversion Price” shall be two dollars
($2.00) per share, or, in case an adjustment of such price has taken place
pursuant to the provisions of Section 8(c) below, then the price as last
adjusted and in effect on the Conversion Date.

(b) Before
any holder of shares of Senior Preferred shall be entitled to convert the same
into Common Stock, he shall deliver the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or the Corporation’s transfer
agent, if any, and shall give written notice to the Corporation that he elects
to convert all or part of the shares represented by the certificate or
certificates and shall state in writing therein the name or names in which he
wishes the certificate or certificates for Common Stock to be issued. Conversion
shall be deemed to have been made effected on the date when such delivery is
made, and such date is referred to herein as the “Conversion Date”. The
Corporation will, as soon as practicable thereafter, issue and deliver to such
holder of shares of Senior Preferred, or to his nominee or nominees,
certificates for the number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with cash in lieu of any fraction of a share as
hereinafter provided. If surrendered certificates for Senior Preferred are
converted only in part, the Corporation will issue and deliver to the holder, a
new certificate or certificates representing the aggregate of the unconverted
shares of Senior Preferred.

(c) The
Conversion Price shall be subject to adjustment as follows:

(i) Adjustment
Upon Issuances of Common Stock Below the Conversion Price. In case
the Corporation shall issue any shares of Common Stock other than Excluded Stock
(as hereinafter defined) for a consideration per share less than the then
existing Conversion Price applicable immediately prior to such issuance, the
Conversion Price in effect immediately prior to each such issuance shall be
reduced to a price determined by dividing (A) the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issue, multiplied
by the Conversion Price in effect immediately prior to such issue, plus (y) the
consideration, if any, received by the Corporation upon such issue, by (B) the
number of shares of Common Stock outstanding immediately after such issue. For
the purposes of this clause 8(c)(i), the following provisions shall also be
applicable:

(1) Convertible
Securities, Option and Rights. If the
Corporation shall issue any stock, warrant, security, obligation, option or
other right which directly or indirectly may be converted, exchanged, or
satisfied in shares of Common Stock other than Excluded Stock, the maximum total
number of shares of 

 

Common
Stock issuable upon such conversion, exchange or other exercise of such
securities or rights shall thereupon be deemed to have been issued and to be
outstanding, and the consideration received by the Corporation therefor shall be
deemed to include the sum of the consideration received for the issue of such
securities or rights and the minimum additional consideration payable upon such
conversion, exchange or other exercise of such securities or rights. No further
adjustment shall be made for the actual issuance of Common Stock upon such
conversion, exchange or other exercise of any such securities or rights. If the
provisions of any such securities or rights with respect to purchase price or
shares purchasable shall change or expire, any adjustment previously made
hereunder therefor shall be readjusted to such as would have obtained on the
basis of the securities or rights as modified by such change or
expiration.

(2) Stock
Dividends and Splits. In case
the Corporation shall declare a dividend or other distribution payable in Common
Stock or shall subdivide Common Stock into a greater number of shares of Common
Stock, such issue of Common Stock shall be deemed to have been made without
consideration.

(3) Consideration. In case
the Corporation shall issue shares of Common Stock for a consideration wholly or
partly other than cash, the amount of the consideration other than cash received
by the Corporation shall be deemed to be the fair value of such consideration as
determined by the Board of Directors of the Corporation by any method such Board
deems appropriate (provided, however, that in
the event that any such shares of Common Stock are to be issued to any person or
entity in which any director or directors of the Corporation has an interest,
such determination shall be made solely by those members of the Board of
Directors who have no such interest).

(4) Record
Dates. In case
the Corporation shall take a record of the holders of Common Stock for the
purpose of entitling them (i) to receive a dividend or other distribution
payable in Common Stock, or (ii) to subscribe for or purchase Common Stock, then
such record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.

(5) Treasury
Stock. The
number of shares of Common Stock outstanding at any given time shall include
shares owned or held by or for the account of the Corporation, and the
disposition of any such shares so owned or held shall not be considered an issue
of Common Stock.

(6) Excluded
Stock. The term
“Excluded Stock” shall mean (i) 330,000 shares issuable at $1.50 per share upon
the full exercise of certain outstanding “Series I Investor Warrants” of the
Company; (ii) 116,700 shares issuable at $1.00 per share upon the full
exercise of certain outstanding “Capital Warrants” of the Company;
(iii) 189,300 shares issuable at $1.00 per share upon the full exercise of
certain outstanding “Contractual Stock Options” of the Company; and (iv) any
rights or warrants referred to in paragraph 8(c)(iii)..

