**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      10-KSB**




x  **ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE**  **SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the fiscal year ended December 31, 2006**





 ̈  **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.**




**For
      the transition period from ___** **until __**





**Commission
      File Number 000-22573**





**AXION
      POWER INTERNATIONAL, INC.**


(Exact
      name of small business issuer in its charter)





**Delaware**
            
            **65-0774638**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                organization)
            
            identification
                No.)**3601
                Clover Lane****New
                Castle, Pennsylvania**
            
            **16105**(Address
                of principal executive offices)
            
            (Zip
                Code)




Issuer’s
        telephone number **(724)
        654-9300**


Securities
      Registered under Section 12(b) of the Act


**None**





Securities
      Registered under Section 12(g) of the Act


**Common
      Stock, par value $.0001 per share**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.   Yes oNo x




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.


Yes oNo
x





The
      issuer’s revenue for the year ended December 31, 2006 was $275,377.





Based
      on
      the sale prices reported on the Pink Sheets, the aggregate market value of
      the
      7,698,665 shares of voting common stock held by non-affiliates was $17,706,930
      on **** February
      29, 2008.





On **** February
      29, 2008, the number of shares of common stock issued and outstanding was
      18,157,060. Transitional Small Business Disclosure Format (Check one):  
Yes o    
No  x







**TABLE
      OF CONTENTS**


**PART
                  I**
              4ITEM
                  1. — DESCRIPTION OF BUSINESS
              4ITEM
                  2.—  DESCRIPTION OF PROPERTY
              13ITEM
                  3.—
                  LEGAL PROCEEDINGS
              13ITEM
                  4. — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              16**PART
                  II**
              16ITEM
                  5. — MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
                  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
              16ITEM
                  6. — MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              21ITEM
                  7. — FINANCIAL STATEMENTS.
              26ITEM
                  8. — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE.
              27ITEM
                  8A. — CONTROLS AND PROCEDURES.
              27**PART
                  III**
              28ITEM
                  9.—  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
                  CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT.
              28ITEM
                  10. — EXECUTIVE COMPENSATION.
              33ITEM
                  11. — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND
                  RELATED STOCKHOLDER MATTERS.
              39ITEM
                  12. — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE.
              40ITEM
                  13. — EXHIBITS
              43ITEM
                  14. — PRINCIPAL ACCOUNTANT FEES AND SERVICES
              45






2




**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING INFORMATION**




This
      Annual Report on Form 10-KSB and other documents incorporated by reference
      contain certain “forward-looking statements” within the meaning of Section 27A
      of the Securities Act of 1933, as amended (the “Securities Act”), and Section
      21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
      These forward-looking statements represent our expectations, beliefs, intentions
      or strategies concerning future events, including, but not limited to, any
      statements regarding our current assumptions about future financial performance;
      the continuation of historical trends; the sufficiency of our cash balances
      for
      future liquidity and capital resource needs; the expected impact of changes
      in
      accounting policies on our results of operations, financial condition or cash
      flows; anticipated problems and our plans for future operations; and the economy
      in general or the future of the electrical storage device industry, all of
      which
      are subject to various risks and uncertainties.




When
      used
      in this Form 10-KSB and our other filings with the Securities and Exchange
      Commission (the “SEC”), in our press releases, presentations to securities
      analysts or investors, in oral statements made by or with the approval of an
      executive officer, the words or phrases “believes,” “may,” “will,” “expects,”
“should,” “continue,” “anticipates,” “intends,” “will likely result,”
“estimates,” “projects” or similar expressions and variations thereof are
      intended to identify such forward-looking statements. However, any statements
      contained in this Form 10-KSB that are not statements of historical fact may
      be
      deemed to be forward-looking statements.




We
      caution that these statements by their nature involve risks and uncertainties,
      certain of which are beyond our control, and actual results may differ
      materially depending on a variety of important factors, including, but not
      limited to such factors as the following.  With regard to the risks the
      Company may face we advise you to carefully consider the following risks and
      uncertainties:





·
            Substantial
                doubt exists as to our ability to continue as a going
                concern;




·
            We
                have incurred net losses since inception and we may not be able to
                generate sufficient revenue in the future to achieve or sustain
                profitability;




·
            We
                have not been current in our Filings under the Exchange Act since
                May 2006
                and can make no assurances when, if ever, we will become current
                in these
                reporting obligations;




·
            We
                must raise substantial additional capital or our business will
                fail;




·
            We
                have incurred substantial indebtedness, some of which is secured
                by a lien
                against all of our assets;




·
            We
                may be unable to enforce or defend our ownership of proprietary
                technology;




·
            We
                have never manufactured carbon electrode assemblies in commercial
                quantities;




·
            We
                may be unable to develop a cost effective alternative to conventional
                lead
                electrodes;




·
            Our
                technology may be rendered obsolete as a result of technological
                changes
                in the battery industry;




3




·
            We
                may not be able to establish reliable supply channels for the raw
                materials and components that will be used in our commercial proprietary
                lead/carbon device PbCTM (“PbC”)
                batteries;




·
            Other
                manufacturers may not be able to modify established lead-acid battery
                manufacturing processes to replicate our processes to accommodate
                differences between their products and our commercial proprietary
                lead/carbon device PbC battery
                technology;




·
            We
                will have limited market opportunities based on our anticipated
                manufacturing capacity; and




·
            Our
                shareholders may suffer significant dilution in the event that our
                outstanding convertible securities, warrants and options are ever
                exercised.




**PART
      I**




**ITEM
      1.** **—
      DESCRIPTION OF BUSINESS**




**Our
      corporate history**




Axion
      Power Corporation (“APC”)) was formed in September of 2003 to acquire and
      develop certain innovative battery technology. Since inception APC has been
      engaged in research and development of the new technology for the production
      of
      lead-acid-carbon energy storage devices that we refer to as our “proprietary
      lead/carbon (PbC) devices.” As of December 31, 2003 APC engaged in a reverse
      acquisition with a public shell company. The shell company was originally
      incorporated in Delaware in January 1997 as Tamboril Cigar Company (“Tamboril”),
      operated a wholesale cigar business until December 1998 and was an inactive
      public shell thereafter until December 2003. The information presented herein
      relates to the operations of APC, the accounting acquirer. Tamboril, the legal
      acquirer, changed its name to Axion Power International, Inc. (including APC,
      “we,” “our,” “our Company,” or “Axion”) and implemented a one share for 16
      reverse split in June 2004. The number of shares in this report have been
      restated where necessary to give retroactive effect to the reverse split.




Since
      inception, our operations have been financed by a small group of individuals
      with minimal revenue generated. As a result, trading in our common stock has
      been sporadic, volumes have been low, and the market price has been volatile.
      We
      believe that a successful transition from research and development to
      manufacturing will improve our cash balances and market profile and may result
      in a more active trading market for our stock. However, we can provide no
      guarantees that our transition efforts will be successful.




**The
      battery industry**




There
      are
      two principal types of lead acid batteries; flooded batteries and valve
      regulated lead acid (“VRLA”). The choice of battery depends mainly on the
      specific application that the battery serves. Typical standby or stationary
      applications use VRLA batteries due to their inherent advantages including
      spill
      proof design, low maintenance, compact form, low self-discharge and high
      performance. On the other hand, applications like industrial equipment, traction
      and/railroad applications prefer the flooded lead acid battery types due to
      their superior performance in continuous deep discharge applications and at
      high
      operating temperatures, among other features.





Technology
      within the lead-acid battery industry has remained relatively stable for the
      last 30 years and an industry-wide lack of innovation has generally restrained
      growth into new applications and emerging markets.





For
      the
      last 10 years, Asian battery manufacturers have been vigorous competitors in
      the
      North American market. However, lead acid batteries suffer irreparable damage
      if
      they are packed in shipping containers for lengthy maritime transport or held
      in
      inventory for extended periods. Due to performance issues and warranty problems
      in North America, increased domestic demand in their home markets, and
      significant changes in their home countries’ import-export regulations and
      tariffs, many of the large Asian manufacturers have significantly reduced their
      battery exports to Europe or the Americas. Domestic battery manufacturing plants
      have closed and, since the closed plants were often sold at auction to foreign
      buyers or scrapped, the net result was a substantial decline in domestic
      capacity. The resulting unavailability of imports coupled with the reduction
      in
      domestic plant capacity has left the North American industry in a position
      where
      it cannot currently produce batteries in sufficient numbers to meet growing
      market demands. The major participants in the industry are responding with
      plans
      to construct several million square feet of new manufacturing facilities, but
      those new plants are not expected to be fully operational for 12 to 24 months.





4




Alternative
      energy applications like wind and solar power require an energy storage solution
      that combines low cost and long life cycles. Lead-acid batteries are currently
      one of the gold standards in large-scale power storage applications, but the
      short cycle-life of lead acid chemistry at deep discharge levels is a primary
      inhibitor to growth. Due primarily to the cycle-life limitations of lead acid
      batteries, a number of battery manufacturers are experimenting with alternative
      battery technologies that are far more expensive to implement, but offer
      substantial cycle-life advantages.





The
      North
      American lead acid battery industry is mature with a few leading vendors that
      have a global presence and a larger number of smaller regional and local vendors
      that cater to the needs of the North American market. The first tier companies
      that have a global presence include EnerSys, Exide Technologies, Johnson
      Controls and FIAMM. The second tier companies that cater mainly to the North
      American Markets include, among others, C&D Technologies, GS Batteries,
      Crown Batteries, Trojan Battery, Eagle Picher Technologies and East Penn
      Manufacturing. The user segments that rely on lead acid batteries include
      automotive applications, standby applications ranging from uninterruptible
      power
      supplies (“UPS”) to telecommunication applications, power storage for wind and
      solar systems and motive power for heavy-duty equipment and railroad
      applications.





**Our
      business**




We
      are a
      development stage company that has invested four years and approximately $7.8
      million in research and development expense to develop a patented energy storage
      device that uses carbon electrode assemblies to replace the lead-based negative
      electrodes found in conventional lead-acid batteries. The end result is the
      PbC
      battery, a battery-supercapacitor hybrid that combines the simplicity of
      lead-acid batteries and the faster recharge rates and longer cycle lives of
      supercapacitors in a low-cost device that can be designed to deliver maximum
      power for fast discharge applications; maximum energy for slow discharge
      applications; or a range of balances between the two.





Our
      PbC
      technology, which is protected by six issued patents, seven pending
      applications, as well as other proprietary features and structures, is
      technically sophisticated yet elegantly simple. The carbon electrode assemblies
      are fabricated from readily available raw materials using, for the most part,
      standard industrial processes and techniques. The electrodes are then assembled
      into PbC batteries that use the same cases, covers, positive electrodes,
      separators and electrolyte as conventional lead-acid batteries and they are
      assembled with the same equipment and manufacturing methods that we, and the
      majority of the lead-acid battery industry, uses for manufacturing lead-acid
      batteries. PbC batteries use up to 40% less lead than comparable sized lead-acid
      batteries, and the lead, plastics and acid employed are fully recyclable at
      existing facilities, which makes the PbC battery a very environmentally-friendly
      product. In February 2007, our PbC technology received the prestigious Frost
      & Sullivan Technology Innovation Award for the best development in the field
      of lead acid batteries for 2006.





We
      believe that for large-scale deep-discharge energy storage systems (10 kWh
      or
      greater), our commercial prototype PbC batteries offer one of the lowest total
      cost of ownership per charge-discharge cycle in the battery industry. As ongoing
      development work on our PbC technology progresses, we believe additional cost
      reductions and efficiency gains are likely.





We
      believe our PbC technology is uniquely situated to exploit the current problems
      facing the North American lead-acid battery industry. While we may exploit
      our
      PbC technology is a number of ways, our acquisition of a failed battery
      manufacturing plant gives us the ability to produce energy storage devices
      using
      our new technology. We believe our acquisition of the plant gives us the ability
      to exploit our technology by manufacturing our new energy storage devices for
      demonstration projects, for sale to end-users (once we are satisfied with the
      technology) or manufacture the component parts other battery manufacturers
      could
      insert into their own batteries. The facility leased in New Castle, Pennsylvania
      beginning in 2006 has a permitted manufacturing capacity of 3,000 batteries
      per
      day and has operational production lines for both sealed and flooded lead-acid
      batteries. The ability to produce both types of batteries in a variety of sizes
      enables us to target our excess capacity at high-margin products that are
      required in relatively small volumes, such as deep cycle industrial batteries
      and other specialty products. Over the next 18 to 24 months, we plan to exploit
      the manufacturing capacity deficit in the lead-acid battery industry by
      producing high margin lead-acid products while we complete development of our
      PbC technology. As additional capacity comes on-line in the broader industry,
      we
      plan to transition our manufacturing focus from lead-acid products to our
      reduced-lead, enhanced-performance PbC products.





5




As
      we
      make the transition from laboratory research to commercial prototype
      manufacturing, we will need to:





·
            Refine
                our planned fabrication methods for carbon electrode
                assemblies;




·
            Demonstrate
                the feasibility of manufacturing our proprietary lead/carbon (PbC)
                device
                using standard techniques and
                equipment;




·
            Demonstrate
                and document the performance of our proprietary lead/carbon (PbC)
                device
                in key applications; and




·
            Respond
                appropriately to anticipated and unanticipated technical and manufacturing
                challenges.




We
      plan
      to develop our proprietary lead/carbon (PbC) device for use in a variety of
      applications including:




·
            Motive
                power applications;




·
            Stationary
                power applications;




·
            Hybrid
                electric vehicle applications; and




·
            Military
                applications.




We
      believe demand for cost-effective energy storage systems will grow rapidly.
      We
      also believe we can become a leader in the high performance battery market.
      We
      believe our competitive advantages will include:




·
            *Ease
                of integration:*Our planned electrode assemblies will be designed to replace the
                standard
                grid and paste negative electrodes in conventional lead-acid batteries.
                In
                some applications that require fixed voltage operations, voltage
                conversion may be needed;




·
            *Superior
                flexibility*:
                By changing the number, geometry and arrangement of the electrode
                assemblies, we expect to be able to configure our technology to favor
                either energy storage or power delivery;
                and




·
            *Reduced
                lead content*:
                Depending on the energy, power and cycling requirements of a particular
                application, our proprietary lead/carbon (PbC) device will use up
                to 40%
                less lead than conventional lead acid
                batteries.




We
      anticipate our ability to establish and maintain a competitive position will
      be
      dependent on several factors, including:




·
            The
                availability of raw materials and key components;




·
            Our
                ability to design and manufacture commercial prototype proprietary
                lead/carbon (PbC);




6




·
            Our
                ability to establish and operate facilities that can fabricate electrode
                assemblies and commercially manufacture our proprietary lead/carbon
                (PbC)
                device with consistent quality at a predictable cost;




·
            Our
                ability to establish and expand a customer base;




·
            Our
                ability to compete against established and emerging battery technologies;




·
            The
                market for batteries in general;
                and




·
            Our
                ability to retain key personnel.




Our
      objective is to become an industry leader in low cost, high performance energy
      storage systems. We plan to achieve this objective by pursuing the following
      core strategies:




·
            *Platform
                technology business model*.
                We plan to implement a platform technology business model where we
                will
                focus on developing and manufacturing carbon electrode assemblies
                that we
                can offer for sale to established battery manufacturers who want
                to use
                our proprietary lead/carbon (PbC) device products in their
                batteries.




·
            *Leverage
                relationships with thought leaders*.
                We are engaged in discussions with industry consortia, research
                institutions and other thought leaders in the fields of utility
                applications, hybrid electric vehicles and automotive fuel cell
                technology. As we develop our relationships in the field of energy
                research, we believe the opportunities for government funding and
                consortia participation will expand rapidly, and improve our access
                to
                potential suppliers and customers.




·
            *Leverage
                relationships with battery manufacturers*.
                Our business model is based on the premise that we can most effectively
                address the needs of the market by selling electrode assemblies to
                established battery manufacturers who want to expand their existing
                product lines. This business model should allow us to leverage the
                business abilities, manufacturing facilities and distribution networks
                of
                established manufacturers, in order to reduce our time to market
                and
                increase our potential market
                penetration.




·
            *Build
                a recognized brand*.
                We believe strong brand name recognition is important to increase
                product
                awareness and to effectively penetrate the mass market. We intend
                to
                differentiate our brand by emphasizing our combination of high performance
                and low total cost of ownership per storage
                cycle.




·
            *Secondary
                focus on emerging markets*.
                Emerging markets for fuel cell power systems, hybrid electric vehicles
                and
                conventional utility applications are becoming increasingly attractive.
                We
                are actively evaluating the potential for using our proprietary
                lead/carbon (PbC) device products in these emerging
                markets.




·
            *Maintain
                our technical advantage and reduce manufacturing costs*.
                We intend to maintain our technical advantage by continuing to invest
                in
                research and development to improve the performance of our proprietary
                lead/carbon (PbC) devices and lower our manufacturing
                costs.




The
      battery industry is mature, capital intensive, heavily regulated, highly
      competitive and averse to product performance risks associated with radical
      departures from established technology. Due to the nature of the industry,
      we do
      not believe we will be able to make a credible entry into the battery market
      until we have proven the advantages of our proprietary lead/carbon (PbC) device
      technology in demonstration projects with end users. Therefore, our business
      plan contemplates two discrete phases: the Development Phase (including
      prototype and demonstration) and the Commercialization Phase.




*Development
      Phase.* **** During
      the Development Phase, we will focus on producing small quantities of commercial
      prototypes in our own manufacturing facilities. These commercial prototypes
      will
      serve as the foundation for a series of paid demonstration projects with
      established end users. If the demonstration projects are successful and end
      user
      testing validates the advantages of our proprietary lead/carbon (PbC) device
      technology under real-world operating conditions, we can proceed to the full
      commercialization phase. In general, our development path in each identified
      target market will include:




7


*Prototype
      manufacturing* .
      We are
      finalizing design work and manufacturing plans for our commercial prototype
      proprietary lead/carbon (PbC) devices. We intend to purchase raw materials
      and
      components from established manufacturers and then fabricate electrode
      assemblies and assemble our commercial prototype proprietary lead/carbon (PbC)
      devices in company-owned facilities.




*Demonstration
      projects* .
      When we
      have developed and tested our commercial prototype proprietary lead/carbon
      (PbC)
      devices for a particular target market, we will need to negotiate demonstration
      projects with industry participants, some of whom we already have contracts
      with, manufacture the required proprietary lead/carbon (PbC) devices and
      document the performance of our products in real-world conditions.




*Commercial
      production* .
      When we
      have developed sufficient data to support a decision to commence full scale
      production of a product or product line, we intend to use our New Castle
      Pennsylvania facility until we fill our permitted capacity, after which we
      plan
      to pursue strategic relationships with one or more battery manufacturers that
      are willing to manufacture co-branded commercial proprietary lead/carbon (PbC
      products).




Our
      planned demonstration projects are not expected to generate sufficient gross
      profit to offset our expected operating costs. Accordingly, we do not expect
      to
      attain profitability during the demonstration phase. If we enter into a
      commercialization relationship for a specific product or product line, we
      believe our margins are likely to improve. However, there is no assurance that
      the commercialization of products for one or more market segments will generate
      sufficient revenue to offset our anticipated operating expenses and yield a
      profit.




*Commercialization
      phase.* During
      the commercialization phase, we intend to implement a platform technology
      business model where we will develop and manufacture the carbon electrode
      assemblies that are unique to our proprietary lead/carbon (PbC), and then sell
      those assemblies to established battery manufacturers who want to make their
      batteries better. We believe a platform technology business model can reduce
      our
      time to market, allow us to rely on the established business abilities of
      existing manufacturers and forge a strong brand identity for our proprietary
      lead/carbon (PbC), while allowing us to focus on a narrow band of value-added
      activities that appear likely to minimize our investment and maximize our
      profitability.




We
      will
      not be in a position to negotiate manufacturing relationships with established
      battery manufacturers until we complete our planned demonstration projects.
      Even
      if our planned demonstration projects are successful, we may
      be unable to negotiate manufacturing relationships on terms acceptable to us.
      If
      we decide to manufacture and distribute a line of commercial battery products
      ourselves, rather than sell carbon electrode assemblies to established battery
      manufacturers, our time to market and our anticipated capital costs may increase
      dramatically.




We
      plan
      to initially focus on high-value market segments. We believe our commercial
      proprietary lead/carbon (PbC) device will be most appealing in high-value market
      segments where longer life, high performance, and low maintenance costs are
      more
      important than initial purchase price.




**Acquisition
      of our proprietary lead/carbon (PbC) device technology**




We
      incorporated APC in September 2003, for the purpose of acquiring rights to
      our
      proprietary lead/carbon technology from the original owner of the patents,
      an
      Ontario corporation named C and T Co., Inc., which we refer to in this report
      as
“C&T.” The founders of APC were shareholders of Mega-C Power Corporation,
      which we refer to in this report as “Mega-C,” which at one time held a limited,
      nonexclusive license to market products utilizing our proprietary lead/carbon
      device technology that we currently own. In February 2003, the Ontario
      Securities Commission began an investigation into Mega-C’s stock sales that
      terminated Mega-C’s ability to finance its operations and continue in business.
      The founders of APC had collectively invested approximately $3.9 million in
      Mega-C and were facing a total loss of this investment when Mega-C was unable
      to
      continue in business. In connection with the organization of APC, the founders
      invested well over a million dollars.




8


In
      late
      December 2003, Tamboril had 1,875,000 shares outstanding. After evaluating
      the
      proprietary lead/carbon (PbC) device technology and APC, Tamboril’s management
      negotiated a series of related transactions that included:




·
            A
                reverse acquisition between Tamboril and APC;




·
            The
                establishment of an irrevocable trust, which we refer to as the “Mega-C
                Trust,” for the stated purpose of preserving the potential equitable
                rights of Mega-C’s creditors and shareholders while potentially insulating
                us from the litigation risks associated with the activities of Mega-C
                and
                its promoters; and




·
            A
                purchase of the proprietary lead/carbon (PbC) device technology from
                C&T.




·
            The
                reverse acquisition, trust establishment and technology acquisition
                transactions closed in December 2003 and January 2004. In connection
                with
                the closings:




·
            In
                the reverse acquisition we issued 10,739,500 common shares and 608,600
                warrants for the outstanding securities of APC (which resulted in
                APC
                becoming a wholly owned subsidiary of the shell company,
                Tamboril);




·
            We
                issued 233,400 warrants to purchase stock in the post-acquisition
                Company
                to Tamboril’s management in satisfaction of related-party
                debt;




·
            C&T
                purchased 1,250,000 previously outstanding common shares from Tamboril’s
                management;




·
            We
                purchased all of C&T’s interest in the proprietary lead/carbon (PbC)
                device technology for 1,562,900 warrants (See the disclosures under
                Warrant Extension in the footnote to the financial statements captioned
                “Subsequent Events.); and




·
            We
                assumed and satisfied APC’s obligations of $1,794,000 under the November
                2003 Development and License Agreement originally entered into by
                APC and
                C&T to develop the PbC technology through the issuance of $1,000,000
                of senior preferred stock and the payment of $794,000 in cash through
                March 31, 2005.




·
            We
                acquired full ownership of C&T in March 2005 upon final satisfaction
                of the payments noted above and extinguished all rights to future
                payments
                under the November 2003 development and license agreement.




Of
      the
      10,739,500 common shares that Tamboril issued for the outstanding securities
      of
      APC, 7,327,500 shares, or approximately 58% of our post-transaction
      capitalization, were deposited in the Mega-C Trust. The remaining 3,412,000
      shares were distributed among APC’s shareholders. After the closing, APC’s
      shareholders, C&T’s shareholders and the Mega-C Trust owned 95% of our
      stock. For financial reporting purposes, APC was deemed to be the accounting
      acquirer of Tamboril, followed by a recapitalization.




Since
      February 2004, we have been involved in litigation with certain promoters of
      Mega-C who are asserting a variety of claims arising from APC’s alleged
      interference in Mega-C’s affairs and our purchase of the proprietary lead/carbon
      (PbC) device technology. We filed an involuntary bankruptcy petition against
      Mega-C in April 2004 and contributed 500,000 additional shares to the Mega-C
      Trust in February 2005 for the purpose of augmenting the Trust corpus and
      offsetting the additional administrative and operating costs associated with
      the
      bankruptcy. In July 2005, we initiated litigation with Mega-C’s Chapter 11
      Trustee that focused primarily on whether the stock in the Mega-C Trust was
      property of the bankruptcy estate or should remain in the Mega-C Trust. On
      December 12, 2005, we entered into a settlement agreement with Mega-C’s Chapter
      11 Trustee, the Mega-C Trust and others that will resolve all disputes,
      including disputes arising from our purchase of the original patents for the
      technology from C&T and derivative claims of Mega-C’s
      shareholders.




9




The
      settlement agreement resulted in the return of 1,500,000 of our shares for
      cancellation, of which, 500,000 represented a return of the 500,000 share
      augmentation and the remaining 1,000,000 were accounted for as a retroactive
      adjustment to the 10,739,500 shares issued as consideration in the reverse
      acquisition. This settlement is discussed in detail in “Item 3, Legal
      Proceedings” of this report. Since the terms of the settlement agreement fall
      within the range of outcomes contemplated by our original structure, the
      successful implementation of the agreement will not dilute the interests of
      our
      other stockholders.




**Our
      patents and intellectual property**




We
      own
      six issued U.S. patents and have seven patent applications pending at the date
      of this report covering various aspects of our proprietary lead/carbon (PbC)
      device technology. There is no assurance that any of the pending patent
      applications will ultimately be granted. Our issued patents are:




·
            U.S.
                Patent No. 6,466,429 (expires May 2021) - Electric double layer
                capacitor;




·
            U.S.
                Patent No. 6,628,504 (expires May 2021) - Electric double layer
                capacitor;




·
            U.S.
                Patent No. 6,706,079 (expires May 2022) - Method of formation and
                charge
                of the negative polarizable carbon electrode in an electric double
                layer
                capacitor;




·
            U.S.
                Patent No. 7,006,346 (expires April 2024) - Positive Electrode of
                an
                electric double layer capacitor;




·
            U.S.
                Patent No. 7,110,242 (expires February 2021) - Electrode for electric
                double layer capacitor and method of fabrication thereof;
                and




·
            U.S.
                Patent No. 7,119,047 (expires February 2021) - Modified activated
                carbon
                for carbon for capacitor electrodes and method of fabrication
                thereof.




Patents
      generally expire 17 years from date of issue.




We
      have
      no duty to pay any royalties or license fees with respect to the
      commercialization of our proprietary lead/carbon (PbC) device technology and
      we
      are not subject to any field of use restrictions. We believe our patents and
      patent applications, along with our trade secrets, knowhow and other
      intellectual property will be critical to our success.




Our
      ability to compete effectively with other companies will depend on our ability
      to maintain the proprietary nature of our lead/carbon (PbC) device technology.
      We plan to file additional patent applications in the future. However, the
      degree of protection offered by our existing patents or the likelihood that
      our
      future applications will be granted is uncertain. Competitors in both the United
      States and foreign countries, many of which have substantially greater resources
      and have made substantial investment in competing technologies, may have, or
      may
      apply for and obtain patents that will prevent, limit or interfere with our
      ability to make and sell products based on our proprietary lead/carbon (PbC)
      device technology. Competitors may also intentionally infringe on our patents.
      The prosecution and defense of patent litigation is both costly and
      time-consuming, even if the outcome is favorable to us. An adverse outcome
      in
      the defense of a patent infringement suit could subject us to significant
      liabilities to third parties. Although third parties have not asserted any
      infringement claims against us, there is no assurance that third parties will
      not assert such claims in the future .
      Although not a patent infringement suit, as set forth more fully below, a
      collection of individuals and entities that describe themselves as the “Taylor
      Group” sued the Company and claimed an interest in some of the Company’s
      intellectual property. In orders dated February 11, 2008, the United States
      Bankruptcy Court for the District of Nevada held that the Taylor Group has
      no
      interest in or rights to the technology.




We
      also
      rely on trade secrets, know-how and other unpatented technology and there is
      no
      assurance that others will not independently develop the same or similar
      technology or obtain unauthorized access to our trade secrets, know-how and
      other unpatented technology. To protect our rights in these areas, we require
      all employees, consultants, advisors and collaborators to enter into
      confidentiality agreements. These agreements may not provide meaningful
      protection for our unpatented technology in the event of an unauthorized use,
      misappropriation or disclosure. While we have attempted to protect the
      unpatented proprietary technology that we develop or acquire and will continue
      to attempt to protect future proprietary technology through patents, copyrights
      and trade secrets, we believe that our success will depend upon further
      innovation and technological expertise.




10




We
      may
      license technology from third parties. Our proposed products are still in the
      development stage and we may need to license additional technologies to optimize
      the performance of our products. We may not be able to license these
      technologies on commercially reasonable terms or at all. In addition, we may
      fail to successfully integrate any licensed technology into our proposed
      products. Our inability to obtain any necessary licenses could delay our product
      development and testing until alternative technologies can be identified,
      licensed and integrated.




In
      general, the level of protection afforded by a patent is directly proportional
      to the ability of the patent owner to protect and enforce his rights through
      legal action. Since our financial resources are limited, and patent litigation
      can be both expensive and time consuming, there can be no assurance that we
      will
      be able to successfully prosecute an infringement claim in the event that a
      competitor develops a technology or introduces a product that infringes on
      one
      or more of our patents or patent applications. There can be no assurance that
      our competitors will not independently develop other technologies that render
      our proposed products obsolete. In general, we believe the best protection
      of
      our proprietary technology will come from market position, technical innovation,
      speed-to-market and product performance. There is no assurance that we will
      realize any benefit from our intellectual property rights.




**Our
      competition**




We
      plan
      to compete with a number of established competitors in the battery and
      supercapacitor industry, including:




·Maxwell
              ·Energy
                Conversion Devices
              ·Panasonic
              ·Nippon-Chemicon
            ·Enersys
              ·Exide
              ·Japan
                Storage Battery
              ·Ness




In
      addition, many universities, research institutions and other companies are
      developing advanced energy storage technologies including:




·
            symmetric
                supercapacitors




·
            asymmetric
                supercapacitors with organic electrolytes




·
            nickel
                metal hydride batteries




·
            lithium
                ion batteries; and




·
            advanced
                lead-acid batteries.




Other
      business entities are developing advanced energy production technologies like
      fuel cells, solar cells and windmills which may use our products, or, in some
      cases, compete with our products.




Since
      some of our competitors are developing technologies that may ultimately have
      costs similar to, or lower than, our projected costs, there can be no assurance
      we will be able to compete effectively.




Most
      of
      our potential competitors have longer operating histories, greater name
      recognition, access to larger customer bases and significantly greater
      financial, sales and marketing, manufacturing, distribution, technical and
      other
      resources than us. As a result, they may be able to respond more quickly to
      changing customer demands or to devote greater resources to the development,
      promotion and sales of their products than we may be able to.




11




Our
      competitors with more diversified product offerings may be better positioned
      to
      withstand changing market conditions. Some of our competitors own, partner
      with,
      have longer term or stronger relationships with suppliers of raw materials
      and
      components, which could result in them being able to obtain raw materials on
      a
      more favorable basis than us. It is possible that new competitors or alliances
      among existing competitors could emerge and rapidly acquire significant market
      share, which would harm our business.




We
      expect
      to compete on the basis of design flexibility, performance, reliability and
      total cost of ownership per storage cycle. If we fail to compete successfully,
      our business would suffer and we may lose or be unable to gain market share.
      In
      addition, the energy storage device market in general competes with other
      sources of renewable energy and conventional power generation. If prices for
      conventional and other renewable energy resources decline, or if these resources
      enjoy greater policy support than solar power, the energy storage device market
      could suffer.




The
      development of technology, equipment and manufacturing techniques and the
      operation of a facility for the automated production of rechargeable batteries
      require large capital expenditures. In order to minimize our capital investment
      in manufacturing facilities and establish strong brand name recognition for
      our
      products, our overall strategy is to negotiate strategic alliances and other
      production agreements with established battery manufacturers that want to
      include a high-performance co-branded product in their existing product lines.
      There can be no assurance, however, that our platform technology business model
      will succeed in the battery industry.




**Raw
      materials**




During
      the research stage, we used readily available raw materials, off-the-shelf
      components manufactured by others and hand-made components fabricated by our
      staff. As we begin manufacturing, we will need to establish reliable supply
      channels for commercial quantities of raw materials and components. We believe
      established suppliers of raw materials and components will be able to satisfy
      our requirements on a timely basis. However we do not have any long-term supply
      contracts and the unavailability of necessary raw materials or components could
      delay the production of our products and adversely impact our results of
      operations .





Lead
      is
      the primary raw material in lead-acid batteries and currently accounts for
      approximately 80% of Axion’s raw material and component costs in the specialty
      batteries we build now. Lead prices have increased dramatically over the last
      two years. Our new proprietary lead/carbon (PbC) device technology will require
      up to 40% less lead than conventional batteries. This makes the reduced lead
      content in our batteries a distinct competitive advantage.





**Environmental
      protection**




Lead
      is a
      toxic material that is a primary raw material in our proprietary lead/carbon
      (PbC). We also use, generate and discharge other toxic, volatile and hazardous
      chemicals and wastes in our research, development and manufacturing activities.
      We will be required to comply with federal, state and local laws and regulations
      regarding pollution control and environmental protection. Under some statutes
      and regulations, a government agency, or other parties, may seek to recover
      response costs from operators of property where releases of hazardous substances
      have occurred or are ongoing, even if the operator was not responsible for
      such
      release or otherwise at fault. In addition, more stringent laws and regulations
      may be adopted in the future, and the costs of complying with those laws and
      regulations could be substantial. If we fail to control the use of, or to
      adequately restrict the discharge of, hazardous substances, we could be subject
      to significant monetary damages and fines, or forced to suspend certain
      operations.




**Our
      research and development**




We
      engage
      in extensive research and development to improve our proprietary lead/carbon
      (PbC) device technology and our proposed products. Our goal is to increase
      efficiency and reduce costs in order to maximize our competitive advantage.
      Our
      research and development organization works closely with our engineering team,
      our suppliers and potential customers to improve our product design and lower
      manufacturing costs. During the years ended December 31, 2004, 2005 and 2006,
      we
      spent $1,871,207, $ 1,633,595 and $2,001,506 respectively on company sponsored
      research and development. While our limited financial resources and short
      operating history make it difficult for us to estimate our future expenditures,
      we expect to incur research and development expenditures of increasing magnitude
      for the foreseeable future.




12




**Our
      employees**




***Woodbridge,
      Ontario*** :
      Before
      approximately summer of 2006 we had 22 full-time employees in Woodbridge,
      Ontario, including a 16-member scientific and engineering team, a three-member
      management and business development team and three clerical employees. In the
      late summer of 2006 we had reduced that staff to 5 employees. The facility
      was closed in December 2006 and the Company moved entirely to New Castle,
      Pennsylvania.




