UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 8-K


CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


DATE OF EARLIEST REPORTED EVENT - MARCH 18, 2005


AXION POWER INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)


DELAWARE   000-22573   65-0774638
(State or other jurisdiction of   (Commission   (IRS Employer
incorporation)   File Number)   Identification Number)


100 Caster Avenue
Vaughan, Ontario, Canada L4L 5Y9
(Address of principal executive offices)


(905) 264-1991
(Registrant’s telephone number, including area code)


(Former name or former address, if changed since last report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
  ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS



On March 18, 2005, we paid $100,500 in cash and issued 100,000 shares of our 8% Convertible Senior Preferred Stock (the “Preferred Stock”) to C and T Co., Inc. (“C&T”) and its shareholders in full and final settlement of $1.1 million in debt and all remaining obligations associated with our purchase of the patents, patent applications, technical know how and other intellectual property embodied in our E 3 Supercell technology. A copy of the Second Amendment to our Development and License Agreement with C&T has been filed as an exhibit to this report. For information on the Preferred Stock, please refer to Item 3.02 of this report.

Concurrently we terminated a research and development project management agreement with C&T that required us to pay the costs and expenses associated with research and development activities that C&T conducted on our behalf, together with a management surcharge equal to 50% of the salaries and bonuses paid to C&T technical staff who were assigned to work on our project.

The project management agreement with C&T was a negotiated element of a November 2003 Development and License Agreement between C&T and our subsidiary Axion Power Corporation (“Axion (Ontario”). Prior to the execution of the Development and License Agreement, neither Axion (Ontario) nor any of its officers, directors or their affiliates had any material relationship with C&T or any of its officers, directors or affiliates. As a result of the agreement and subsequent amendments thereto, the C&T shareholders became significant stockholders of our company and Dr. Igor Filipenko, the president of C&T, became member of our board of directors. Collectively, C&T and its shareholders and affiliates have transferred the E 3 Supercell technology to us and invested $500,000 cash in our company in return for:

·  
1,736,800 shares of our common stock;

·  
100,000 shares of our preferred stock that are presently convertible into 500,000 shares of common stock;

·  
1,796,300 warrants to purchase shares of common stock at an average price of $1.96 per share; and

·  
17,100 options to purchase shares of common stock at an average price of $4.72 per share

Assuming conversion of their preferred stock and full exercise of their warrants and options, C&T and its shareholders and affiliates will have transferred the E 3 Supercell technology to us and invested $4.1 million cash in our company in return for 4,051,644 shares of our common stock, or approximately 19.9% of our fully-diluted capitalization.

In connection with the termination of the project management agreement, we hired certain former employees of C&T as full-time employees of our company. We also entered into consulting agreements with other former C&T employees whose services are not required on a full-time permanent basis.

Over the past 12 months, our aggregate monthly costs under the project management agreement averaged approximately $100,000 per month. While we believe the terms of the C&T project management agreement were comparable to, or better than, the terms we could have obtained from an unaffiliated party with comparable staff, we believe the consolidation of research and development activities under our direct control will improve our relations with our scientific staff and facilitate more uniform compensation policies in the future.

ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES

Preferred Stock Issuance to C&T Shareholders

On March 18, 2005 , we issued 100,000 shares of Preferred Stock to six individual shareholders of C&T in settlement of $1 million in debt associated with our purchase of the patents, patent applications, technical know how and other intellectual property embodied in our E 3 Supercell technology. The six purchasers are current stockholders of our company. The stock issuance transactions were exempt from registration under Section 4(2) of the Securities Act of 1933 (the “Act”) and Regulation S promulgated thereunder. Each purchaser is a non-U.S. person who was provided information analogous to the information that would have been required in a registration statement under
 
the Act. We implemented appropriate offering restrictions and did not engage in directed selling efforts or use any form of advertising or general solicitation in connection with the sale of these securities. The securities are non-transferable in the absence of an effective registration statement under the Act, or an available exemption therefrom, and all certificates are imprinted with a restrictive legend to that effect. For further information on the C&T transaction, please refer to Item 2.02 of this report.

Private Placement of Preferred Stock

On March 18, 2005, we sold 281,000 shares of Preferred Stock to 11 investors in private placement transactions. The purchasers also received an aggregate of 503,500 warrants, each of which represent the right to purchase one share of our common stock at a price of $2.00 for a period of two years from the issue date. After deducting commissions and offering costs of $35,000, the net cash proceeds of the private placement transactions were $2,775,000.

In connection with the private placement transactions, three affiliates of our company purchased 40,000 shares of Preferred Stock for $400,000 in cash; two adult children of directors purchased 175,000 shares of Preferred Stock for $1,750,000 in cash; four current stockholders of our company purchased 50,000 shares of Preferred Stock for $500,000 in cash; and two new investors purchased 16,000 shares of Preferred Stock for $160,000 in cash.

