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 E3Cell 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 E3Cell 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 E3Cell
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 E3Cell Technology; it has not granted any
license or other rights to the patents, know-how and other intellectual property
embodied in the E3Cell 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 E3Cell 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 “E3Cell” 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 E3Cell 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 E3Cell 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 E3Cell
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 E3Cell 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 E3Cell 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 E3Cell 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 E3Cell 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 E3Cell 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 E3Cell 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 E3Cell technology until the E3Cell 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 E3Cell 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
E3Cell 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