***New
      Castle, Pennsylvania*** *:* We began
      manufacturing activities in New Castle, Pennsylvania in March 2006. While we
      have not made our final staffing decisions at New Castle, we presently employ
      a
      staff of 27, including a 6-member scientific and engineering team, and 12 people
      who are involved principally in manufacturing. We are not subject to any
      collective bargaining agreements and believe our relations with our employees
      are good.




**ITEM
      2.**— **DESCRIPTION
      OF PROPERTY**




***Research
      and Development, Woodbridge, Ontario.*** Our
      research and development operations in Woodbridge were conducted through our
      wholly owned subsidiary APC. This facility was closed in December 2006. During
      our occupation of this facility, we rented the facility on a month-to-month
      basis for a rental of $8,150 per month. The Woodbridge facility included
      approximately 14,000 square feet of floor space, including 5,000 square feet
      of
      management, administrative and engineering offices, 5,000 square feet of
      manufacturing facilities and 4,000 square feet of research laboratories. The
      principal function of this facility was to insure that formulations, constructs
      and fabrication methods that succeed in the laboratory were tested in-house
      under controlled conditions.




***Battery
      manufacturing, New Castle***  ***Pennsylvania.*** In
      February 2006, we purchased the battery fabrication equipment, parts inventories
      and trademarks from a bank in connection with a foreclosure proceeding. We
      also
      leased the buildings that the former owner of the equipment used for its
      manufacturing plant, for a current monthly rate of $11,265. The initial term
      of
      this lease terminated on February 14, 2008. The lease includes two successive
      five-year renewal options, with future rent to be negotiated at a commercially
      reasonable rate. Negotiations are underway for the renewal of the lease. The
      Company continues to rent the property on a month-to-month basis. Management
      believes we are close to concluding a new lease upon favorable terms. Any
      failure to successfully conclude a new lease could be disruptive to our
      operations. While management believes any disruption to be highly unlikely,
      a
      disruption could cause downtime in production and increased costs in terms
      of
      moving and rent. Further, alternative space, if available, may not be on
      favorable rental terms. The battery manufacturing facility includes
      approximately 62,700 square feet of floor space, including 7,232 square feet
      of
      office, locker, lab and lunch area, 42,500 square feet of manufacturing space,
      8,000 square feet of storage buildings and 5,000 square feet of basement area.
      In addition to the monthly rental, we are obligated to pay all required
      maintenance costs, taxes and special assessments, maintain public liability
      insurance, and maintain fire and casualty insurance for an amount equal to
      at
      least 80% of the replacement value of the leased premises. Our battery
      manufacturing operations at this facility are conducted through a wholly owned
      subsidiary named Axion Power Battery Manufacturing, Inc (APB). APB was organized
      in February of 2006. Management believes our property is in good condition.




**ITEM
      3.****—
      LEGAL PROCEEDINGS******




***Taylor
      Litigation.*** On
      February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor,
      Elgin Investments, Inc. and Mega-C Technologies, Inc. (collectively the “Taylor
      Group”) filed a lawsuit in the Ontario Superior Court of Justice Commercial List
      (Case No. 04-CL-5317) that named Tamboril, APC, Rene Pardo, Marvin Winick,
      Kirk
      Tierney, Joseph Piccirilli, Ronald Bibace, Robert Averill, James Smith, James
      Eagan, Thomas Granville, Joseph Souccar, Glenn W. Patterson, Canadian
      Consultants Bureau Inc., Robert Appel, Harold Rosen, Igor Filipenko, Valeri
      Shtemberg, Yuri Volfkovich, Pavel Shmatko, Michael Kishinevsky, Mega-C Power
      Corporation (Nevada), Mega-C Power Corporation (Ontario), C&T, Turitella
      Corporation, Gary Bouchard, Fogler Rubinoff LLP, Netprofitetc Inc., 503124
      Ontario Ltd., HAP Investments LLC, Infinity Group LLC, James Keim, Benjamin
      Rubin and John Doe Corporation as defendants (the “Taylor Litigation”). As
      discussed more fully below, by virtue of an order entered on February 11, 2008
      by the Bankruptcy Court in the Mega-C bankruptcy case, this action against
      the
      Company, Mega-C Power Corporation (Nevada), Robert Averill, Glenn Patterson,
      Igor Filipenko, Thomas Granville and HAP Investments is subject to the permanent
      injunction of the confirmed Chapter 11 Plan of Mega-C Power Corporation. This
      ruling confirmed management’s prior assessment of this lawsuit, which management
      believed had remote possibility of an adverse decision. No amounts have been
      provided for in the accompanying financial statements pursuant to the
      requirements of FASB 5, “ *Accounting
      for Contingencies.* “
We
      have
      offered to provide a coordinated legal defense for all individual defendants
      who
      agree to be represented by counsel for the Company in Canada. Any named
      defendant will be free to retain independent legal counsel, but we are not
      responsible for the costs of separate legal counsel. We have not agreed to
      indemnify any party against damage awards rendered against them or amounts
      paid
      in settlement of claims.





13




In
      February 2005, the Bankruptcy Court stayed the Taylor Litigation pending
      resolution of Mega-C’s Chapter 11 bankruptcy case. On December 12, 2005, we
      entered into a settlement agreement with Mega-C, through its Chapter 11 Trustee,
      and various others that was approved by an order entered in the bankruptcy
      case
      on February 1, 2006 and which became fully effective when the Court confirmed
      Mega-C’s Chapter 11 Plan of Reorganization in an order entered on November 8,
      2006. The details of the settlement agreement are discussed below.




***Bankruptcy
      Court Litigation.*** In April
      2004, we filed an involuntary Chapter 11 petition against Mega-C in the U.S.
      Bankruptcy Court for the District of Nevada (Case No. 04-50962-gwz). In March
      2005, the Bankruptcy Court appointed William M. Noall (Noall) to serve as
      Chapter 11 Trustee for the Mega-C case. On June 7, 2005, the Chapter 11 Trustee
      commenced an adversary proceeding against Sally Fonner (Fonner), the trustee
      of
      the Mega-C Trust (Adversary Proceeding No. 05-05042-gwz), demanding, among
      other
      things, the turnover of at least 7,327,500 shares held by the Mega-C Trust
      as
      property of the bankruptcy estate. On July 27, 2005, we commenced an adversary
      proceeding against Noall and Fonner (Adversary Proceeding No. 05-05082-gwz)
      for
      the purpose of obtaining a judicial determination that:




·
            Mega-C
                does not have any interest in the three patents and other intellectual
                property the Company purchased directly from
                C&T;




·
            Mega-C
                did not transfer any property to our company with the intent to damage
                or
                defraud any entity;




·
            Mega-C
                did not transfer any property to our company for less than reasonably
                equivalent value; and




·
            If
                the court ultimately decides that the stock in the Mega-C Trust is
                property of the bankruptcy estate, the stock must be held in a resulting
                trust for our benefit.




***Settlement
      Agreement*** On
      December 12, 2005, the Company entered into a settlement agreement with Mega-C,
      represented by Chapter 11 Trustee Noall, and the Mega-C Trust, represented
      by
      its trustee Fonner. Additional signatories to the settlement agreement include:
      (a) the Company’s subsidiaries APC and C&T; (b) Fonner in both her capacity
      as Mega-C’s sole officer and director and as trustee of the Trust; (c) certain
      former stockholders of APC including Robert Averill, Joe Piccirilli, Canadian
      Consultants Bureau Inc., James Smith, James Eagan, Tom Granville, Joe Souccar,
      HAP Investments, LLC, Glenn Patterson, Igor Filipenko, Ron Bibace, Kirk Tierney,
      Infinity Group, LLC, James Keim and Turitella Corporation; (d) Paul Bancroft,
      and (e) certain former stockholders of C&T including, Yuri Volkovich, Pavel
      Shmatko, Albert Shtemberg, Edward Shtemberg, C&T Co., Inc. in Trust, Oksana
      Fylypenko, Andriy Malitskiy, Valeri Shtemberg, Yuri Shtemberg, Victor Eshkenazi,
      Miraslav E. Royz, and Rimma Shtemberg.




The
      settlement agreement was approved by the Bankruptcy Court after a hearing in
      an
      order dated February 1, 2006. Certain terms were subject to confirmation and
      effectiveness of Mega-C’s Chapter 11 plan of reorganization. On November 8,
      2006, the Bankruptcy Court entered an order confirming the plan. The confirmed
      chapter 11 plan was subsequently substantially consummated on November 21,
      2006.
      The settlement agreement was fully incorporated in the confirmed Chapter 11
      plan. At the date of these financial statements, the plan is fully effective
      and
      substantially consummated. Accordingly, all pending and potential disputes
      between the parties have been resolved. By way of summary of the Plan, the
      following steps have been accomplished:




·
            We
                have compromised and withdrawn our notes receivable from Mega-C to an
                allowed unsecured claim of $100;




14




·
            Mega-C
                has assigned all of right, title and interest, if any, in the technology
                and any and all tangible and intangible personal property in our
                possession to the Company;




·
            The
                Mega-C Trust has been restated as the Second Amended Shareholders
                Trust of
                Mega C Power Corporation and retained title to 4,700,000 shares that
                will
                be sold to pay creditor claims that remain unsatisfied from the
                Liquidation Trust described below, with the balance to be proportionately
                distributed to the holders of allowed equity interests in Mega-C.
                The
                Second Amended Shareholders Trust also has title to certificates
                for
                685,002 shares of the Company’s common stock which serve as collateral for
                loans in the amount of $2,055,000 paid to the newly created Liquidation
                Trust to fund the confirmed Chapter 11
                Plan;




·
            A
                newly created Liquidation Trust received the proceeds of loans in
                the
                amount of $2,055,000, secured by 685,002 shares, and legal title
                to
                314,998 shares that will be sold to pay creditor claims and Liquidation
                Trust expenses;




·
            The
                former trustee of the Trust has received 627,500 shares as compensation
                by
                the Trust through the effective date of Mega-C's plan; and




·
            The
                Trust surrendered 1,500,000 shares to us which were promptly
                cancelled.




The
      litigation settlement and releases provided by the Plan, which are as broad
      as
      the law allows, are now binding on Mega-C, the Chapter 11 trustee, the Taylor
      Group and all other parties described in the plan of reorganization. In an 
order entered on February 11, 2008, the Bankruptcy Court  granted the
      Company's motion for partial summary judgment, holding that the alleged "oral"
      agreement creating rights or interests in the Technology in favor of the Taylor
      Group never existed and, even if it had, the Taylor Group transferred any such
      rights to the Debtor which were then transferred to the Company by the confirmed
      Chapter 11 Plan.  The Bankruptcy Court held that the Taylor Group has no
      interest in or rights to the Technology.  The Bankruptcy Court held that
      the only rights the Taylor Group has are as putative creditors or shareholders
      of Mega-C and that  any attempts to claim an interest in or contest the
      Company's title to the technology are contrary to the permanent injunction
      of
      the Chapter 11 Plan. The
      Bankruptcy Court held that the Taylor Litigation against the Company is barred
      by the permanent injunction of the confirmed Plan.





The
      Taylors have filed motions for relief from the order granting partial summary
      judgment in


favor
      of
      the Company.  The Company believes the Taylors' motions are without
      merit.  The Company intends to file additional motions for summary judgment
      on its remaining claims for relief, namely for an appropriate order to


require
      dismissal of the Taylor Litigation against the Company and for damages caused
      by
      the Taylors' violation of the permanent injunction of the confirmed chapter
      11
      plan.





While
      certain aspects of the bankruptcy litigation discussed above relating to the
      confirmation of the Chapter 11 plan and the settlement agreement are on appeal
      to the Ninth Circuit Court of Appeals and to the United States District Court
      for the District of Nevada, we believe the possibility of any adverse decision
      to the Company to be remote.





We
      recorded a recovery of notes receivable previously written off in November
      of
      2006 in the amount of $100 as well as other assets received from Mega-C Power
      Corp. The other assets received, primarily miscellaneous fixed assets, have
      been
      determined to be negligible in value and no attempt has been made to secure
      an
      appraisal or record any amounts for these assets. By virtue of the confirmed
      Chapter 11 plan, all of the Mega C’s right, title and interest, if any, in
      the technology was transferred to the Company. ******By
      virtue
      of the February 11, 2008 orders of the Bankruptcy Court, the Taylor Group has
      no
      interest in or rights to the technology.





***Contingent
      Shares.*** The
      Company agreed to sell 1,000,000 shares of common stock to a foreign
      partnership, Mercatus & Partners Limited (the “Purchaser”), a private
      limited company formed under the laws of the United Kingdom with an executive
      office at Via S. Roberto Bellarmino 4, 00142 Roma, Italy, December 12, 2005,
      at
      a price of $2.50 per share as part of a group of comparable transactions where
      the purchaser planned to contribute a portfolio of small public company
      securities to a pair of offshore funds in exchange for fund units, and then
      use
      the fund units as security for bank financing that would be used to pay for
      the
      underlying securities. Contrary to the terms and conditions of the Company’s
      agreement, the foreign partnership was in possession of a stock certificate
      representing these 1,000,000 shares; however, completion of the transaction
      was
      contingent upon receipt of the proceeds from the foreign partnership, which
      were
      not received.  The 1,000,000 shares were recovered December 4, 2007 and
      forwarded to Continental Stock Transfer Agency for cancellation which took
      place
      that same month.





15




In
      connection with the offering described above, four holders of warrants to
      purchase the Company’s common stock agreed to exercise their warrants to
      purchase, in the aggregate, 301,700 (the Incompletely Exercised Warrant Shares)
      common shares of stock for the purpose of selling them to the foreign
      partnership in a transaction that was substantially similar to the one the
      Company entered into with the same foreign partnership.  These shares were
      to be issued to the foreign partnership upon receipt of payment, which was
      in
      turn contingent upon the foreign partnership tendering the payment of the
      purchase price for these shares.  Contrary to the terms and conditions of
      their agreements, the Company believes the foreign partnership is in possession
      of a stock certificate representing these shares without tendering the
      purchase price to either the Company or to the warrantholders.  As such,
      the Incompletely Exercised Warrant Shares have not been duly issued and have
      been excluded from all calculations of the issued and outstanding shares of
      common stock in these financial statements.    The Company has
      included the Incompletely Exercised Warrant Shares as outstanding warrants,
      pending receipt of the exercise price from the four warrantholders.  The
      Company has not yet located the Incompletely Exercised Warrant Shares. The
      Company retained counsel to cause the parties who have possession of the
      Incompletely Exercised Warrant shares to return the shares absent payment.
      Counsel was retained October 6, 2007.





**ITEM
      4.****—
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




No
      matters were submitted to a vote of the stockholders during the fourth quarter
      of the fiscal year ended December 31, 2006.




**PART
      II**




**ITEM
      5.— MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES.**




**Market
      information**




At
      that
      start of the year ended December 31, 2006, our stock was quoted on the OTC
      Bulletin Board (Symbol: AXPW.OB), until we became delinquent in our SEC
      reporting obligations in August 2006. As a result our stock was removed from
      the
      OTC Bulletin Board and began trading on the OTC Pink Sheets. Trading in our
      stock has historically been sporadic, trading volumes have been low, and the
      market price has been volatile.




The
      following table shows the range of high and low bid prices for our common stock
      as reported by the OTC Pink Sheets and the OTC Bulletin Board, as the case
      may
      be, for each quarter since the beginning of 2005. The quotations reflect
      inter-dealer prices, without retail markup, markdown or commission and may
      not
      represent actual transactions.




**Period**
            
            **High**
            
            **Low**First
                Quarter 2005
            
            $
            4.25
            
            $
            2.58Second
                Quarter 2005
            
            $
            6.75
            
            $
            2.30Third
                Quarter 2005
            
            $
            5.30
            
            $
            3.25Fourth
                Quarter 2005
            
            $
            4.75
            
            $
            3.40First
                Quarter 2006
            
            $
            6.00
            
            $
            2.50Second
                Quarter 2006
            
            $
            4.10
            
            $
            1.75Third
                Quarter 2006
            
            $
            3.50
            
            $
            1.60Fourth
                Quarter 2006
            
            $
            4.00
            
            $
            1.10




On
      February 29, 2008, the sale price for our common stock as reported on the Pink
      Sheets was $2.30 per share.




16




**Securities
      outstanding and holders of record**




After
      giving effect to recent stock sales, there were 18,157,060 common shares,
      including 5.7 million shares held by the Mega-C Trust and the newly created
      liquidation trust, excluding the Incompletely Exercised Warrant Shares discussed
      in “Legal Proceedings,” outstanding as of February 29, 2008. These shares
      represented 386 record holders of common stock.




**Dividend
      Policy**




We
      have
      not paid and do not expect to pay dividends on our common stock. Any future
      decision to pay dividends on our common stock will be at the discretion of
      our
      board and will depend upon, among other factors, our results of operations,
      financial condition, capital requirements and contractual restrictions.




**Information
      respecting equity compensation plans**




Summary
      Equity Compensation Plan Information The
      following table provides summary information on our equity compensation plans
      as
      of December 31, 2006.




**Plan
                  category:**
              
              **Number
                  of shares issuable on exercise of outstanding options, warrants
                  and
                  rights**
              
              **Weighted average
                  exercise price of outstanding options, warrants and
                  rights**
              
              **Number
                  of shares available for future issuance under equity compensation
                  plans****Equity compensation plans
                  approved by stockholders**2004
                  Incentive Stock Plan
              
              
              175,950
              
              $
              2.79
              
              
              1,349,0502004
                  Directors’ Option Plan
              
              
              140,035
              
              $
              2.67
              
              
              330,400**Equity
                  compensation plans not approved by stockholders**Contract
                  options held by officers
              
              
              911,000
              
              $
              4.86Contract
                  options held by consultants
              
              
              519,900
              
              $
              5.39**Total
                  equity awards**
              
              
              1,746,885
              
              $
              4.63




The
      Company has two stockholder approved equity compensation plans and occasionally
      enters into employment and other contracts that provide for equity compensation
      arrangements other than those contemplated by the stockholder approved plans.
      The following sections summarize the Company’s equity compensation
      arrangements.





***Incentive
      Stock Plan Approved by Stockholders:*** The
      Company’s stockholders have adopted an incentive stock plan for the benefit of
      its employees, consultants and advisors. Under the terms of the original plan,
      the Company was authorized to grant incentive awards for up to 1,000,000 shares
      of common stock. At the Company’s 2005 annual meeting, its shareholders
      increased the authorization under the incentive stock plan to 2,000,000
      shares.





The
      incentive stock plan authorizes a variety of awards including incentive stock
      options, non-qualified stock options, shares of restricted stock, shares of
      phantom stock and stock bonuses. In addition, the plan authorizes the payment
      of
      cash bonuses when a participant is required to recognize income for federal
      income tax purposes because of the vesting of shares of restricted stock or
      the
      grant of a stock bonus.





17




The
      plan
      authorizes the grant of incentive awards to full-time employees of the Company
      who are not eligible to receive awards under the terms of their employment
      contract or another specialty plan. The plan also authorizes the grant of
      incentive awards to directors who are not eligible to participate in the
      Company’s outside directors’ stock option plan, independent agents, consultants
      and advisors who have contributed to the Company’s success.





The
      compensation committee administers the plan. The committee has absolute
      discretion to decide which employees, consultants and advisors will receive
      incentive awards, the type of award to be granted and the number of shares
      covered by the award. The committee also determines the exercise prices,
      expiration dates and other features of awards.





The
      exercise price of incentive stock options must be equal to the fair market
      value
      of such shares on the date of the grant or, in the case of incentive stock
      options granted to the holder of more than 10% of the Company’s common stock, at
      least 110% of the fair market value of such shares on the date of the grant.
      The
      maximum exercise period for incentive stock options is ten years from the date
      of grant, or five years in the case of an individual who owns more than 10%
      of
      the Company’s common stock. The aggregate fair market value determined at the
      date of the option grant, of shares with respect to which incentive stock
      options are exercisable for the first time by the holder of the option during
      any calendar year, shall not exceed $100,000.





The
      following awards have been granted under the Plan in 2005 and 2006:





In
      March
      2005, the compensation committee authorized stock bonuses to the former
      employees of C&T for an aggregate of 219,000 shares of common stock. These
      stock grants are fully vested and unrestricted, subject to compliance with
      the
      Company’s insider trading policies. The fair value of these shares, as
      determined by the Company’s stock price on the date of grant, amounted to
      $565,202 and was recorded as compensation during the year ended December 31,
      2005.





In
      April
      2005, the former employees of C&T were granted options to purchase an
      aggregate of 744,500 shares of common stock at an exercise price of $2.50.
      These
      options vest at a rate of 20% per year beginning in April 2006. The market
      value
      of the Company stock at the date of grant was less than the exercise price
      which
      resulted in no intrinsic value in accordance with APB 25. On January 1, 2006,
      the Company adopted the provisions of FASB 123R as noted above which resulted
      in
      the Company recording compensation expense of $86,954 during the year ended
      December 31, 2006. Various options lapsed when several individuals terminated
      their employment with the Company in 2005 and 2006. During the years ended
      December 31, 2005 and 2006, an aggregate of 157,700 and 454,000 options,
      respectively, forfeited unvested as a result of these terminations.





In
      September 2005, the compensation committee awarded 6,000 shares of restricted
      common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to
      his 2005 employment agreement, which were valued at $24,000 on the date of
      grant
      and became fully vested in April 2006. The Company recorded $8,000 and $16,000
      of compensation in 2005 and 2006, respectively, related to this award.





In
      December 2006, the Company issued 250,000 shares of restricted common stock
      to
      the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2006
      employment agreement, which were valued at $937,500 on the date of grant and
      will become fully vested on December 2009. The Company will recognize this
      as
      compensation over the requisite service period. No compensation expense was
      recorded for the year ended December 31, 2006.





***Outside
      Directors' Stock Option Plan Approved by
      Stockholders*** ***:*** The
      Company’s stockholders have adopted an outside directors' stock option plan for
      the benefit of its non-employee directors in order to encourage their continued
      service as directors. Under the terms of the original plan, the Company was
      authorized to grant incentive awards for up to 125,000 shares of common stock.
      At the 2005 annual meeting, the Company’s shareholders increased the
      authorization under the incentive stock plan to 500,000 shares.





Each
      eligible director who is, on or after the effective date, appointed to fill
      a
      vacancy on the Board or elected to serve as a member of the Board may
      participate in the plan. Each eligible director shall automatically be granted
      an option to purchase the maximum number of shares having an aggregate fair
      market value on the date of grant of twenty thousand dollars ($20,000). The
      option price of the stock subject to each option is required to be the fair
      market value of the stock on its date of grant. Options generally expire on
      the
      fifth anniversary of the date of grant. Any option granted under the plan shall
      become exercisable in full on the first anniversary of the date of grant,
      provided that the eligible director has not voluntarily resigned or been removed
      "for cause" as a member of the Board of Directors on or prior to the first
      anniversary of the date of grant (qualified option). Any qualified option shall
      remain exercisable after its first anniversary regardless of whether the
      optionee continues to serve as a member of the Board.





18




The
      following awards have been granted under the Plan in 2005 and 2006:





During
      the year ended December 31, 2005, the Company issued 70,000 5-year options
      to
      five of its directors vesting 1/3 per year over three years from the date of
      grant. The market value of the Company stock at the date of grant was less
      than
      the exercise price which resulted in no intrinsic value in accordance with
      APB
      25. On January 1, 2006, the Company adopted the provisions of FASB 123R as
      noted
      above and recorded compensation of $41,024 during the year ended December 31,
      2006.





During
      the year ended December 31, 2006, the Company issued 60,000 5-year options
      to
      two of its directors vesting 1/3 per year over the next three years. These
      options are exercisable at a price of $2 per share, expiring five years from
      vest date and are valued at $71,680 utilizing the Black-Scholes-Merton option
      pricing model, of which $20,230 was expensed in 2006.




***Non-plan
      Equity Incentives Not Approved by Stockholders*** : The
      Company has issued 1,131,000, 300,000 and 629,300 stock purchase options in
      the
      fiscal years ended December 31, 2006, 2005 and 2004, respectively, to officers,
      employees, attorneys and consultants in connection with contractual agreements
      that do not reduce the shares available under the shareholder’s approved plans.
      The following paragraphs summarize these contractual stock options.





In
      January 2004, members of the law firm of Petersen & Fefer, general corporate
      counsel (of which one member was a director of the Company at the time) were
      granted two-year contractual options to purchase 189,300 shares of common stock
      at a price of $2.00 per share as partial compensation for services rendered,
      valued at $68,296. These members also received 116,700 warrants as consideration
      of pre-merger Tamboril debt). In August 2004, $1.00 of the exercise price of
      the
      total 306,000 options and warrants owned by these members was considered paid
      in
      advance in consideration of unbilled legal services provided by the firm. The
      Company recorded $306,000 related to this reduction. All of the warrants and
      options were exercised in the fourth quarter of 2005, however, $306,000 of
      the
      amount is included in stock subscription receivable as of December 31, 2005
      and
      was received in 2006.




In
      July
      2004, the President and Chief Operating Officer of the Company, Charles
      Mazzacato, was granted a contractual option to purchase 240,000 shares of common
      stock at a price of $4.00 per share. This option vests on a monthly basis at
      the
      rate of 60,000 shares per year commencing July 31, 2005 and is exercisable
      for
      five years after each vesting date. The market value of the Company stock at
      the
      date of grant was greater than the exercise price which resulted in a total
      intrinsic value of $180,000. In accordance with APB 25 the Company expensed
      the
      intrinsic value over the vesting period which resulted in expense of $18,750
      and
      $45,000 during the years ended December 31, 2004 and 2005, respectively. On
      January 1, 2006, the Company adopted the provisions of FASB 123R as noted above
      and recorded compensation of $124,364 during the year ended December 31, 2006.
      During the year ended December 31, 2006 the options were forfeited as a result
      of his termination of employment from the Company in 2006.





In
      July
      2004, the Chief Financial Officer of the Company, Peter Roston, was granted
      a
      contractual option to purchase 200,000 shares of common stock at a price of
      $4.00 per share. This option will vest on a monthly basis at the rate of 50,000
      shares per year commencing July 31, 2005 and is exercisable for five years
      after
      each vesting date. The market value of the Company stock at the date of grant
      was greater than the exercise price which resulted in a total intrinsic value
      of
      $150,000. In accordance with APB 25 the Company has expensed the intrinsic
      value
      over the vesting period which resulted in expense of $15,625 and $37,500 during
      the years ended December 31, 2004 and 2005, respectively. On January 1, 2006,
      the Company adopted the provisions of FASB 123R as noted above and recorded
      compensation of $138,182 during the year ended December 31, 2006. During the
      year ended December 31, 2006 the options were forfeited as a result of his
      termination of employment from the Company in 2006.





19




In
      April
      2005, the Chief Executive Officer of the Company, Thomas Granville, was granted
      a contractual option to purchase 180,000 shares of common stock at a price
      of
      $2.50 per share. This option vests at the rate of 7,500 shares per month
      commencing May 1, 2005 and is exercisable for five years after each vesting
      date. The market value of the Company stock at the date of grant was less than
      the exercise price which resulted in no intrinsic value in accordance with
      APB
      25. On January 1, 2006, the Company adopted the provisions of FASB 123R as
      noted
      above and recorded compensation of $112,500 during the year ended December
      31,
      2006.





In
      April
      2005, a European financial advisor was granted a contractual option to purchase
      30,000 shares of common stock at a price of $2.50 per share. Options for an
      aggregate of 20,000 shares vested during the year ended December 31, 2005 and
      will be exercisable for two years. On December 31, 2005, a total of 10,000
      unvested options were forfeited when the advisory agreement was terminated.
      The
      options were valued at $35,998 using the Black-Scholes-Merton option pricing
      model and included as expense in 2005.





In
      September 2005, the Chief Technical Officer of the Company, Edward Buiel, was
      granted a contractual option to purchase 90,000 shares of common stock at a
      price of $4.00 per share. This option vests at the rate of 2,500 shares per
      month commencing October 2005 and is exercisable for five years after each
      vesting date. The market value of the Company stock at the date of grant was
      less than the exercise price which resulted in no intrinsic value in accordance
      with APB 25. On January 1, 2006, the Company adopted the provisions of FASB
      123R
      as noted above and recorded compensation of $68,100 during the year ended
      December 31, 2006.





In
      February 2006, the Chief Executive Officer of the Company, Thomas Granville,
      was
      granted an option to purchase 500,000 shares of common stock at an exercise
      price of $6.00. Of this total 300,000 options vested immediately and the balance
      is expected to vest, subject to the attainment of certain specified objectives,
      over the next one to three years. These options are valued at $300,187 utilizing
      the Black-Scholes-Merton option pricing model with $259,027 of compensation
      recorded in 2006.




In
      February 2006, the Chief Technical Officer of the Company, Edward Buiel, was
      granted an option to purchase 35,000 shares of common stock at an exercise
      price
      of $6.00. Of this total 10,000 options vested immediately and the balance is
      expected to vest, subject to the attainment of certain specified objectives,
      over the next two to three years. These options are valued at $20,994 utilizing
      the Black-Scholes-Merton option pricing model with $13,330 of compensation
      recorded in 2006.




In
      February 2006, members and affiliates of the law firm of Petersen & Fefer,
      general corporate counsel (of which one member was a director of the Company
      at
      the time) were granted an option to purchase 360,000 shares of common stock
      at
      an exercise price of $6.00. Of this total 240,000 options vested immediately
      and
      the balance will vest at the rate of 10,000 shares per month during the year
      ended December 31, 2006. These options are valued at $193,449 utilizing the Black-Scholes-Merton
      option pricing model and are recorded as legal expense in 2006.




In
      February 2006, the external bankruptcy counsel of the Company, Cecilia
      Rosenauer, was granted an option to purchase 15,000 shares of common stock
      at an
      exercise price of $6.00. The options vested on the effective date of Mega-C’s
      Chapter 11 plan of reorganization, which took place in November 2006. These
      options are valued at $2,483 utilizing the Black-Scholes-Merton
      option pricing model and are recorded as legal expense in 2006.




In
      March
      2006, two employees were granted options to purchase a total of 24,000 shares
      of
      common stock at an exercise price of $4.00 and $6.00. The options vest at a
      rate
      of 2,500 per month over the first 6 months and 1,500 per month thereafter.
      These
      options are valued at $28,257 utilizing the Black-Scholes-Merton
      option pricing model with $24,408 of compensation recorded in 2006.




In
      December 2006, the Chief Technical Officer of the Company, Edward Buiel, was
      granted a contractual option to purchase an additional 100,000 shares of our
      common stock at a price of $3.75 per share. A total of 50,000 options will
      vest
      on December 29, 2009 and the remaining 50,000 will vest on December 29,
      2010. The options will be exercisable for a period of six years from the
      vesting date. These options are valued at $267,372, utilizing the Black-Scholes-Merton
      option pricing model with $6,481 of compensation recorded in 2006.




In
      February 2006, a consultant, Trey Fecteau, was granted an option to purchase
      97,000 shares of common stock at an exercise price of $4.00. The options vested
      upon completion of contractual services in December 2006. These options are
      valued at $150,702 utilizing the Black-Scholes-Merton
      option pricing model. This amount reduced the proceeds of the Series A Preferred
      Stock offering in 2006.




20




**ITEM
      6.- MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**Overview**




At
      December 31, 2006, we had cumulative net losses of approximately $24.2 million.
      This includes approximately $4.1 million in preferred stock dividends and
      beneficial conversion feature charges. We had $4.4 million in current assets
      and
      $2.25 million in current liabilities at December 31, 2006, which left net
      working capital of approximately $2.2 million. Accordingly, the notes to our
      financial statements for the year ended December 31, 2006 contain a note
      explaining that our financial statements have been prepared assuming that our
      Company will continue as a going concern but that our history of litigation,
      operating losses and working capital deficits raise substantial doubt about
      that
      assumption. As of December 31, 2007, the Company’s available and anticipated
      financial resources would not have been sufficient to pay our anticipated
      operating expenses beyond approximately May of 2008 without significant
      additional financing. As discussed below, we received approximately $4 million
      in long term equity financing in mid January of 2008 from the Quercus Trust.
      Management believes those funds will support operations through, September
      30,
      2008, even if the anticipated, and contractually agreed to, second and third
      closings with the Quercus Trust, as described below do not occur.




**Plan
      of Operations**




In
      November of 2007 we began discussions related to a bridge loan offer with our
      directors, officers, and significant investors. We eventually structured a
      short
      term Secured Bridge Loan arrangement in increments of $100,000, such loans
      to
      bear interest at the rate of 14% and will be secured by all of the assets,
      including the intellectual property assets of Axion Power International and
      all
      of the equipment and inventory assets of Axion Power Battery Manufacturing
      Inc.
      (the “Secured Bridge Loan”). Elections to participate had to be made no later
      than January 7, 2008, and if fully subscribed, the Secured Bridge Loan could
      result in our receiving up to $3,000,000 in short term funding.





Total
      funding received under the Secured Bridge Loan as of December 31, 2007 amounted
      to $2,540,000, with lender commitments to fund an additional $100,000. The
      new
      loans made to the Company since October 1, 2007, exclusive of extinguishment
      of
      existing debt on October 1, 2007, Secured Bridge Loan agreements, aggregate
      to
      approximately $1,740,000 in new working capital.




The
      bridge loan has an original maturity date of March 31, 2008, with three
      extensions of the maturity date at the option of the Company with higher
      interest rates to apply to each such extension. If extended to April 30, 2008,
      the interest rate during the extension period increases to 15% with an extension
      fee equal to 1% of the original loan. If extended to May 31, 2008, the interest
      rate during the extension period increases to 16% with an extension fee equal
      to
      1% of the original loan. If extended to June 30, 2008, the interest rate during
      the extension period increases to 18% with an extension fee equal to 2% of
      the
      original loan. A loan origination fee applies, equal to 8% of the original
      loan;
      provided that the origination fee will decrease by one-half percent each week
      after December 15, 2007 until it reaches 6.5% by January 7, 2008. Warrants
      exercisable at $2.35 until December 31, 2012 are included with each $100,000
      Secured Bridge Loan note. Warrants to be issued are as follows: 3,405 warrants
      upon occurrence of the loan, 851 warrants upon extension of the loan to April
      30, 2008, 1,276 warrants upon extension of the loan to May 31, 2008, and 2,128
      warrants upon extension to June 30, 2008. Anti-dilution provisions apply to
      the
      warrants.





As
      the
      Secured Bridge Loan financing will mature no later than June 30, 2008, we will
      not have sufficient capital to pay our day-to-day operating costs, finance
      our
      research and development, cover costs associated with our manufacturing
      activities, pay for the development of a sales and marketing organization and
      finance the acquisition of complimentary assets, technologies and businesses
      unless we obtain additional significant financing within the next 6 months.
      As
      the Company has done throughout our 4 year existence, we will explore both
      equity and long and short term debt solutions.