The private placement transactions were exempt from registration under Section 4(2) of the Act. Seven of the investors are citizens or residents of the United States and four of the investors are non-U.S. persons. All investors are accredited investors as defined in Rule 501 of Regulation D. Each investor was provided information analogous to the information that would have been required in a registration statement under the Securities Act. Appropriate offering restrictions were implemented and we did not engage in directed selling efforts or use any form of advertising or general solicitation in connection with the sale of these securities. The securities are non-transferable in the absence of an effective registration statement under the Act, or an available exemption therefrom, and all certificates are imprinted with a restrictive legend to that effect.

Description of 8% Convertible Senior Preferred Stock

The following description of our Preferred Stock is qualified in its entirety by the “Certificate of Powers, Designations, Preferences and Rights of the 8% Convertible Senior Preferred Stock of Axion Power International, Inc.” which has been filed as an exhibit to this report.

Authorization. The Preferred Stock has been authorized by our board of directors as a new series consisting of up to 1,000,000 shares of Preferred Stock. So long as any Preferred Stock is outstanding, we are prohibited from issuing any series of stock having rights senior to or on parity with the Preferred Stock without the approval of a two-thirds majority of the holders of Preferred Stock.

Stated Value. The Preferred Stock has an initial stated value of $10.00 per share. Accrued dividends that are not paid in cash within 10 days of a payment date shall automatically be added to the stated value of the Preferred Stock and the stated value, as adjusted, will be used for all future dividend and conversion calculations. Since we expect to incur operating losses for at least two years, the following table summarizes the expected future stated value of our Preferred Stock at the end of each quarter through December 31, 2006.

Quarter Ended
Adjusted Stated Value
 
Quarter Ended
Adjusted Stated Value
March 30, 2005
$10.03
 
March 31, 2006
$10.86
June 30, 2005
$10.23
 
June 30, 2006
$11.07
September 30, 2005
$10.43
 
September 30, 2006
$11.29
December 31, 2005
$10.64
 
December 31, 2006
$11.52

Liquidation Preference. In the event of any liquidation, dissolution or winding up of our company, holders of shares of Preferred Stock are entitled to receive the liquidation preference equal to the stated value of the Preferred Stock on the payment date before any payment or distribution is made to the holders of common stock. After payment in full of the liquidation preference of the shares of the Preferred Stock, the holders of such shares will not be entitled to any further participation in any distribution of assets by our company.

Dividends.   Holders of shares of Preferred Stock will be entitled to receive dividends at the annual rate of 8% of the stated value of the Preferred Stock. Such dividends shall be payable in equal quarterly payments on the last day of March, June, September and December of each year commencing March 31, 2005, except that if any such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday. Dividends will accrue and be cumulative from the date of first issuance of the Preferred Stock and will be payable to holders of record. In order to conserve our available resources, however, we will not pay cash dividends on the Preferred Stock in any quarter where our company reports a net loss. Any accrued dividends that are not paid in cash will be added to the stated value of the Preferred Stock.

Election of directors. In connection with the election of Directors, the holders of Preferred Stock will have the right to vote as a separate class to elect a presently indeterminate number of members of our board of directors. To determine the number of directors to be elected by the holders of Preferred Stock, we will calculate the number of common shares issuable upon 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 our board of directors that will be separately elected by the holders of Preferred Stock. All calculations that result in a fractional number of directors will be rounded to the nearest whole number. Based on our present capitalization, the holders of Preferred Stock would be entitled to elect one director.

Voting on other matters. With respect to all matters submitted for a stockholder vote other than the election of directors and matters that specifically require class voting under Delaware law, the holders of the Preferred Stock will be entitled to cast the number of votes equal to the number of shares of Common Stock into which the shares of Senior Preferred could be converted.

Amendment of stockholder rights. So long as any Preferred Stock is outstanding, we may not, without the affirmative vote of the holders of at least two-thirds of the outstanding Preferred Stock, voting separately as a class, (i) amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws so as to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Preferred Stock, (ii) authorize or issue, or increase the authorized amount of, any additional class or series of stock, or any security convertible into stock of such class or series, ranking senior to the Preferred Stock as to dividends or upon liquidation, dissolution or winding up of the Company or (iii) effect any reclassification of the Preferred Stock.