(ii) Adjustments
for Changes in Capital Stock. If the
Corporation (A) pays a dividend in shares of Common Stock to holders of Common
Stock; (B) subdivides outstanding shares of Common Stock into a greater number
of shares; (C) combines outstanding shares of Common Stock into a smaller number
of shares; (D) pays a dividend on shares of Common Stock in shares of capital
stock other than Common Stock or makes a distribution on Common Stock in shares
of capital stock other than Common Stock; or (E) issues by reclassification of
shares of Common Stock any shares of its capital stock; then the Conversion
Price in effect immediately prior to such action shall be adjusted so that the
holder of Senior Preferred thereafter converted may receive the number of shares
of capital stock of the Corporation which such holder would have owned
immediately following such action if such holder held converted the Senior
Preferred immediately prior to such action.

For a
dividend or distribution, the adjustment shall become effective immediately
after the record date for the dividend or distribution. For a subdivision,
combination or reclassification, the adjustment shall become effective
immediately after the effective date of the subdivision, combination or
reclassification.

If after
an adjustment a holder of Senior Preferred upon conversion thereof may receive
shares of two or more classes of capital stock of the Corporation, the Board of
Directors of the Corporation shall determine the allocation of the adjusted
Conversion Price between or among the classes of capital stock. After such
allocation, the Conversion Price of the classes of capital stock shall
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock contained in this Section 8 (c).

(iii) Adjustment
for Rights Issue or Other Distributions. If the
Corporation distributes to all or substantially all holders of shares of Common
Stock any assets or general evidences of indebtedness, or issues any rights or
warrants to all or substantially all holders of shares of Common Stock entitling
them after the record date mentioned below to purchase shares of Common Stock
(or securities convertible into shares of Common Stock) at a price per share (or
having a Conversion Price per share) less than the Market Price (as defined in
Section 5(a)) per share on that record date, provision shall be made so that the
holders of Senior Preferred shall receive upon conversion, and in addition to
the number of shares of Common Stock otherwise receivable thereupon, the amount
of other securities of the Corporation that they would have received had their
Senior Preferred been converted into Common Stock on the date of such event and
had, thereafter, during the period from the date of such event to and including
the conversion date, retained such other securities giving application to all
adjustments called for during such period under this paragraph 8 with respect to
such other securities. The adjustment shall be made successively whenever any
such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive the
rights or warrants. If all of the shares of Common Stock or securities
convertible into shares of Common Stock subject to such rights or warrants have
not been issued when such rights or warrants expire, then the Conversion Price
shall promptly be readjusted to the Conversion Price which would then be in
effect had the adjustment upon the issuance of such rights or warrants been made
on the basis of the actual number of shares of Common Stock (or securities
convertible into shares of Common Stock) issued upon the exercise of such rights
or warrants.

(iv) Adjustment
for Registration Delays. If the
Corporation fails to file the initial registration statement specified in
paragraph 9(b) in a timely manner; is unable to obtain an order of effectiveness
for the initial registration statement prior to April 30, 2005; or obtains an
order of effectiveness with respect to the initial registration statement which
is subsequently terminated, withdrawn or suspended for a period of more than 10
days, then the Conversion Price will be decreased by an initial delay adjustment
of three percent (3%), plus an additional delay adjustment of two percent (2%)
for every thirty (30) day period (or portion thereof) that the Registrable
Common Stock is not subject to and included in an effective registration
statement.

(v) Voluntary
Adjustment. The
Corporation at any time may decrease the Conversion Price, temporarily or
otherwise, by any amount but in no event shall such Conversion Price result in
the issuance of Common Stock at a price less than the par value of the Common
Stock at the time such decrease is made. Any such decreased Conversion Price
shall be available for at least 20 days from the date on which notice of such
decrease is filed by the Corporation with the transfer agent for the Common
Stock, and such decrease shall be irrevocable during such period. The Company
shall notify holders of Senior Preferred at least 15 days prior to the date on
which the reduced Conversion Price takes effect.