21


On
        January 14, 2008, we entered into a Securities Purchase Agreement (the
“Agreement”) with The Quercus Trust (“Quercus”), pursuant to which we have
        agreed to issue to Quercus up to 8,571,429 shares of our common stock, together
        with common stock purchase warrants that will entitle the holder to purchase
        up
        to 10,000,000 additional shares of our common stock.


At
      the
      initial closing on January 14, 2008, we issued and sold 1,904,762 first closing
      units (a unit is one share of common stock, and a 5-year warrant to purchase
      1.5
      additional shares of common stock at an exercise price of $2.60 per share)
      issuable to Quercus for an aggregate purchase price of $4,000,000, or $2.10
      per
      Unit.





In
      the
      second closing (the “Second Quercus Closing”), which will occur within five
      business days after we file the last of our delinquent reports under the
      Securities Exchange Act of 1934 (the “Delinquency Cure Date”), Quercus has
      agreed to purchase 1,904,762 additional units for $4,000,000. Each Quercus
      Second Closing unit will consist of one share of common stock, and a 5-year
      warrant to purchase 1.25 additional shares of common stock at an exercise price
      of $2.60 per share.





In
      the
      third closing (the “Third Quercus Closing”) Quercus has agreed to make an
      additional investment of $10,000,000 on or before June 30, 2008 upon our
      execution of one or more qualifying contracts that satisfy the requirements
      of
      the **** Securities
      Purchase Agreement. There is no assurance that we will be able to satisfy this
      condition. Upon the occurrence of the Third Quercus Closing, Quercus has agreed
      to purchase an additional 4,761,905 units for $10,000,000. Each Third Quercus
      Closing unit will consist of one share of common stock, and a 5-year warrant
      to
      purchase one additional share of common stock at an exercise price of $2.60
      per
      share.





The
      warrants contain conventional anti-dilution provisions for adjustment of the
      exercise price in the event we issue additional shares of our common stock
      or
      securities convertible into common stock (subject to certain specified
      exclusions) at a price less than $1.00 per share.





In
      the
      Securities Purchase Agreement, we agreed to file one or more registration
      statements under the Securities Act of 1933 (the “Securities Act”) covering the
      resale by Quercus of the shares of our common stock issued pursuant to the
      Agreement and the shares of our common stock issued upon exercise of the
      warrants. The registration rights provisions of the Agreement contain
      conventional terms including indemnification and contribution undertakings
      and a
      provision for liquidated damages in the event any of the following
      occurs:





·
            any
                registration statement is not filed on or prior to the date it is
                required
                to be filed, and in the case of the initial registration statement,
                that
                date is 30 days after the Second Quercus Closing (the “Filing Deadline”)
                or a Restriction Termination Date (as defined below),


·
            any
                post-effective amendment is not filed on or prior to the seventh
                business
                day after the registration statement ceases to be effective pursuant
                to
                applicable securities laws due to the passage of time or the occurrence
                of
                an event requiring the Company to file a post-effective amendment
                ( the
                “Post-Effective Amendment Filing Deadline”), or


·
            we
                fail to file with the SEC a request for acceleration of effectiveness
                within five business days after the date that we are notified by
                the SEC;
                or


·
            we
                fail to respond to any comments made by the SEC within 15 business
                days
                after the receipt of such comments, or


·
            a
                registration statement filed hereunder is not declared effective
                by the
                SEC within 150 days of the filing of the registration, or


·
            a
                post-effective amendment is not declared effective on or prior to
                the
                fifteenth business day following the Post-Effective Amendment Filing
                Deadline, or


·
            after
                a registration statement is filed with and declared effective by
                the SEC,
                such registration statement ceases to be effective as to all securities
                registrable pursuant to the Agreement (“Registrable Securities”) to which
                it is required to relate at any time until the earlier of (i) the
                fifth
                anniversary of the effective date, (ii) the date when all Registrable
                Securities covered by such Registration Statement have been sold
                publicly,
                or (iii) the date on which the Registrable Securities are eligible
                for
                sale without volume limitation pursuant to Rule 144 of the Securities
                Act
                for a period of more than 60 days in any twelve month period without
                being
                succeeded by an amendment to such registration statement or by a
                subsequent registration statement filed with and declared effective
                by the
                SEC, or


·
            an
                amendment to a registration statement is not filed with the SEC within
                15
                business days after the SEC having notified us that such amendment
                is
                required in order for such Registration Statement to be declared
                effective
                (any such failure or breach being referred to as an “Registration Failure
                Event”).




22





If
      at any
      time the staff of the SEC takes the position that the offering of some or all
      of
      these registrable securities in a registration statement is not eligible to
      be
      made on a delayed or continuous basis under the provisions of Rule 415 under
      the
      Securities Act or requires Quercus to be named as an “underwriter” (an “SEC
      Objection”), we shall promptly notify Quercus of such SEC Objection and if
      Quercus requests, we shall use commercially reasonable efforts to persuade
      the
      staff of the Commission that the offering contemplated by the registration
      statement is a valid secondary offering and not an offering “by or on behalf of
      the issuer” as defined in Rule 415 and that Quercus is not an “underwriter” (a
“Rule 415 Response Effort”). In the event that, despite our commercially
      reasonable efforts, the staff of the Commission has not altered its position
      and
      Quercus provides notice to us to cease any further Rule 415 Response Efforts
      (the “Quercus Rule 415 Determination”), we shall (i) remove from any
      registration statement such portion of the Registrable Securities (the “Cut Back
      Shares”) and/or (ii) agree to such restrictions and limitations on the
      registration and resale of the Registrable Securities as the staff of the
      Commission may require to assure our compliance with the requirements of Rule
      415; provided, however, that we shall not agree to name Quercus as an
“underwriter” in such Registration Statement without the prior written consent
      of Quercus (collectively, the “SEC Restrictions”). Notwithstanding any other
      provision of the Agreement to the contrary, no liquidated damages shall accrue
      during the period beginning on the date of an SEC Objection and ending on the
      date that either we receive written notification from the SEC that our Rule
      415
      Response Effort has been successful or Quercus provides us with an Quercus
      Rule
      415 Determination or as to any Cut Back Shares until such time as we are able,
      using commercially reasonable efforts, to effect the filing of an additional
      Registration Statement with respect to the Cut Back Shares in accordance with
      any SEC Restrictions (such date, the “Restriction Termination
      Date”)





In
      case
      any Registration Failure Event occurs, we would be obligated to pay liquidated
      damages to the Quercus in an amount equal to 1% of the aggregate purchase price
      paid by the Quercus pursuant to the Agreement for any of our securities that
      were required to be registered but were not covered under an effective
      registration statement (the “Monthly Liquidated Damages”) for the first month
      and each successive month thereafter until the Registration Failure Event shall
      have been cured. Failure to make payments of the Monthly Liquidated Damages
      shall result in our being obligated to pay interest on any unpaid Monthly
      Liquidated Damages at a rate of 18% per year.




The
      Agreement also grants to Quercus a right of first refusal to participate in
      any
      subsequent financing we undertake prior to the second anniversary of the second
      closing (subject to certain conventional exceptions) in order to permit Quercus
      to maintain its fully-diluted ownership interest in our common
      stock.




As
      an
      inducement to Quercus to enter into the Agreement and to purchase the shares
      of
      our common stock and the warrants issuable under the Agreement, certain
      directors, officers and principal holders of our issued and outstanding
      convertible securities, warrants and stock options agreed to refrain from
      converting any of their convertible securities or exercising any of their stock
      purchase rights until the board of directors proposes and our stockholders
      approve a charter amendment that will increase the number of authorized common
      shares from the current limit of 50 million shares of common stock to a proposed
      limit of not less than 75 million shares of common stock. Concurrently, we
      agreed to extend the expiration date of the warrants and options that are
      subject to forbearance agreements for a period of time equal to the forbearance
      period.




***Operating
      activities*** :
      In
      2006, when we were operating in both Vaughan, Canada and in New Castle,
      Pennsylvania, our operating expenses averaged approximately $500,000 per month.
      In connection with the transition from research to manufacturing, the Company
      has reduced the size of our scientific and technical staff and increased the
      size of our manufacturing staff. We closed the Canadian operation completely
      in
      December of 2006 and moved key employees to New Castle. These consolidation
      and
      staffing changes reduced our operating expenses by approximately $150,000 per
      month, in spite of significant increases in accounting related expenses in
      connection with restating our financial statements for the 3 years ended
      December 31, 2005. We will continue to add to the total number of employees
      as
      we add new manufacturing contracts for both our standard lead/lead battery
      product and our proprietary lead/carbon (PbC) device. Throughout 2008, we expect
      the number of manufacturing production employee positions to triple as the
      Company aims to increase production numbers, increase revenue, and reduce
      accounting expenses resulting in improved operational results.




23





In
      early
      2006, we purchased, for approximately $800,000, the equipment and assets of
      a
      failed Pennsylvania battery manufacturing company and moved into their fully
      permitted facility. We immediately spent, and will continue to spend, money
      to
      modify some of the equipment at that facility. In the first quarter of 2007,
      we
      received $1,200,000 in grant money from the Commonwealth of Pennsylvania. Of
      that total grant amount, $900,000 was dedicated for use in purchasing new
      equipment. Additionally in 2007, the Company purchased used manufacturing
      equipment with a documented replacement cost of $3,140,000. Management believes
      we purchased the equipment very economically. We paid cash for certain of the
      property while other equipment is reflected in accounts payable. We already
      installed most of the new lab and test equipment and the new carbon processing
      equipment. During the fourth quarter of 2007 we began to assemble and install
      some of the manufacturing equipment. Management believes additional automated
      carbon electrode manufacturing equipment will be needed over the next twelve
      months. The needed equipment purchases will be substantial and will be phased
      in
      based upon the speed at which the Company moves forward.





We
      began
      production of a commercial prototype of our proprietary lead/carbon device
      PbC
      batteries during 2006 and early 2007. Our initial production runs were used
      exclusively for characterization and performance testing and we did not generate
      revenue from sales of commercial PbC batteries. We have signed non-binding
      letters of intent for a series of alternative energy demonstration projects
      with
      distributors of wind and solar energy equipment. We
      also
      have a signed binding contract to provide storage for a grid buffering project
      sponsored by the New York State Energy Research Development Agency .
      While
      we believe our future revenue from the sale of specialty lead-acid batteries
      and
      our commercial proprietary lead/carbon device PbC batteries will be sufficient
      to offset our anticipated manufacturing costs and make a modest contribution
      to
      overhead, the amount and timing of our anticipated revenues are both uncertain,
      and we do not expect this source of revenue to be able to fund all of our
      overhead in the near term.




Our
      current manufacturing and product demonstration plans have been formulated
      with
      the strategic goal of generating sufficient profit from battery sales and
      demonstration projects to bring us to the breakeven point in early 2009. By
      breakeven we mean that revenues are expected to exceed all costs of operations
      resulting in the realization of positive results of operations measured on
      an
      alternative non-GAAP measure of profitability, Earnings Before Interest,
      Depreciation, and Amortization (EBITDA). Net results of operations may still
      be
      negative using a standard measure employing GAAP in which all non-cash expenses
      are recognized in calculating results of operations. We do not know if our
      demonstration projects will be successful, but if they are, rapid growth is
      likely to place a significant strain on our managerial, operational and
      financial resources. In that event, our plans to reach breakeven in the
      short-term may be unattainable. To achieve profitability we will need to develop
      our standard lead/lead products and introduce our commercial proprietary
      lead/carbon (PbC) products that can be profitably manufactured by the Company
      or
      other battery producers. With this strategy in mind, the Company in December
      of
      2007, entered into a 3 year employment contract with Bob Nelson (PhD.), a well
      respected lead-acid battery expert. Dr. Nelson’s expertise in manufacturing and
      research development over the last 30 years makes him an excellent fit as Vice
      President of Engineering Manufacturing. By combining Dr. Nelson’s talents with
      the existing staff in both the department of carbon research and development,
      and the department of lead-acid battery manufacture, we believe that the
      manufactured battery product will improve substantially in quality and
      consistency.




During
      the year ended December 31, 2006, we devoted substantial time, effort and
      financial resources to litigation arising from the business failure of Mega-C
      and our efforts to continue the development of the proprietary lead/carbon
      device PbC technology. See the discussion under “Item 3. Legal Proceedings” in
      Part I.





In
      December 2004, the Financial Accounting Standards Board issued FASB 123R,
“ *Share-Based
      Payment”* (FASB
      123R). FASB 123R supersedes FASB 123, “ *Accounting
      for Stock Based Compensation* ,”
and
      Accounting Principles Board Opinion 25, “ *Accounting
      for Stock Issued to Employees”* (APB 25)
      and its related implementation guidance. On January 1, 2006, the Company adopted
      the provisions of FASB 123R using the modified prospective transition method.
      Under this method, the Company is required to record compensation expense for
      all stock based awards granted after the date of adoption and for the unvested
      portion of previously granted awards that remain outstanding as of the beginning
      of the adoption. Prior periods have not been restated for the effects of FASB
      123R. Under FASB 123R, employee-compensation expense related to stock based
      payments are recorded over the requisite service period based on the grant
      date
      fair value of the awards.




24




Prior
      to
      the adoption of FASB 123R, the Company accounted for employee stock options
      using the intrinsic value method in accordance with APB 25. Accordingly, no
      compensation expense was recognized for stock options issued to employees as
      long as the exercise price was greater than or equal to the market value of
      the
      common stock at the date of grant. During the year ended December 31, 2005
      and
      2004, we recorded $82,500 and $34,375, respectively, related to stock based
      compensation expense for the intrinsic value of options granted to employees.
      In
      accordance with FASB 123, the Company disclosed the summary of pro forma effects
      to reported net loss as if the Company had elected to recognize compensation
      costs based on the fair value of the awards at the grant date in its 2005 annual
      report.





The
      Company elected to use the Black-Scholes-Merton option pricing model to
      determine the fair market value. On January 1, 2006, the Company adopted FASB
      123R and recorded stock based compensation expense of $881,489 for the year
      ended December 31, 2006. The impact of these expenses to basic and diluted
      loss
      per share was approximately $.05 during the year. As of December 31, 2006,
      there
      was approximately $744,000 of unrecognized compensation related to non-vested
      options granted during 2006 and prior, which we expect to recognize over a
      weighted average period of 2.3 years. Starting in 2006, we began granting stock
      options that vest upon certain performance conditions.





The
      adoption of FAS 123R did not have an impact on cash flows from operating or
      financing activities. For stock options issued as non-qualified stock options,
      a
      tax deduction is not allowed until the options are exercised. The amount of
      this
      deduction will be the difference between the fair value of the Company’s common
      stock and the exercise price at the date of exercise. Accordingly, there is
      a
      deferred tax asset recorded related for the tax effect of the financial
      statement expense recorded. The tax effect of the income tax deduction in excess
      of the financial statement expense will be recorded as an increase to additional
      paid-in capital. Due to the uncertainty of the Company’s ability to generate
      sufficient taxable income in the future to utilize the tax benefits of the
      options granted, the Company has recorded a valuation allowance to reduce gross
      deferred tax asset to zero. As a result, for the year ended December 31, 2006,
      there is no income tax expense impact from recording the fair value of options
      granted. There is no tax deduction allowed by the Company for incentive stock
      options.





In
      compliance with FASB 123R, the Company, has developed a model for use in
      estimating volatility, when valuing share based compensation awards. Axion
      shares have been selling in a thinly traded market over the past two years,
      with
      few buyers and sellers at current price levels given the current stage of
      development. Our low liquidity has led to high volatility, with small changes
      in
      demand having the potential for a dramatic impact on market price. Daily
      variations tend to be an acceptable measure in a deep market, where a large
      number shares can be transacted without affecting the stock price. In thinly
      traded markets however, daily returns tend to generate a higher volatility.
      In
      view of trading levels and to adjust for the one period in which the share
      price
      was extraordinarily volatile, the company has elected to factor in volume and
      measure volatility based on the monthly weighted average price derived from
      the
      daily returns.




The
      process was first applied during 2006, upon adoption of FASB 123R. The process
      encompasses the full scope of daily trading data, from the inception of the
      corporation, beginning with January 1, 2004, and adjusts for problems inherent
      to a thin market by factoring close price by daily volume for the purpose of
      calculating a monthly weighted average price per share. The net change in this
      average is then measured over time. Though a public company, the majority of
      our
      offerings have been administered through private placement, where shares change
      hands at negotiated prices. Consistent with the provisions of FASB 123R -
      section A32d, and SAB 107, the company has elected use these monthly weighted
      average price observations for the purpose of calculating volatility. The
      monthly weighted average price is calculated as follows: [The Sum of (Daily
      Volume x Daily Close Price)] / Volume of shares traded that month.




As
      of
      February 29, 2008, the Company has approximately 18 million shares outstanding,
      valued in the market at roughly $2.30 per share. There is potential for double
      that number of shares because of equity instruments exercisable in a price
      from
      $2 to $6 within the next 60 days.




Given
      our
      current stage of development and mode of financing, management expects that
      volatility associated with the incorporation of these price levels into the
      market over the next two to three years should mirror our historic volatility
      levels. The company will have a continued need for cash, so long as the
      operations remain focused on R&D and until it meets SEC reporting
      requirements, it is likely to offer equity instruments at price levels or with
      additional compensation features in order to produce positive cash flow. The
      Company has not attempted to forecast the potentially dilutive impact which
      these offerings would have on the overall volatility of its stock.




25




**Off
      Balance Sheet Arrangements.** We do
      not have any off-balance sheet arrangements that have, or are reasonably likely
      to have, an effect on our financial condition, financial statements, revenues
      or
      expenses.




**ITEM
      7.— FINANCIAL STATEMENTS.**




The
      following financial statements are included in this Annual Report on Form
      10-KSB:




26


**AXION
      POWER INTERNATIONAL, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Stockholders of
 Axion
        Power International, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of Axion Power
        International, Inc. as of December 31, 2006 and the related consolidated
        statements of operations, cash flows and changes in stockholders' equity
        for the
        year then ended and for the period from date of inception (September 18,
        2003)
        through December 31, 2006.  Axion Power International Inc.'s management is
        responsible for these consolidated financial statements. Our responsibility
        is
        to express an opinion on these consolidated financial statements based on
        our
        audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the company's internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements, assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall consolidated financial statement presentation. We
        believe
        that our audit provides a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Axion Power International,
        Inc. as of December 31, 2006, and the results of its operations and its cash
        flows for the year ended December 31, 2006 and for the period from date of
        inception (September 18, 2003) through December 31, 2006 in conformity with
        accounting principles generally accepted in the United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 2 to the
        consolidated financial statements, the Company's significant operating losses
        raise substantial doubt about its ability to continue as a going concern.
        The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 /s/
        Rotenberg & Co., llp
 
 Rotenberg
        & Co., llp
 Rochester,
        New York
 March
        27,
        2008
  F-1
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Board
          of
          Directors and Stockholders
 Axion
          Power International, Inc.
 
 We
          have
          audited the accompanying consolidated balance sheet of Axion Power
          International, Inc. as of December 31, 2005, and the related consolidated
          statements of operations, stockholders' equity, and cash flows for the
          year then
          ended and for the period included in the cumulative development stage period
          from inception (September 18, 2003) through December 31, 2005. These financial
          statements are the responsibility of the Company's management. Our
          responsibility is to express an opinion on these financial statements based
          on
          our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. The Company is not required
          to
          have, nor were we engaged to perform, an audit of its internal control
          over
          financial reporting. Our audit included consideration of internal control
          over
          financial reporting as a basis for designing audit procedures that are
          appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting. Accordingly, we express no such opinion. An audit includes examining,
          on a test basis, evidence supporting the amounts and disclosures in the
          financial statements. An audit also includes assessing the accounting principles
          used and significant estimates made by management, as well as evaluating
          the
          overall financial statement presentation. We believe that our audit provides
          a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Axion Power International,
          Inc. as of December 31, 2005, and the results of its operations, its cash
          flows
          and changes in stockholders' equity for the year then ended and for the
          period
          included in the cumulative development stage period from inception (September
          18, 2003) through December 31, 2005 in conformity with accounting principles
          generally accepted in the United States of America.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern. As discussed in Note 2 to
          the
          consolidated financial statements, the Company is a development stage Company
          with no revenues, recurring losses from operations and working capital
          deficits.
          As of December 31, 2005, the Company does not have readily available resources
          and operating cash flows are not adequate to fund operations. This raises
          substantial doubt about the Company’s ability to continue as a going concern.
          Management’s plans in regard to these matters are also described in Note 2. The
          consolidated financial statements do not include any adjustments that might
          result from the outcome of this uncertainty.
 
 /s/
          FREED
          MAXICK & BATTAGLIA, CPAs, PC
 
 Buffalo,
          New York
 October
          1, 2007
  F-2
  Item
        7  Consolidated
        Financial Statements
 
 **AXION
                  POWER INTERNATIONAL, INC****CONSOLIDATED
                  BALANCE SHEETS****(A
                  Development Stage Company)**
  December
                  31,
                2006
              
              December
                  31,
                2005**ASSETS****Current
                  Assets:**Cash
                  & cash equivalents
              
              $
              3,610,280
              
              $
              553,001Accounts
                  receivable
              
              
              45,007
              
              
              -Refundable
                  tax credits
              
              
              429,035
              
              
              343,200Inventory
              
              
              267,186
              
              
              -Prepaid
                  expenses
              
              
              92,579
              
              
              44,446**Total
                  current assets**
              
              
              4,444,087
              
              
              940,647**Property
                  & equipment, net**
              
              
              1,044,805
              
              
              264,942**TOTAL
                  ASSETS**
              
              $
              5,488,892
              
              $
              1,205,589**LIABILITIES
                  & STOCKHOLDERS' EQUITY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              911,466
              
              $
              538,119Accrued
                  expenses
              
              
              840,330
              
              
              308,211Notes
                  payable to related parties
              
              
              499,482
              
              
              180,231**Total
                  current liabilities**
              
              
              2,251,278
              
              
              1,026,561Commitments
                  and Contingencies (See Notes 6, 15 and 16)
              
              
              -
              
              
              -**Stockholders'
                  Equity:**Convertible
                  preferred stock-12,500,000 shares authorizedSenior
                  preferred - 1,000,000 shares designated 137,500 issued and outstanding
                  (140,000 in 2005)
              
              
              1,548,989
              
              
              1,454,897Series
                  A preferred - 2,000,000 shares designated 782,997 shares issued
                  and
                  outstanding (0 in 2005)
              
              
              1,578,235
              
              
              -Common
                  stock-50,000,000 shares authorized $0.0001 par value16,247,298
                  issued & outstanding (16,604,598 in 2005)
              
              
              1,625
              
              
              1,660Additional
                  paid in capital
              
              
              24,574,346
              
              
              15,950,173Stock
                  subscriptions receivable
              
              
              -
              
              
              (721,000
              )Deficit
                  accumulated during development stage
              
              
              (24,214,622
              )
              
              (16,351,130
              )Cumulative
                  foreign currency translation adjustment
              
              
              (250,959
              )
              
              (155,572
              )**Total
                  Stockholders' Equity**
              
              
              3,237,614
              
              
              179,028**TOTAL
                  LIABILITIES & STOCKHOLDERS' EQUITY**
              
              $
              5,488,892
              
              $
              1,205,589**The
                  Accompanying Notes are an Integral Part of the Financial
                  Statements**
  F-3
  **AXION
                  POWER INTERNATIONAL, INC****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****(A
                  Development Stage Company)**
  **Years
                    Ended**
                  **December
                    31,**
              
              **Inception****(9/18/2003)
                  to****2006**
              
              **2005**
              
              **December
                  31, 2006****Revenues**
              
              $
              275,377
              
              $
              -
              
              $
              275,377Cost
                  of tangible products sold
              
              
              557,983
              
              
              -
              
              
              557,983Gross
                  profit / (loss)
              
              
              (282,606
              )
              
              -
              
              
              (282,606
              )**Expenses**Selling,
                  general & administrative
              
              
              4,788,986
              
              
              2,960,175
              
              
              9,448,560Research
                  & development
              
              
              2,001,506
              
              
              1,633,595
              
              
              7,834,888Impairment
                  of assets
              
              
              6,581
              
              
              379,755
              
              
              1,391,485Interest
                  expense - related party
              
              
              713,048
              
              
              -
              
              
              737,836Derivative
                  revaluation
              
              
              437,588
              
              
              -
              
              
              437,588Mega
                  C Trust Share Augmentation (Return)
              
              
              (1,125,000
              )
              
              1,525,000
              
              
              400,000Other,
                  net
              
              
              (77352
              )
              
              (173,412
              )
              
              (475,738
              )**Net
                  loss before income taxes**
              
              
              (7,027,963
              )
              
              (6,325,113
              )
              
              (20,103,743
              )Income
                  Taxes
              
              
              -
              
              
              -
              
              
              -**Deficit
                  accumulated during development stage**
              
              
              (7,027,963
              )
              
              (6,325,113
              )
              
              (20,103,743
              )Less
                  preferred stock dividends and beneficial conversion
                  feature
              
              
              (835,529
              )
              
              (3,275,351
              )
              
              (4,110,879
              )Net
                  loss applicable to common shareholders
              
              $
              (7,863,492
              )
              $
              (9,600,464
              )
              $
              (24,214,622
              )Basic
                  and diluted net loss per share
              
              $
              (0.47
              )
              $
              (0.67
              )
              $
              (1.81
              )Weighted
                  average common shares outstanding
              
              
              16,628,290
              
              
              14,238,585
              
              
              13,413,375**The
                  Accompanying Notes are an Integral Part of the Financial
                  Statements**
  F-4
  **AXION
                  POWER INTERNATIONAL, INC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(A
                  Development Stage Company)**
  **Years
                    Ended**
                    **December
                      31,**
                
                **Inception**
                    **(9/18/2003)****2006**
                
                **2005**
                
                **December
                    31, 2006****Cash
                    Flows from Operating Activities:**Deficit
                    accumulated during development stage
                
                $
                (7,027,963
                )
                $
                (6,325,113
                )
                $
                (20,103,743
                )Adjustments
                    required to reconcile deficit accumulated during development
                    stage to cash
                    flows to cash flows used by operating activitiesDepreciation
                
                
                96,249
                
                
                58,157
                
                
                177,286Impairment
                    of assets
                
                
                6,582
                
                
                379,755
                
                
                1,391,486Non-cash
                    interest expense
                
                
                713,048
                
                
                -
                
                
                737,836Derivative
                    revaluations
                
                
                437,588
                
                
                -
                
                
                437,588Equity
                    instruments issued for services
                
                
                1,577,147
                
                
                884,998
                
                
                3,010,681Mega
                    C Trust Share Augmentation (Return)
                
                
                (1,125,000
                )
                
                1,525,000
                
                
                400,000Changes
                    in Operating Assets & LiabilitiesAccounts
                    receivable
                
                
                (51,878
                )
                
                -
                
                
                (51,878
                )Refundable
                    tax credits
                
                
                (88,206
                )
                
                (165,200
                )
                
                (407,074
                )Inventory
                
                
                (267,186
                )
                
                -
                
                
                (267,186
                )Prepaid
                    expenses
                
                
                (47,933
                )
                
                (30,753
                )
                
                (89,992
                )Accounts
                    payable
                
                
                619,977
                
                
                176,821
                
                
                1,113,843Accounts
                    payable to related party (C&T)
                
                
                
                
                
                (100,000
                )
                
                1,452,268Other
                    current liabilities
                
                
                551,109
                
                
                58,298
                
                
                857,221**Net
                    cash used by operating activities**
                
                
                (4,602,466
                )
                
                (3,538,037
                )
                
                (11,341,664
                )**Cash
                    Flows from Investing Activities**Purchase
                    of property & equipment
                
                
                (801,870
                )
                
                (218,042
                )
                
                (1,131,324
                )Investment
                    in intangible assets
                
                
                
                
                
                (51,399
                )
                
                (167,888
                )Investments
                    in notes receivable
                
                
                -
                
                
                (328,356
                )
                
                (1,217,016
                )**Net
                    cash used by investing activities**
                
                
                (801,870
                )
                
                (597,797
                )
                
                (2,516,228
                )**Cash
                    Flow from Financing Activities**Proceeds
                    from convertible debt
                
                
                -
                
                
                -
                
                
                1,550,000Proceeds
                    of related party note
                
                
                3,495,000
                
                
                173,510
                
                
                3,668,510Proceeds
                    from exercise of warrants
                
                
                -
                
                
                787,480
                
                
                1,655,500Proceeds
                    from sale of preferred stock, net of costs
                
                
                4,352,500
                
                
                2,729,181
                
                
                7,081,681Repayment
                    of related party note
                
                
                (185,286
                )
                
                -
                
                
                (185,286
                )Proceeds
                    from sale of common stock; net of costs
                
                
                788,900
                
                
                971,371
                
                
                3,717,405Net
                    cash provided by financing activities
                
                
                8,451,114
                
                
                4,661,542
                
                
                17,487,810Net
                    Change in Cash and Cash Equivalents
                
                
                3,046,778
                
                
                525,708
                
                
                3,629,918Effect
                    of Exchange Rate on Cash
                
                
                10,501
                
                
                (21,414
                )
                
                -(19,638
                )Cash
                    and Cash Equivalents - Beginning
                
                
                553,001
                
                
                48,707
                
                
                -Cash
                    and Cash Equivalents - Ending
                
                $
                3,610,280
                
                $
                553,001
                
                $
                3,610,280
 **The
          Accompanying Notes are an Integral Part of the Financial
          Statements**
  F-5
  
 Axion
                  Power International, Inc.Consolidated
                  Statement of Stockholders' Deficit-US$For
                  Periods Ended December 31, 2003; 2004; 2005; 2006(A
                  Development Stage Company)
  Preferred
              
              
              CommonShares
              
              
              Senior
                  Preferred
              
              
              Series
                  A Preferred
              
              
              Shares
              
              
              Common
                  Stock Amount
              
              
              Additional
                  Paid-In Capital
              
              
              Subscriptions
                  Receivable
              
              
              Deficit
                  Accumulated During Development Stage
              
              
              Other
                  Comprehensive Income Cumulative Translation Adjustments
              
              
              Total
                  Stockholders' EquityInception
                  September 18, 2003
              
              
              0
              
              $
              0
              
              
              
              
              
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Shares
                  to founders upon formulation of APC
              
              
              
              
              
              
              
              
              
              
              
              1,360,000
              
              
              137
              
              
              (137
              )
              
              0
              
              
              
              
              
              
              
              
              0Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              170,000
              
              
              17
              
              
              48,936
              
              
              
              
              
              
              
              
              
              
              
              48,953Conversion
                  of debt to equity
              
              
              
              
              
              
              
              
              
              
              
              1,108,335
              
              
              111
              
              
              1,449,889
              
              
              (350,000
              )
              
              
              
              
              
              
              
              1,100,001Debt
                  Discount from convertible debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,402
              
              
              
              
              
              
              
              
              
              
              
              86,402Unamortized
                  discount on convertible debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (77,188
              )
              
              
              
              
              
              
              
              
              
              
              (77,188
              )Fair
                  value of options issued as loan inducements
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,574
              
              
              
              
              
              
              
              
              
              
              
              15,574Shared
                  issued during Recapitalization-
                  Shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              6,147,483
              
              
              615
              
              
              (615
              )
              
              
              
              
              
              
              
              
              
              
              0-
                  Equity acquired in recapitalization
              
              
              
              
              
              
              
              
              
              
              
              1,875,000
              
              
              188
              
              
              (188
              )
              
              
              
              
              
              
              
              
              
              
              0Net
                  Loss December 31, 2003
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,097,030
              )
              
              
              
              
              (3,097,030
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (56,547
              )
              
              (56,547
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,153,577
              )Balance
                  at December 31, 2003
              
              
              0
              
              
              0
              
              
              
              
              
              10,660,818
              
              $
              1,067
              
              $
              1,522,674
              
              
              ($350,000
              )
              
              ($3,097,030
              )
              
              ($56,547
              )
              
              ($1,979,836
              )Shares
                  issued to founders
              
              
              
              
              
              
              
              
              
              
              
              445,000
              
              
              45
              
              
              (45
              )
              
              
              
              
              
              
              
              
              
              
              0Augmentation
                  shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              180,000
              
              
              18
              
              
              (18
              )
              
              
              
              
              
              
              
              
              
              
              0Conversion
                  of debt
              
              
              
              
              
              
              
              
              
              
              
              283,333
              
              
              28
              
              
              451,813
              
              
              350,000
              
              
              
              
              
              
              
              
              801,841Warrants
                  in consideration for technology purchased
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              563,872
              
              
              
              
              
              
              
              
              
              
              
              563,872Common
                  stock offering - net of cost
              
              
              
              
              
              
              
              
              
              
              
              823,800
              
              
              81
              
              
              1,607,053
              
              
              
              
              
              
              
              
              
              
              
              1,607,134Proceeds
                  from exercise of warrants
              
              
              
              
              
              
              
              
              
              
              
              475,200
              
              
              48
              
              
              867,972
              
              
              
              
              
              
              
              
              
              
              
              868,020Liability
                  converted as partial prepayment on options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              306,000
              
              
              
              
              
              
              
              
              
              
              
              306,000Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              45,000
              
              
              5
              
              
              191,738
              
              
              
              
              
              
              
              
              
              
              
              191,742Fraction
                  Shares Issued Upon Reverse Spilt
              
              
              
              
              
              
              
              
              
              
              
              48,782
              
              
              5
              
              
              (5
              )
              
              
              
              
              
              
              
              
              
              
              0Net
                  Loss December 31, 2004
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,653,637
              )
              
              
              
              
              (3,653,637
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (74,245
              )
              
              (74,245
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,727,882
              )Balance
                  at December 31, 2004
              
              
              0
              
              
              0
              
              
              
              
              
              12,961,933
              
              $
              1,296
              
              $
              5,511,054
              
              $
              0
              
              
              ($6,750,667
              )
              
              ($130,792
              )
              
              ($1,369,109
              )Proceeds
                  From Exercise of Warrants & Options
              
              
              
              
              
              
              
              
              
              
              
              853,665
              
              
              85
              
              
              1,283,395
              
              
              (496,000
              )
              
              
              
              
              
              
              
              787,480Common
                  Stock Offering Proceeds
              
              
              
              
              
              
              
              
              
              
              
              600,000
              
              
              60
              
              
              1,171,310
              
              
              (200,000
              )
              
              
              
              
              
              
              
              971,370Preferred
                  Stock Offering proceeds
              
              
              385,000
              
              
              3,754,110
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (25,000
              )
              
              
              
              
              
              
              
              3,729,110Conversion
                  of preferred to common
              
              
              (245,000
              )
              
              (2,475,407
              )
              
              
              
              
              1,470,000
              
              
              147
              
              
              2,475,260
              
              
              
              
              
              
              
              
              
              
              
              0Stock
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              50
              
              
              1,524,950
              
              
              
              
              
              
              
              
              
              
              
              1,525,000Fair
                  Value of Options for Non-Employee Services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              237,568
              
              
              
              
              
              
              
              
              
              
              
              237,568Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              219,000
              
              
              22
              
              
              647,480
              
              
              
              
              
              
              
              
              
              
              
              647,502Impact
                  of beneficial conversion feature
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,099,156
              
              
              
              
              
              (3,099,156
              )
              
              
              
              
              0Preferred
                  Stock Dividends
              
              
              
              
              
              176,194
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (176,194
              )
              
              
              
              
              0Net
                  Loss December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,325,113
              )
              
              
              
              
              (6,325,113
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (24,780
              )
              
              (24,780
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,349,893
              )Balance
                  at December 31, 2005
              
              
              140,000
              
              $
              1,454,897
              
              
              
              
              
              16,604,598
              
              $
              1,661
              
              $
              15,950,173
              
              
              ($721,000
              )
              
              ($16,351,130
              )
              
              ($155,572
              )
              $
              179,029Preferred
                  Series A Proceeds
              
              
              782,997
              
              
              
              
              
              7,571,768
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,571,768Preferred
                  - Dividends
              
              
              
              
              
              119,092
              
              
              103,101
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (222,193
              )
              
              
              
              
              0Senior
                  Preferred Cancellation
              
              
              (2,500
              )
              
              (25,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,000
              
              
              
              
              
              
              
              
              0Common
                  Stock Offering Proceeds
              
              
              
              
              
              
              
              
              
              
              
              80,000
              
              
              8
              
              
              199,992
              
              
              696,000
              
              
              
              
              
              
              
              
              896,000Proceeds
                  from exercise of warrants
              
              
              
              
              
              
              
              
              
              
              
              56,700
              
              
              6
              
              
              113,394
              
              
              
              
              
              
              
              
              
              
              
              113,400Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              6,000
              
              
              1
              
              
              23,999
              
              
              
              
              
              
              
              
              
              
              
              24,000Augmentation
                  shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              (500,000
              )
              
              (50
              )
              
              (1,124,950
              )
              
              
              
              
              
              
              
              
              
              
              (1,125,000
              )Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,241,231
              
              
              
              
              
              
              
              
              
              
              
              1,241,231Fair
                  value of warrants with related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              885,126
              
              
              
              
              
              
              
              
              
              
              
              885,126Modification
                  of preexisting warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              392,811
              
              
              
              
              
              
              
              
              
              
              
              392,811Fair
                  value warrants issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,848
              
              
              
              
              
              
              
              
              
              
              
              86,848Beneficial
                  conversion feature on related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              95,752
              
              
              
              
              
              
              
              
              
              
              
              95,752Beneficial
                  conversion feature on Preferred Stock
              
              
              
              
              
              
              
              
              (6,096,634
              )
              
              
              
              
              
              
              
              6,709,970
              
              
              
              
              
              (613,336
              )
              
              
              
              
              0Net
                  Loss December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,027,963
              )
              
              
              
              
              (7,027,963
              )Other
                  Comprehensive income (loss):
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (95,387
              )
              
              (95,387
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,123,350
              )Balance
                  at December 31, 2006
              
              
              920,497
              
              $
              1,548,989
              
              $
              1,578,235
              
              
              16,247,298
              
              
              1,625
              
              
              24,574,346
              
              
              -
              
              
              (24,214,622
              )
              
              (250,959
              )
              $
              3,237,614**The
                  Accompanying Notes are an Integral Part of the Financial
                  Statements**
 
 F-6
  **AXION
        POWER INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **Note
        1 — Organization and Operations**
 
 These
        consolidated financial statements of Axion Power International, Inc., a Delaware
        corporation (API), include the operations of its wholly owned subsidiaries;
        Axion Power Battery Manufacturing, Inc (APB), Axion Power Corporation, a
        Canadian Federal corporation (“APC”), and C & T Co. Inc., an Ontario
        corporation (“C&T”) (collectively, the Company).
 