Optional Conversion. Holders will have the right to convert shares of Preferred Stock into shares of our common stock at any time. The initial conversion price of the common stock is $2 per share. If we fail to obtain an order of effectiveness for the registration statement described below before April 30, 2005, however, the conversion price will be decreased by an initial delay adjustment equal to 3% of the conversion price, plus an additional delay adjustment 2% of the conversion price for every 30-day period (or portion thereof) that the underlying common stock is not subject to and included in an effective registration statement. For example, if the actual effective date of the registration statement is June 30 instead of April 30, the adjusted conversion price of the common stock will be $1.86 instead of $2.00.

The conversion price will be subject to further adjustment for other events, including: sales of common stock at a price that is less than the then current conversion price of the Preferred Stock; share dividends on our common stock; subdivisions or combinations of our common stock; and the issuance of certain rights or warrants to holders of our common stock that permit them to subscribe for or purchase shares of our common stock at a price less than current market price. No adjustment in the Conversion Price will be required to be made until cumulative adjustments equal at least $.05 per share of common stock; however, any adjustments that are not made shall be carried forward. All conversion price adjustment calculations shall be made to the nearest cent.

We may from time to time decrease the conversion price by any amount for any period of at least 20 days, in which case we will give each holder of Preferred Stock at least 15 days notice of such decrease.

No fractional shares of Common Stock will be issued upon conversion, but, in lieu thereof, an appropriate amount will be paid in cash by the Company based on the reported last sale price for the shares of Common Stock on the business day prior to the date of conversion.

In connection with any optional conversion, all accrued and declared dividends through the end of the calendar quarter in which the conversion is effected will be added to the conversion value. If the Preferred Stock is called for redemption, the conversion right shall terminate at the close of business on the redemption date.

Mandatory Initial Registration of Underlying Common Stock. We are required to promptly file a registration statement under the Act for the resale of the common stock issuable upon conversion of the Preferred Stock. In connection therewith, we will use all reasonable efforts to cause such registration statement to become effective as promptly as practicable; and use all reasonable efforts to maintain the effectiveness of such registration statement for a period of not less than 18 months. Upon receipt of an order of effectiveness, the holders of Preferred Stock will have the right to sell any or all of the shares of common stock issued upon conversion of Preferred Stock subject to certain restrictions.

Optional Piggyback Registration of Underlying Common Stock. If we decide at any time to file a registration statement under the Act for a proposed underwritten public offering of common stock by our company, then the holders of Preferred Stock will be afforded a reasonable opportunity to participate in that public offering as selling shareholders. In connection with any such piggyback registration, we will use our best efforts to cause the managing underwriter of the proposed public offering to include any and all shares that the purchasers of Preferred Stock then wish to offer for sale. If the managing underwriter of a proposed public offering advises the purchasers of Preferred Stock that marketing considerations require a limitation on the total number of shares of common stock offered by selling shareholders, then any agreed limitation shall be apportioned pro rata among the holders of our restricted securities based on their aggregate holdings. As a condition of such a piggy-back registration, holders may be required to agree that they will not effect any other public sale or distribution of our common stock, including a sale pursuant to the Rule 144 (except as part of the proposed public offering), during the seven-day period prior to, and during the 120-day period following, the date of public offering.

Optional Redemption of Preferred Stock . After we have registered the common stock issuable upon conversion of the Preferred Stock under the Act, if the market price of our common stock exceeds certain price thresholds for at least 30 trading days within any period of 45 consecutive trading days, we will have the right to redeem unconverted shares of Preferred Stock for cash according to the following schedule:

·  
If the market price of our common stock exceeds $6.00 per share, we will be entitled to redeem 20% of the Preferred Stock for the stated value unless the holders exercise their conversion rights;

·  
If the market price of our common stock exceeds $7.00 per share, we will be entitled to redeem another 20% of the Preferred Stock for the stated value unless the holders exercise their conversion rights;

·  
If the market price of our common stock exceeds $8.00 per share, we will be entitled to redeem another 20% of the Preferred Stock for the stated value unless the holders exercise their conversion rights;

·  
If the market price of our common stock exceeds $9.00 per share, we will be entitled to redeem another 20% of the Preferred Stock for the stated value unless the holders exercise their conversion rights; and

·  
If the market price of our common stock exceeds $10.00 per share, we will be entitled to redeem the final 20% of the Preferred Stock for cash unless the holders exercise their conversion rights.

In connection with any proposed redemption of Preferred Stock, we will give each holder not less than 30 days notice of our intention to redeem a portion of his shares. The notice will state the redemption date, the number of shares of Preferred Stock to be redeemed, the amount payable in connection with the redemption and the number of shares of common stock that will be issued to the holder if he chooses to exercise his conversion rights prior to the redemption date. If fewer than all of the outstanding shares of Preferred Stock are to be redeemed, we will select those to be redeemed pro rata or by lot. After the redemption date, unless we fail to pay the redemption price, dividends will cease to accrue on the shares of Preferred Stock called for redemption and all conversion rights of the holders of those shares will terminate, except the right to receive the redemption price without interest. There is no mandatory redemption or sinking fund obligation with respect to the Preferred Stock.