(vi) When
Adjustment May Be Deferred, Etc. No
adjustment in the Conversion Price need be made under this Section 8(c) unless
cumulative adjustments equal at least $.05. Any adjustments that are not made
shall be carried forward and taken into account in any subsequent adjustment. No
adjustment of the Conversion Price will be made for cash distributions or cash
dividends paid out of current or undistributed net income or retained earnings.
All calculations under this Section 8(c) shall be made to the nearest cent or to
the nearest 1/100th of a share, as the case may be.

(vii) Notice
of Adjustment. Whenever
the Conversion Price is adjusted, the Company shall calculate the adjustment to
be made and shall promptly mail to holders of the Senior Preferred a notice of
the adjustment and file with the transfer agent of the Corporation a certificate
from an officer of the Corporation briefly stating the facts requiring the
adjustment and the manner of computing it. The certificate shall be conclusive
evidence that the adjustment is correct, absent manifest error.

(viii) Notice
of Certain Transactions. If (A)
the Corporation takes any action which would require an adjustment in the
Conversion Price; (B) the Corporation proposes to consolidate with or merge with
or into, or transfer all or substantially all or its assets to, another
corporation; or (C) there is a proposed dissolution or liquidation of the
Corporation, a holder of shares of Senior Preferred may desire to convert them
into shares of Common Stock prior to the record date for the effective date of
the transaction so that he may receive the rights, warrants, securities or
assets which a holder of shares of Common Stock on that date may receive.
Therefore, the Corporation shall mail to holder and the transfer agent a notice
stating any such proposed record or effective agent a notice stating any such
proposed record or effective date, as the case may be, by first-class mail at
least 15 days before such date. Failure to mail the notice or any defect in it
shall not affect the validity of any transaction referred to in this
Section.

(ix) Merger,
Consolidation or Sale of Assets. In case
the Corporation shall consolidate or merge into or with another corporation, or
in case the Corporation shall sell or convey to any other person or persons all
or substantially all the assets of the Corporation, each holder of Senior
Preferred the outstanding shall have the right thereafter to convert each share
of Senior Preferred held by him into the kind and amount of shares of stock,
other securities, cash and property receivable upon such consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such consolidation, merger, sale or conveyance, and shall have no other
conversion rights. In any event, effective provision shall be made, in the
certificate or Certificate of Incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale and conveyance so that, so
far as appropriate and as nearly as reasonably may be, the provisions set forth
herein for the protection of the conversion rights of the shares of the Senior
Preferred shall thereafter be made applicable.

(d) No
fractional shares or scrip representing fractional shares of Common Stock shall
be issued upon conversion of the Senior Preferred. If more than one certificate
representing shares of the Senior Preferred shall be surrendered for conversion
at one time by the same holder, the number of full shares issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Senior Preferred so surrendered. Instead of any fractional share of
Common Stock that would otherwise be issuable upon conversion of any shares of
Senior Preferred, the Corporation will pay a cash adjustment in respect of such
fractional interest in an amount equal to the same fraction of the Market Price
per share of Common Stock at the close of business on the business day prior to
the day of conversion.

(e) The
Corporation shall reserve out of its authorized but unissued shares of Common
Stock or its shares of Common Stock held in treasury sufficient shares of Common
Stock to permit the conversion of the Senior Preferred at all times. All shares
of Common Stock which may be issued upon conversion of the Senior Preferred
shall be validly issued, fully paid and non-assessable.

(f) The
issuance of certificates for shares of Common Stock upon the conversion of
shares of Senior Preferred shall be made without charge to the holders of shares
of Senior Preferred converting such shares of Senior Preferred for any issue or
stamp tax in respect of the issuance of such certificates, and such certificates
shall be issued in the respective names of, pro in such names as may be directed
by, the holders of shares of Senior Preferred converted.

(g) Shares of
Common Stock held in the treasury of the Corporation may in its discretion be
delivered upon any conversion of shares of the Senior Preferred.

(h) All
certificates for the shares of Senior Preferred and any shares of Common Stock
issued upon conversion thereof shall bear the following legend:

“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR
QUALIFICATION UNDER THE BLUE SKY LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY
NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, BENEFICIALLY OR ON
THE RECORDS OF THE CORPORATION, UNLESS THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AND

 

QUALIFIED
UNDER APPLICABLE BLUE SKY LAWS OR AN EXEMPTION FROM SUCH REGISTRATION AND
QUALIFICATION IS AVAILABLE.”

The
certificates evidencing such shares shall also bear any legends required
pursuant to any state, local or foreign law governing such
securities.