 Axion
        is
        developing innovative battery/energy storage device technology. The Company
        continues its research and development and has entered the testing phase
        of its
        unique battery designs. The Company also acquired the equipment and inventory
        from a closed battery manufacturing plant from a bank (which had acquired
        the
        assets in foreclosure) and commenced limited manufacture of specialty batteries
        (see footnote captioned “Purchase of Assets of Failed Battery Manufacturing
        Company [Asset Purchase]).”
  **Note
        2 — Continued Operations**
 
 The
        accompanying financial statements have been prepared on the basis of accounting
        principles applicable to a “going concern” which assumes that the Company will
        continue operations for the foreseeable future and will be able to realize
        its
        assets and discharge its liabilities in the normal course of business. The
        significant operating losses, negative cash flow from operations, and the
        development stage of the Company have historically caused management to seek
        financing from various sources in order to carry out operations. The Company
        is
        presently seeking capital from multiple alternative sources. Management believes
        actions already taken (see footnote captioned “Subsequent Events”), or planned,
        will allow the Company to continue in business and accordingly realize its
        assets and discharge its liabilities in the normal course of business.
  **Note
        3 —Accounting Policies**
 
 ***Use
        of Estimates:*** **** The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at the date of the financial
        statement and the reported amounts of revenues and expenses during the reporting
        period. Actual results could differ from the estimates.
 
 ***Principles
        of Consolidation*** **:** The
        consolidated financial statements include the accounts of Axion, and its
        wholly
        owned subsidiaries, APB, APC and C&T (collectively, the Company). All
        significant inter-company balances and transactions have been eliminated
        in
        consolidation.
 
 ***Basis
        of Presentation*** **:** The
        financial statements have been presented in a “development stage” format in
        accordance with the provisions of Statement of Financial Accounting Standards
        (FASB) No. 7, *Accounting
        and Reporting by Development Stage Enterprises* .
        Since
        inception, the Company’s primary activities have been raising capital, obtaining
        financing, developing Axion’s energy storage technology and testing its proposed
        products.
 
 ***Segment
        Reporting:*** Management
        has determined that the Company is organized, managed and internally reported
        as
        one business segment. Segments are determined based on differences in products,
        internal reporting and how operational decisions are made.
 
 ***Foreign
        Currency Translation:*** ** The
        accounts of APC and C&T are measured using the Canadian dollar as the
        functional currency for all the periods presented in the financial statements.
        The translation from Canadian dollars to U.S. dollars is performed for the
        balance sheet accounts using current exchange rates in effect at each of
        the
        balance sheet dates, and for the revenue and expense accounts using the average
        rate in effect during the periods. The resulting translation adjustments
        are
        recorded as a component of accumulated other comprehensive income (loss)
        within
        stockholders’ equity. Gains or losses resulting from transactions denominated in
        currencies other than the functional currency are included in the results
        of
        operations as incurred. The gains or losses arising from the inter-company
        loan
        denominated in U.S. dollars are directly reflected in other comprehensive
        income, as the amounts are not expected to be repaid in the foreseeable
        future.
  F-7
 
 ***Comprehensive
        Income:*** The
        Company follows FASB No. 130, “ *Reporting
        Comprehensive Income* .”
        Comprehensive income, as defined by Statement 130, is the change in equity
        of a
        business enterprise during a reporting period from transactions and other
        events
        and circumstances from non-owner sources. In addition to the Company’s net loss,
        the change in equity components under comprehensive income include the foreign
        currency translation adjustment.
 
 ***Fair
        Value of Financial Instruments:*** **** FASB
        No.
        107, " *Disclosures
        about Fair Value of Financial Instruments* ,"
        requires disclosure of fair value information about certain financial
        instruments, including, but not limited to, cash and cash equivalents, accounts
        receivable, refundable tax credits, prepaid expenses, accounts payable, accrued
        expenses, notes payable to related parties and convertible debt-related
        securities. Fair value estimates discussed herein are based upon certain
        market
        assumptions and pertinent information available to management as of December
        31,
        2005 and 2006. The carrying value of the balance sheet financial instruments
        included in the Company’s consolidated financial statements approximated their
        fair values.
 
 ***Cash
        and Cash Equivalents:*** **** For
        financial statement presentation purposes, the Company considers those
        short-term, highly liquid investments with original maturities of three months
        or less to be cash or cash equivalents.
 
 ***Concentration
        of Credit Risk:*** The
        Company’s cash and cash equivalents are on deposit with banks. Only a portion of
        the cash and cash equivalents would be covered by deposit insurance and the
        uninsured balances are substantially greater than the insured amounts. Although
        cash and cash equivalent balances exceed insured deposit amounts, management
        does not anticipate non-performance by the banks.
 
 ***Accounts
        Receivable:*** The
        Company records its accounts receivable at the original invoice amount less
        an
        allowance for doubtful accounts. An account receivable is considered to be
        past
        due if any portion of the receivable balance is outstanding beyond its scheduled
        due date. On a quarterly basis, the Company evaluates its accounts receivable
        and establishes an allowance for doubtful accounts, based on its history
        of past
        write-offs and collections, and current credit conditions. No interest is
        accrued on past due accounts receivable. The Company has concluded that there
        is
        no need for an allowance for doubtful accounts at December 31, 2006 and
        2005.
 
 ***Inventory:*** Inventory is recorded at the lower of cost or market value, and adjusted
        as
        appropriate for decreases in valuation and obsolescence. Adjustments to the
        valuation and obsolescence reserves are made after analyzing market conditions,
        current and projected sales activity, inventory costs and inventory balances
        to
        determine appropriate reserve levels. As of December 31, 2006, no reserve
        for
        obsolescence was deemed necessary. Cost is determined using the first-in
        first-out (FIFO) method. As of December 31, 2006, inventory included $267,186
        of
        lead-acid battery components, consisting of $177,461 of raw materials, $45,560
        of work-in-process and $44,165 of finished goods.
  ***Property
        and Equipment:*** **** Property
        and equipment are recorded at cost. Depreciation is computed using the straight
        line method over the estimated useful lives of the assets, ranging from 3
        to 22
        years. This method represents a change in accounting policy effective January
        1,
        2006; previously the Company depreciated its assets using the double declining
        balance method of depreciation. In connection with the change in policy,
        the
        Company reassessed the useful lives assigned and changed its estimate therefore.
        The changes in accounting estimate and policy did not have a material impact
        on
        depreciation expense for the period ended December 31, 2006, or the Company’s
        financial statements as a whole,
  Expenditures
        for renewals and betterments are capitalized. Expenditures for minor items,
        repairs and maintenance are charged to operations as incurred. Gain or loss
        upon
        sale or retirement due to obsolescence is reflected in the operating results
        in
        the period the event takes place.
 
 ***Impairment
        or Disposal of Long-Lived Assets:*** The
        Company adopted the provisions of FASB No. 144 (FASB 144), “ *Accounting
        for the Impairment or Disposal of Long-lived Assets* .”
This
        standard requires, among other things, that long-lived assets be reviewed
        for
        potential impairment whenever events or circumstances indicate that the carrying
        amounts may not be recoverable. The Company has fully impaired patent costs
        for
        all periods presented resulting in an impairment loss of $51,399 in 2005.
        This
        is based on the management’s conclusion that future cash flows were not readily
        determinable and there was no way to reasonably estimate the expenses to
        be
        incurred in commercializing the patents.
  F-8
 
 The
        assessment of possible impairment is based on the ability to recover the
        carrying value of the asset from the expected future pre-tax cash flows
        (undiscounted and without interest charges) of the related operations. If
        these
        expected cash flows are less than the carrying value of such asset, an
        impairment loss is recognized for the difference between estimated fair value
        and carrying value. The primary measure of fair value is based on discounted
        cash flows. The measurement of impairment requires management to make estimates
        of these cash flows related to long-lived assets, as well as other fair value
        determinations.
  ***Impairment
        of Notes Receivable*** (Mega-C) ***:*** The
        Company tests its notes receivable for collectability pursuant to the standards
        in the FASB No. 5, *Accounting
        for Contingencies* (FASB
        5) ***.*** Based
        on
        management’s assessment of substantial doubt as to collectability pursuant to
        FASB 5, the Company fully impaired notes receivable for all periods presented
        resulting in an impairment loss of $328,356 in 2005. See footnote captioned
        “ Mega-C Power
        Corp (Mega-C), Mega-C  Trust
        (the Trust), The Taylor Litigation” for further information.
 
 ***Revenue
        Recognition:*** The
        Company recognizes revenue upon transfer of title at the time of shipment
        (F.O.B. shipping point), when all significant contractual obligations have
        been
        satisfied, the price is fixed or determinable, and collectability is reasonably
        assured.
  ***Shipping
        and Handling Costs:*** All
        shipping and handling costs charged to customers are recorded as Net Sales
        and
        all related expenses are included in Cost of Sales. Shipping and handling
        costs
        not billed to customers are included in selling, general and administrative
        expense.
  ***Stock-Based
        Compensation:*** Prior to
        January 1, 2006, the Company accounted for stock option awards in accordance
        with the recognition and measurement provisions of Accounting Principles
        Board
        Opinion No. 25, “ *Accounting
        for Stock Issued to Employees,* (APB
        25) *”* and
        related interpretations, as permitted by Statement of Financial Accounting
        Standard No. 123, “ *Accounting
        for Stock-Based Compensation* ”,
        (SFAS
        123). Under APB 25, compensation cost for stock options issued to employees
        was
        measured as the excess, if any, of the fair value of the Company’s stock at the
        date of grant over the exercise price of the option granted. Compensation
        cost
        was recognized for stock options, if any, ratably over the vesting period.
        As
        permitted by SFAS 123, the Company reported pro-forma disclosures presenting
        results and earnings as if the Company had used the fair value recognition
        provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.
 
 Effective
        January 1, 2006, the Company adopted the provisions of Statement of Financial
        Accounting Standards No. 123 (revised 2004), *“Share-Based
        Payment”* ,
        (SFAS
        123(R)) using the modified prospective transition method. See footnote captioned
        “Equity Compensation” for further detail on the impact of SFAS 123(R) to the
        Company’s consolidated financial statements.
 
 Stock-based
        compensation related to non-employees is recognized as compensation expense
        in
        the accompanying consolidated statements of operations and is based on the
        fair
        value of the services received or the fair value of the equity instruments
        issued, whichever is more readily determinable **.** The
        Company’s accounting policy for equity instruments issued to consultants and
        vendors in exchange for goods and services follows the provisions of EITF
        96-18, *“Accounting
        for Equity Instruments That are Issued to Other Than Employees for Acquiring,
        or
        in Conjunction with Selling, Goods or Services”* and EITF
        00-18, *“Accounting
        Recognition for Certain Transactions Involving Equity Instruments granted
        to
        Other Than Employees.”* The
        measurement date for the fair value of the equity instruments issued is
        determined at the earlier of (i) the date at which a commitment for performance
        by the consultant or vendor is reached or (ii) the date at which the consultant
        or vendor’s performance is complete. In the case of equity instruments issued to
        consultants, the fair value of the equity instrument is recognized over the
        term
        of the consulting agreement.
 
 ***Research
        and Development*** **:** Research
        and development costs are recorded in accordance with FASB No, 2, “ *Accounting
        for Research and Development Costs,* ”
which
        requires that costs incurred in research and development activities covering
        basic scientific research and the application of scientific advances to the
        development of new and improved products and their uses be expensed as incurred.
        The policy of expensing the costs of research and development activities
        relate
        to (i) in-house work conducted by the Company; (ii) costs incurred in
        connection with contracts that outsource research and development to third
        party
        developers; and (iii) costs incurred in connection with the acquisition of
        intellectual property that is properly classified as in-process research
        and
        development. All research and development costs have been expensed.
  F-9
  ***Income
        Taxes:*** Deferred
        income taxes are recorded in accordance with FASB No. 109, “ *Accounting
        for Income Taxes* ,”
or
        FASB 109, and deferred tax assets and liabilities are determined based on
        the
        differences between financial reporting and the tax basis of assets and
        liabilities using the tax rates and laws in effect when the differences are
        expected to reverse. FASB 109 provides for the recognition of deferred tax
        assets if realization of such assets is more likely than not to occur.
        Realization of net deferred tax assets is dependent upon generating sufficient
        taxable income in future years in appropriate tax jurisdictions to realize
        benefit from the reversal of temporary differences and from net operating
        loss,
        or NOL, carryforwards. The Company has determined it more likely than not
        that
        the deferred tax asset resulting from these timing differences will not
        materialize and have provided a valuation allowance against the entire net
        deferred tax asset. Management will continue to evaluate the realizability
        of
        the deferred tax asset and its related valuation allowance. If the assessment
        of
        the deferred tax assets or the corresponding valuation allowance were to
        change,
        the Company would record the related adjustment to income during the period
        in
        which the determination is made. The tax rate may also vary based on actual
        results and the mix of income or loss in domestic and foreign tax jurisdictions
        in which operations take place.
 
 Refundable
        tax credits are recorded, to the extent receipt is assured, in the year that
        they are earned and included in other income.
 
 ***Recent
        Accounting Pronouncements:***
  In
        June
        2006, The FASB issued Interpretation No. 48 “ *Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
        109* ”
(“FIN
        48”). This Interpretation clarifies the accounting for uncertainty in income
        taxes recognized in an enterprise’s financial statements in accordance with FASB
        No. 109, “ *Accounting
        for Income Taxes* ” *.* FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on de-recognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. The Company is currently evaluating the impact of adopting
        the provisions of FIN 48 in fiscal 2007.
 
 In
        September 2006, the United States Securities and Exchange Commission (“SEC”)
        released Staff Accounting Bulletin No. 108 *,
        Considering the Effects of Prior Year Misstatements When Quantifying
        Misstatements in Current Year Financial Statements* ”
(“SAB
        108”). SAB 108 provides interpretive guidance on how public companies quantify
        financial statement misstatements. There have been two common approaches
        used to
        quantify such errors. Under an income statement approach, the “roll-over”
method, the error is quantified as the amount by which the current year income
        statement is misstated. Alternatively, under a balance sheet approach, the
“iron
        curtain” method, the error is quantified as the cumulative amount by which the
        current year balance sheet is misstated. In SAB 108, the SEC established
        an
        approach that requires quantification of financial misstatements based on
        the
        effects of the misstatements on each of the company’s financial statements and
        the related financial statement disclosures. This method is commonly referred
        to
        as a “dual approach” because it requires quantification of errors under both the
        roll-over and iron curtain methods. SAB 108 was effective for the Company
        as of
        December 31, 2006. The adoption of SAB 108 did not have a material impact
        on the
        Company’s consolidated financial position, results of operations or cash flows.
 
 In
        September 2006, the FASB issued FASB No. 157, “ *Fair
        Value Measurements* ”
which
        establishes a framework for measuring fair value, and expands disclosures
        about
        fair value measurements. While FASB No. 157 does not apply to transactions
        involving share-based payment covered by FASB No. 123, it establishes a
        theoretical framework for analyzing fair value measurements that is absent
        from
        FASB No. 123. We have relied on the theoretical framework established by
        FASB
        No. 157 in connection with certain valuation measurements that were made
        in the
        preparation of these financial statements. FASB No. 157 is effective for
        years
        beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
        FASB issued an exposure draft that provides a one year deferral for
        implementation of the Standard for non-financial assets and liabilities.
        The
        Company is current evaluating the impact FASB No. 157 will have on its
        consolidated financial statements.
  F-10
 
 In
        February 2007, Statement of Financial Accounting Standards No. 159,
“ *The
        Fair Value Option for Financial Assets and Financial Liabilities-Including
        an
        Amendment of FASB Statement No. 115* ,”
(FASB
        159), was issued. This standard allows a company to irrevocably elect fair
        value
        as the initial and subsequent measurement attribute for certain financial
        assets
        and financial liabilities on a contract-by-contract basis, with changes in
        fair
        value recognized in earnings. The provisions of this standard are effective
        as
        of the beginning of our fiscal year 2008, with early adoption permitted.
        The
        Company is currently evaluating what effect the adoption of FASB 159 will
        have
        on its consolidated financial statements.
 
 In
        December of 2006 the Financial Accounting Standards Board issued FSP No.
        EITF
        00-19-2, “ *Accounting
        for Registration Payment Arrangements* .”
This
        FSP specifies that the contingent obligation to make future payments or
        otherwise transfer consideration under a registration payment arrangement
        should
        be separately recognized and measured. The FSP also clarifies that a financial
        instrument subject to a registration payment arrangement should be separately
        accounted for in accordance with the applicable guidance without regard to
        the
        registration payment arrangement’s contingent obligation. The FSP is effective
        immediately for registration payment arrangements and the financial instruments
        subject to those arrangements that are entered into or modified subsequent
        to
        December 21, 2006. For registration payment arrangements and financial
        instruments subject to those arrangements that were entered into prior to
        December 21, 2006, the guidance is effective for financial statements issued
        for
        fiscal years beginning after December 15, 2006, and interim periods within
        those
        fiscal years. The Company is currently evaluating what effect the adoption
        of
        FSP No. EITF 00-19-2 will have on its consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), *Business
        Combinations* and SFAS
        No. 160, *Accounting
        and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
        an amendment of ARB No. 51* .
        These
        new standards will significantly change the accounting for and reporting
        of
        business combinations and non-controlling (minority) interests in consolidated
        financial statements. Statement Nos. 141(R) and 160 are required to be
        adopted simultaneously and are effective for the first annual reporting period
        beginning on or after December 15, 2008. Earlier adoption is prohibited.
        The Company is currently evaluating the impact of adopting SFAS Nos. 141(R)
        and SFAS 160 on its consolidated financial statements.
 
 In
        March
        2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
        Assets-an amendment of FASB Statement No. 140" This Statement amends SFAS
        No.
        140, "Accounting for Transfers and Servicing of Financial Assets and
        Extinguishments of Liabilities", with respect to the accounting for separately
        recognized servicing assets and servicing liabilities. The provisions of
        this
        Statement are effective for all financial instruments acquired or issued
        in
        fiscal years beginning after September 15, 2006. The Company is currently
        evaluating the impact of adopting SFAS No. 156 on its consolidated financial
        statements.
 
 In
        February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140".
        This
        Statement, among other things, allows a preparer to elect fair value measurement
        of instruments in cases in which a derivative would otherwise have to be
        bifurcated.  The provisions of this Statement are effective for all
        financial instruments acquired or issued in fiscal years beginning after
        September 15, 2006. The Company is currently evaluating the impact of adopting
        SFAS No. 155 on its consolidated financial statements.
 
 As
        discussed in Note 9, the Company adopted the provisions of FASB No. 123(R)
        effective as of its first fiscal quarter beginning January 1, 2006.
 
 In
        December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB
        110 permits companies to continue to use the simplified method, under certain
        circumstances, in estimating the expected term of “plain vanilla” options beyond
        December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously
        stated that the Staff would not expect a company to use the simplified method
        for share option grants after December 31, 2007. Adoption of SAB 110 is not
        expected to have a material impact on the Company’s consolidated financial
        statements.
  F-11
  **Note
        4 — Property and Equipment**
 
 A
        summary
        of property and equipment at December 31, 2006 and 2005 is as
        follows:
  **Estimated
                    useful**
                  **life**
              
              
              **2006**
              
              
              **2005**Asset
                  deposit
              
              
              
              
              $
              -
              
              $
              80,000Leasehold
                  improvements
              
              
              10
              
              
              84,975
              
              
              -Machinery
                  & equipment
              
              
              3-22
                  years
              
              
              1,139,657
              
              
              270,902Less
                  accumulated depreciation
              
              
              
              
              
              179,827
              
              
              85,960Net
              
              
              
              
              $
              1,044,805
              
              $
              264,942Depreciation
                  expense
              
              
              
              
              $
              96,249
              
              $
              58,157
 **Note
        5-Purchase of Assets of Failed Battery Manufacturing Company (Asset Purchase)**
 
 ***Incorporation
        of new subsidiary:*** In
        January 2006, the Company incorporated a new wholly owned subsidiary named
        Axion
        Battery Products, Inc. (“ABP”) under the laws of the Commonwealth of
        Pennsylvania for the purpose of operating a battery manufacturing facility
        in
        New Castle, Pennsylvania. The Company changed the name of this subsidiary
        to
        Axion Power Battery Manufacturing Inc.
 
 ***Purchase
        of battery manufacturing assets:*** In
        February 2006, ABP entered into an agreement to purchase all of the equipment,
        inventory and other tangible assets of the New Castle Battery Manufacturing
        Company, Inc. from National City Bank, Pennsylvania in a foreclosure sale
        conducted pursuant to the provisions of Article 9 of the Pennsylvania Uniform
        Commercial Code. The assets were purchased by ABP and include all equipment,
        molds, inventories, parts and supplies that were subject to the bank’s security
        interest. Since the former New Castle Battery Manufacturing Company had been
        closed for several months prior to the acquisition and there were no employees,
        distribution systems, sales force, customer base, vendor relationships, or
        established revenue stream, the transaction was accounted for as a purchase
        of
        assets rather than as a business combination.
 
 ***Consideration
        Paid:*** ABP paid
        $800,000 for the assets and incurred $20,244 of legal expenses directly
        associated with negotiating and executing this transaction. Of the $800,000
        paid, $710,000 was paid to the seller at closing and $90,000 was initially
        placed in an interest bearing escrow account pending the seller’s resolution of
        certain encumbrances on a portion of the purchased assets. In August 2006,
        it
        was determined that the encumbered assets would not be transferred to ABP
        and
        $83,250 of the deposit was returned resulting in a final purchase price of
        $736,994 that was allocated to manufacturing equipment and inventory valued
        at
        approximately $540,000 and $197,000, respectively, on the date of the purchase.
  ***Property
        rental:*** In
        February 2006, ABP entered into a lease agreement for an industrial building
        located in New Castle, Pennsylvania. The agreement provides for an initial
        term
        of two years with two renewal terms of five years each. The monthly rent
        payable
        for the initial term of the agreement is $11,265. During the two extension
        terms, the rent will be based on market rates as determined by negotiation
        between the parties, or if the parties are unable to reach a mutually agreed
        rental rate, by an independent appraisal process. The renewal and extension
        of
        the lease is being negotiated as of the date of filing of this report. In
        addition to the monthly rental, ABP is obligated to pay all required maintenance
        costs, taxes and special assessments, maintain public liability insurance
        in the
        amount of $1 million, and maintain fire and casualty insurance for an amount
        equal to at least 80% of the replacement value of the leased
        premises.
 
 **Note
        6 — Transactions with a related party (C&T)**
 
 ***License
        Agreement / Stock Purchase:*** In
        a
        series of transactions from 2003 to 2005 the Company acquired 100% of the
        outstanding shares of C&T. In summary, APC entered into a Development and
        License Agreement with C&T in November 2003 that provided for certain
        payments to C&T and gave APC the right to acquire all of C&T’s technical
        assets. The terms of the agreement were renegotiated by the Company in January
        of 2004. Under the amended agreement, the Company acquired the technology
        in its
        current state in exchange for warrants. The asset acquired was recorded as
        in-process research and development in the restated financial statements
        and
        fully expensed. Through a series of subsequent transactions the Company acquired
        full ownership of C&T in 2005 upon final satisfaction of the payments due
        under the original Development and License Agreement.
  F-12
 
 Under
        the
        November 2003 Development and License Agreement between APC and C&T, APC
        agreed to:
 
 ·
              pay
                  $794,000 to C&T in periodic
                  payments;;
 
 ·
              pay
                  $1 million to C&T when beta testing of the technology was successfully
                  completed;
 
 ·
              issue
                  12.5% of APC’s common stock to C&T;
 
 ·
              pay
                  royalties of 3.75% to C&T on future sales of products based on the
                  technology, and,
 
 ·
              if
                  APC becomes a public company, listed on a major exchange, issue
                  an
                  additional 12.5% of APC’s common stock for the acquisition of all
                  outstanding shares of C&T
                  stock.
 
 In
        January 2004, the terms of the agreement with C&T were renegotiated and the
        Company agreed to:
 
 ·
              assume
                  APC’s obligation to pay the remaining balance of the $794,000
                  obligation;
 
 ·
              assume
                  APC’s obligation to pay the $1 million contingent payment;
                  and
 
 ·
              issue
                  1,562,900 warrants (25,000,000 pre 16:1 reverse split) to C&T in
                  exchange for its residual interest in the technology, including
                  its
                  patents; its reserved rights to develop the technology for use
                  in mobile
                  applications and consumer products; and any reserved royalties
                  that were
                  paid by Mega-C and Mega-C Technologies, Inc (MCT) under C&T’s earlier
                  agreements with those companies, and the shares of C&T will be
                  transferred to Axion upon final payment of the obligation under
                  the
                  license agreement. See discussion about Warrant Extension in the
                  footnote
                  captioned “Subsequent Events.”
  Preliminary
        beta testing was completed in early 2005 and the parties entered into Second
        Amendment to the Development and License Agreement on March 18, 2005. Under
        the
        terms of this agreement, the Company was obligated to deliver certificates
        for
        100,000 shares of preferred stock to persons designated by C&T, and C&T
        was obligated to deliver a series of assignments and other documents to the
        Company. The Company issued the preferred stock certificates in March 2005
        in
        connection with the completion of the senior preferred offering. However,
        C&T delayed the delivery of the assignments and other documents to the
        Company until February 2007. Since the Company’s only obligations under the
        March 2005 agreement were the delivery of the consideration specified therein,
        the certificates for the shares of senior preferred were prepared promptly
        and
        have been ready for delivery since March 2005 and the delays in holding a
        formal
        closing were beyond the Company’s control, the attached financial statements
        reflect completion of the transaction and full ownership of C&T in March
        2005 upon final satisfaction of the payments due under the agreements even
        though the final document deliveries thereunder were not completed until
        March
        2007.
 
 ***Research
        and development payments to C&T:*** As
        discussed above, the Company issued 1,562,900 warrants to the former
        shareholders of C&T to purchase intangible assets from C&T. These
        warrants were valued at approximately $564,000 and recorded as in-process
        research and development. In connection with the 2003 license agreement,
        the
        Company entered into a research and development project management agreement
        with C&T. Under the project management agreement, the Company agreed to pay
        all direct costs and expenses associated with its research and development
        activities, including reasonable equipment, material, travel and employee
        costs
        actually incurred by C&T. In addition to the direct costs, C&T was paid
        a management surcharge equal to 50% of the salaries and bonuses paid to members
        of the C&T technical staff who are assigned to work on Company projects.
        During the year ended December 31, 2005, research costs incurred under the
        project management agreement were approximately $115,000. Upon purchase of
        the
        outstanding shares of C&T, the Company, in March 2005, terminated the
        agreement and all necessary C&T employees assigned to Company projects were
        hired by the Company. During the year ended December 31, 2006, the terms
        of the
        warrants granted were modified. The modification resulted in additional expense
        of approximately $342,000, which has been classified as research and development
        expense. See note captioned “Stockholders’ Equity for further
        discussion.
  F-13
 
 ***Purchase
        of equipment:*** In
        connection with the acquisition of C&T stock, the Company was granted the
        option to purchase certain tangible personal property owned by C&T Labs,
        Inc., an affiliate of C&T, for the appraised value up to a year subsequent
        to the transaction. In April 2006 the option was exercised and the Company
        took
        ownership of the equipment and a liability for approximately $84,000 was
        recorded related to the purchase. The liability remains unpaid as of the
        date of
        this report.
 
 **Note
        7-Related Party Debt Financing**
 
 During
        the year ending December 31, 2005, the Company borrowed approximately $180,000
        from a member of the board of directors. The note originally charged interest
        at
        the rate of 6% per year and was due December 10, 2005. As of December 31,
        2005,
        the amount was still outstanding, resulting in a default interest rate of
        12%.
        The note was fully repaid in January 2006. Interest charges of approximately
        $2,000 were recorded.
  In
        January 2006, ABP entered into a secured loan agreement with Robert Averill,
        a
        director of the Company, whereby Mr. Averill agreed to provide $1 million
        in
        acquisition and working capital financing for ABP’s purchase of the battery
        manufacturing facility which was increased to $1.2 million in September 2006
        and
        amended to incorporate the conversion terms of the second and third quarter
        loans discussed below. The loan agreements require ABP to pay interest on
        the
        outstanding balance at the annual rate of 10%. Interest payments are due
        on the
        first day of each month and commenced in February 2006. The entire principal
        balance of the loan was initially due on February 1, 2007, provided that
        the
        loan may be repaid at any time without notice or penalty. The loan was secured
        by a first priority interest in all of ABP’s equipment, inventory, furniture and
        fixtures, together with all substitutions or replacements and all proceeds
        from
        the sale thereof. The amount of the secured loan was further increased to
        $1,510, 000
        in
        November 2006, at which time the interest rate was amended retroactively
        to an
        annual rate of 12% and
        amended to extend the maturity date to February 2008. In November 2007, the
        loan
        was subsequently extinguished in exchange for the security provided under
        the
        Secured Bridge Loan program offered during the fourth quarter of 2007. See
        Note
        captioned “Subsequent Events” for further discussion.
  The
        Company has signed the loan agreement as an accommodation party and assumed
        direct liability for the payment of ABP’s obligations. ABP and the Company each
        granted Mr. Averill a first priority security interest in all of their
        equipment, inventory, furniture, fixtures and intellectual property, together
        with all substitutions or replacements and all proceeds from any bulk sale
        thereof. As additional consideration for the loan, the Company issued Mr.
        Averill 50,000 common stock purchase warrants in January 2006 with an additional
        50,000 warrants each quarter the loan was outstanding, resulting in the issuance
        of an additional 200,000 warrants in December 2006. The warrants are exercisable
        for a period of three & four years from the issue date at a price of $6 per
        share. The warrants have been valued as of each date of grant using the
        Black-Scholes-Merton option pricing model. This amount was recorded as a
        note
        discount and amortized into interest expense over the term of the
        loan.
  During
        2006, the Company borrowed an additional $1,985,000 from three directors
        of the
        Company, including Mr. Averill, along with two of the original founders of
        APC.
        Certain of the loan agreements provided for a second priority security interest
        in the Company’s property consisting of all accounts receivable, equipment,
        inventory, furniture and fixtures, and intellectual property, together with
        all
        substitutions, replacements, developments or accessions thereto and all proceeds
        from the sale thereof. The loan agreements required the Company to pay interest
        on the outstanding balance at annual rates of 10% to 12% and provided for
        the
        issuance of 553,000 common stock purchase warrants that were partially
        redeemable if the loans were repaid in a timely manner. The warrants are
        exercisable for a period of three & four years from the date of issuance at
        a price of $6 per share, and provide that the holders would be entitled to
        tender their respective notes in full or partial payment of the subscription
        price of any equity securities the Company elected to offer while the loans
        were
        outstanding.
 