Other Provisions. The shares of Preferred Stock are duly and validly issued, fully paid and nonassessable. The holders of Preferred Stock have no preemptive rights with respect to any other securities of our company.

Description of warrants

In connection with our Preferred Stock offering, we issued 503,500 warrants that are exercisable at a price of $2 per share for a period of two years from the issue date. We are required to file a registration statement under the Securities Act for the shares of common stock issuable upon the exercise of the warrants.

ITEM 7.01 REGULATION FD DISCLOSURE

On March 21, 2005, Axion Power International, Inc. issued a press release announcing the sale of 381,000 shares of Preferred Stock and 503,500 warrants in private placement transactions for offering proceeds that included $2.8 million in cash and $1 million in debt settlements. A copy of the press release is attached as an exhibit to this report.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

Exhibit 4.9
 
Certificate of Powers, Designations, Preferences and Rights of the 8% Convertible Senior Preferred Stock of Axion Power International, Inc. dated March 17, 2005.
Exhibit 10.11
 
Second Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated as of March 18, 2005.
Exhibit 99.1
 
Press Release of Axion Power International, Inc. dated March 21, 2005.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, Axion Power International, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AXION POWER INTERNATIONAL, INC,
March 21, 2005


By:   /s/ Charles Mazzacato  
       Charles Mazzacato, Chief Executive Officer

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
SECOND AMENDMENT TO
DEVELOPMENT AND LICENSE AGREEMENT

THIS AGREEMENT is made, entered into and effective as of the 18th day of March 2005 between and among Axion Power International, Inc. (“ Axion ”), a corporation organized under the laws of the State of Delaware, C and T Co. Inc., (“ C&T ”) a corporation organized under the laws of the Province of Ontario, Canada, and the persons who collectively own 100% of the issued and outstanding common stock of C&T ( “C&T Shareholders” ).

WHEREAS, between November 15, 2003 and January 9, 2004 Axion and its wholly owned subsidiary negotiated a series of agreements to purchase all of the issued and outstanding common stock of C&T, free and clear of all encumbrances and corporate obligations of C&T, in exchange for a consideration that included $1,794,000 in cash that would be payable in installments and 1,562,900 capital warrants that would each represent the two-year right to purchase one Axion share at a price of $2.00 per share; and

WHEREAS, after giving effect to the required warrant issuances and cash payments, Axion owes $1,100,500 for balance of the purchase obligations and the parties have agreed to settle and fully satisfy the remaining obligations for a consideration consisting of $100,500 in cash and 100,000 shares of Axion’s 8% Convertible Senior Preferred Stock; and

WHEREAS, C&T, the C&T Shareholders and C&T’s directors, officers and affiliates have agreed to acknowledge and memorialize their continuing obligations to deliver certain intellectual property to Axion and assist in efforts to develop and commercialize the E 3 Cell Technology;

NOW THEREFORE , in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the Parties agree as follows:


ARTICLE I
INTEGRATION OF AGREEMENTS BETWEEN THE PARTIES

1.1   Integration of Agreements. This Agreement is an amendment, continuation and extension of a business relationship established between November 15, 2003 and January 9, 2004. The documents identified below (collectively the “Prior Agreements”) establish and define the terms of the parties’ relationship with each other:

·  
A Development and License Agreement between C&T and Axion dated November 15, 2003;

·  
A letter of clarification from Axion to C&T dated November 15, 2003;

·  
A letter of amendment from Axion to C&T dated November 17, 2003;

·  
A First Amendment to Development and License Agreement dated January 9, 2004; and

·  
A Dispute Resolution Memorandum dated January 25, 2005.

Except to the extent that the terms of any Prior Agreements are amended by the express terms of a later agreement, such Prior Agreements are intended to continue in full force and effect. In the event of an inconsistency between the Prior Agreements and this Agreement, the contracts shall be interpreted in a manner that will give fair application to all agreements between the parties. If provisions of any agreements between the parties are inconsistent with the terms of an earlier agreement, the terms of the later agreement shall be given priority. To the extent possible, the agreements between the parties are to be interpreted as an integrated whole and if any terms are held to be invalid; the remainder shall not be affected thereby. By execution of this Agreement, C&T and Axion expressly affirm their mutual intention to fully comply with all applicable requirements of the Prior Agreements.