9. Registrable
Common Stock: Initial Registration and Piggy-Back Registration
Rights.

(a) Definitions. As used
in this Section 9, the following terms shall have the meanings set forth
herein:

“Registrable
Common Stock” shall mean the shares of Common Stock issued or issuable upon
conversion of the Senior Preferred pursuant to Section 8.

“Registration
Statement” shall mean any registration statement that the Corporation files with
the Securities and Exchange Commission (the “SEC”) under the Securities Act of
1933, as amended (the “Act”), that registers the resale of Registrable Common
Stock pursuant to the provisions of this Certificate, including the Prospectus,
amendments and supplements to such Registration Statement, including
post-effective amendments, and all exhibits and all material incorporated by
reference in such Registration Statement.

“Prospectus”
shall mean the prospectus included in any Registration Statement, as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Common Stock covered by the
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.

(b) Initial
Registration. Within
60 days after the Closing Date, the Corporation shall file an appropriate
Registration Statement under the Act for the purpose of registering all shares
of Registrable Common Stock issuable upon the conversion of the Senior
Preferred; (ii) use all reasonable efforts to cause such Registration Statement
to become effective as promptly as practicable; and (iii) use all reasonable
efforts to maintain the effectiveness of such Registration Statement for a
period of not less than 18 months from the Closing Date; provided,
however, that if
the holders of more than two-thirds of the shares of Senior Preferred
outstanding on the Closing Date elect to convert their shares of Senior
Preferred into Common Stock in accordance with the provisions hereof prior to
the expiration of such 18 month period, the Corporation shall have the right to
withdraw or cause to lapse the Registration Statement filed pursuant to this
Section 9(b).

(c) Piggy-Back
Registration. If at any
time after the date hereof, the Corporation determines to file a registration
statement under the Securities Act relating to a proposed sale to the public by
the Corporation of shares of Common Stock (but excluding registrations on Form
S-4 or Form S-8 or similar forms hereafter in effect), the Corporation
shall:

(i) promptly
give to each holder of Senior Preferred or Registrable Common Stock written
notice thereof (which will include a list of the jurisdictions in which the
Corporation intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws, the proposed offering price, and the
plan of distribution);

(ii) include
in such registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Registrable
Common Stock specified in a written notice from the Corporation, by any holder
of Registrable Common Stock; and

(iii) use its
best efforts to cause the managing underwriter or underwriters of such proposed
underwritten offering to permit the Registrable Common Stock requested to be
included in the Registration Statement for such offering to be included on the
same terms and conditions as any similar securities of the Corporation included
therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering deliver a written opinion to the holders of such
Registrable Common Stock that marketing considerations require a limitation in
the number of shares of Common Stock offered pursuant to any Registration
Statement filed under this Section, then, subject to the advice of said managing
underwriter or 

 

underwriters
as to the size and composition of the offering, such limitation shall be imposed
pro
rata among
both of: (A) the Registrable Common Stock to be included in the Registration
Statement pursuant to Section 9(f); and (B) all other shares of Common Stock to
be issued for the account of the Corporation.

(d) Restrictions
on Public sale by Holder of Registrable Common Stock. Each
holder of Registrable Common Stock whose Registrable Common Stock is covered by
a Registration Statement filed pursuant to Section 9(c) agrees, if requested in
writing by the managing underwriter or underwriters in an underwritten offering,
not to effect any public sale or distribution of securities of the Corporation
of the same class as the securities included in such Registration Statement,
including a sale pursuant to the Rule 144 under the Securities Act (except as
part of such underwritten registration), during the seven-day period prior to,
and during the 120-day period following, the effective date of the Registration
Statement for each underwritten offering made pursuant to such Registration
Statement, to the extent timely notified in writing by the Corporation or the
managing underwriter or underwriters.

The
foregoing provisions shall not apply to any holder of Registrable Common Stock
if such holder is prevented by applicable statute or regulation from entering
into any such agreement; provided that any
such holder shall undertake, in its request to participate in any such offering,
not to effect any public sale or distribution of the Registrable Common Stock
commencing on the date of sale of such Registrable Common Stock unless it has
provided 45 days’ prior written notice of such sale or distribution to the
underwriter or underwriters.