 Borrowings
        under the loan arrangements discussed above are convertible into offering
        units
        at a price of $2.50 per unit. The unit consists of one share of common stock
        and
        one warrant to purchase one share of common stock at a price of $4.00 per
        share.
        The warrants are exercisable up until the first anniversary of the effective
        date of the common stock registration statement. The
        effective conversion price of certain of these loans was at a price lower
        than
        the market price of the common stock at the date of the issuance, resulting
        in a
        non-cash beneficial conversion feature of $95,792. This beneficial conversion
        feature was immediately recognized as additional interest expense during
        the year ended December 31, 2006.
  F-14
 
 In
        October 2006, the Company redeemed 15,000 warrants and converted $48,217
        of
        interest and $1,491,783 of principal on related party loans into shares of
        the
        Company’s Series A Preferred Stock for a total subscription of $1,540,000. 
In December 2006, lenders converted an aggregate of $1,502,418 in principal
        and
        $130,833 in accrued interest into shares of the Company’s Series A Preferred
        Stock, as discussed below, and the Company redeemed 66,387 warrants at this
        time. The unpaid balance of the Company’s loans was $500,799 plus $11,066 in
        interest at December 31, 2006, with a maturity date of February 1, 2008.
        $72,124
        of this balance was repaid on January 25, 2007, while the remainder was
        converted into obligations under the Secured Bridge Loan program discussed
        in
        the Note captioned “Subsequent Events”, subheading “Debt Financing”.
 
 ***Warrants:*** The loan
        agreements disclosed above provided for the aggregate issuance of 741,613
        common
        stock purchase warrants, which were issuable as of December 31, 2006. The
        warrants due under these agreements were valued using a Black-Scholes-Merton
        option pricing model at $271,567 and initially recorded as a note discount.
        Of
        this amount, $251,234 has been amortized into interest expense during the
        twelve-month period ended December 31, 2006 with $1,317 to be amortized during
        2007. The remainder of $19,016 was recognized as a loss on extinguishment
        of
        certain of the loans as described below.  430,000 of these warrants, (the
        amount of warrants net of those subsequently redeemed), were not issued
        consistent with the originating document. Originally valued at $156,080,
        the
        liability to issue these equity instruments was settled in the fourth quarter
        of
        2006. Using the stock price at the date of issuance, the warrant valuations
        based on their original terms amounted to $593,668 or $437,588 more than
        the
        original liability. However, the warrants when actually issued were issued
        with
        a four year term extending the exercise period through December 29, 2010.
        This
        modification added an additional $175,971 in expense recognized during the
        fourth quarter of 2006. See the footnotes captioned “Stockholder's Equity” and
“Subsequent Events” for additional disclosure of these transactions.
 
 ***Interest
        Expense:*** Interest
        expense recognized for the year ended December 30, 2006 in connection with
        these
        notes and related liabilities amounted to $713,048, of which $251,234 relates
        to
        the amortization of the note discount related to the warrants granted, $95,752
        relates to the beneficial conversion feature, $175,971 results from the warrant
        extension, and the remainder relates to the stated interest rate on the
        outstanding balance.
 
 ***Extinguishment
        Loss:*** During
        the fourth quarter, the Company recognized an additional $19,016 in loss
        on
        extinguishment when converting debt into preferred shares as described
        above.
 
 **Note
        8 — Stockholders' Equity**
 
 ***Authorized
        capital stock:*** As
        of December 31, 2006, the Company’s certificate of incorporation authorizes the
        issuance of 50,000,000 shares of common stock and 12,500,000 shares of preferred
        stock.
 
 ***Common
        stock:*** At
        December 31, 2006, 16,247,298 shares of common stock were issued and
        outstanding, as compared with 16,604,598 shares at December 31, 2005. The
        holders of common stock are entitled to one vote for each share held of record
        on all matters to be voted on by stockholders. There is no cumulative voting
        with respect to the election of directors, with the result that the holders
        of
        more than 50% of the shares voted for the election of directors can elect
        all of
        the directors. Holders of common stock are entitled to receive dividends
        when
        and if declared by the board out of funds legally available. In the event
        of
        liquidation, dissolution or winding up, the common stockholders are entitled
        to
        share ratably in all assets remaining available for distribution to them
        after
        payment of liabilities and after provision has been made for each class of
        stock, if any, having preference over the common stock. The common stockholders
        have no conversion, preemptive or other subscription rights and there are
        no
        redemption provisions applicable to the common stock. All of the outstanding
        shares of common stock are fully paid and non-assessable.
 
 ***Preferred
        Stock:*** The
        Company’s certificate of incorporation authorizes the issuance of 12,500,000
        shares of blank check preferred stock. The Company’s board of directors has the
        power to establish the designation, rights and preferences of any preferred
        stock. Accordingly, the board of directors has the power, without stockholder
        approval, to issue preferred stock with dividend, liquidation, conversion,
        voting or other rights that could adversely affect the voting power or other
        rights of the holders of common stock.
  F-15
 
 At
        December 31, 2006, 137,500 shares of 8% Cumulative Convertible Senior Preferred
        stock were issued and outstanding, and 782,997 shares of Series A Convertible
        Preferred stock were issued and outstanding.
 
 ***Equity
        Transactions -period ended December 31, 2003***
 
 *APC
        and Tamboril Cigar Company (Tamboril, now Axion) reverse
        acquisition* *:* ****** In
        December 2003 Tamboril entered into a reverse acquisition agreement with
        APC.
        Under the terms of the agreement, all outstanding securities of APC were
        acquired by Tamboril in exchange for newly issued stock. Upon consummation
        of
        the transaction, the former stockholders of APC owned the majority of Tamboril’s
        outstanding shares and controlled Tamboril’s Board of Directors. Accordingly,
        t he
        acquisition of APC by Tamboril was structured as a reverse acquisition under
        which Tamboril was the legal acquirer in the transaction and APC was the
        accounting acquirer. The transaction was treated as a recapitalization of
        APC
        for accounting purposes. Tamboril had no material assets or liabilities and
        1,875,000 common shares outstanding on December 31, 2003 when it entered
        into a
        reverse acquisition with shareholders of APC. The historical financial
        statements presented prior to December 31, 2003 represent those of APC since
        its
        inception on September 18, 2003. The transactions of Tamboril are included
        beginning January 1, 2004. Subsequently, Tamboril changed its name to Axion
        Power International, Inc.
 
 Prior
        to
        the reverse acquisition, APC issued rights to its founders for 1,360,000
        shares
        of APC common stock as additional shares for money contributed through the
        purchase of convertible debt. Accordingly, there was no expense recorded
        related
        to these issuances of these shares. However, there was one founder that did
        not
        contribute funds in which APC valued the 170,000 shares issued as expense
        for
        services rendered during the period ending December 31, 2003 amounting to
        $48,953 based on the value of the shares received for the funds contributed
        by
        the other founders. The founders purchased convertible debt from APC for
        $1,450,000 of which $350,000 was not collected until 2004 which is included
        as a
        subscription receivable as of December 31, 2003. These convertible debt
        instruments were converted prior to the merger in which 1,108,335 shares
        of APC
        common stock were issued as consideration for $1,450,000 of convertible debt
        and
        $92,761 in unamortized debt discount attributable to detachable
        warrants.
 
 The
        following transactions were completed in conjunction with the original
        closings:
 
 ·
              Tamboril
                  had 1,875,000 shares of common stock outstanding at December 31,
                  2003
                  which is reflected as equity acquired in the
                  recapitalization.
 
 ·
              Tamboril
                  settled $484,123 in pre-merger accrued related party compensation
                  debt
                  through the issuance of 233,400 warrants. No corresponding expense
                  was
                  recorded on the Company’s records because the debt was included on the
                  legal acquirer’s (Tamboril’s) records prior to the reverse acquisition.
 
 ·
              Tamboril
                  issued 9,785,818 common shares (prior to the return of 1,000,000
                  shares
                  from The Trust for the Benefit of the Shareholders of Mega-C Power
                  Corp in
                  the fiscal year ended December 31, 2006, as disclosed in the note
                  captioned “Subsequent Events”) and 608,600 warrants to APC’s stockholders
                  in exchange for a substantial controlling interest in APC. This
                  includes
                  the common shares issued to the founders, common shares and warrants
                  issued in conjunction with the convertible notes, and shares issued
                  to the
                  Mega C Trust.
 
 As
        part
        of the above described transaction, APC shareholders, who had rights to the
        stock agreed to have 7,147,483 shares of Tamboril shares to be issued to
        the
        Trust and APC shareholders retained the remaining shares. As a result of
        the
        November 21, 2006 Mega C Chapter 11 plan of reorganization, the Trust was
        required to return 1,000,000 shares of the common stock distributed to the
        Trust
        noted above for cancellation by the Company. The Company retroactively adjusted
        the return of the shares against the shares issued to the Trust resulting
        in
        6,147,483 net shares issued to the Trust at December 31, 2003.
 
 ·
              The
                  original reverse acquisition was amended on January 9, 2004. See
                  discussion of the amendment under the explanation of the equity
                  2004
                  below.
  F-16
  ***Equity
        Transactions -period ended December 31, 2004***
 
 *APC
        and Tamboril Cigar Company (Tamboril, now Axion) reverse
        acquisition* *:* ****** Prior
        to
        the second part of the reverse acquisition on January 9, 2004, the Company
        adjusted the original shares issued to the founders by issuing rights to
        an
        additional 445,000 shares to the founders and 180,000 shares to the Trust.
        Since
        there was no additional service or money contributed there was no expense
        recorded related to the additional shares issued. Also, the Company issued
        45,000 shares to the CEO which amounted to $72,000 valued at the pink sheet
        bid
        price on the date of grant. Certain related parties purchased convertible
        debt
        from APC for $400,000. The $400,000 of convertible debt purchased during
        2004
        and the remaining $50,000 of convertible debt outstanding at December 31,
        2003
        was converted into 283,333 shares of APC common stock during 2004.
 
 *2004
        Private Placements:* ****** During
        the year ended December 31, 2004, the Company sold 823,800 shares of common
        stock and 463,100 warrants for net cash proceeds of $1,607,134. The Company
        also
        received $868,020 in cash proceeds from the exercise of 475,200 outstanding
        common stock purchase warrants. The Company issued 48,782 shares of common
        stock
        for rounding purposes in conjunction with the 2004 one-for-sixteen reverse
        stock
        split.
 
 ***Equity
        Transactions -Year ended December 31, 2005***
 
 *Augmentation
        of Trust and Trust Settlement:* In
        February 2005, the Company issued 500,000 shares of common stock to The Trust
        for the Benefit of the Shareholders of Mega-C Power Corp. For accounting
        and
        financial reporting purposes, the stock issuance transaction was valued at
        $1,525,000, which represents the value of the shares on the date of issuance.
        This amount was charged to operating expenses during the year ended December
        31,
        2005. There
        were 500,000 shares returned to the Company for cancellation in November
        2006 in
        connection with the bankruptcy court confirmation of the settlement (see
        note
        captioned “ Mega-C Power
        Corp (Mega-C), Mega-C **** Trust
        (the Trust), The Taylor Litigation”) .
        Those
        shares were effectively the return of the 500,000 shares issued to the Trust
        in
        February, 2005. The return of those shares was recorded as a reversal of
        the
        expense at fair value on the date of return in 2006 in the amount of $1,125,000
        and has been subsequently cancelled. In addition, under the bankruptcy court
        confirmation of the settlement, the Trust corpus was reduced another 1,000,000
        shares, which were returned to the Company and cancelled. The return in 2006
        was
        the result of a negotiated settlement and there are no contingencies surrounding
        the Trust shares in 2005. This cancellation was considered a retroactive
        adjustment to the shares issued in the 2003 reverse acquisition.
 
 *2005
        Private Placement of Senior Preferred:* In
        February 2005, the board of directors designated 1,000,000 shares of preferred
        stock as 8% Cumulative Convertible Senior Preferred Stock (the “senior
        preferred”). The Company sold 385,000 shares of senior preferred at a price of
        $10 per share. The net proceeds of the offering included $2,754,110 in cash
        and
        $1,000,000 in liability conversion (see Note captioned “Transactions with a
        Related Party (C&T)”). At December 31, 2005, $25,000 of this amount was
        included in stock subscription receivable that was subsequently reversed
        in 2006
        when the amount was deemed uncollectible. The senior preferred offering
        originally required the sale of a minimum of 500,000 shares ($5,000,000)
        before
        the offering proceeds would be available to the Company. The purchasers of
        the
        senior preferred ultimately waived this minimum offering condition. The
        preferred stock has liquidation preference equal to the stated value on the
        payment date before any payment or distribution is made to the holders of
        common
        stock.
 
 So
        long
        as any senior preferred shares are outstanding, the Company cannot (i) issue
        any
        series of stock having rights senior to or on parity with the senior preferred
        (ii) amend, alter or repeal any provision of its Certificate of Incorporation
        or
        bylaws to adversely affect the relative rights, preferences, qualifications,
        limitations or restrictions of the senior preferred, or (iii) effect a
        reclassification of the senior preferred without the consent of the holders
        of a
        two-thirds majority of the outstanding shares. The Company is not authorized
        to
        issue any additional shares of senior preferred.
 
 To
        provide for immediate cash needs during the offering period, the Company
        agreed
        to issue warrants to any purchaser of senior preferred who agreed to loan
        the
        Company the amount of the share proceeds until the $5 million minimum
        subscription was reached. In connection therewith, the purchasers of $565,000
        of
        senior preferred agreed to release their subscription payments notwithstanding
        the minimum subscription and other restrictions in the associated private
        placement memorandum. As a result, the Company issued 282,500 warrants to
        those
        purchasers. By March 2005, the $5 million minimum was still not met and the
        Company agreed to issue 228,500 additional warrants to the purchasers of
        $2,285,000 of senior preferred who agreed to waive the minimum subscription
        requirement. The foregoing warrants were exercisable at a price of $2 per
        share,
        and were to expire on March 21, 2007. ** Because
        the warrants were detachable, granted in connection with the offering,
        immediately vested, and exercisable at a price that was less than the reported
        fair market value of the underlying common stock on the date of grant, the proceeds
        of the offering were allocated between the senior
        preferred and the
        warrants based on the relative fair value of each instrument. The assumed
        value
        of the senior
        preferred was
        determined based on the fair value of the underlying common shares and the
        fair
        value of the warrants was valued using the Black-Scholes-Merton option
        pricing model. The proceeds allocated to the senior
        preferred amounted to $3,440,268. The
        effective conversion price of the senior
        preferred was at a
        price lower than the market price of the common stock at the date of the
        issuance, resulting in a non-cash beneficial conversion feature of $2,315,482.
        This beneficial conversion feature was immediately recognized as additional
        non-cash dividends. On
        March
        9, 2007 the Board of Directors unanimously agreed to extend the life of 476,000
        $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior
        Preferred private placement offering to March 17, 2008. Those warrants have
        now
        expired. See “Warrant Modifications” in the note captioned “Subsequent Events”
below.
  F-17
 
 Holders
        of senior preferred had the right to convert their shares into common stock
        at
        any time, at an original conversion price of $2.00. The Company was required
        to
        register the underlying shares by April 30, 2005. The shares were not registered
        until June 2005 and as a result the conversion price was reduced to $1.86
        per
        share. This reduction in the conversion price resulted in an additional
        beneficial conversion feature, valued at the fair value of the additional
        common
        shares issuable as a result of the reduced conversion price, amounting to
        $433,228.
 
 Holders
        of senior preferred were entitled to anti-dilution protection for certain
        subsequent events, including the issuance of equity or debt securities that
        may
        be converted into common stock at a conversion price that is less than the
        conversion price of the senior preferred. As discussed in the note captioned
        “Subsequent Events,” the Company sold approximately 823,000 shares of Series A
        Preferred Stock that is convertible at a price of $1.25 per share. This stock
        sale triggered the anti-dilution provisions of the senior preferred stock
        and
        giving effect to all required adjustments, the adjusted conversion price
        of the
        senior preferred is now $1.68 per share as of December 31, 2006.
 
 In
        September 2005, the Company offered all holders of preferred stock an early
        conversion incentive that was approximately equivalent to one year’s anticipated
        dividends on the preferred stock. While each share of senior preferred was
        convertible into 5.5 shares of common stock when the Company offered the
        early
        conversion incentive, 6 shares of common stock were issued for each share
        of
        senior preferred converted during the incentive period. A total of 245,000
        shares were converted. The fair value of the additional common shares issued
        as
        a result of this inducement was recorded as a preferred dividend, amounting
        to
        $350,446.
 
 The
        total
        of the beneficial conversion feature and conversion inducement for the year
        ended December 31, 2005 that is included in preferred dividends on the
        accompanying statement of operations amounted to $3,099,156. The Company
        analyzed the embedded derivative conversion feature and the free standing
        warrants issued in connection with the senior preferred and determined that
        the
        instruments are equity instruments and accordingly, are not accounted for
        as
        derivatives, requiring fair value accounting at each reporting
        period.
 
 Holders
        of senior preferred are entitled to receive dividends at the annual rate
        of 8%.
        Dividends are payable quarterly on the last day of March, June, September
        and
        December of each year. Dividends are cumulative from the date of issuance
        and
        payable to holders of record. In order to conserve available resources, the
        Company did not pay cash dividends on the senior preferred in any quarter
        where
        the Company reported a net loss. Any accrued dividends that are not paid
        in cash
        will be added to the stated value of the senior preferred. Dividends accrued
        and
        added to the stated value of the senior preferred during the year ended December
        31, 2006 and 2005 amounted to $119,092 and $176,194, respectively.
 
 The
        senior preferred is redeemable by the Company under certain conditions unless
        the holders elected to exercise their conversion rights prior to the redemption
        date. Twenty percent of the senior preferred will become redeemable when
        the
        market price of the Company’s common stock exceeds $6.00 per share for at least
        30 trading days within any period of 45 consecutive trading days. Thereafter,
        an
        additional twenty percent of the senior preferred will become redeemable
        for
        each $1.00 increase in the stabilized market price of the Company’s common
        stock. In connection with any proposed redemption of senior preferred, the
        Company will give each holder not less than 30 days notice of its intention
        to
        redeem a portion of the shares.
  F-18
  2005
        Private Placement of Common Stock :
        Common
        stock private placement activities during the year ended December 31, 2005
        were
        as follows:
  ·
              The
                  Company sold 600,000 units, each consisting of one share of common
                  stock
                  and a two-year warrant exercisable at $4.00 for a purchase price
                  of $2.00
                  per unit, or $1,200,000, before offering costs. As of December
                  31, 2005,
                  $200,000 is included in stock subscriptions receivable, which was
                  received
                  in 2006.
 
 ·
              A
                  director exercised 446,000 - $1 warrants/options and 25,000 - $2
                  options
                  with a total exercise price of $496,000. The stock was issued and
                  included
                  in stock subscriptions receivable as of December 31, 2005. As of
                  June 19,
                  2006, the full amount has been settled.
 
 ·
              Other
                  holders exercised 382,665 options & warrants with an aggregate
                  exercise price of $787,395.
 
 ***Equity
        Transactions -Year ended December 31, 2006***
 
 *Augmentation
        of Trust and Trust Settlement:* See
        above 2005 transactions and the discussion in the note captioned “ Mega-C Power
        Corp (Mega-C), **** Mega-C **** Trust
        (the Trust), The **** Taylor
        Litigation” for
        disclosures about shares issued to the Trust, returned from the Trust in
        November 2006 and the accounting for those shares.
 
 *Senior
        Preferred:* During
        2006, a subscription for senior preferred shares was cancelled, reducing
        the
        balance by 2,500 shares or $25,000. The senior preferred had an initial stated
        value of $10.00 per share. Accrued dividends that are not paid in cash within
        10
        days of a payment date will automatically be added to the stated value and
        the
        stated value, as adjusted, will be used for all future dividend and conversion
        calculations. The following table summarizes the earnings through 2006 and
        the
        expected future stated value of the senior preferred at the end of each quarter
        through December 31, 2007.
 
 **Quarter**
                **Ended**
              
              **Adjusted
                  Stated**
                **Value**
              
              **Quarter**
                **Ended**
              
              **Adjusted
                  Stated**
                **Value****31-Mar-06**
              
              **$**
              **10.86**
              
              
              31-Mar-07
              
              $
              11.75**30-Jun-06**
              
              
              **11.07**
              
              
              30-Jun-07
              
              $
              11.99**30-Sep-06**
              
              
              **11.29**
              
              
              30-Sep-07
              
              $
              12.23**31-Dec-06**
              
              
              **11.52**
              
              
              31-Dec-07
              
              $
              12.47
  ***2006
        Private Placement of Series A Preferred Stock:*** ****** On
        October 18, 2006, the Company’s board of directors designated, from the
        Company’s total authorized 12,500,000 shares, a new series of preferred stock
        consisting of up to 2,000,000 shares designated Series A Convertible Preferred
        Stock (the “series A preferred”). During the fourth quarter of 2006, the Company
        sold an aggregate of 782,997 shares of series A preferred at a price of $10
        per
        share for net proceeds of $7,722,470 including $4,352,500 in cash and $3,369,970
        in liability conversion. In connection with the private placement, the Company
        incurred total offering expenses of $258,202, of which $107,500 was paid
        in
        cash, while the remainder was paid through the issuance of options to acquire
        shares of the Company’s common stock.
 
 Under
        the
        terms of this new series of preferred stock, no more than 1,000,000 shares
        may
        be sold for cash and the remaining shares must be reserved for (i) issuance
        upon exercise of the conversion rights of holders of secured and unsecured
        short-term debt and (ii) to pay in-kind dividends on the series A
        preferred. So long as any series A preferred shares are outstanding, the
        Company
        cannot (i) issue any series of stock having rights senior to or on parity
        with
        the series A preferred (ii) amend, alter or repeal any provision of its
        Certificate of Incorporation or bylaws to adversely affect the relative rights,
        preferences, qualifications, limitations or restrictions of the series A
        preferred (iii) effect a reclassification of the series A preferred or (iv)
        issue any additional shares of series A preferred, each without the consent
        of
        the holders of a two-thirds majority of the outstanding shares. The holders
        of
        series A preferred have no pre-emptive rights with respect to any other
        securities of the Company and a liquidation preference equal to the stated
        value
        on the payment date before any payment or distribution is made to the holders
        of
        common stock.
  F-19
 
 Beginning
        on April 23, 2007, the shares of series A preferred shall be convertible
        at the
        option of the holders of record at an initial conversion price of $1.25 per
        share. Holders of series A preferred are entitled to anti-dilution protection
        for certain subsequent events, including the issuance of equity or debt
        securities that may be converted into common stock at a conversion price that
        is
        less than the conversion price of the series A preferred resulting in a
        reduction in the conversion price of the series A preferred. No such other
        securities have been issued through the date of this report which would require
        the reduction of the conversion price of the series A preferred. In addition,
        the effective conversion price of the series A preferred was at a price lower
        than the market price of the common stock at the respective dates of issuance
        in
        the fourth quarter of 2006, resulting in an aggregate non-cash beneficial
        conversion feature of $6,709,970 recognized as additional non-cash dividends
        on
        a straight line basis, which did not differ materially from the effective
        interest method, from the respective dates of issuance of the series A preferred
        in the fourth quarter of 2006 through the first date these shares are
        convertible on April 23, 2007. As a result, $613,336 was recognized as
        additional non-cash dividends in the fourth quarter of 2006 with the remaining
        amount recognized in 2007. In addition, if all holders of the series A preferred
        were to have exercised their conversion rights at their respective dates
        of
        subscription, these holders would have received an additional $5,597,970
        in fair
        value in excess of the proceeds paid for their subscriptions to the series
        A
        preferred. The Company further analyzed the embedded conversion feature and
        determined that it is properly classified as an equity instrument and
        accordingly, is not accounted for as a derivative, requiring fair value
        accounting at each reporting period.
 
 Holders
        of the shares of series A preferred shall receive dividends at the annual
        rate
        of 10% of the stated value of the series A preferred so long as the Company
        is
        current with respect to its reporting obligations under the Securities Exchange
        Act of 1934 on any dividend payment date. Dividends are payable quarterly
        on the
        last day of March, June, September and December in each year. Dividends are
        cumulative from the date of issuance and payable to holders of record. Any
        accrued dividends that are not paid in cash will be added to the stated value
        of
        the series A preferred.
 
 Because
        the Company has not been current with respect to its reporting obligations
        since
        the issuance of the series A preferred, the annual dividend rate increased
        to
        20% of the stated value. All but one of the series A preferred shareholders
        elected to reinvest their preferred dividends back into series A preferred
        shares. As of December 31, 2006, $103,101 of dividends has been accrued,
        including $97,896 in non-cash and $5,205 in cash dividends. No cash dividends
        have been paid with respect to the series A preferred shares. Non-cash dividends
        have increased the value of the series A preferred shares by $0.13 to a stated
        value of $10.13 as of December 31, 2006.
 
 The
        series A preferred had an initial stated value of $10.00 per share. Non-cash
        dividends are automatically added to the stated value and the stated value,
        as
        adjusted, will be used for all future dividend and conversion calculations.
        The
        following table summarizes the expected future stated value of the senior
        preferred at the end of each quarter through December 31, 2007:
 
 **Quarter**
                **Ended**
              
              **Adjusted
                  Stated**
                **Value****31-Mar-07**
              
              **$**
              **10.63****30-Jun-07**
              
              **$**
              **11.16****30-Sep-07**
              
              **$**
              **11.72****31-Dec-07**
              
              **$**
              **12.30**
 
 The
        series A preferred is redeemable by the Company under certain conditions
        unless
        the holders elect to exercise their conversion rights prior to the redemption
        date. Twenty percent of the series A preferred will become redeemable when
        the
        market price of the Company’s common stock exceeds $5.00 per share for at least
        30 trading days within any period of 45 consecutive trading days. Thereafter,
        an
        additional twenty percent of the series A preferred will become redeemable
        for
        each $2.50 increase in the stabilized market price of the Company’s common
        stock. In connection with any proposed redemption of series A preferred,
        the
        Company will give each holder not less than 30 days notice of its intention
        to
        redeem a portion of the shares.
 
 F-20
 
 *Common
        Stock & Private Placements.* The common stock transactions during the year ended December 31, 2006 are
        as
        follow:
 
 ·
              Two
                  unaffiliated individual accredited investors purchased a total
                  of 80,000
                  units for a purchase price of $2.50 per unit or $200,000.   Each unit
                  consists of one share of common stock and one common stock purchase
                  warrant with an exercise price of $4.00 per share. The warrants
                  are
                  exercisable up until the first anniversary of the effective date
                  of the
                  common stock registration statement and were valued at $26,354
                  on the date
                  of issuance
 ·
              The
                  Company’s chief executive officer exercised his $2.00 warrants to purchase
                  56,700 shares for $113,400
 ·
              The
                  Company’s Chief Technical Officer received 6,000 unrestricted shares,
                  valued at $24,000, pursuant to his 2005 employment contract and
                  an
                  additional 250,000 restricted shares, valued at $937,500, pursuant
                  to his
                  2006 employment contract. The 250,000 shares will become fully
                  vested on
                  December 28, 2009. The expense related to these shares will be
                  recognized
                  over this three-year requisite service period and the shares will
                  be
                  considered issued and outstanding upon vesting.
 
 **Common
        Stock Issuances:** The
        following table represents per share issuances of common stock from inception
        through December 31, 2006, pursuant to FASB No. 7, “ *Development
        Stage Enterprises* ”:
 **2003**Description:
                
                Date
                
                Shares
                
                Per
                    share valuation
                
                Business
                    reason:Shares
                    issued to founders
                
                9/18/2003
                
                1,360,000
                
                $0.00
                
                original
                    capitalization-no contributed capitalAPC
                    Founder
                
                9/18/2003
                
                170,000
                
                $0.29
                
                services
                    rendered with respect to formationSeed
                    debt financing
                
                12/31/2003
                
                500,000
                
                $1.00
                
                conversion
                    of debt and accrued interest to common stockSeries
                    I convertible debt
                
                12/31/2003
                
                533,334
                
                $1.50
                
                conversion
                    of debt and accrued interest to common stockSeries
                    II convertible debt
                
                12/31/2003
                
                75,000
                
                $2.00
                
                conversion
                    of debt and accrued interest to common stockMega-C
                    Trust
                
                12/31/2003
                
                6,147,484
                
                $0.00
                
                In
                    lieu of shares issuable to foundersTamboril
                    shareholders
                
                12/31/2003
                
                1,875,000
                
                $0.00
                
                recapitalization
                    measured at fair market value of Tamboril assets2003
                    Totals
                
                
                
                10,660,818
                
                $0.14**2004**Description:
                
                Date
                
                Shares
                
                Per
                    share valuation
                
                Business
                    reason:Shares
                    issued to founders
                
                1/9/2004
                
                445,000
                
                $0.00
                
                In
                    lieu of shares issuable to foundersMega-C
                    Trust
                
                1/9/2004
                
                180,000
                
                $0.00
                
                adjustment
                    is shares issuable to foundersOfficer
                
                1/9/2004
                
                45,000
                
                $1.60
                
                services
                    rendered by former officerSeries
                    I convertible debt-Igor Filipenko
                
                1/9/2004
                
                50,000
                
                $1.00
                
                conversion
                    of debt and accrued interest to common stockSeries
                    II convertible debt-Turitella
                
                1/9/2004
                
                133,333
                
                $1.50
                
                conversion
                    of debt and accrued interest to common stockSeries
                    III convertible debt-Turitella
                
                1/9/2004
                
                100,000
                
                $2.00
                
                conversion
                    of debt and accrued interest to common stockSeries
                    II common stock offering
                
                2/1/2004
                
                175,000
                
                $2.00
                
                common
                    stock & warrants issued for cashSeries
                    III common stock offering
                
                3/31/2004
                
                288,100
                
                $3.00
                
                common
                    stock & warrants issued for cashExercise
                    of Series I warrants
                
                various
                
                316,700
                
                $1.50
                
                warrants
                    exercised pursuant to original termsExercise
                    of Series II warrants
                
                various
                
                125,000
                
                $2.28
                
                warrants
                    exercised pursuant to original termsExercise
                    of Series II warrants
                
                various
                
                33,500
                
                $3.23
                
                warrants
                    exercised pursuant to original termsNovember
                    emergency funding
                
                11/1/2004
                
                314,000
                
                $1.50
                
                common
                    stock & warrants issued for cashDecember
                    emergency funding
                
                12/1/2004
                
                46,700
                
                $1.50
                
                common
                    stock & warrants issued for cashFractional
                    shareholders
                
                12/31/2004
                
                48,782
                
                $0.00
                
                shares
                    issued due to reverse split rounding formula2004
                    Totals
                
                
                
                2,301,115
                
                $1.37
  F-21
  **2005**Description:
                
                Date
                
                Shares
                
                Per
                    share valuation
                
                Business
                    reason:Mega-C
                    Trust
                
                2/28/2005
                
                500,000
                
                $3.05
                
                Trust
                    augmentationBanca
                    di Unionale
                
                3/18/2005
                
                30,000
                
                $2.00
                
                conversion
                    of Preferred and accrued dividendsBanca
                    di Unionale
                
                4/20/2005
                
                20,000
                
                $2.00
                
                conversion
                    of Preferred and accrued dividendsC&T
                    employees
                
                4/1/2005
                
                219,000
                
                $2.50
                
                employee
                    incentive share grants7
                    individuals
                
                6/10/2005
                
                29,565
                
                $3.57
                
                Exercise
                    of Director options3
                    individuals
                
                7/11/2005
                
                190,000
                
                $1.58
                
                conversion
                    of Preferred and accrued dividendsBanca
                    di Unionale
                
                7/11/2005
                
                10,000
                
                $1.60
                
                exercise
                    of preferred warrants3
                    individuals
                
                8/28/2005
                
                150,000
                
                $1.67
                
                conversion
                    of Preferred and accrued dividendsJames
                    Smith
                
                9/7/2005
                
                30,000
                
                $1.67
                
                conversion
                    of Preferred and accrued dividends2
                    individuals
                
                9/28/2005
                
                1,050,000
                
                $1.69
                
                conversion
                    of Preferred and accrued dividends2
                    individuals
                
                various
                
                226,900
                
                $1.79
                
                exercise
                    of Series I warrants3
                    individuals
                
                various
                
                91,200
                
                $2.40
                
                exercise
                    of Series III warrants2
                    individuals
                
                various
                
                25,000
                
                $1.60
                
                exercise
                    of Preferred warrantsOfficer
                
                10/20/2005
                
                446,000
                
                $1.00
                
                exercise
                    of warrants and optionsOfficer
                
                10/20/2005
                
                25,000
                
                $2.00
                
                exercise
                    of warrants6
                    individuals
                
                12/1/2005
                
                600,000
                
                $2.00
                
                common
                    stock and warrants2005
                    Totals
                
                
                
                3,642,665
                
                $1.94
  **2006**2
                  individuals
              
              4/21/06
              
              80,000
              
              2.50
              
              Common
                  stock and warrants issued for cashOfficer
              
              4/21/06
              
              56,700
              
              2.00
              
              Exercise
                  of non-plan incentive option granted to CEOOfficer
              
              4/21/06
              
              6,000
              
              4.00
              
              Unrestricted
                  share grant to CTOMega-C
                  Trust
              
              11/28/06
              
              (500,000)
              
              2.25
              
              Return
                  of shares per settlement agreement2006
                  Totals
              
              
              
              (357,300)
              
              $2.20
  ***Subscriptions
        Receivable:*** The
        balance sheet as of December 31, 2005 reflected $721,000 in subscriptions
        receivable. During the year ended December 31, 2006, the Company received
        subscription payments of $588,900, settled $107,100 against open invoices
        for
        legal services, and cancelled the unsettled balance of the subscription
        receivable for preferred stock amounting to $25,000,
  ***Warrants:*** ** 741,613
        warrants were issued to related parties in conjunction with the financing
        of
        debt issued during 2006. See the “Related Party” footnote within ‘Debt Financing
“above. In
        April,
        2006, the Company’s chief executive officer exercised his $2.00 warrants to
        purchase 56,700 shares for $113,400. ** In
        October 2006, 200,000 3-year warrants were issued in payment for consulting
        services. These $3.00 warrants valued at $74,437 are scheduled to expire
        in
        October 2009. In December 2006, a former director of the Company received
        9,000
        $6.00 warrants valued at $12,411, and are scheduled to expire December 29,
        2010.
        Additionally, 80,000 warrants were issued to accredited investors in connection
        with a private placement of units comprised of one share of the Company’s common
        stock and one stock purchase warrant, as discussed above.
  F-22
  The
        following table provides summary information on the various warrants issued
        by
        the Company in private placement transactions; the warrants exercised to
        date;
        the warrants that are presently exercisable **** and
        the
        current exercise prices of such warrants.
  *2006*
              
              
              *2005*Shares
              
              
              Weighted
                average
                exercise
                price
              
              
              Shares
              
              
              Weighted
                average
                exercise
                priceWarrants
                  outstanding January 1
              
              
              3,242,400
              
              $
              2.66
              
              
              2,626,200
              
              $
              2.21Granted
                  during year
              
              
              1,030,613
              
              
              5.26
              
              
              1,111,000
              
              
              3.08Exercised
              
              
              (56,700
              )
              
              2.00
              
              
              (494,800
              )
              
              1.95Lapsed
              
              
              (455,100
              )
              
              1.33
              
              
              -
              
              
              -Outstanding
                  at December 31
              
              
              3,761,213
              
              $
              3.21
              
              
              3,242,400
              
              $
              2.66Weighted
                  average years remaining
              
              
              
              
              
              1.57
              
              
              
              
              
              1.50
 
 On June
        9,
        2006 the Board of Directors extended the life of 1,562,900 warrants issued
        to
        the original shareholders of C&T along with 91,700 capital warrants issued
        to Sally Fonner in recognition of the Company’s difficulty in establishing a
        public trading market for its common stock. These $2 warrants scheduled to
        expire in 2006 and early 2007 were modified to a December 31, 2007 expiration.
        The warrants, valued at $521,642 prior to the extension, were revalued at
        the
        date of modification using the Black-Scholes-Merton option-pricing model.
        The
        incremental expense resulting from the revaluations was recorded into R&D
        ($342,131) and SG&A ($50,680) during the nine-month period ending September
        30, 2006. These warrants expired December 31, 2007
 
 **Registration
        Rights**
 
 ***General*** :
        The
        Company filed a resale registration statement for the shares of common stock
        held by the Mega-C Trust. See the discussion in the note titled “Mega-C Power
        (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation.”
  **Senior
        Preferred:** The
        Company registered the resale of the shares of common stock issuable upon
        conversion of the senior preferred and was required to maintain an effective
        registration statement until September 18, 2006, the 18-month anniversary
        of the
        closing date of the preferred stock offering. In the event that the current
        registration statement was subsequently terminated, withdrawn or suspended
        for a
        period of more than 10 days, then the conversion price of the senior preferred
        was to be decreased by an initial delay adjustment of three percent (3%),
        plus
        an additional delay adjustment of two percent (2%) for every thirty day period
        (or portion thereof) that the underlying common stock is not subject to and
        included in an effective registration statement. The holders of senior
        preferred, or common stock issued upon conversion thereof, also have certain
        piggy-back registration rights with respect to future offerings. The
        registration statement included Axion’s Financial Statements for the period
        ended June 30, 2005 and the financial statements became out of date. Axion
        did
        not terminate, withdraw or suspend the registration statement. The Company
        believes that the financial statements going out of date is not enough to
        reactivate the registration delay provisions of the Senior Preferred
        Stock.
 