ARTICLE II
SATISFACTION OF CERTAIN OBLIGATIONS
2.1   Delivery of Cash Payment. Upon execution of this Agreement, Axion shall pay $100,500 to such account or accounts as may be designated by C&T in final satisfaction of all debts owed to C&T under the Development and License Agreement and the prior amendments thereto.

2.2   Issuance of Preferred Stock. Upon execution of this Agreement, Axion shall issue 100,000 shares of its 8% Convertible Senior Preferred Stock (the “Preferred Stock”) to C&T’s creditors and shareholders in such numbers as C&T may direct. The Preferred Stock is more fully described in Axion’s Private Placement Memorandum dated February 16, 2005, copies of which have been provided to C&T and each person who is entitled to receive shares of Preferred Stock pursuant to the provisions of this paragraph. As a condition to the distribution of the shares of Preferred Stock pursuant to the requirements of this paragraph, each creditor and each C&T Shareholder shall be required to complete and execute a Stock Purchase Agreement and Investment Representation Letter in the form attached as Exhibit C to the memorandum.

2.3   Release of Security Interest. Subject only to the payment of the cash balance specified in paragraph 2.1, the issuance and delivery of certificates for the Preferred Stock specified in paragraph 2.2, C&T declares that the purchase money security interest specified in paragraph 3.1 of the First Amendment to Development License Agreement dated January 9, 2004 has been satisfied by Axion and is hereby released by C&T. From and after the payment of the referenced consideration Axion shall be the sole and exclusive owner of all right title and interest in the patents, know-how and other intellectual property embodied in the E 3 Cell Technology, including:

·  
All rights to exploit the Intellectual property for any purpose and in any market worldwide;

·  
All rights, powers and privileges that C&T has or may have under any pre-existing license or other agreements that grant any person other than Axion any right to exploit all or any part of the Intellectual Property for any purpose; and

·  
All rights to fixed or contingent license fees, royalties or other payments of any nature that C&T has or may have under any pre-existing license or other agreements that grant any person other than Axion any right to exploit all or any part of the Intellectual Property for any purpose.


ARTICLE III
IMPLEMENTATION OF ASSET TRANSFER

3.1   Assignment of Patents and Patent Applications. Upon C&T’s receipt of the cash payment specified in paragraph 2.1 together with proof of Axion’s delivery of certificates for the shares of Preferred Stock specified in paragraph 2.2, C&T shall promptly transfer to Axion by appropriate assignments all patents and all patent applications owned by C&T that relate in any way to the E 3 Cell Technology.

3.2   Warranty of Title. C&T hereby warrants that with the exception of:

(a)  
any rights previously conveyed to Chip Taylor in Trust under the terms of a Joint Venture Agreement dated December 23, 1999, which was amended on November 26, 2000 and subsequently terminated by C&T on June 24, 2003; and

(b)  
any rights previously conveyed to Mega-C Technologies, Inc. and Mega-C Power Corporation under the terms of an Agreement of Association dated April 2, 2002 which was subsequently terminated by C&T on June 24, 2003;

it has clear and unencumbered title to the patents, know-how and other intellectual property embodied in the E 3 Cell Technology; it has not granted any license or other rights to the patents, know-how and other intellectual property embodied in the E 3 Cell Technology to any other person or entity; and it has not conveyed or transferred any ownership interest in the patents, know-how and other intellectual property embodied in the E 3 Cell Technology to any person or entity. C&T further warrants that the agreements referred to in subparagraphs (a) and (b) above, complete copies of which have previously been provided to Axion, fairly represent all material terms of the agreements between the parties thereto and have not been amended in any respect.

3.3   Assignment of Other Assets. Upon C&T’s receipt of the cash payment specified in paragraph 2.1 together with proof of Axion’s delivery of certificates for the shares of Preferred Stock specified in paragraph 2.2, C&T shall promptly assign, transfer, convey and deliver to Axion, all right, title, interest and benefit, including all of C&T’s right, title, interest and benefit, of whatever kind and nature, real, personal and mixed, tangible and intangible, whether or not reflected on C&T’s books and records, known or unknown, accrued, absolute, contingent or otherwise, in and to the assets, properties and rights owned by C&T, free and clear of and expressly excluding all debts, liabilities, obligations, taxes, liens and encumbrances of any kind, character or description, whether accrued, absolute, contingent or otherwise (and whether or not reflected or reserved against in the balance sheets, books of account and records of C&T) (the foregoing collectively referred to as "Encumbrances") including, without limitation:

(a)  
all interests of C&T as tenant under any leases or subleases of real estate, including any leasehold improvements owned by C&T, and any and all amendments, modifications, supplements, renewals and extensions thereof;

(b)  
all of the equipment owned by C&T and used in the operation of its business including, but not limited to laboratory equipment, office equipment, office furnishings and other tangible personal property owned by C&T, provided that the foregoing conveyance shall not extend to certain tangible personal property owned by C&T Labs, Inc., an affiliate of C&T, which will be the subject of a separate contract;

(c)  
all rights of C&T under any contracts and agreements with technical development partners, employees and consultants, but only to the extent that such rights would or might otherwise preclude the establishment of new relationships between Axion and the counterparties to such contracts and agreements, it being expressly understood that Axion is assuming no duty or responsibility to any such counterparty by virtue of this agreement and shall have no duty of performance with respect thereto.