10. Registration
Procedures. In
connection with the Corporation’s registration obligations pursuant to Section 9
hereof, the Corporation will use all reasonable efforts to effect such
registration to permit the sale of such Registrable Common Stock in accordance
with the intended method or methods of disposition thereof, and pursuant thereto
the Corporation will:

(a) before
filing a Registration Statement or Prospectus or any amendments or supplements
thereto, furnish to the holders of the Registrable Common Stock covered by such
Registration Statement and the underwriters, if any, copies of all such
documents proposed to be filed;

(b) prepare
and file with the SEC such amendments and post-effective amendments to any
Registration Statement, and such supplements to the Prospectus, as may be
reasonably requested by any holder of Registrable Common Stock or any
underwriter or underwriters of Registrable Common Stock or as may be required by
the rules, regulations or instructions applicable to the registration form
utilized by the Corporation under the Securities Act or otherwise necessary to
keep such Registration Statement effective for the applicable period and cause
the Prospectus as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended methods
of dispositions by the sellers thereof set forth in such Registration Statement
or supplement to the Prospectus;

(c) notify
the selling holders of Registrable Common Stock and the managing underwriters,
if any, promptly, and (if requested by any such person) confirm such advice in
writing,

(i) when the
Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and with respect to the Registration Statement or any post-effective
amendment, when the same has become effective;

(ii) of any
request by the SEC for amendments or supplements to the Registration Statement
or the Prospectus or for additional information;

(iii) of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose;

(iv) of the
receipt by the Corporation of any notification with respect to the suspension of
the qualification of the Registrable Common Stock for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose;
and

(v) of the
existence of any fact which results in the Registration Statement, the
Prospectus or any

 

 document
incorporated therein by reference containing an untrue statement of material
fact or omitting to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;

(d) make
reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of the Registration Statement;

(e) if
reasonably requested by the managing underwriter or underwriters or the holders
of a majority in number of the Registrable Common Stock being sold in connection
with an underwritten offering, incorporate in a Prospectus supplement or
post-effective amendment such necessary information as the managing underwriter
or underwriters and the holders of a majority in number of the Registrable
Common Stock being sold reasonably request to have included therein relating to
the plan of distribution with respect to such Registrable Common Stock,
including, without limitation, information with respect to the amount of
Registrable Common Stock being sold to such underwriter or underwriters and with
respect to any other terms of the underwritten (or best efforts underwritten)
offering of the Registrable Common Stock to be sold in such
offering;

(f) at the
request of any selling holder of Registrable Common Stock, furnish to such
selling holder of Registrable Common Stock and each underwriter, if any, without
charge, at least one signed copy of the Registration Statement.

(g) deliver
to each selling holder of Registrable Common Stock and the underwriters, if any,
without charge, copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such persons may reasonably
request;

(h) register
or qualify the Registrable Common Stock covered by such Registration Statement
under the securities or blue sky laws of such states as the Corporation shall
determine (but in any event not fewer than 10 states) and do any and all other
acts and things which may be necessary or advisable to enable the holder of
Registrable Common Stock to consummate the public sale or other disposition in
such jurisdictions of such Registrable Common Stock owned by such holder;
provided,
however,
that the Corporation shall not be required to qualify to do business as a
foreign corporation in any state where it is not then so qualified, nor take any
action which will subject it to general service or process in any state where it
is not then so subject;

(i) cooperate
with the selling holders of Registrable Common Stock and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Common Stock to be sold and not bearing
any restrictive legends; and enable such Registrable Common Stock to be in such
denominations and registered in such names as the managing underwriters may
request;

(j) if any
fact contemplated by Section 10(c)(5) above shall exist, prepare a supplement or
post-effective amendment to the Registration Statement or the related Prospectus
or any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Registrable
Common Stock, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;

(k) cause all
Registrable Common Stock covered by the Registration Statement to be listed on
the securities exchange on which the Common Stock is then listed if requested by
the holders of a majority in number of such Registrable Common Stock or by the
managing underwriter or underwriters, if any:

(l) not later
than the effective date of the applicable Registration Statement, provide a
CUSIP number for all Registrable Common Stock and provide the transfer agent(s)
with printed certificates for the Registrable Common Stock which are in a form
eligible for deposit with Depositary Trust Holdings; and

(m) otherwise
use its best efforts to comply with all applicable rules and regulations of the
SEC.

The
Corporation may required each seller of Registrable Common Stock as to which any
registration is being effected to furnish to the Corporation such information
regarding such seller and the distribution of such securities as the Corporation
may from time to time reasonably request in writing.