 ***Series
        A Preferred*** *:* The
        Company is required to file a registration statement within 180 days after
        the
        initial closing of the offering and use its best efforts to maintain its
        effectiveness for two years subsequent to the date it is declared effective.
        If,
        at any time after the issuance of the series A preferred, the Company files
        a
        registration statement for a proposed public offering of common stock, then
        holders of the series A preferred will be able to participate in that offering
        as selling shareholders.
 
 **Warrants:** The
        Company has registered the resale of the shares of common stock issuable
        upon
        exercise of all warrants that were issued and outstanding in June 2005 and
        is
        required to maintain an effective registration statement until the expiration
        dates of the warrants. It is also obligated to file a resale registration
        statement for the warrants issued after June 2005. The recently issued warrants
        generally provide that they will be exercisable for terms of two to three
        years
        after the effective date of the required registration statements. However
        there
        are no cash penalties or exercise price adjustments associated with registration
        delays.
 
 During
        2006 & 2007, as a response to substantial unanticipated registration delays,
        the Company extended the expiration dates of certain warrants that were issued
        in 2003, 2004 and 2005. Under the extensions, which presently expire in December
        2007 and March 2008, the Company has retained the right to redeem the warrants
        at a price of $.01 per warrant if the underlying stock has been included
        in an
        effective registration statement under the Securities Act and has traded
        at an
        average bid price of $4 per share or more for at least 30 days before the
        call
        for redemption. The accounting treatment for the modifications is discussed
        above.
  F-23
 
 **Note
        9: Equity Compensation**
  In
        December 2004, the Financial Accounting Standards Board issued FASB 123R,
        “ *Share-Based
        Payment”* (FASB
        123R). FASB 123R supersedes FASB 123, “ *Accounting
        for Stock Based Compensation* ,”
and
        Accounting Principles Board Opinion 25, “ *Accounting
        for Stock Issued to Employees”* (APB 25)
        and its related implementation guidance. On January 1, 2006, the Company
        adopted
        the provisions of FASB 123R using the modified prospective transition method.
        Under this method, the Company is required to record compensation expense
        for
        all stock based awards granted after the date of adoption and for the unvested
        portion of previously granted awards that remain outstanding as of the beginning
        of the adoption. Prior periods have not been restated for the effects of
        FASB
        123R. Under FASB 123R, employee-compensation expense related to stock based
        payments are recorded over the requisite service period based on the grant
        date
        fair value of the awards.
  Prior
        to
        the adoption of FASB 123R, the Company accounted for employee stock options
        using the intrinsic value method in accordance with APB 25. Accordingly,
        no
        compensation expense was recognized for stock options issued to employees
        as
        long as the exercise price was greater than or equal to the market value
        of the
        common stock at the date of grant. In accordance with FASB 123, the Company
        disclosed the summary of pro forma effects to reported net loss as if the
        Company had elected to recognize compensation costs based on the fair value
        of
        the awards at the grant date.
  The
        compensation cost that has been charged against income for options granted
        under
        the plans was approximately $881,000 for the year ended December 31, 2006.
        The
        impact of these expenses to basic and diluted loss per share was approximately
        $0.05 per share during the year. The adoption of FASB 123R did not have an
        impact on cash flows from operating or financing activities. For stock options
        issued as non-qualified stock options, a tax deduction is not allowed until
        the
        options are exercised. The amount of this deduction will be the difference
        between the fair value of the Company’s common stock and the exercise price at
        the date of exercise. Accordingly, there is a deferred tax asset recorded
        for
        the tax effect of the financial statement expense recorded. The tax effect
        of
        the income tax deduction in excess of the financial statement expense will
        be
        recorded as an increase to additional paid-in capital. Due to the uncertainty
        of
        the Company’s ability to generate sufficient taxable income in the future to
        u tilize
        the tax benefits of the options granted, the Company has recorded a valuation
        allowance to reduce gross deferred tax assets to zero. As a result, for the
        year
        ended December 31, 2006, there is no income tax expense impact from recording
        the fair value of options granted. There is no tax deduction allowed by the
        Company for incentive stock options.
  The
        Company has two stockholder approved equity compensation plans and occasionally
        enters into employment and other contracts that provide for equity compensation
        arrangements other than those contemplated by the stockholder approved plans.
        The following sections summarize the Company’s equity compensation
        arrangements.
 
 ***Incentive
        Stock Plan Approved by Stockholders:*** The
        Company’s stockholders have adopted an incentive stock plan for the benefit of
        its employees, consultants and advisors. Under the terms of the original
        plan,
        the Company was authorized to grant incentive awards for up to 1,000,000
        shares
        of common stock. At the Company’s 2005 annual meeting, its shareholders
        increased the authorization under the incentive stock plan to 2,000,000
        shares.
 
 The
        incentive stock plan authorizes a variety of awards including incentive stock
        options, non-qualified stock options, shares of restricted stock, shares
        of
        phantom stock and stock bonuses. In addition, the plan authorizes the payment
        of
        cash bonuses when a participant is required to recognize income for federal
        income tax purposes because of the vesting of shares of restricted stock
        or the
        grant of a stock bonus.
 
 The
        plan
        authorizes the grant of incentive awards to full-time employees of the Company
        who are not eligible to receive awards under the terms of their employment
        contract or another specialty plan. The plan also authorizes the grant of
        incentive awards to directors who are not eligible to participate in the
        Company’s outside directors’ stock option plan, independent agents, consultants
        and advisors who have contributed to the Company’s success.
 
 The
        compensation committee administers the plan. The committee has absolute
        discretion to decide which employees, consultants and advisors will receive
        incentive awards, the type of award to be granted and the number of shares
        covered by the award. The committee also determines the exercise prices,
        expiration dates and other features of awards.
  F-24
 
 The
        exercise price of incentive stock options must be equal to the fair market
        value
        of such shares on the date of the grant or, in the case of incentive stock
        options granted to the holder of more than 10% of the Company’s common stock, at
        least 110% of the fair market value of such shares on the date of the grant.
        The
        maximum exercise period for incentive stock options is ten years from the
        date
        of grant, or five years in the case of an individual who owns more than 10%
        of
        the Company’s common stock. The aggregate fair market value determined at the
        date of the option grant, of shares with respect to which incentive stock
        options are exercisable for the first time by the holder of the option during
        any calendar year, shall not exceed $100,000.
 
 The
        following awards have been granted under the Plan since its
        inception:
 
 In
        February 2004, Igor Filipenko, a Director of the Company, was granted options
        to
        purchase 6,300 shares of common stock at a price of $3.20 per share. In June
        2004, Mr. Filipenko was granted options to purchase 10,800 shares of common
        stock at a price of $5.60 per share. The options are fully vested and may
        be
        exercised at any time during the five-year period commencing one year after
        the
        date of grant. The market value of the Company stock at the date of grant
        was
        less than the exercise price; therefore there was no intrinsic value in
        accordance with APB 25. Options for 7,200 shares were cancelled in April
        2005
        after Mr. Filipenko was issued additional options in March 2005 as part of
        the
        offering to the former employees of C&T discussed below.
 
 In
        February 2004, John Petersen, a Director of the Company (and general corporate
        counsel), and Kirk Tierney, each were granted options to purchase 6,300 shares
        of common stock at a price of $3.20 per share. In June 2004, Messrs. Petersen
        and Tierney were each granted options to purchase 3,600 shares of common
        stock
        at a price of $5.60 per share. The options are fully vested and may be exercised
        at any time during the five-year period commencing one year after the date
        of
        grant. The market value of the Company stock at the date of grants was less
        than
        the exercise price; therefore there was no intrinsic value in accordance
        with
        APB 25.
 
 In
        February 2004, an advisor to the board was granted an option to purchase
        6,300
        shares of common stock at a price of $3.20 per share as compensation for
        services. In June 2004, Mr. the advisor was granted options to purchase 3,600
        shares of common stock at a price of $5.60 per share. The options are fully
        vested and may be exercised at any time during the five-year period commencing
        one year after the date of grant. The options were valued at $17,067 using
        the
        Black-Scholes-Merton option pricing model and were included as expense in
        2004.
 
 In
        November 2004, the Company’s President and Chief Operating Officer, Charles
        Mazacatto, was granted options to purchase 6,250 shares of common stock at
        an
        exercise price of $3.20. This option vested in 2004 and is exercisable until
        November 2010. The market value of the Company stock at the date of grant
        was
        less than the exercise price; therefore there was no intrinsic value in
        accordance with APB 25.
 
 In
        March
        2005, the compensation committee authorized stock bonuses to the former
        employees of C&T for an aggregate of 219,000 shares of common stock. These
        stock grants are fully vested and unrestricted, subject to compliance with
        the
        Company’s insider trading policies. The fair value of these shares, as
        determined by the Company’s stock price on the date of grant, amounted to
        $565,202 and was recorded as compensation during the year ended December
        31,
        2005.
 
 In
        April
        2005, the former employees of C&T were granted options to purchase an
        aggregate of 744,500 shares of common stock at an exercise price of $2.50.
        These
        options vest at a rate of 20% per year beginning in April 2006. The market
        value
        of the Company stock at the date of grant was less than the exercise price
        which
        resulted in no intrinsic value in accordance with APB 25. On January 1, 2006,
        the Company adopted the provisions of FASB 123R as noted above which resulted
        in
        the Company recording compensation expense of $86,954 during the year ended
        December 31, 2006. Various options lapsed when several individuals terminated
        their employment with the Company in 2005 and 2006. During the years ended
        December 31, 2005 and 2006, an aggregate of 157,700 and 454,000 options,
        respectively, forfeited unvested as a result of these terminations.
 
 In
        September 2005, the compensation committee awarded 6,000 shares of restricted
        common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to
        his 2005 employment agreement, which were valued at $24,000 on the date of
        grant
        and became fully vested in April 2006. The Company recorded $8,000 and $16,000
        of compensation in 2005 and 2006, respectively, related to this award.
  F-25
 
 In
        December 2006, the Company issued 250,000 shares of restricted common stock
        to
        the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2006
        employment agreement, which were valued at $937,500 on the date of grant
        and
        will become fully vested on December 2009. The Company will recognize this
        as
        compensation over the requisite service period. No compensation expense was
        recorded for the year ended December 31, 2006.
 
 ***Outside
        Directors' Stock Option Plan Approved by
        Stockholders*** ***:*** The
        Company’s stockholders have adopted an outside directors' stock option plan for
        the benefit of its non-employee directors in order to encourage their continued
        service as directors. Under the terms of the original plan, the Company was
        authorized to grant incentive awards for up to 125,000 shares of common stock.
        At the 2005 annual meeting, the Company’s shareholders increased the
        authorization under the incentive stock plan to 500,000 shares.
 
 Each
        eligible director who is, on or after the effective date, appointed to fill
        a
        vacancy on the Board or elected to serve as a member of the Board may
        participate in the plan. Each eligible director shall automatically be granted
        an option to purchase the maximum number of shares having an aggregate fair
        market value on the date of grant of twenty thousand dollars ($20,000). The
        option price of the stock subject to each option is required to be the fair
        market value of the stock on its date of grant. Options generally expire
        on the
        fifth anniversary of the date of grant. Any option granted under the plan
        shall
        become exercisable in full on the first anniversary of the date of grant,
        provided that the eligible director has not voluntarily resigned or been
        removed
        "for cause" as a member of the Board of Directors on or prior to the first
        anniversary of the date of grant (qualified option). Any qualified option
        shall
        remain exercisable after its first anniversary regardless of whether the
        optionee continues to serve as a member of the Board.
 
 The
        following awards have been granted under the Plan since its
        inception:
 
 During
        the year ended December 31, 2004, the Company issued 54,000 5-year options
        to
        four of its directors vesting in one year from the date of issuance. The
        market
        value of the Company stock at the date of grant was less than the exercise
        price
        which resulted in no intrinsic value in accordance with APB 25. During the
        year
        ended December 31, 2005, these directors waived an aggregate of $105,542
        in
        accrued compensation as full payment of the exercise price of 29,565 options.
        An
        additional 14,400 options were forfeited in 2005.
 
 During
        the year ended December 31, 2005, the Company issued 70,000 5-year options
        to
        five of its directors vesting 1/3 per year over three years from the date
        of
        grant. The market value of the Company stock at the date of grant was less
        than
        the exercise price which resulted in no intrinsic value in accordance with
        APB
        25. On January 1, 2006, the Company adopted the provisions of FASB 123R as
        noted
        above and recorded compensation of $41,024 during the year ended December
        31,
        2006.
 
 During
        the year ended December 31, 2006, the Company issued 60,000 5-year options
        to
        two of its directors vesting 1/3 per year over the next three years. These
        options are exercisable at a price of $2 per share, expiring five years from
        vest date and are valued at $71,680 utilizing the Black-Scholes-Merton option
        pricing model, of which $20,230 was expensed in 2006.
  ***Non-plan
        Equity Incentives Not Approved by Stockholders*** : The
        Company has issued 1,131,000, 300,000 and 629,300 stock purchase options
        in the
        fiscal years ended December 31, 2006, 2005 and 2004, respectively, to officers,
        employees, attorneys and consultants in connection with contractual agreements
        that do not reduce the shares available under the shareholder’s approved plans.
        The following paragraphs summarize these contractual stock options.
 
 In
        January 2004, members of the law firm of Petersen & Fefer, general corporate
        counsel (of which one member was a director of the Company at the time) were
        granted two-year contractual options to purchase 189,300 shares of common
        stock
        at a price of $2.00 per share as partial compensation for services rendered,
        valued at $68,296. As represented in the note captioned “Stockholder’s Equity”,
        these members also received 116,700 warrants as consideration of pre-merger
        Tamboril debt (the amount cited in “Stockholder’s Equity” is actually 233,400
        because another party received the same number of warrants for a total of
        233,400 warrants). In August 2004, $1.00 of the exercise price of the total
        306,000 options and warrants owned by these members was considered paid in
        advance in consideration of unbilled legal services provided by the firm.
        The
        Company recorded $306,000 related to this reduction. All of the warrants
        and
        options were exercised in the fourth quarter of 2005, however; $306,000 of
        the
        amount is included in stock subscription receivable as of December 31, 2005
        and
        was received in 2006.
  F-26
  In
        July
        2004, the Company’s President and Chief Operating Officer, Charles Mazzacato,
        was granted a contractual option to purchase 240,000 shares of common stock
        at a
        price of $4.00 per share. This option vests on a monthly basis at the rate
        of
        60,000 shares per year commencing July 31, 2005 and is exercisable for five
        years after each vesting date. The market value of the Company stock at the
        date
        of grant was greater than the exercise price which resulted in a total intrinsic
        value of $180,000. In accordance with APB 25 the Company expensed the intrinsic
        value over the vesting period which resulted in expense of $18,750 and $45,000
        during the years ended December 31, 2004 and 2005, respectively. On January
        1,
        2006, the Company adopted the provisions of FASB 123R as noted above and
        recorded compensation of $124,364 during the year ended December 31, 2006.
        During the year ended December 31, 2006 the options were forfeited as a result
        of his termination of employment from the Company in 2006.
 
 In
        July
        2004, the Company’s Chief Financial Officer, Peter Roston, was granted a
        contractual option to purchase 200,000 shares of common stock at a price
        of
        $4.00 per share. This option will vest on a monthly basis at the rate of
        50,000
        shares per year commencing July 31, 2005 and is exercisable for five years
        after
        each vesting date. The market value of the Company stock at the date of grant
        was greater than the exercise price which resulted in a total intrinsic value
        of
        $150,000. In accordance with APB 25 the Company has expensed the intrinsic
        value
        over the vesting period which resulted in expense of $15,625 and $37,500
        during
        the years ended December 31, 2004 and 2005, respectively. On January 1, 2006,
        the Company adopted the provisions of FASB 123R as noted above and recorded
        compensation of $138,182 during the year ended December 31, 2006. During
        the
        year ended December 31, 2006 the options were forfeited as a result of his
        termination of employment from the Company in 2006.
 
 In
        April
        2005, the Company’s Chief Executive Officer, Thomas Granville, was granted a
        contractual option to purchase 180,000 shares of common stock at a price
        of
        $2.50 per share. This option vests at the rate of 7,500 shares per month
        commencing May 1, 2005 and is exercisable for five years after each vesting
        date. The market value of the Company stock at the date of grant was less
        than
        the exercise price which resulted in no intrinsic value in accordance with
        APB
        25. On January 1, 2006, the Company adopted the provisions of FASB 123R as
        noted
        above and recorded compensation of $112,500 during the year ended December
        31,
        2006.
 
 In
        April
        2005, a European financial advisor was granted a contractual option to purchase
        30,000 shares of common stock at a price of $2.50 per share. Options for
        an
        aggregate of 20,000 shares vested during the year ended December 31, 2005
        and
        will be exercisable for two years. On December 31, 2005, a total of 10,000
        unvested options were forfeited when the advisory agreement was terminated.
        The
        options were valued at $35,998 using the Black-Scholes-Merton option pricing
        model and included as expense in 2005.
 
 In
        September 2005, the Company’s Chief Technical Officer, Edward Buiel, was granted
        a contractual option to purchase 90,000 shares of common stock at a price
        of
        $4.00 per share. This option vests at the rate of 2,500 shares per month
        commencing October 2005 and is exercisable for five years after each vesting
        date. The market value of the Company stock at the date of grant was less
        than
        the exercise price which resulted in no intrinsic value in accordance with
        APB
        25. On January 1, 2006, the Company adopted the provisions of FASB 123R as
        noted
        above and recorded compensation of $68,100 during the year ended December
        31,
        2006.
 
 In
        February 2006, the Company’s Chief Executive Officer, Thomas Granville, was
        granted an option to purchase 500,000 shares of common stock at an exercise
        price of $6.00. Of this total 300,000 options vested immediately and the
        balance
        is expected to vest, subject to the attainment of certain specified objectives,
        over the next one to three years. These options are valued at $300,187 utilizing
        the Black-Scholes-Merton option pricing model with $259,027 of compensation
        recorded in 2006.
  In
        February 2006, the Company’s, Chief Technical Officer, Edward Buiel, was granted
        an option to purchase 35,000 shares of common stock at an exercise price
        of
        $6.00. Of this total 10,000 options vested immediately and the balance is
        expected to vest, subject to the attainment of certain specified objectives,
        over the next two to three years. These options are valued at $20,994 utilizing
        the Black-Scholes-Merton option pricing model with $13,330 of compensation
        recorded in 2006.
  F-27
  In
        February 2006, members and affiliates of the law firm of Petersen & Fefer,
        general corporate counsel (of which one member was a director of the Company
        at
        the time) were granted an option to purchase 360,000 shares of common stock
        at
        an exercise price of $6.00. Of this total 240,000 options vested immediately
        and
        the balance will vest at the rate of 10,000 shares per month during the year
        ended December 31, 2006. These options are valued at $193,449 utilizing the Black-Scholes-Merton
        option pricing model and are recorded as legal expense in 2006.
  In
        February 2006, the Company’s external bankruptcy counsel, Cecilia Rosenauer, was
        granted an option to purchase 15,000 shares of common stock at an exercise
        price
        of $6.00. The options vested on the effective date of Mega-C’s Chapter 11 plan
        of reorganization, which took place in November 2006. These options are valued
        at $2,483 utilizing the Black-Scholes-Merton
        option pricing model and are recorded as legal expense in 2006.
  In
        March
        2006, two employees were granted options to purchase a total of 24,000 shares
        of
        common stock at an exercise price of $4.00 and $6.00. The options vest at
        a rate
        of 2,500 per month over the first 6 months and 1,500 per month thereafter.
        These
        options are valued at $28,257 utilizing the Black-Scholes-Merton
        option pricing model with $24,408 of compensation recorded in 2006.
  In
        December 2006, the Company’s Chief Technical Officer, Edward Buiel, was granted
        a contractual option to purchase an additional 100,000 shares of our common
        stock at a price of $3.75 per share. A total of 50,000 options will vest
        on
        December 29, 2009 and the remaining 50,000 will vest on December 29,
        2010. The options will be exercisable for a period of six years from the
        vesting date. These options are valued at $267,372, utilizing the Black-Scholes-Merton
        option pricing model with $6,481 of compensation recorded in 2006.
  In
        February 2006, a consultant, Trey Fecteau, was granted an option to purchase
        97,000 shares of common stock at an exercise price of $4.00. The options
        vested
        upon completion of contractual services in December 2006. These options are
        valued at $150,702 utilizing the Black-Scholes-Merton
        option pricing model. This amount reduced the proceeds of the Series A Preferred
        Stock offering in 2006.
 
 The
        Company uses the
        Black-Scholes-Merton Option Pricing Model to estimate the fair value of awards
        on the measurement date using the weighted average assumptions noted in the
        following table:
 **Year**
                
                **Interest
                    Rate**
                
                **Dividend
                    Yield**
                
                **Expected
                    Volatility**
                
                **Expected
                    Life**2004
                
                
                3.8
                %
                
                0.0
                %
                
                59.1
                %
                
                60
                    months2005
                
                
                4.0
                %
                
                0.0
                %
                
                52.0
                %
                
                100
                    months2006
                
                
                4.7
                %
                
                0.0
                %
                
                53.6
                %
                
                45
                    months
 
 Expected
        volatilities are calculated based on the historical volatility of the Company’s
        stock since its listing on the public markets. Management has determined
        that it
        cannot reasonably estimate a forfeiture rate given the insufficient amount
        of
        time and activity of share option exercise and employee termination patterns.
        The expected life of options represents the period of time that options granted
        are expected to be outstanding was determined using the contractual term.
        The
        risk-free interest rate for periods within the expected life of the option
        is
        based on the interest rate for a similar time period of a U.S. Treasury note
        in
        effort on the date of the grant.
 
 The
        following table provides consolidated summary information on the Company’s
        equity compensation plans for the years ended December 31 2004, 2005 and
        2006.
  *2004*W
                  e i g h t e d A v e r a g e.**All
                  Plan & Non-Plan Compensatory Options**
              
              
              Number
                  of Options
              
              
              Exercise
              
              
              Fair
                  Value
              
              
              Remaining
                  Life (years)
              
              
              Aggregate
                  Intrinsic
                ValueOptions
                  outstanding at December 31,2003
              
              
              0
              
              $
              0.00
              
              $
              0.00Granted
              
              
              736,350
              
              $
              3.53
              
              $
              2.87Exercised
              
              
              0
              
              $
              0.00
              
              $
              0.00Forfeited
                  or lapsed
              
              
              0
              
              $
              0.00
              
              $
              0.00Options
                  outstanding at December 31,2004
              
              
              736,350
              
              $
              3.53
              
              $
              $2.87
              
              
              6.34
  *2005*W
                  e i g h t e d A v e r a g e.**All
                  Plan & Non-Plan Compensatory Options**
              
              
              Number
                  of Options
              
              
              Exercise
              
              
              Fair
                  Value
              
              
              Remaining
                  Life (years)
              
              
              Aggregate
                  Intrinsic
                ValueOptions
                  outstanding at December 31,2005
              
              
              736,350
              
              $
              3.53
              
              $
              2.87Granted
              
              
              1,254,500
              
              $
              2.48
              
              $
              1.34Exercised
              
              
              (358,865
              )
              $
              1.65
              
              $
              2.32Forfeited
                  or lapsed
              
              
              (182,100
              )
              $
              3.04
              
              $
              1.44Options
                  outstanding at December 31,2005
              
              
              1,449,885
              
              $
              3.12
              
              $
              1.86
              
              
              7.73
   2006W
                  e i g h t e d A v e r a g e.**All
                  Plan & Non-Plan Compensatory Options**
              
              
              Number
                  of Options
              
              
              Exercise
              
              
              Fair
                  Value
              
              
              Remaining
                  Life (years)
              
              
              Aggregate
                Intrinsic
                ValueOptions
                  outstanding at December 31,2005
              
              
              1,449,885
              
              $
              3.12
              
              $
              1.86Granted
              
              
              1,191,000
              
              $
              5.42
              
              $
              .82Exercised
              
              
              0
              
              $
              0
              
              $
              0Forfeited
                  or lapsed
              
              
              (894,000
              )
              $
              3.24
              
              $
              1.94Options
                  outstanding at December 31,2006
              
              
              1,746,885
              
              $
              4.62
              
              $
              1.05
              
              
              3.7
              
              $
              634,903Options
                  exercisable at December 31,2006
              
              
              1,192,385
              
              $
              5.11
              
              $
              .97
              
              
              2.9
              
              $
              254,903
  The
        following table summarizes the status of the Company’s non-vested options under
        the stock option plans:
  **All
        non-vested stock options as of December 31, 2006**  **** Shares   **** Fair
        Value
  Options
                  subject to future vesting atDecember
                  31,2005
              
              
              1,194,000
              
              $
              1.69Options
                  granted
              
              
              1,191,000
              
              $
              .82Options
                  forfeited or lapsed
              
              
              (784,000
              )
              $
              1.82Options
                  vested
              
              
              (1,046,500
              )
              $
              .79Options
                  subject to future vesting at December 31,2006
              
              
              554,500
              
              $
              1.34
  As
        of
        December 31, 2006, there was approximately $744,000 of unrecognized compensation
        related to non-vested options granted under the plans. The Company expects
        to
        recognize the cost over a weighted average period of 2.3 years. The total
        fair
        value of options vested during the twelve-month period ended December 31,
        2006
        was $830,181 ($207,781 during the twelve-month period ended December 31,
        2005).
  ***Pro-Forma
        Stock Compensation Expense:*** For
        the
        year ended December 31, 2005, the Company applied the intrinsic value method
        of
        accounting for stock options as prescribed by APB 25. Had compensation expense
        for employee stock options granted under the plan been determined based on
        the
        fair value at the grant date consistent with FASB 123R, the Company’s pro forma
        net loss and loss per share for the year ended December 31, 2005 would have
        been
        as follows.
  F-28
  **2005**Fair
                  value and per share summary:
              
              **Total**
              
              **Per
                  share**Net
                  loss applicable to common shareholders
              
              $
              (9,600,464
              )
              $
              (.67
              )Fair
                  value ofoptions
                  (expense)
              
              $
              (553,263
              )
              $
              (.04
              )Intrinsic
                  value of employee options recorded
              
              $
              82,500
              
              $
              .01Pro
                  forma loss
              
              $
              (10,071,227
              )
              $
              (.70
              )
 
 **Note
        10-Segment Information**
  The
        Company’s business is organized, managed and internally reported as one segment.
        Segments are determined based on differences in products, internal reporting
        and
        how operational decisions are made. The entire business currently operates
        in
        the United States and Canada. **** While
        Axion is a Delaware corporation, its principal assets during the year ended
        December 31, 2005 were located at APC, a wholly owned subsidiary that was
        organized under the laws of Canada and did business in the Province of Ontario.
        At December 31, 2005, the Company had no substantial business or properties
        in
        the U.S. The Company purchased the manufacturing assets of a failed small
        lead-acid battery manufacturing plant located in New Castle, Pennsylvania
        in
        early 2006 from a bank. As of December 31, 2006 the Company closed all Canadian
        facilities and operated entirely from the United States. Sales for the year
        ended December 31, 2006 by geographic area is determined by customer
        location.
  **United
                  States**
              
              
              **Canada**
              
              
              **Total**Sales
              
              $
              227,781
              
              $
              47,596
              
              $
              275,377Property
                  & equipment
              
              $
              1,044,805
              
              $
              -
              
              $
              1,044,805
 
 **Note
        11--Earnings/Loss Per Share**
 
 Basic
        earnings per share is computed by dividing income applicable to common
        shareholders (the numerator) by the weighted-average number of common shares
        outstanding (the denominator) for the period. Diluted earnings per share
        assume
        that any dilutive convertible securities outstanding were converted, with
        related preferred stock dividend requirements, interest expense and outstanding
        common shares adjusted accordingly. It also assumes that outstanding common
        shares were increased by shares issuable upon exercise of those stock options
        and warrants for which the market price exceeds the exercise price, less
        shares
        which could have been purchased by the Company with the related proceeds.
        In
        periods of losses, diluted loss per share is computed on the same basis as
        basic
        loss per share as the inclusion of any other potential shares outstanding
        would
        be anti-dilutive. Had the Company recorded income applicable to common
        shareholders for the periods ended December 31, 2003, 2004 2005 and 2006,
        weighted-average number of common shares outstanding would have increased
        by
        785,897, 1,386,612 and 2,970,730 and 2,135,938, respectively, for the fiscal
        years, reflecting the addition of dilutive securities in the calculation
        of
        diluted earnings per share. The increase in weighted average common shares
        for
        the cumulative period (September 18, 2003 to December 31, 2006) is 2,050,720
        shares.
 
 **Note
        12 — Income Taxes**
 
 Following
        is a summary of the components giving rise to the income tax provision for
        the
        periods ended December 31, 2006 and 2005.
 **2006**
                
                **2005**Currently
                    payable:Federal
                
                $
                -
                
                $
                -State
                
                
                0
                
                
                -Foreign
                
                
                -
                
                
                -Total
                    currently payable
                
                
                0
                
                
                -Deferred:Federal
                
                
                1,386,000
                
                
                278,000State
                
                
                456,000
                
                
                -Foreign
                
                
                787,000
                
                
                837,000Total
                    deferred
                
                
                2,629,000
                
                
                1,115,000Less
                    increase in allowance
                
                
                (2,629,000
                )
                
                (1,115,000
                )Net
                    deferred
                
                
                -
                
                
                -Total
                    income tax provision
                
                $
                0
                
                $
                -
 Individual
          components giving rise to the deferred tax asset are as
          follows:
  F-29
  Individual
        components giving rise to the deferred tax asset are as follows:
  **2006**
                
                **2005**Future
                    tax benefit arising from net operating loss carry forwards
                
                $
                3,242,000
                
                $
                1,330,000Future
                    tax benefit arising from available tax credits
                
                
                864,000
                
                
                715,000Future
                    tax benefit arising from options/warrants issued for
                    Services
                
                
                536,000
                
                
                56,000Other
                
                
                149,000
                
                
                61,000Total
                
                
                4,791,000
                
                
                2,162,000Less
                    valuation allowance
                
                
                (4,791,000
                )
                
                (2,162,000
                )Net
                    deferred
                
                $
                -
                
                $
                -
 The
        components of pretax net loss are as follows:
 
 **2006**
              
              **2005**United
                  States
              
              $
              (4,867,383
              )
              $
              (3,178,299
              )Foreign
              
              
              (2,160,580
              )
              
              (3,146,814
              )$
              (7,027,963
              )
              $
              (6,325,113
              )
 
 The
        Company has net operating loss carryforwards of approximately $4,125,000
        and
        $4,144,000 available to reduce future income taxes in United States and
        Canadian, respectively. The United States carryforwards expire at various
        dates
        between 2024 and 2026. The Canadian carryforwards expire at various dates
        between 2010 and 2025. The Company also has generated Canadian tax credits
        related to research and development activities. A portion of this credit,
        amounting to approximately $429,000 is refundable and has been presented
        as such
        in the accompanying balance sheet. The remaining credit, amounting to $864,000,
        is available to offset future taxable income in Canada and expires at various
        dates between 2014 and 2026. The Company has adopted FASB 109 which provides
        for
        the recognition of a deferred tax asset based upon the value certain items
        will
        have on future income taxes and management's estimate of the probability
        of the
        realization of these tax benefits. The Company has determined it more likely
        than not that these timing differences will not materialize and have provided
        a
        valuation allowance against the entire net deferred tax asset. The utilization
        of NOL and tax credit carryforwards from Tamboril prior to the reorganization
        may be subject to a substantial annual limitation due to the ownership change
        limitations provided by the Internal Revenue Code of 1986, as amended and
        similar state provisions. Accordingly, these amounts have not been included
        in
        the gross deferred tax asset number above. In addition, due to equity
        transactions that have occurred subsequent to the reorganization with Tamboril,
        the utilization of NOL carryforwards may be subject to further change in
        control
        limitations that generally restricts the utilization of the NOL per
        year.
  F-30
 The
        reconciliation of the United States statutory federal income rate and the
        effective income tax rate in the accompanying consolidated statements of
        operations is as follows:
 
 **2006**
              
              **2005**Statutory
                  U.S. federal income tax rate
              
              
              (34
                  .0
              )%
              
              (34.0)
              %State
                  taxes
              
              
              (6
                  .4
              )%Mega-C
                  Trust Shares augmentation/return
              
              
              (5
                  .4
              )%
              
              8.1
              %Equity
                  based compensation
              
              
              2
                  .0
              %
              
              3.0
              %Nondeductible
                  research and development
              
              
              3
                  .2
              %
              
              8.5
              %Warrant
                  modifications
              
              
              5
                  .1
              %
              
              -Other
                  permanent non-deductible ifferences
              
              
              (1.
                  9
              )%
              
              (2.9
              )%Change
                  in valuation allowance
              
              
              37
                  .4
              %
              
              17.3
              %Effective
                  income tax rate
              
              
              0
                  .0
              %
              
              0.0
              %
 
 **Note
        13 — Related Party Transactions**
 
 ***Trust
        for the Benefit of the Shareholders of Mega-C Power
        Corp:*** The
        Trustee for The Trust for the Benefit of the Shareholders of Mega-C Power
        Corp.
        served as an officer of one of our consolidated companies in 2004. See
        discussion of the transactions with the trust in the note captioned
“ Mega-C Power
        Corp (Mega-C), Mega-C  Trust
        (the Trust), The Taylor Litigation”
 
 ***Transactions
        with C&T:*** **** A
        current
        board member of the Company is the former majority shareholder of C&T prior
        to the acquisition by the Company. See the note captioned “Transactions with
        Related (C&T)” for disclosure of transactions with C&T prior to and in
        connection with the acquisition.
 