(d)  
all patents, copyrights, trademarks, trade names and service marks used by C&T, whether registered or unregistered, including but not limited to any and all rights C&T may have or be able to assert with respect to Axion’s pending trademark registrations for the word “E 3 Cell” and all of the rights associated therewith, including any and all applications, registrations, extensions and renewals thereof;

(e)  
all engineering specifications, laboratory notebooks, laboratory and technical reports, plans, drawings, diagrams, computer media and other books and records of any form or nature owned by C&T and relating to the E 3 Cell Technology or the prior operations of C&T, provided, however, that Axion agrees to give C&T’s authorized representatives reasonable access, at C&T's expense, to all of C&T’s tax returns and financial records for a period of three years from the date hereof;

All of the foregoing assets, properties and contract rights to be transferred to Axion hereunder are collectively referred to as the “Other Assets.” Anything in the foregoing to the contrary notwithstanding, there shall be excluded from the Other Assets (i) cash and cash equivalents held by C&T on the date of this Agreement or received by C&T pursuant to the provisions of paragraph 2.1; (ii) accounts receivable for services provided by C&T to Axion prior to the date of this Agreement; and (iii) the specific items of tangible personal property identified in Schedule A attached hereto.

3.4   Instruments of Transfer. Upon C&T’s receipt of the cash payment specified in paragraph 2.1 together with proof of Axion’s delivery of certificates for the shares of Preferred Stock specified in paragraph 2.2, C&T will deliver Axion (i) such deeds, bills of sale, assignments, endorsements, checks and other good and sufficient instruments of sale, transfer and conveyance, in such form and substance as Axion shall reasonably request and consistent with all applicable law, as shall be effective to vest in Axion all right and title to, and interest in, the E 3 Cell Technology and the Other Assets free and clear of all encumbrances; and (ii) all contracts and commitments, instruments, books and records and other data being conveyed hereunder and relating to the E 3 Cell Technology and the Other Assets, and, simultaneous with such delivery, C&T will take such steps as may be reasonably required to put Axion in actual possession and operating control of the E 3 Cell Technology and the Other Assets. At any time and from time to time thereafter, on Axion’s reasonable request, C&T will execute, acknowledge and deliver such further deeds, assignments and transfers and take such actions as may be required in conformity with this Agreement for the adequate assignment, transfer, and grant to Buyer of the E 3 Cell Technology and the Other Assets.


ARTICLE IV
CONTINUING OBLIGATIONS OF THE PARTIES

4.1   Obligations Respecting Certain Contracts. Upon execution of this Agreement C&T shall terminate all employment and consulting agreements with its scientific, research, administrative and management personnel. In connection therewith, C&T will use its best efforts to encourage all former C&T employees and consultants who either work at 100 Caster Avenue or are necessary for the proper development of the E 3 Cell Technology to become direct employees of or consultants to Axion. Without limiting the generality of the foregoing, C&T will cooperate fully in transitioning all necessary scientists, technicians and management over to a formal status as Axion employees; and the benefit of all secrecy agreements previously signed by C&T employees and consultants that relate in any way to the E 3 Cell technology or the intellectual property embodied therein will be assigned to Axion.

4.2   Obligations Respecting Technology Transfer. The execution of this Agreement and the performance of the obligations set forth herein shall not in any manner reduce C&T’s continuing obligation to completely transfer the intellectual property embodied in or necessary for the effective use of the E 3 Cell Technology to Axion. Without limiting the generality of the foregoing, the technology transfer and information delivery obligations of C&T specified in the Development and License Agreement shall continue in full force and effect until all engineering specifications, laboratory notebooks, laboratory and technical reports, plans, drawings, diagrams, computer media and other books and records of any form or nature owned by C&T and relating to the E 3 Cell Technology have been delivered to Axion, the required technology transfer has been successfully completed and Axion has actual and effective possession of all experience, know-how and other intellectual property owned by C&T. Each director, officer or employee of C&T who is entitled to receive shares of Preferred Stock pursuant to the provisions of paragraph 2.2 shall agree that he will, to the extent deemed reasonably necessary by Axion, actively participate and fully cooperate and use his best efforts to cause all other necessary parties to actively participate and fully cooperate in the transfer of all such property to Axion.