Each
holder of Registrable Common Stock agrees by acquisition of such Registrable
Common Stock that, upon receipt of any notice from the Corporation of the
happening of any event of the kind described in paragraph (j) above, such holder
will forthwith discontinue disposition of Registrable Common Stock until such
holder’s receipt of the copies of the supplemented or amended Prospectus
contemplated by paragraph (j) above, or until it is advised in writing by the
Corporation that the use of the Prospectus may be resumed, and has received
copies of any additional or supplemental filings which are incorporated by
reference in the Prospectus, and, if so directed by the Corporation such holder
will deliver to the Corporation (at the Corporation’s expense) all copies, other
than permanent file copies then in such holder’s possession, of the Prospectus
covering such Registrable Common Stock current at the time of receipt of such
notice. In the event the Corporation shall give any such notice, the time
periods mentioned in Section 9 hereof shall be extended by the number of days
during the period from and including the date of the giving of such notice to
and including the date when each seller of Registrable Common Stock covered by
such Registration Statement either receives the copies of the supplemented or
amended prospectus contemplated by Section 10 (j) hereof or is advised in
writing by the Corporation that the use of the Prospectus may be
resumed.

11. Registration
Expenses. All
expenses incident to the Corporation’s performance of or compliance with the
registration provisions contained in Section 9 will be paid by the Corporation,
regardless of whether the Registration Statement becomes effective.

12. Indemnification.

(a) Indemnification
by the Corporation. The
Corporation agrees to indemnify and hold harmless each holder of Registrable
Common Stock, its officers, directors, employees and agents and each person who
controls such holder within the meaning of either Section 15 of the Securities
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) (each such person being sometimes hereinafter referred to as an
“Indemnified Holder”) from and against all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation and legal expenses)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement or Prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of or based upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
allegation thereof based upon information furnished in writing to the
Corporation by such holder expressly for use therein; provided, however, that
the Corporation shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any preliminary prospectus if (i) such holder failed to send or deliver
a copy of the Prospectus with or prior to the delivery of written confirmation
of the sale of Registrable Common Stock and (ii) the Prospectus would have
completely corrected such untrue statement or omission; and provided, further,
that the Corporation shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission in
the Prospectus, if such untrue statement or alleged untrue statement, omission
or alleged omission is completely corrected in an amendment or supplement to the
Prospectus and if, having previously been furnished by or on behalf of the
Corporation with copies of the Prospectus as so amended or supplemented, such
holder thereafter fails to deliver such Prospectus as so amended or supplemented
prior to or concurrently with the sale of Registrable Common Stock to the person
asserting such loss, claims, damage, liability or expense who purchased such
Registrable Common Stock which is the subject thereof from such
holder.

If any
action or proceeding (including any governmental investigation or inquiry) shall
be brought or asserted against an Indemnified Holder in respect of which
indemnity may be sought from the Corporation, such Indemnified Holder shall
promptly notify the Corporation in writing, and the Corporation shall assume the
defense thereof, including the employment of counsel. Such Indemnified Holder
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnified Holder unless (a) the Corporation has
agreed to pay such fees and expenses or (b) the Corporation shall have failed to
assume the defense of such action or proceeding or (c) the named parties to any
such action proceeding (including any interpleaded parties) include both such
Indemnified Holder and the Corporation, and such Indemnified Holder shall have
been advised by counsel that representation of both parties by the same counsel
would be inappropriate due to actual or potential material differing interests
between them (in 

 

which
case, if such Indemnified Holder notifies the Corporation in writing that it
elects to employ separate counsel at the expense of the Corporation, the
Corporation shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Holder, it being understood, however,
that the Corporation shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys at any time for such Indemnified Holder and any
other Indemnified Holders, which firms shall be designated in writing by such
Indemnified Holders). The Corporation shall not be liable for any settlement of
any such action or proceeding effected without its written consent.