 ***Related
        party notes payable:*** During
        the year ending December 31, 2006, the Company borrowed certain amounts from
        related parties; certain of these borrowings were extinguished through the
        issuance of the Company’s Series A Preferred Stock. Refer to Notes captioned
“Related Party Debt Financing” and “Stockholders’ Equity” for discussion on
        these matters.
 
 ***Series
        A Preferred stock sales -*** The
        Company raised capital in a preferred stock offering during the year ended
        December 31, 2006, discussed further in the note captioned “Stockholder’s
        Equity,” of which $3,829,970 related to transactions with board members and
        their family members.
 
 ***Senior
        Preferred stock sales:*** The
        Company raised capital in a preferred stock offering during the year ended
        December 31, 2005, discussed further in the note captioned “Stockholder’s
        Equity,” of which $2,576,330 related to transactions with board members and
        their family members.
 
 ***Common
        stock sales:*** The
        Company raised capital in common stock offerings during the three years ended
        December 31, 2005, discussed further in the note captioned “Stockholder’s
        Equity,” of which $400,000 related to transactions to sell 200,000 shares to
        board members and their affiliates
 
 ***Legal
        fees:*** John
        Petersen was a director of the Company until January 15, 2007, and a partner
        in
        the law firm of Petersen & Fefer, which serves as the Company’s legal
        counsel. During the year ended December 31, 2006, fees incurred for services
        amounted to $287,463, including $49,352 related to the value of options vesting.
        This amount is offset by a credit of $64,943 for the change in value of equity
        instruments accrued in the fourth quarter of 2005 with a measurement date
        in the
        first quarter of 2006. Fees incurred for services during the year ended December
        31, 2005 amounted to approximately $550,000.
 
 **Note** **14-
        Significant Non-Cash Transactions**
  The
        following table provides summary information on our significant non-cash
        investing and financing transactions during the twelve-month periods ended
        December 31, 2006 and 2005.
  2006
                
                
                2005Notes
                    payable to related parties converted to preferred stock
                
                $
                3,184,292
                
                $
                1,000,000Preferred
                    converted to common
                
                $
                -
                
                $
                2,475,407Reclassification
                    of escrow deposit
                
                $
                -
                
                $
                -Dividend
                    accrued to preferred stock
                
                $
                222,193
                
                $
                176,194Beneficial
                    conversion feature on preferred stock
                
                $
                613,336
                
                $
                3,099,156Amount
                    due for warrants exercised satisfied by extinguishment of
                    liability
                
                $
                113,400
                
                $
                -Satisfaction
                    of accrued legal liability with equity instruments
                
                $
                144,097
                
                $Subscription
                    receivable satisfied extinguishment of liability
                
                $
                107,100
                
                $
                -Equipment
                    purchases included in accounts payable
                
                $
                66,813
                
                $
                -Reversal
                    of stock subscription receivable
                
                $
                25,000
                
                $
                -Preferred
                    stock issued in exchange for subscription receivable
                
                
                
                
                $
                $
                    721,000Satisfaction
                    of 2005 Liability to issue stock
                
                $
                24,000
                
                $
                -Warrants
                    issued for commission on sale of preferred stock
                
                $
                150,702
                
                $
                -
  F-31
 
 There
        were no payments for interest or income taxes during the years ended 2006
        and
        2005.
 
 **Note
        15 — Mega-C**  **Power
        Corp (Mega-C** ), **Mega-C**  **Trust
        (the Trust), The Taylor Litigation**
 
 ***Mega-C
        Power Corp Business and Trust rationale:*** Mega-C
        Power Corporation was a Nevada corporation that previously held limited and
        non-exclusive license rights to the technology that APC licensed from C&T
        and that the Company purchased from C&T [as discussed in the note captioned
“Transactions with a related party (C&T]. Mega-C had ceased substantive
        operations as a result of the investigation of the promoters and management
        by
        the Ontario Securities Commission (OSC) in the spring of 2003 and was placed
        into an involuntary bankruptcy in April, 2004, as further described below.
 
 ***Trust
        Creation:*** The
        Trust was created on December 31, 2003, in connection with a reverse acquisition
        between APC and the Company, through its public shell then known as Tamboril
        Cigar Company, in response to the potential perceived equities of the Mega-C
        shareholders and risks of the situation. APC’s founders believed that the
        investors in Mega-C might be able to assert a variety of equitable claims
        to the
        energy storage technology the Company acquired from C&T. The Trust document
        required that when the Trust made its distribution, the beneficiary released
        any
        claims against all parties. Therefore, while Axion had no control over the
        Trust, its mandates were believed to be an effective way to eliminate
        conflicting claims to the technology. The Company’s founders were also
        shareholders in Mega-C for the most part.
 
 ***Trust
        corpus:*** The
        original corpus of the Trust was 7,327,500 shares of the common stock that
        APC’s
        shareholders had rights to in connection with the reverse acquisition on
        December 31, 2003. In connection with the execution of the Amended and Restated
        Trust Agreement in February 2005, which formally recognized the jurisdiction
        of
        the bankruptcy court on all matters, Axion issued 500,000 additional shares
        to
        the Trust. There was no contingency surrounding the issuance of these shares
        at
        that time. This issuance was intended to be Axion’s contribution to the Trust to
        obtain clear title to the technology and resolve all related matters and
        was
        charged to operating expense during the year ended December 31, 2005. The
        stock
        issuance transaction was valued at $1,525,000, which was the value of the
        shares
        on the date of issuance.
 
 As
        a
        result of the bankruptcy court’s confirmation of a Chapter 11 Plan and the
        substantial consummation of the confirmed plan in November 2006 the settlement
        disclosed below became effective and 1,500,000 shares were returned to the
        Company for cancellation in 2006, of which 1,000,000 represented a retroactive
        adjustment to the shares issued in the reverse acquisition in December 31,
        2003
        and 500,000 shares represented a return of the 2005 augmentation. The return
        in
        2006 was the result of a negotiated settlement and there were no contingencies
        surrounding the Trust shares in 2005 or 2006. The 500,000 shares recovered
        were
        recorded as a reversal of the expense at fair value on the date of return
        in
        2006 amounting to $1,125,000 and were promptly cancelled as were the 1,000,000
        shares.
 
 ***Trust
        Operations:*** The
        Trust did not conduct any substantive operations because, as described below,
        Mega-C was placed into involuntary bankruptcy shortly after the Trust’s
        inception. As a result of the confirmation of Mega-C’s plan of reorganization by
        an order entered on November 8, 2008 and the substantial consummation of
        the
        confirmed plan on November 21, 2006, as described below, the Trust is now
        governed by a court appointed Trustee along with a court appointed Board
        from
        the Trust’s beneficiaries.
  F-32
 
 ***The
        Trust for the Benefit of the Shareholders of Mega-C Power
        Corp*** . ***Analysis of Consolidation:*** Under
        FASB Interpretation No. 46 (revised December 2003) *Consolidation
        of Variable Interest Entities an interpretation of ARB No. 51* ,
        (FIN
        46R), reporting companies are required to consolidate a related variable
        interest entity (“VIE”) when the reporting company is the “primary beneficiary”
of that entity and holds a variable interest in the VIE. The determination
        of
        whether a reporting company is the primary beneficiary of a VIE ultimately
        stems
        from whether the reporting entity will absorb a majority of the VIE’s
        anticipated losses or receive a majority of the VIE’s anticipated
        gains.
 
 ***Variable
        Interest Entity:*** The
        Trust
        may be a variable interest entity because it has required outside infusions
        of
        cash over its existence.
 
 ***Variable
        Interest:*** The
        Company analyzed its transactions with and relationship to the Trust and
        concluded that it may have had a very small variable interest in the Trust
        based
        on its obligation to perform the acts necessary to have the SEC declare a
        registration statement effective. Further, Axion appeared to have had a limited
        variable interest based on its obligation, pursuant to the requirements in
        the
        Trust instrument that Axion pay Trust expenses until the required registration
        statement was declared effective. However, in reality, Axion never paid any
        significant Trust expenses for three reasons: (1) while the Trust included
        a
        provision for payment of expenses, no significant expenses were ever paid,
        (2)
        the Trust suspended operations on April 4, 2004 when Mega-C Power Corp. entered
        bankruptcy; and (3) the explicit obligation the Company had to pay certain
        expenses of the Trust ended on January 7, 2005 when the required registration
        statement was declared effective. The Company’s relationship to and transactions
        with the Trust, based on actual transactions, constituted a very small variable
        interest, if any, compared to other entities who provided much larger amounts
        of
        support to the Trust, for which the Company had no responsibility. Further
        no
        shares were expected to be returned to Axion at the time these assessments
        were
        made. The relative size of the variable interest is relevant to the
        determination of the primary beneficiary, as discussed below.
 
 ***Primary
        Beneficiary:*** Axion
        did
        not and will not absorb a majority of the Trust’s anticipated losses or derive
        the benefit of a majority of the Trust’s gains, if any, at any time. The primary
        beneficiary, at the time of assessment, based on an assessment of what entity
        (entities) absorbs a majority of the entity’s expected losses, receives a
        majority of its expected residual returns, or both, as a result of holding
        variable interests, was the creditors and shareholders of Mega-C Power Corp,
        as
        a group. These were the entities, as groups, who would be affected by increases
        and decreases in the Trust’s primary asset, the Axion stock. These two groups
        will also suffer a diminution in assets available for distribution to them
        because of the expenses the Trust incurs. The increases and decreases in
        the
        value of the Axion stock in the Trust will have no effect on Axion. Axion
        may
        have had a very limited obligation in the first quarter of 2004 but few,
        if any,
        expenses were incurred by the Trust in that quarter. In the second quarter,
        Mega-C Power Corp. entered bankruptcy and the Trust became dormant and,
        effectively, under the jurisdiction of the Bankruptcy Court. Upon registration
        of the Trust shares in January 2005 Axion’s obligation to the Trust ended except
        as described below relative to possible registration of shares.
  Based
        on
        the above, Axion was not the primary beneficiary and accordingly, Axion is
        not
        required to consolidate the Trust. Axion’s relationship with the Trust ended
        when the Bankruptcy Court in Reno confirmed the bankruptcy plan in 2006 except
        as described below relative to possible registration of shares. (See “Settlement
        Agreement” below)
 
 ***Trust
        Registration Rights*** **:** The
        Company registered 7,327,500 shares of common stock held by the Mega-C Trust
        by
        a registration statement the SEC declared effective January 7, 2005. 
Pursuant to the confirmed Chapter 11 Plan (See footnote captioned “Subsequent
        Events”), as referenced above, the Company may be required to register 5,700,000
        of those shares (the "Plan Funding Shares") which fund the Chapter 11
        Plan.  The Company filed a post-effective amendment relating to the resale
        or other disposition of 1,627,500 shares, of which, 1 million represent a
        portion of the Plan Funding Shares and 627,500 represent shares to pay expenses
        of the Trust. In paragraph 1(d) of the Settlement Agreement, the Company
        further
        agreed to file such additional registration statements or post-effective
        amendments as may be necessary or desirable to facilitate or accommodate
        the
        sale or distribution of 4,700,000 of those shares. The Settlement Agreement
        was
        incorporated and approved in its entirety in paragraph 6.1 of the Second
        Amended
        Plan, which further provided in paragraph 6.12 that the Second Amended
        Shareholder Trustee and the Liquidation Trustee have the right and power
        to
        request that the Company file such amendments to the registration statement
        for
        the Plan Funding Shares.
  F-33
 
 ***Taylor
        Litigation:*** On
        February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor,
        Elgin Investments, Inc. and Mega-C Technologies, Inc. (collectively the “Taylor
        Group”) filed a lawsuit in the Ontario Superior Court of Justice Commercial List
        (Case No. 04-CL-5317) that named Tamboril, APC, Rene Pardo, Marvin Winick,
        Kirk
        Tierney, Joseph Piccirilli, Ronald Bibace, Robert Averill, James Smith, James
        Eagan, Thomas Granville, Joseph Souccar, Glenn W. Patterson, Canadian
        Consultants Bureau Inc., Robert Appel, Harold Rosen, Igor Filipenko, Valeri
        Shtemberg, Yuri Volfkovich, Pavel Shmatko, Michael Kishinevsky, Mega-C Power
        Corporation (Nevada), Mega-C Power Corporation (Ontario), C&T, Turitella
        Corporation, Gary Bouchard, Fogler Rubinoff LLP, Netprofitetc Inc., 503124
        Ontario Ltd., HAP Investments LLC, Infinity Group LLC, James Keim, Benjamin
        Rubin and John Doe Corporation as defendants. Although the complaint alleges
        a
        number of complex and intersecting causes of action, it appears that with
        respect to the Company and certain of its directors, officers and stockholders,
        the lawsuit alleged a conspiracy to damage the value of the Taylor Group’s
        investment in Mega-C and deprive the Taylor Group of its alleged interests
        in
        the technology based on an alleged “oral” agreement, as well as damages of
        $250,000,000.
 
 Based
        on
        orders entered in the Bankruptcy Court on February 11, 2008, management believes
        that this litigation against the Company is resolved, as set forth more fully
        in
        the section entitled “Settlement Agreement and Confirmed Chapter 11
        Plan.”
 
 ***Mega-C
        Bankruptcy Court Litigation*** **:** As
        described above, shortly after the formation of the Trust, Lewis “Chip” Taylor,
        Chip Taylor in Trust, Elgin Investments, Jared Taylor and Mega-C Technologies
        filed suit against Axion and APC’s founders (the “Taylor Litigation”). The
        Company, APC and Thomas Granville filed an involuntary Chapter 11 petition
        against Mega-C in the U.S. Bankruptcy Court for the District of Nevada (Case
        No.
        BK-N-04-50962-gwz).
 
 In
        February 2005, the Bankruptcy Court stayed the Taylor Litigation pending
        resolution of Mega-C’s Chapter 11 bankruptcy case. In March 2005, the Bankruptcy
        Court appointed William M. Noall to serve as Chapter 11 Trustee for the Mega-C
        case. On June 7, 2005, the Chapter 11 Trustee commenced an adversary proceeding
        against Sally Fonner, the trustee of the Trust (Adversary Proceeding No.
        05-05042-gwz), demanding, among other things, the turnover of at least 7,327,500
        shares of the Company’s stock held by the Trust as property of the bankruptcy
        estate.
 
 On
        July
        27, 2005, the Company commenced an adversary proceeding against the Chapter
        11
        Trustee and Ms. Fonner (Adversary Proceeding No. 05-05082-gwz) for the purpose
        of obtaining a judicial determination that as of the petition
        date:
  ·
              Mega-C's
                  license to commercialize the technology was
                  terminated;
  ·
              Mega-C
                  does not have any interest in the
                  technology;
  ·
              Mega-C
                  did not transfer any property to the Company with the intent to
                  damage or
                  defraud any entity;
  ·
              Mega-C
                  did not transfer any property to the Company for less than reasonably
                  equivalent value; and
  ·
              If
                  the court ultimately decides that Mega-C has a valid legal interest
                  in the
                  technology, then the Company is entitled to terminate the Trust.
                  Further,
                  Axion amended its complaint in September 2005 to assert its legal
                  right to
                  have the Trustee of the Mega-C Trust hold the assets of the Trust
                  for the
                  benefit of the Company in the event the bankruptcy court were to
                  grant the
                  Chapter 11 Trustee's request for turnover of the Trust assets and
                  to set
                  aside the Trust. Among other things these theories made it necessary
                  to name Sally A. Fonner as a defendant in the lawsuit.
  ***Settlement
        Agreement and Confirmed Chapter 11 Plan*** **:** On
        December 12, 2005, the Company entered into a settlement agreement with Mega-C,
        represented by its Chapter 11 Trustee William M. Noall ("Noall"), and the
        Trust,
        represented by its trustee Sally A. Fonner ("Fonner"). Additional signatories
        to
        the settlement agreement include: (a) the Company's subsidiaries APC and
        C&T; (b) Fonner in both her capacity as Mega-C's sole officer and director
        and as trustee of the Trust; (c) certain former stockholders of APC
        including Robert Averill, Joe Piccirilli, Canadian Consultants Bureau Inc.,
        James Smith, James Eagan, Tom Granville, Joe Souccar, HAP Investments, LLC,
        Glenn Patterson, Igor Filipenko, Ron Bibace, Kirk Tierney, Infinity Group,
        LLC,
        James Keim and Turitella Corporation; (d) Paul Bancroft, and
        (e) certain former stockholders of C&T including, Yuri Volkovich, Pavel
        Shmatko, Albert Shtemberg, Edward Shtemberg, C&T Co., Inc. in Trust, Oksana
        Fylypenko, Andriy Malitskiy, Valeri Shtemberg, Yuri Shtemberg, Victor Eshkenazi,
        Miraslav E. Royz, and Rimma Shtemberg.
  F-34
  The
        settlement agreement was approved by the Bankruptcy Court after a hearing
        in an
        order dated February 1, 2006. Certain terms were subject to confirmation
        and
        effectiveness of Mega-C's Chapter 11 plan of reorganization. On November
        8,
        2006, the Bankruptcy Court entered an order confirming the plan which was
        subsequently substantially consummated on November 21, 2006. The settlement
        agreement was fully incorporated in the confirmed Chapter 11 plan. At the
        date
        of these financial statements, the plan is fully effective and substantially
        consummated.  Accordingly, all pending and potential disputes between the
        parties to the Settlement Agreement have been resolved. In summary, the
        following steps have been accomplished:
  ·
              The
                  Company has compromised and withdrawn  its notes receivable from
                  Mega-C to an allowed unsecured claim of $100;
  ·
              Mega-C
                  has assigned all of its right, title and interest, if any, in the
                  technology and any and all tangible and intangible personal property
                  in
                  the Company's possession to the Company;
  ·
              The
                  Trust has been restated and retained 4,700,000 shares that will
                  be sold to
                  pay creditor claims that remain unsatisfied from the Liquidation
                  Trust
                  described below, with the balance to be proportionately distributed
                  to the
                  holders of allowed equity interests in Mega-C in connection with
                  the
                  implementation of Mega-C's Chapter 11 plan. It is also the owner of
                  685,002 share certificates which serve as collateral for loans
                  paid to the
                  newly created Liquidation Trust in the amount of
                  $2,055,000;
  ·
              A
                  newly created Liquidation Trust received the proceeds of loans
                  in the
                  amount of $2,055,000, secured by 685,002 shares and has legal title
                  to
                  314,998 shares that will be sold to pay creditor claims and Liquidation
                  Trust expenses.
  ·
              The
                  former trustee of the Trust has received 627,500 shares as compensation
                  by
                  the Trust through the effective date of Mega-C's plan; and
  ·
              The
                  Trust surrendered 1,500,000 shares to the Company which were promptly
                  cancelled as discussed under “Trust corpus” above.
  The
        litigation settlement and releases provided by the plan, which are as broad
        as
        the law allows, are now binding on Mega-C, the Chapter 11 trustee, the Taylor
        Group and all other parties described in the plan of reorganization. The
        plan
        requires the Liquidation Trustee or the Second Amended Shareholders Trustee
        to
        seek dismissals of the Taylor litigation to the extent the litigation asserts
        derivative or other causes of action that belong to the Chapter 11 estate
        of
        Mega-C.
 
 While
        certain aspects of the litigation discussed above are on appeal to the Ninth
        Circuit Court of Appeals and to the United States District Court for the
        District of Nevada, management believes the possibility of any adverse decision
        to the Company to be remote.
 
 In
        orders
        entered on February 11, 2008, the Bankruptcy Court held that the alleged
“oral”
agreement creating rights or interests in the Technology in favor of the
        Taylor
        Group never existed and, even if it had, the Taylor Group transferred any
        such
        rights to the Debtor which were then transferred to the Company by the confirmed
        Chapter 11 Plan. The Bankruptcy Court held that the Taylor Group has no interest
        in or rights to the Technology. The Bankruptcy Court held that the only rights
        the Taylor Group has are as putative creditors or shareholders of Mega-C
        and
        that any attempts to claim an interest in or contest the Company’s title to the
        Technology are contrary to the permanent injunction of the Chapter 11
        Plan.
  F-35
  ***Future
        Litigation Costs:*** No
        amounts have been accrued in the accompanying balance sheet related to future
        litigation costs. Protracted litigation or higher than anticipated costs
        could
        significantly reduce available working capital and have a material adverse
        impact on the company’s financial condition.
 
 ***Notes
        Receivable-Mega-C:*** The
        Company advanced funds to Mega-C over the years from 2003 to 2005. The Company
        considered these notes impaired, by recording an allowance for doubtful
        accounts, in an amount equal to the aggregate of the advances, net of certain
        repayments, against the Mega-C advances as the advances were made.
 
 Because
        of the uncollectibility of the Mega-C receivable, as confirmed by the above
        described transactions and events, the Company recorded a recovery of notes
        receivable previously written off in November of 2006 in the amount of $100
        as
        well as other assets received from Mega-C Power Corp. The other assets received,
        primarily miscellaneous fixed assets, have been determined to be negligible
        in
        value and no attempt has been made to secure an appraisal or record any amounts
        for these assets. Most importantly, the confirmation of the plan of
        reorganization
 conveyed
        all of Mega C’s right, title and interest, if any, in the technology to the
        Company, thereby resolving a significant challenge to the Company’s ownership of
        the technology.
  **Note
        16 — Commitments and Contingencies**
 
 ***Facilities:*** During
        the year ended December 31, 2005, all of the Company’s operations were conducted
        at its research and development center located at 100 Caster Avenue in
        Woodbridge, a suburb of Toronto, Ontario, Canada. The Company rented this
        facility under a month-to-month arrangement that required a minimum monthly
        rental of $8,150. During 2006 the Company closed the facilities and moved
        to New
        Castle, Pennsylvania. See the note captioned “Purchase of Assets of Failed
        Battery Manufacturing Company (Equipment Purchase).” The agreement provides for
        an initial term of two years with two renewal terms of five years each. The
        monthly rent payable for the initial term of the agreement is $10,000. During
        the two extension terms, the rent will be based on market rates as determined
        by
        negotiation between the parties, or if the parties are unable to reach a
        mutually agreed rental rate, by an independent appraisal process. The renewal
        and extension of the lease is being negotiated and is on a month-to-month
        basis
        while those negotiations are ongoing. In addition to the monthly rental,
        ABP is
        obligated to pay all required maintenance costs, taxes and special assessments,
        maintain public liability insurance in the amount of $1 million, and maintain
        fire and casualty insurance for an amount equal to at least 80% of the
        replacement value of the leased premises. Rent expense for the plant in New
        Castle amounted to approximately $103,000 for the year ended December 31,
        2006.
        Future commitments under the initial term of the lease amount to $120,000
        in
        2007 and $20,000 in 2008.
 
 ***Employment
        Agreements:*** The
        Company’s Chief Executive Officer, President, Chief Financial Officer and Chief
        of Research and Development have each executed written employment agreements
        that provide for initial terms of two to four years, provide for the salaries
        and contractual stock options specified in the following table.
  **Name**
              
              **Position**
              
              **Date**
              
              **Term**
              
              **Salary**
              
              **Options**
              
              **Price**
              
              **Vesting**Thomas Granville
              
              
              CEO
              
              
              4/4/05
              
              
              24
                  Months
              
              $
              261,000
              
              
              180,000
              
              $
              2.50
              
              
              MonthlyCharles Mazzacato
              
              
              President
              
              
              7/27/04
              
              
              48
                  Months
              
              $
              160,000
              
              
              240,000
              
              $
              4.00
              
              
              MonthlyPeter
                  Roston
              
              
              CFO
              
              
              7/27/04
              
              
              48
                  Months
              
              $
              125,000
              
              
              200,000
              
              $
              4.00
              
              
              MonthlyEdward
                  Buiel
              
              
              CTO
              
              
              12/28/06
              
              
              48
                  Months
              
              $
              168,000
              
              
              90,000
              
              $
              4.00
              
              
              Monthly
  Thomas Granville’s
        employment agreement was automatically extended for another 24 months through
        April 2009 based on the terms of the agreement. The terms in the agreement
        did
        not change. Mr. Conway’s employment agreement has a similar provision by which
        the agreement may automatically extend another 6 months. The compensation
        committee approved a new employment agreement with Mr. Buiel December 31,
        2006.
        His compensation was increased to $168,000 annually.
 
 If
        any of
        these officers is terminated under certain circumstances, their contracts
        provide that, they will be entitled to receive a lump sum payment equal to
        six
        month’s base annual salary as liquidated damages. During 2006 Charles Mazzacato
        resigned and Peter Roston was terminated for cause. Mr. Roston filed a lawsuit
        for the full amount of compensation and benefits stated in his employment
        agreement. The Company determined the range of potential loss to be CAD $250,000
        to CAD $275,000, however the risk of loss as a result of this lawsuit is
        considered by the Company to be remote as that term is used in Statement
        of
        Financial Accounting Standards number 5, “ *Accounting
        for Contingencies” (FASB 5).*
  F-36
 
 ***Contingent
        Shares:***  In
        connection with a prospective offering with a foreign partnership in which
        the
        Company did not receive payment for 1,000,000 shares, and recovered and
        cancelled the stock certificate, four holders of warrants to purchase the
        Company’s common stock agreed to exercise their warrants to purchase, in the
        aggregate, 301,700 shares of common stock for the purpose of selling them
        to the
        foreign partnership in a transaction that was substantially similar to the
        one
        in which the Company recovered and cancelled 1,000,000 shares.  The 301,700
        shares were to be issued to the foreign partnership upon receipt of payment,
        which was in turn contingent upon the foreign partnership tendering the payment
        of the purchase price for these shares.  Contrary to the terms and
        conditions of their agreements, the foreign partnership is in possession
        of a
        stock certificate representing the 301,700 shares without tendering the
        purchase price to either the Company or to the warrantholders.  As such,
        the 301,700 shares have not been duly issued and have been excluded from
        all
        calculations of the issued and outstanding shares of common stock in these
        financial statements.    The Company has included these 301,700
        shares as outstanding warrants, pending receipt of the exercise price from
        the
        four warrantholders. The Company has not yet located the certificates
        representing the block of 301,700 unissued shares.
 
 Management
        concluded there is no requirement, pursuant to the requirements of FASB 5,
        “ *Accounting
        for Contingencies* ,”
to
        accrue any loss contingency based on the above described matters involving
        the
        301,700 shares. As a result, there has been no accounting recognition of
        these
        events in the financial statements.
 
 **Note
        17 — Subsequent Events**
 
 ***Series
        A Preferred*** :
        In
        January 2007, the Company sold 40,000 additional shares of series A preferred
        to
        accredited investors for gross cash proceeds of $400,000. On the date of
        issuance, the effective conversion price of the series A preferred was at
        a
        price lower than the market price of the common stock resulting in a non-cash
        beneficial conversion feature of $400,000 recognized as additional non-cash
        dividends on a straight line basis, which did not differ materially from
        the
        effective yield method, through the first date these shares are convertible
        on
        April 23, 2007.
 
 ***Debt
        Financing:*** In
        August 2007, the Company borrowed an additional $460,000 from Robert Averill,
        a
        director of the Company and $115,000 of this sum was repaid on September
        28,
        2007. In October 2007, Igor Filipenko, a former Board Member and majority
        shareholder of C&T, loaned the Company $115,000 at 12% interest per annum.
        On November 1, 2007, the Company borrowed an additional $267,900 from Robert
        Averill.
 
 On
        November 27, 2007, Robert Averill and the Company entered into an agreement
        to
        convert all outstanding debt obligations due and owing to Mr. Averill, into
        obligations under the Secured Bridge Loan discussed below, extinguishing
        the
        security interest Mr. Averill had in all of the assets of Axion Power Battery,
        Inc. in exchange for the security provided under the Secured Bridge Loan.
        At the
        time this indebtedness was converted, the Company owed Mr. Averill outstanding
        principal plus interest amounting to $1,111,910 together with new borrowings
        of
        $688,090, resulting in Mr. Averill holding a note for $1,800,000 under the
        Secured Bridge Loan financing.
 
 In
        December 2007 the Company offered certain of its directors, officers, and
        significant investors the opportunity to participate in a short term bridge
        loan
        arrangement in increments of $100,000, each such loan to bear interest at
        14%
        and to be secured by all of the assets, including the intellectual property
        assets of Axion Power International and Axion Power Battery Manufacturing
        Inc.
        (the “Secured Bridge Loan”). Elections to participate must be made no later than
        January 7, 2008, and if fully subscribed, the Secured Bridge Loan could result
        in up to $3,000,000 in short term funding for the Company.
 
 Total
        funding received under the Secured Bridge Loan as of December 31, 2007 amounted
        to $2,541,216, with additional funding of $100,000 in January of 2008.
  F-37
  The
        Secured Bridge Loan has an original maturity date of March 31, 2008, with
        three
        extensions of the maturity date at the option of the Company with higher
        interest rates to apply to each such extension. If extended to April 30,
        2008,
        the interest rate during the extension period increases to 15% with an extension
        fee equal to 1% of the original loan. If extended to May 31, 2008, the interest
        rate during the extension period increases to 16% with an extension fee equal
        to
        1% of the original loan. If extended to June 30, 2008, the interest rate
        during
        the extension period increases to 18% with an extension fee equal to 2% of
        the
        original loan. A loan origination fee applies, equal to 8% of the original
        loan;
        provided that the origination fee will decrease by one-half percent each
        week
        after December 15, 2007 until it reaches 6.5% by January 7, 2008. Warrants
        exercisable at $2.35 until December 31, 2012 are included with each $100,000
        Secured Bridge Loan note. Warrants to be issued are as follows: 3,405 warrants
        upon occurrence of the loan, 851 warrants upon extension of the loan to April
        30, 2008, 1,276 warrants upon extension of the loan to May 31, 2008, and
        2,128
        warrants upon extension to June 30, 2008. Anti-dilution provisions apply
        to the
        warrants.The Holders of these Notes shall have the right to convert the Note
        together with interest, into any security sold by the Company in an
        institutional offering. Upon repayment of this Note, all conversion rights
        shall
        terminate forthwith.
 
 On
        January 15, 2008, in the initial closing, the Company received approximately
        $4,000,000 from the Quercus Trust as the first installment of a prospective
        $18,000,000 investment. In exchange for the investment the Quercus Trust
        received 1,904,762 units. Each
        unit
        consisted of one share of Common Stock, and a 5-year Warrant to purchase
        1.5
        shares of Common Stock at an exercise price of $2.60 per share. The second
        closing will occur five days after Axion becomes current in its reporting
        obligations under the Securities and Exchange Act of 1934. At that time,
        Quercus
        has agreed to buy 1,904,762 additional units for $4,000,000. Each second
        closing
        unit will consist of one share of Common Stock, and a 5-year Warrant to purchase
        1.25 shares of Common Stock at an exercise price of $2.60 per share. The
        warrants have full-ratchet antidilution protection, subject to customary
        exclusions, until a registration statement covering the underlying shares
        of
        Common Stock is in effect, and a weighted average anti-dilution protection
        thereafter.
 
 Quercus
        has agreed to make an additional investment of $10 million on or before June
        30,
        2008 upon the Company’s execution of one or more qualifying contracts that
        satisfy the requirements of the **** Securities
        Purchase Agreement. There is no assurance that the Company will be able to
        satisfy this condition. In that follow-on investment, Quercus has agreed
        to
        purchase an additional 4,761,905 units for $10,000,000. Each third closing
        unit
        will consist of one share of Common Stock, and a 5-year Warrant to purchase
        1
        additional shares of Common Stock at an exercise price of $2.60 per
        share.
 
 ***Warrant
        Modifications:*** ** On
        March
        9, 2007 the Board of Directors unanimously agreed to extend the life 476,000
        $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior
        Preferred private placement offering. The warrants, valued at $381,832 prior
        to
        the extension, were revalued at the date of modification using the
        Black-Scholes-Merton option-pricing model. The incremental expense resulting
        from the revaluations was recorded as preferred dividends during the first
        quarter of 2007.   The warrants revalued at the date of modification
        using the Black-Scholes-Merton option-pricing model generated incremental
        expense in 2007 in the amount of $164,179.   These warrants expired
        March 17, 2008.
 
 ***Expiration
        of Warrants*** :
        The
        1,562,900 warrants issued to the shareholders of C&T expired December 31,
        2007.
 
 ***Employment
        Agreements:*** In
        August 31, 2007, the Company entered into a 6 month service contract with
        Andrew
        Carr Conway, Jr. to fill the position of Chief Financial Officer. The contract
        automatically renews for an additional six month term if an express renewal
        is
        not reached between Mr. Conway and the Company, calls for a $15,000 per month
        consulting fee, and the issuance of 80,000 $4.50 options with an exercise
        period
        of 2 years. 30,000 options vested with the execution of the contract, and
        the
        balance vest periodically over the remainder of the contract.
 