4.3   Obligations Respecting Technology Development. Each director, officer or employee of C&T who is entitled to receive shares of Preferred Stock pursuant to the provisions of 2.2 shall agree that he will, to the extent deemed reasonably necessary by Axion, actively participate and fully cooperate and use his best efforts to cause all other necessary parties to actively participate and fully cooperate in the future development of the E 3 Cell technology until the E 3 Cell is “commercializable,” as that term is defined in the Development and License Agreement.

4.4   Obligations Respecting Non-employee Consultants. If and to the extent that the technology transfer obligations of paragraph 4.2 or the technology development obligations of 4.3 require the services of one or more former C&T employees who have not been retained as continuing Axion employees, then Axion shall be obligated to hire such individuals as independent consultants and to pay them for services actually and necessarily rendered at an hourly rate that is determined by current market conditions and scales for similar work as determined by Human Resources and Skills Development Canada. In connection therewith, C&T will use its best efforts to encourage all former C&T employees to enter into appropriate consulting agreements with Axion and cooperate fully in Axion’s efforts to ensure that such consultants provide the required services in a timely and cost effective manner.

4.5   Obligations Respecting Patent Matters. All obligations of C&T relating to the diligent pursuit of patent protection for the inventions and other intellectual property embodied in the E 3 Cell Technology; cooperation in connection with the filing of additional patent applications; cooperation in connection with future patent litigation and cooperation in connection with Axion’s efforts to acquire other complementary or competitive technology in order to solidify Axion’s intellectual property platform shall survive the execution of this Agreement and the performance of the conditions herein set forth for a period of five years. Without limiting the generality of the foregoing, each director, officer or employee of C&T who is entitled to receive shares of Preferred Stock pursuant to the provisions of 2.2 shall agree that he will, to the extent deemed reasonably necessary by Axion, actively participate and fully cooperate and use his best efforts to cause all other necessary parties to actively participate and fully cooperate in Axion’s efforts to acquire any competitive or complimentary technologies or patents that are or may be more readily available to such persons.

4.6   Obligations Respecting Representations and Warranties. All representations and warranties of Axion (Ontario) and C&T as specified in the Development and License Agreement shall survive the execution of this Agreement and the performance of the conditions herein set forth for a period of two years.

4.7   Obligations Respecting Competitive Activities. Each director, officer or employee of C&T who is entitled to receive shares of Preferred Stock pursuant to the provisions of paragraph 2.2 shall agree, in connection with the distribution of such shares to him, that for a period of five years from the date of this Agreement he will not, without disclosure to and approval of Axion, which may not be unreasonably withheld, directly or indirectly, assist or have an active interest in (whether as a principal, stockholder, lender, employee, officer, director, partner, joint venture partner, consultant or otherwise) any firm, partnership, association, corporation, business organization, entity or enterprise that is engaged in a business that is directly competitive with Axion.

4.8   Obligations Respecting Indebtedness. Axion shall not assume any responsibility for any existing debts or obligations of C&T that are not specifically enumerated herein. All such debts and obligations shall be the sole responsibility of and paid by C&T. Each of the directors, officers and employees of C&T who are entitled to receive shares of Preferred Stock pursuant to the provisions of paragraph 2.2 shall indemnify and hold Axion harmless from and against any and all losses, claims, damages and liabilities of any nature, including attorney’s fees, associated with or arising from the separate indebtedness of C&T.

4.9   Obligations Respecting Litigation. Axion, C&T and certain of their respective directors, officers and affiliates have been named as co-defendants in certain pending lawsuits and Axion is presently paying all of the costs associated with or arising from such litigation. Axion will continue paying the reasonable costs of a common defense for so long as the activities necessary for the proper preparation and presentation of C&T’s case are not materially different from the activities necessary for the proper preparation and presentation of Axion’s case. Axion and C&T expressly acknowledge that no information delivered to their joint legal counsel in connection with the pending litigation can be treated as confidential so far as any of the other parties are concerned and that, if a conflict develops which cannot be resolved, their joint legal counsel may not be able to continue to act for all of them and may have to withdraw completely. In the event of such a conflict, no matter what that conflict may consist of, Axion may, in its absolute discretion instruct the parties joint counsel to cease acting for C&T or any of its directors, officers and employees and continue to act as counsel for Axion and the remaining parties. If any party is disqualified from participating in a joint defense, then all of the costs arising from the retention of separate counsel shall be the sole responsibility of the disqualified party. To the extent that new claims are asserted against C&T, any its directors, officers and employees or the E 3 Cell technology, but not against Axion, then Axion shall have the right but not the duty to assume principal responsibility for the defense of such new claims. Notwithstanding its payment of the costs of a common legal defense, Axion shall not be required to indemnify C&T or any of its directors, officers and employees unless Axion’s board of directors subsequently determines such indemnification is both permissible and proper under the totality of the circumstances.