(b) Indemnification
by Holder of Registrable Common Stock. Each
holder of Registrable Common Stock agrees to indemnify and hold harmless the
Corporation, its directors, officers, employees and agents and their affiliates,
and each person, if any, who controls the Corporation within the meaning of each
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Corporation to such holder, but only
with respect to information relating to such holder furnished in writing by such
holder expressly for use in any Registration Statement or Prospectus, or any
amendment or supplement thereto, or any preliminary prospectus. In case any
action or proceeding shall be brought against the Corporation or its directors,
officers, employees, agents or their affiliates or an such controlling person,
in respect of which indemnity may be sought against a holder of Registrable
Common Stock, the Corporation or its directors, officers, employees, agents or
their affiliates or such controlling person shall have the rights and duties
given to each holder by preceding paragraph. In no event shall the liability of
any selling holder of Registrable Common Stock hereunder be greater in amount
than the dollar amount of the proceeds received by such holder upon the sale of
the Registrable Common Stock giving rise to such indemnification
obligation.

(c) Contribution. If the
indemnification provided for in this Section 12 is unavailable to an indemnified
party under Section 12 (a) or Section 12(b) hereof (other than by reason of
exceptions provided in those Sections) in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the Corporation, on the one
hand, and of the Indemnified Holder, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the Corporation, on the one hand, and the Indemnified
Holder, on the other hand, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Corporation or by the Indemnified Holder and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or mission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in the
second paragraph of Section 12(a), any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.

The
Corporation and each holder of Registrable Common Stock agree that it would not
be just and equitable if contribution pursuant to this Section 12(c) were
determined by pro
rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 12 (c), an Indemnified Holder
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Registrable Common Stock sold by such Indemnified
Holder or its affiliated Indemnified Holders and distributed to the public were
offered to the public exceeds the amount of any damages which such Indemnified
Holder, or its affiliated Indemnified Holders, has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. 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.

13. Restrictions
and Limitations. So long
as any shares of Senior Preferred remain outstanding, the Corporation shall not,
and shall not permit any corporation at least 50% of whose outstanding voting
stock shall be owned directly or indirectly by the Corporation (a “Subsidiary”)
or any subsidiary of a subsidiary to, without the 

 

vote or
written consent by the holders of at least two-thirds (66.67%) of the
outstanding shares of Senior Preferred:

(a)redeem,
purchase or otherwise acquire for value, any share or shares of Senior Preferred
otherwise than by conversion in accordance with paragraph 8 hereof;

(b)effect
any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Corporation or any Subsidiary, or any
consolidation or merger involving the Corporation or any Subsidiary (except a
merger of a Subsidiary with or into the Corporation or any other Subsidiary) or
any reclassification or other change of any stock, or any recapitalization of
the Corporation;

(c)increase
or decrease (other than by conversion) the total number of authorized shares of
Senior Preferred;

(d)designate
any additional series of Preferred Stock having rights, preferences and
privileges which would impair in any manner the rights, preferences and
privileges of the Senior Preferred or reduce the amount payable to the holders
of Senior Preferred upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation,

(e)amend its
Certificate of Incorporation if such amendment would change any of the rights,
preferences, privileges of or limitations provided herein for the benefit of the
holders of Senior Preferred, including, but not limited to amendments which
would change the voting rights of the holders of Senior Preferred in relation to
the voting rights of the holders of Common Stock, reduce the amount payable to
the holders of Senior Preferred upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, change the relative seniority of
the liquidation preferences of the holders of Senior Preferred, or cancel or
otherwise modify the conversion rights of the Senior Preferred provided for in
paragraph 8 hereof. Notwithstanding the generality of the foregoing, nothing
herein contained shall be construed to limit or otherwise impair the
Corporation’s rights to designate additional series of Preferred Stock or other
securities which have rights superior to the rights of the Senior Preferred
herein set forth.

14. Amendment. Any of
the rights specified in this Certificate of Designation may be amended,
provided, that all amendments to this Certificate of Designation shall be made
in accordance with the provisions of the GCLD in effect from time to time,
provided that any such amendment must be approved by the holders of not less
than two-thirds (66.67%) of all Senior Preferred then outstanding. Any such
amendment so effected shall be binding upon the Corporation and any holder of
Senior Preferred or Registrable Common Stock.

THE
UNDERSIGNED chief
executive officer and secretary of Axion Power International, Inc., hereby make
this certificate, declaring and certifying that this is the duly authorized act
and deed of the Corporation and the facts herein stated are true, and
accordingly has hereunto set his hand this 17th day of March 2005.

Axion
Power International, Inc.

a
Delaware corporation

By:  /s/
Charles
Mazzacato                      
 

Charles
Mazzacato, Chief Executive Officer

Axion
Power International, Inc.

a
Delaware corporation

Attest: /s/
John
Petersen                               

John L.
Petersen, Secretary and General Counsel

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