IN WITNESS WHEREOF the Parties have executed this Agreement as of the date set forth above.


 
AXION POWER INTERNATIONAL, INC.
 
INDIVIDUAL C&T SHAREHOLDERS:
       
       
By:
  /s/ Charles Mazzacato  
By:
  /s/ Igor Filipenko
 
Authorized Officer: Charles Mazzacato
 
IGOR FILIPENKO, Attorney-in-fact for all
 
I have power to bind the corporation
 
C&T Shareholders under duly executed and
     
acknowledged powers of attorney
 
C AND T CO. INC.
   
       
       
By:
  /s/ Andriy Malitskiy      
 
Authorized Officer: Andriy Malitskiy
   
 
I have power to bind the corporation
   


AXION POWER INTERNATIONAL, INC.
100 Caster Avenue
Vaughan, Ontario, Canada L4L 5Y9



FOR IMMEDIATE RELEASE

AXION RECEIVES $3.8 MILLION FROM PRIVATE PLACEMENT

VAUGHAN, ONTARIO - March 21, 2005 - Axion Power International, Inc. (OTC Bulletin Board: AXPW) announced today that has sold 381,000 shares of its 8% Convertible Senior Preferred Stock and 503,500 common stock purchase warrants in private placement transactions. The initial offering proceeds include $2.8 million in cash and $1 million in debt settlements.

The holders of Preferred Stock are entitled to an 8% annual dividend preference and the Preferred Stock is convertible into common stock at price of $2.00 per share. The warrants are exercisable for a period of two years at a price of $2 per share. For a complete description of the Preferred Stock and warrants, please refer to the Company’s Current Report on Form 8-K.

Commenting on the private placement, Peter Roston, the company’s chief financial officer said, “During our first 17 months of operations, our capital raising activities kept pace with our cash outlays but our working capital was always limited. The private placement increased our stockholders’ equity by over 300% and will give us a solid financial foundation for the future development of our E 3 Supercell technology. We also believe our sale of preferred stock and warrants at a reasonable fixed valuation will support our efforts to obtain a more favorable listing for our stock.”

Charles Mazzacato, the company’s chief executive officer said, “Since inception, we have been engaged in fabricating and testing a series of evaluation prototypes that range from simple E 3 Supercells to complex laboratory prototype power systems constructed from multiple E 3 Supercells. Over the last several months, we have conducted extensive in-house testing of our laboratory prototype systems in cooperation with our joint development partners. We are very excited about the results. Our laboratory prototype systems are now ready for independent evaluation and we expect to announce details of a formal third party testing program within 4 to 6 weeks. W e have also begun preparing drawings and design specifications for a series of application prototypes that will be tailored to specific uses, including UPS systems. Those will be followed shortly by application prototypes for grid-connected applications, including energy storage and buffering systems for both traditional and alternative or ‘green’ power plants.”

About Axion Power International.

Axion is developing a new technology for supercapacitive hybrid electrical energy storage devices that it calls E 3 Supercells. Instead of using two lead electrodes like a conventional lead-acid battery, E 3 Supercells replace each of the lead-based negative electrodes with two nanoporous carbon electrodes. The result is a new class of energy storage device that offers both battery and supercapacitor performance characteristics and has a much longer service life. Axion believes its E 3 Supercells may offer a cost-effective alternative to conventional lead-acid batteries that will:

·  
Charge three to five times faster;

·  
Offer three to four times as many charge/discharge cycles in deep discharge applications;

·  
Withstand repetitive 90% depth of discharge without significant loss of performance; and

·  
Require minimal maintenance.

Initially, Axion plans to focus on developing E 3 Supercells for uninterruptible power supplies and DC power systems for communications networks. Its second target market will be energy storage and buffering systems for alternative and conventional grid-connected electric utilities. Its third target market will be high performance power systems for hybrid automobiles. Axion may also develop specialized E 3 Supercells for a variety of industrial and consumer products including forklifts, wheelchairs and golf carts.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995:

Certain statements in this Press Release are "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements are based on our current expectations and beliefs and are subject to a number of risk factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For a detailed description of the risk factors and uncertainties affecting the Company, please refer to our current and future filings with the Securities and Exchange Commission, all of which are available at www.sec.gov .

For further information, please visit www.axionpower.com or contact:

Nazia Khan, Corporate Communications
Axion Power International. 905-264-1991
nkhan@axionpower.com