 In
        December 2007, the Company entered into a 2 year service contract with Robert
        Nelson, to fill the position of Vice President of Manufacturing Engineering.
        The
        contract contains an automatic renewal provision for an additional two year
        term
        if an express renewal is not reached between Mr. Nelson and the Company prior
        to
        the original termination of the contract. In addition, the contract contains
        a
        severance clause, whereby a lump sum payment equal to twenty-five percent
        of Mr.
        Nelson’s base salary will be immediately due and payable in the event Mr.
        Nelson’s employment is terminated other than for cause or for other reasons
        stipulated in the contract. The contract calls for the issuance of 108,000
        $5.00
        options exercisable over 5 years. The options vest at a rate of 3,000 shares
        per
        month and are exercisable for a period of five years. Simultaneous with the
        issuance of this contract, Mr. Nelson received a restricted stock grant of
        36,000 shares of the company’s common stock. The shares vest at a rate of 1,000
        shares per month, with provision for immediate vesting based on significant
        changes in the relative ownership of the company.
  F-38
 
 ***Grant
        from Commonwealth of Pennsylvania*** :
        The
        Company received a grant from the Commonwealth of Pennsylvania for $1.2 million
        on April 30, 2007. Of that total, $900,000 was in cash for equipment with
        the
        remainder for job training and tax credits. Of the total grant, $512,000
        was
        received September 6, 2007 and an additional $150,000 was received on December
        17, 2007. Of the total $900,000 there is a remaining balance of $238,000
        of cash
        available for equipment once the Company purchases the equipment and submits
        the
        necessary claim to the Commonwealth. The Company has also received job training
        grants in smaller amounts.
  F-39


**ITEM
      8.****—
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**




None




**ITEM
      8A — CONTROLS AND PROCEDURES**




***Background*** .
      On May
      3, 2006, we filed a post-effective amendment to a Form S-1 registration
      statement for the purpose of registering the resale of shares of our stock
      held
      by the Mega-C Trust. In connection with their review of that filing, the SEC’s
      staff raised a number of questions relating to our historical accounting
      practices. In response to the SEC’s questions, the audit committee of our Board
      of Directors concluded that our previously issued audited financial statements
      for the short period September 18, 2003 to December 31, 2003 and the years
      ended
      December 31, 2004 and 2005 should be evaluated for the accounting policies
      and
      procedures used. We concluded the financial statements for those periods, the
      interim periods within those years and the three months ended March 31, 2006
      should be restated. The year-end restated financial statements were re-audited
      by the Company’s independent external auditors for the period from our inception
      through December 31, 2005.




***Effectiveness
      of Disclosure Controls and Procedures*** .
      We are
      required to maintain disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure
      that
      required information is recorded, processed, summarized and reported within
      the
      required timeframe, as specified in the rules set forth by the SEC. Our
      disclosure controls and procedures are also designed to ensure that information
      required to be disclosed is accumulated and communicated to management,
      including our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosures.




Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures as of December
      31, 2006 and,
      based on this evaluation, our Chief Executive Officer and our Chief Financial
      Officer concluded the design of our system of disclosure controls and procedures
      was not effective as of that date to ensure that material information relating
      to our Company would be made known to them and that our system of disclosure
      controls and procedures was operating to provide a reasonable level of assurance
      that information required to be disclosed in our reports would be recorded,
      processed, summarized and reported in a timely manner, particularly during
      the
      period in which this Annual Report on Form 10-KSB was being prepared. These
      conclusions were based on the identification of material weaknesses as described
      below.




We
      determined that the following material weaknesses existed as of December 31,
      2006:




·
            Inadequate
                controls over the process for the identification and implementation
                of the
                proper accounting for complex and non-routine transactions, particularly
                as they relate to accounting for equity based transactions, uncollectible
                accounts, in-process research and development expense, inventory,
                foreign
                currency transactions, calculation of earnings per share, income
                taxes,
                completeness and accuracy of required disclosures (footnotes), periodic
                cutoff procedures and various other
                adjustments.





·
            The
                Company does not properly segregate duties and restrict access to
                accounting systems and data, spreadsheets used for critical calculations,
                and assets were not always properly
                safeguarded.





·
            The
                Company does not have a comprehensive set of policies and procedures,
                related to corporate governance, accounting, human resources, and
                other
                significant matters.





·
            During
                the audit, we noted numerous items in inventory that contained costing
                errors. An overall accurate inventory balance is composed of two
                major
                components. The first component is proper quantities of goods in
                inventory
                and the second is accurate inventory costing. We strongly recommend
                that
                the Chief Financial Officer periodically review the inventory listing
                and
                compare inventory costs to the invoice amounts to ensure accuracy
                of the
                unit costs. This practice should help to ensure that inventories
                are
                accurately valued for financial statement
                purposes.




27





·
            During
                our audit, we noted that Axion Power International, Inc. does not
                have a
                consistent system of taking periodic inventory counts. This is a
                serious
                weakness in the system of controls and has the potential for allowing
                abuse, including fraud and other defalcation, to exist and not be
                detected. Physical counts of inventory should be performed at least
                quarterly. The results should be reviewed and reconciled to the system.
                The inventory listing should be reconciled to the general ledger,
                with any
                large discrepancies investigated and explained. Any adjustments,
                along
                with the cost of goods sold entries, should be made and a procedure
                should
                be implemented to allow for these adjustments to occur on a monthly
                basis.




Because
      the material weaknesses described above relating to the Company’s internal
      control over financial reporting were not remedied as of December 31, 2006,
      our
      Chief Executive Officer and our Chief Financial Officer concluded that our
      disclosure controls and procedures were not effective for the year ended
      December 31, 2006.




We
      added
      or are initiating the following additional controls to the Company’s internal
      control over financial reporting, which we expect will improve such internal
      control subsequent to the date of the assessment and earlier assessments that
      also concluded internal controls were not effective. These changes
      are:




·
            We
                added an experienced accountant to our accounting staff, whose
                responsibilities will include identification and implementation of
                proper
                accounting procedures relating to guidance on financial reporting
                issues
                that apply to the Company;




·
            We
                performed additional analysis and other procedures in order to identify
                weaknesses and errors in order to develop an adequate system of disclosure
                and financial controls,




·
            We
                restructured certain departmental responsibilities as they relate
                to the
                financial reporting function,




·
            We
                hired a new Chief Financial
                Officer.




***Changes
      in Internal Control over Financial Reporting*** .
      No
      changes in our internal control over financial reporting occurred during the
      quarter ended December 31, 2006 that materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




**PART
      III**




**ITEM
      9.**— **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
      PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT.**




Our
      Board
      of Directors directs the management of the business and affairs of our company
      as provided in our Certificate of Incorporation, our By-Laws and the General
      Corporation Law of Delaware. Members of our Board of Directors keep informed
      about our business through discussions with senior management, by reviewing
      analyses and reports sent to them, and by participating in board and committee
      meetings.




Our
      Board
      of Directors is divided into three classes of directors that serve for staggered
      three-year terms. Three of our current board members have been elected to serve
      for terms that expire on the date of our 2007 annual meeting; three have been
      elected to serve for terms that expire on the date of our 2008 annual meeting;
      and two have been elected to serve for terms that expire on the date of our
      2009
      annual meeting. In light of the fact that we did not hold an annual meeting
      in
      2007, the directors whose terms have expired continue to serve until our next
      annual meeting, which we anticipate will be held sometime during 2008. At the
      2008 annual meeting, we expect to nominate six directors for election, three
      to
      serve until the annual meeting in 2010 and three to serve until the annual
      meeting in 2011. The following table identifies our directors; specifies their
      respective ages and positions with our company; and specifies the annual meeting
      when their current term as a board member will expire.




**Name**
            
            **Age**
            
            **Position**
            
            **Term
                expires**Dr.
                Igor Filipenko
            
            43
            
            Director
            
            2007Robert
                G. Averill
            
            68
            
            Director
            
            2007D.
                Walker Wainwright
            
            57
            
            Director
            
            2007Thomas
                Granville
            
            63
            
            Chief
                Executive Officer, Director
            
            2008Dr.
                Howard K. Schmidt
            
            49
            
            Director
            
            2008Michael
                Kishinevsky
            
            42
            
            Director
            
            2008Glenn
                Patterson
            
            54
            
            Director
            
            2009Stanley
                A. Hirschman
            
            61
            
            Director
            
            2009




28




***Executive
      officers*** .
      The
      following table identifies our non-director executive officers and specifies
      their respective ages and positions with the Company.




**Name**
            
            **Age**
            
            **Position**
            
            **Contract
                expires**Andrew
                Carr Conway Jr.
            
            64
            
            Chief
                Financial Officer
            
            February
                2008Dr.
                Edward Buiel
            
            35
            
            Vice
                President and Chief Technology Officer
            
            September
                2010Dr.
                Robert F. Nelson
            
            67
            
            Vice
                President, Manufacturing and Engineering
            
            ****November
                30, 2009




Mr.
      Conway’s employment automatically renews for an additional six months at the
      same terms and conditions absent negotiations to change the terms and
      conditions. There have been no such negotiations.




The
      following paragraphs provide summary biographical information furnished by
      our
      directors and non-director executive officers.




**Directors**




***Dr.
      Igor Filipenko, M.D.*** was
      appointed to our board in February 2004 and reelected at our 2004 annual meeting
      for a term that will expire on the date of our 2007 annual meeting. Dr.
      Filipenko was a founder of C and T Co. Incorporated, the original developer
      of
      the e3 Supercell technology. In addition to his duties as president of C&T,
      Dr. Filipenko a principal shareholder in a number of other enterprises,
      including Oledo Associated S.A., VIK Oil and Vostok Energiya, a group of
      Ukrainian companies that are engaged in petroleum refining and the import,
      export and trading of petroleum products, and Laser Plus, an ophthalmologic
      clinic located in Donetsk, Ukraine. Dr. Filipenko is a 1986 graduate of Donetsk
      Medical University, Ukraine.





***Robert
      G. Averill*** is
      an
      independent director who was appointed to our board in February 2004 and
      reelected at our 2004 annual meeting for a term that will expire on the date
      of
      our 2007 annual meeting. Mr. Averill is retired and principally involved in
      personal investments. He served as a director of Implex Corp., a New Jersey
      based developer and manufacturer of orthopedic implants that he co-founded
      in
      1991 and then sold to Zimmer Holdings, Inc. From 1978 to 1991 Mr. Averill held
      a
      variety of executive positions with Osteonics Corp., a developer and
      manufacturer of orthopedic implants that he co-founded in 1978 and then sold
      to
      Stryker Corporation. From 1971 to 1977, Mr. Averill served as a director and
      held a variety of executive positions with Meditech Inc., a developer and
      manufacturer of orthopedic implants that he co-founded in 1971 and sold to
      3M
      Corporation in 1975. Mr. Averill holds 28 patents on a variety of orthopedic
      devices and materials and he is the co-author of several publications in the
      field of orthopedics. Mr. Averill holds two degrees from the Newark College
      of
      Engineering (BS-mechanical engineering, 1962 and MS-engineering management,
      1966).





***Thomas
      Granville*** was
      appointed to our board in February 2004 and reelected at our 2005 Annual Meeting
      for a term that will expire on the date of our 2008 annual meeting. Mr.
      Granville served as the chairman of our Board of Directors from February 2004
      through April 2005 when he agreed to accept full-time employment as our chief
      executive officer. Mr. Granville has served as the president of Gallagher
      Elevator Company, a New York company that specializes in the installation and
      maintenance of elevators, escalators, moving walkways and other building
      transportation products. Mr. Granville also served 15 years as treasurer, 10
      years as the president of the National Elevator Industry Inc., a trade
      association that represents elevator manufacturers and contractors where
      his
      duties included labor negotiations for national contracts and oversight duties
      to a $2.3 billion national pension fund. Mr.
      Granville has also been a partner, or the general partner of a number of real
      estate partnerships that owned multi-family housing, commercial real estate
      and
      a cable television company. Mr. Granville is a 1967 graduate of Canisus College.
      (BA-Business Administration).





***Michael
      Kishinevsky*** is an
      independent director who was elected at our 2005 Annual Meeting for a term
      that
      will expire on the date of our 2008 annual meeting. Mr. Kishinevsky is a
      Canadian lawyer who principally engaged in the practice of corporate and
      commercial law for 10 years, with a particular emphasis on the needs of
      Toronto’s Russian speaking population. For five years Mr. Kishinevsky served as
      general legal counsel for C&T, the original developer of Axion’s base
      technology. Mr. Kishinevsky currently serves as a Director of Sunrock Consulting
      Ltd., a company he co-founded in 1995 that specializes in the import and
      distribution of carbon black and synthetic rubber. He is also the President
      and
      Director of SunBoss Chemicals Corp., a corporation specializing in chemical
      additives for the custom rubber mixing industry. Mr. Kishinevsky is a 1989
      graduate of the University of Calgary (B.Sc. in Cellular, Molecular and
      Microbial Biology and B.Sc. in Psychology) and a 1993 graduate of the University
      of Ottawa School of Law. Mr. Kishinevsky was called to the bar in the Ontario
      courts in 1995 and is a member of the Law Society of Upper Canada.




29





***Dr.
      Howard K. Schmidt, PhD.*** is
      an
      independent director who was appointed to our board in April 2005 and reelected
      at our 2005 Annual Meeting for a term that will expire on the date of our 2008
      annual meeting. Dr. Schmidt is presently employed the Executive Director of
      the
      Carbon Nanotechnologies Laboratory (the “CNL”) at Rice University in Houston,
      Texas, a post he has held since September 2003. Dr. Schmidt is an expert in
      the
      field of carbon nanotechnology and single-wall carbon nanotubes. At the CNL,
      Dr.
      Schmidt is responsible for developing and managing key federal and industrial
      relationships to drive emerging applications for carbon nanotubes. Before
      joining the CNL, Dr. Schmidt operated Stump Partners, a Houston-based
      consultancy firm and was involved in two Internet ventures. In 1989, Dr. Schmidt
      founded SI Diamond Technologies, Inc., a company that received the prestigious
      R&D 100 Award from Research and Development Magazine in 1989; went public in
      1993; and recently changed its name to Nano-Proprietary, Inc. Dr. Schmidt holds
      two degrees from Rice University (BS-Electrical Engineering, 1980 and
      PhD-Chemistry, 1986).





***Glenn
      Patterson*** is
      an
      independent director who was appointed to our board in February 2003 and is
      currently elected to serve until our 2009 annual meeting. Until November 2004,
      Mr. Patterson served as president of Oregon Electric Group, an industrial,
      commercial, power (including distribution systems) and technology services
      contractor based in Portland, Oregon. During Mr. Patterson’s tenure as
      president, Oregon Electric grew from $16 million in sales in 1994 to $127
      million in sales in 2000. In September 2001, Oregon Electric was sold to
      Montana-Dakota Resources, whose major subsidiaries includes major electrical
      power generating, utility and distribution companies with operations in 40
      states. Mr. Patterson graduated summa cum laude from Willamette University
      (BS-Economics) in 1975.





***Stanley
      A. Hirschman*** **** was
      elected to the board and an independent director at our 2006 annual meeting
      serving for a three-year term that will end on the date of our 2009 annual
      meeting. He is President of CPointe Associates, Inc., a Plano, Texas. He is
      an
      investment due diligence specialist and works regularly with public companies
      dealing with the difficulties of the balance between increased regulatory
      requirements and reasonable corporate governance. He has served on boards of
      several public companies and is currently a director of South Texas Oil Co.
      and
      former chairman of Mustang Software, Inc. While at Mustang Software, Mr.
      Hirschman took a hands-on role in the planning and execution of the strategic
      initiative to increase shareholder value resulting in the successful acquisition
      of the company by Quintus Corporation.





Mr.
      Hirschman’s client list has included GameStop, Nortel, Dalrada Financial Corp,
      The Longview Funds, Earthlink, Aiirmesh Communications, Bravo Foods
      International and Retail Highway. Prior to establishing CPointe Associates,
      Mr.
      Hirschman was Vice President Operations, Software Etc., Inc., a 396 retail
      store
      software chain, from 1989 until 1996. Mr. Hirschman also held senior executive
      management positions with T.J. Maxx, Gap Stores and Banana
      Republic.





Mr.
      Hirschman is a member of the National Association of Corporate Directors, the
      KMPG Audit Committee Institute and is a graduate of the Harvard Business School
      Audit Committees in the New Era of Governance.  He is active in community
      affairs and serves on the Advisory Board of the Salvation Army Adult
      Rehabilitation Centers.





***D.
      Walker Wainwright*** is an
      independent director who was appointed to our board January 15, 2007. Mr.
      Wainwright was elected to fill a vacancy on our board of directors created
      by
      the concurrent resignation of John Petersen, who continued to serve as corporate
      counsel. He is the founder and chief executive of Wainwright & Co. LLC, an
      independent financial advisory firm and investment manager. The Firm’s
      activities include the identification and assessment of hedge fund investments,
      the monitoring of these investments and the creation of proprietary hedge fund
      portfolios. In this respect, the Firm works with investment management firms,
      not-for-profit organizations and family offices as an independent consultant
      to
      create client-specific solutions. Wainwright & Co. also researches and
      reviews private investments, including private equity funds, to assist in
      determining their suitability for specific accounts or portfolios. Hedge fund
      portfolios for which Mr. Wainwright serves as manager or advisor currently
      have
      an aggregate value of $200 million. The Firm also provides corporate finance
      advice on a selective basis to individuals or corporate entities. Formerly
      a
      Managing Director in investment banking at Smith Barney, Inc. and at Kidder,
      Peabody & Co., Mr. Wainwright has over 30 years’ consulting, banking and
      investment banking experience. Having directed Kidder’s investment banking
      efforts in the Asia Pacific Region, he has extensive international experience
      and has lived in Australia and Lebanon. Mr. Wainwright began his career at
      Chemical Bank and, subsequently, Schroders. He is a graduate of Stanford
      University (A.B. - 1972) and of Columbia University (M.B.A. - 1976).




30




**Executive
      officers**




***Andrew
      Carr Conway, Jr*** .
      was
      appointed Chief Financial Officer on September 27, 2007. Mr. Conway is a
      Certified Public Accountant, Forensic Certified Public Accountant, Certified
      Fraud Examiner, and Certified Financial Investigator. For the last ten years
      Mr.
      Conway has been in private practice examining violations of GAAP and
      investigating misappropriations of corporate assets. Mr. Conway retired from
      the
      SEC December 30, 1997 where he worked both in the Division of Corporation
      Finance and the Division of Enforcement, as those functions are conducted in
      the
      SEC’s regional offices. Prior to Mr. Conway’s service with the SEC he served in
      a wide variety of different functions for the Internal Revenue Service until
      transferring to the SEC January 7, 1984. Mr. Conway has a total of over forty
      years of investigative and examination experience including service as an expert
      witness by deposition and appearance at trial. Mr. Conway graduated from Abilene
      Christian University in 1967 with a degree in accounting.




***Dr.
      Edward Buiel, PhD.*** was
      appointed chief of research and development in September 2005. Before joining
      our company, Dr. Buiel served for 3-1/2 years as project leader for the Energy
      Storage Group of Meadwestvaco Corporation, one of the largest producers of
      activated carbon in the world. In this position Dr. Buiel’s team focused on
      developing activated carbon materials for electrochemical applications including
      Lithiumion batteries, organic ultracapacitors, and asymmetric lead-carbon
      capacitors. His responsibilities included managing a USCAR-Advanced Battery
      Consortium project to develop activated carbon materials for hybrid electric
      vehicle energy storage systems and managing a joint program with Sandia National
      Laboratories to develop lead-carbon capacitors for grid-connected energy storage
      systems. Previously, Dr. Buiel worked for nine months as a senior software
      engineer for Vasocor, Inc. and for 2-1/2 years as a Senior Research Engineer
      for
      the Automotive Carbon Group of Meadwestvaco Corporation. Dr. Buiel is a 1994
      graduate of Queen’s University, Kingston, Ontario, where he earned a Bachelor of
      Science in Engineering and Physics, and a 1998 graduate of Dalhousie University,
      Halifax, Nova Scotia, where he earned a PhD in Physics and wrote his doctoral
      thesis on “The Development of Disordered Carbon Materials as Anode Materials for
      Li-ion Battery Applications.”





***Dr.
      Robert F. Nelson, PhD.*** joined
      Axion as Vice President of Manufacturing Engineering in December 2007. Before
      joining Axion, Dr. Nelson worked for Firefly Energy, Inc. as a Technical Advisor
      and Senior Vice President of Engineering for 4-1/2 years. His primary function
      at Firefly was to implement the development and testing of valve-regulated
      lead-acid (VRLA) cells and batteries. Before Firefly, Dr. Nelson was an
      independent consultant for six years, working with some 45 companies on
      materials and designs of VRLA batteries. Previous positions include three years
      at Bolder Technologies (1994-1997), three years at the International Lead Zinc
      Research Organization (where he organized and managed the Advanced Lead-Acid
      Research Organization, ALABC, from 1991 to 1994), one year at Portable Energy
      Products (a lead-acid startup company) and 13 years with Gates Energy Products,
      the innovator of VRLA technology. Over these 30 years, Dr. Nelson has five
      patents, has given invited presentations at some 35 international conferences
      and published 38 research papers in refereed journals. Before this, he spent
      11
      years in teaching and research, lastly at the University of Georgia (1972-1977).
      Dr. Nelson is a 1963 graduate of Northwestern University with a B.A. in
      Chemistry (cum laude) and a 1967 graduate of the University of Kansas with
      a
      Ph.D. in Analytical Chemistry. During his academic career he gave presentations
      at over 30 international conferences and published more than 35 refereed papers
      dealing with organic electrochemistry.





**Presiding
      director**




Our
      Chief
      Executive Officer, Thomas Granville, acts as the presiding director at meetings
      of our Board of Directors. In the event that Mr. Granville is unavailable to
      serve at a particular meeting, responsibility for the presiding director
      function will rotate among the chairmen of each of the committees of our Board
      of Directors.




**Corporate
      governance**




Our
      Board
      of Directors believes that sound governance practices and policies provide
      an
      important framework to assist them in fulfilling their duty to stockholders.
      Our
      Board of Directors is working to adopt and implement many “best practices” in
      the area of corporate governance, including separate committees for the areas
      of
      audit and compensation, careful annual review of the independence of our Audit
      and Compensation Committee members, maintenance of a majority of independent
      directors, and written expectations of management and directors, among other
      things.




**Code
      of  business conduct and ethics**




Our
      Board
      of Directors has adopted a Code of Business Conduct and Ethics, which has been
      distributed to all directors, officers, and employees and will be given to
      new
      employees at the time of hire. The Code of Business conduct and Ethics contains
      a number of provisions that apply principally to our President, Chief Financial
      Officer and other key accounting and financial personnel. A copy of our Code
      of
      Business Conduct and Ethics can be found under the “Investor Information”
section of our website at www.axionpower.com. We intend to disclose any
      amendments or waivers of our Code of Business Conduct and Ethics on our
      website.




31




**Communications
      with the Board of Directors**




Stockholders
      and other parties who are interested in communicating with members of our Board
      of Directors, either individually or as a group may do so by writing to Thomas
      Granville, c/o Axion Power International, Inc, 3601 Clover Lane, New Castle,
      Pennsylvania, 16105. Mr. Granville will review all correspondence and forward
      to
      the appropriate members of the Board of Directors copies of all correspondence
      that, in the opinion of Mr. Granville, deals with the functions of the Board
      of
      Directors or its committees or that he otherwise determines requires their
      attention. Concerns relating to accounting, internal controls or auditing
      matters should be immediately brought to the attention of our Audit Committee
      and will be handled in accordance with procedures established by that
      committee.




**Director
      independence**




Our
      Board
      of Directors has determined that six of our directors would meet the
      independence requirements of the American Stock Exchange if such standards
      applied to the Company. In the judgment of the Board of Directors, Dr.
      Filipenko, and Mr. Granville do not meet such independence standards. In
      reaching its conclusions, the Board of Directors considered all relevant facts
      and circumstances with respect to any direct or indirect relationships between
      the Company and each of the directors, including those discussed under the
      caption “Certain Relationships and Related Transactions.” Our Board of Directors
      determined that any relationships that exist or existed in the past between
      the
      Company and each of the independent directors were immaterial on the basis
      of
      the information set forth in the above-referenced sections.




**Board
      committees**




Audit
      Committee —
Our
      Board of Directors has created an Audit Committee that presently consists of
      Mr.
      Patterson, Mr. Hirschman and Dr. Schmidt. Mr. Patterson serves as chairman
      of
      the audit committee. All members have a basic understanding of finance and
      accounting, and are able to read and understand fundamental financial
      statements. The Board of Directors has determined that all members of the Audit
      Committee would meet the independence requirements of the Amex if such standards
      applied to our company. Our Board of Directors has also determined that based
      on
      education and work history, Messrs. Patterson and Hirschman meet the definition
      of an “Audit Committee Financial Expert” as established by the Securities and
      Exchange Commission. The Audit Committee has the sole authority to appoint,
      review and discharge our independent auditors. The Audit Committee reviews
      the
      results and scope of the audit and other services provided by our independent
      auditors, as well as our accounting principles and its system of internal
      controls, reports the results of their review to the full Board of Directors
      and
      to management and recommends to the full Board of Directors that the our audited
      consolidated financial statements be included in the our Annual Report on Form
      10-KSB.




Compensation
      Committee —
Our
      Board of Directors has created a
      compensation committee that presently consists of Messrs Averill, Patterson,
      Kishinevsky and Wainwright. Mr. Averill serves as chairman of the compensation
      committee. The compensation committee exercises our Board’s authority concerning
      compensation of the executive management team, non-employee directors and the
      administration of our stock-based incentive compensation plans. The Compensation
      Committee typically meets in separate sessions independently of board meetings.
      The Compensation Committee typically schedules telephone meetings as necessary
      to fulfill its duties.  The chairman establishes meeting agendas after
      consultation with other committee members and Mr. Thomas Granville, our CEO.
      Subject to supervision by the full Board of Directors, the compensation
      committee administers our 2004 Incentive Stock Plan. Our CEO and other members
      of management regularly discuss our compensation issues with Compensation
      Committee members. Subject to Compensation Committee review, modification and
      approval, Mr. Granville typically makes recommendations respecting bonuses
      and
      equity incentive awards for the other members of the executive management team.
      The Compensation Committee establishes all bonus and equity incentive awards
      for
      Mr. Granville in consultation with other members of the management team. Our
      Board of Directors has determined all members of the compensation committee
      would meet the independence requirements of the Amex if such standards are
      applied to us.




Technology
      Committee —
Our
      Board of Directors has created a Technology Committee that consists of Dr.
      Schmidt and Messrs. Averill and Granville. Dr. Schmidt serves as chairman of
      the
      technology committee. The technology committee provides board-level oversight,
      guidance and direction to our research and development staff, supervises the
      activities of our Technical Advisory Board, evaluates and makes recommendations
      with respect to the acquisition and licensing of complementary and competitive
      technologies and supervises the activities of our intellectual property
      lawyers.




Nominating
      Committee —
Our
      Board of Directors does not have a separate nominating committee, and has
      determined that it is appropriate for the entire Board of Directors to serve
      that function for the time being. With respect to Director nominees, our Board
      of Directors will consider nominees recommended by stockholders that are
      submitted in accordance with our By-Laws. The process for receiving and
      evaluating director nominations from stockholders is described
      below.




32




**Board
      meetings and attendance**




During
      the year ended December 31, 2006, the Board of Directors held 7 meetings, the
      Audit Committee held 21 meetings; the Compensation Committee held 2 meetings;
      and the Technology Committee held one meeting. During the year ended December
      31, 2006, Dr. Igor Filipenko and Mr. Kishinevsky attended less than 75% of
      all
      Board of Directors meetings that required their attendance.




We
      encourage all members of the Board of Directors to attend our annual
      stockholders meetings and six of our seven board members attended the 2004
      Annual Meeting, seven of our eight board members attended the 2005 Annual
      Meeting and seven of our eight board members attended the 2006 Annual
      Meeting.




**Board
      nominations**




Stockholders
      wishing to bring a nomination for a director candidate before a stockholders
      meeting must give written notice to our Corporate Secretary, either by personal
      delivery or by Untied States mail, postage prepaid. The stockholder’s notice
      must be received by the Corporate Secretary not later than (a) with respect
      to
      an Annual Meeting of Stockholders, 90 days prior to the anniversary date of
      the
      immediately preceding annual meeting, and (b) with respect to a special meeting
      of stockholders for the election of directors, the close of business on the
      tenth day following the date on which notice of the meeting is first given
      to
      stockholders. The stockholder’s notice must set forth all information relating
      to each person whom the stockholder proposes to nominate that is required to
      be
      disclosed under applicable rules and regulations of the SEC, including the
      written consent of the person proposed to be nominated to being named in the
      proxy statement as a nominee and to serving as a director if elected. The
      stockholder’s notice must also set forth as to the stockholder making the
      nomination (i) the name and address of the stockholder, (ii) the number of
      shares held by the stockholder, (iii) a representation that the stockholder
      is a
      holder of record of stock of the Company, entitled to vote at the meeting and
      intends to appear in person or by proxy at the meeting to nominate the person
      named in the notice, and (iv) a description of all arrangements or
      understandings between the stockholder and each nominee.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




To
      our
      knowledge, based solely on a review of the Section 16(a) reports furnished
      to us
      and written representations that no other reports were required to be filed
      pursuant to Section 16(a) and the related rules of the SEC, for transactions
      occurring in fiscal year 2006, our officers, directors and holders of more
      than
      10% of our common stock filed all Section 16(a) reports on a timely basis,
      other
      than as described below. For transactions occurring in fiscal year 2006, one
      or
      more Forms 4 (Statement of Changes of Beneficial Ownership) was inadvertently
      filed late for each of the following persons, as indicated: Mr. Thomas
      Granville, a member of our Board of Directors (two filings disclosing a total
      of
      four transactions); Mr. Glenn Patterson, a member of our Board of Directors
      (three filings disclosing a total of six transactions); Mr. John Peterson,
      who
      was serving as a member of our Board of Directors for 2006 and resigned
      effective January 15, 2007 (four filings disclosing a total of 13 transactions);
      and Mr. Robert Averill, a member of our Board of Directors (twelve filings
      disclosing a total of one hundred thirty-four transactions).





**Item
      10.— EXECUTIVE COMPENSATION.**




**Summary
      Compensation Table**




The
      following table sets forth the compensation earned by or paid to our Named
      Executive Officers with respect to the year ended December 31,
      2006.  The Named Executive Officers are as shown. We did not have
      any non-equity incentive plans, pension plans or deferred compensation plans
      during the year ended December 31, 2006.


**Salary**
              
              **Bonus**
              
              **Stock
                  Awards**
              
              **Option
                  Awards**
              
              **Total
                  All Other Compensation**
              
              **Total****(1)**
              
              **(2)**
              
              **(3)**
              
              **(4)**
              
              **(5)**
              
              **Compensation****Notes**
              
              **Year**
              
              $
              
              $
              
              $
              
              $
              
              $
              
              $Thomas
                  Granville
              
              
              (8
              )
              
              2006
              
              
              252,000
              
              
              356,700
              
              
              200,000
              
              
              412,687
              
              
              174,184
              
              
              1,395,571Edward
                  Buiel
              
              
              
              
              
              2006
              
              
              132,000
              
              
              
              
              
              937,500
              
              
              288,366
              
              
              28,039
              
              
              1,385,905Peter
                  Roston
              
              
              
              
              
              2006
              
              
              122,570
              
              
              
              
              
              
              
              
              138,182
              
              
              
              
              
              260,752(Aka:
                  Thornbridge Capital)
              
              
              
              
              
              
              
              
              (7
              )Michael
                  Courtade
              
              
              (6
              )
              
              2006
              
              
              18,000
              
              
              
              
              
              
              
              
              
              
              
              604
              
              
              18,604Charles
                  Mazzacato
              
              
              
              
              
              2006
              
              
              125,000
              
              
              
              
              
              
              
              
              124,364
              
              
              
              
              
              249,364




(Aka:
        Emergency Powers Inc) (7)


1.
            Salaries
                are presented as the contractual amount earned for the year, regardless
                of
                date of payment. Dr. Buiel’s salary includes a $12,000 contractual
                retroactive adjustment, for the period from October 2006 to December
                2006,
                but paid in January 2007.




2.
            Discretionary
                bonuses not made pursuant to any bonus plan. On February 6, 2006
                Tom
                Granville was awarded a $56,700 cash bonus to be paid in quarterly
                installments. In December 2006, Mr. Granville was awarded a cash
                bonus of
                $300,000. $225,000 was paid during the first quarter of 2007 and
                the
                remainder on May 19, 2007.





3.
            In
                December 2006, Mr. Granville was awarded a cash bonus of $200,000
                with the
                understanding that he would invest $200,000 in the Company’s Private
                Placement Offering. A non-cash payment was effected to accommodate
                the
                purchase of 20,000 shares of Series A Preferred Stock on December
                29,
                2006.





On
      December 29, 2006 Edward Buiel received 250,000 restricted shares of the
      Company’s common stock pursuant to his December 2006 employment contract. The
      shares are issued under the Company’s Incentive Stock Option plan and will vest
      in December 2009. Edward
      Buiel’s stock award in 2006 covers work to be performed through 2009. If Dr.
      Buiel leaves the employ of the Company before the end of 2009 he does not
      receive the award.





4.
            In
                April 2005, Thomas Granville was awarded 180,000 options pursuant
                to his
                employment agreement. The options have an exercise price of $2.50
                per
                share, vest at the rate of 7,500 per month and are exercisable 5
                years
                from vest date. The options are valued at $225,000. $112,500 is being
                reported as compensation for 2006, consistent with the modified
                prospective transition method pursuant with FAS 123R. In February
                2006,
                Tom Granville was awarded 500,000 3-year options with an exercise
                price of
                $6.00 per share. 400,000 of these options vested during 2006 with
                the
                balance of 100,000 options triggered to vest upon five separate
                performance objectives related to the shipment of the newly developed
                e3
                Supercell batteries. The options are valued at $300,187.




33


In
      February 2006 Edward Buiel was issued 35,000 3-year options with an exercise
      price of $6/share, 10,000 of these options vested during 2006 with the balance
      to vest upon five separate performance objectives related to the shipment of
      newly developed E3 supercell batteries, now identified as our proprietary
      lead/carbon (PbC) devices. The options are valued at $20,994. In December 2006,
      Edward Buiel was awarded 100,000 options pursuant to his 2006 employment
      agreement. The options have an exercise price of $3.75 per share, vest 50,000
      per year in December 2009 and 2010 and are exercisable for 5 years from vest
      date. The options are valued at $267,372 The assumptions used in the calculation
      of fair values of stock option awards are set forth under the note captioned
      “Equity Compensation” in the footnotes to the to the Consolidated Financial
      Statements in this report.





In
      July
      2004, pursuant to their employment contracts, option awards were granted to
      Mr.
      Roston in the amount of 200,000 and Mr. Mazzacato in the amount of 240,000.
      The
      awards were valued at $552,729 USD & $663,274 USD respectively. The table
      reflects the value of the award being reported as compensation for 2006,
      consistent with the modified prospective transition method pursuant with FAS
      123R.





Options
      awards require the Officer to remain in the employ of the Company through the
      period on which the options vests.





5.
            Mr.
                Granville received perquisites in the amount of $9,000 and Other
                Compensation gross ups to cover the payment of taxes amounting to$165,184.





Dr.
      Buiel received
      perquisites in the amount of $28,039.





6.
            Michael
                Courtade was paid through an employment agency without a signed employment
                agreement. His salary noted above is an estimate of his actual earnings.
                Mr. Courtade served as CFO starting October 20, 2006 while Mr. Roston
                served as CFO for the earlier part of the year.





7.
            Mr.
                Roston and Mr. Mazzacato’s contract amounts are converted in U.S. Dollar,
                using an exchange rate of .88206CAD = 1
                USD





8.
            Of
                the compensation total listed above, approximately $608,700related
                to Mr. Granville’s employment were remitted to Gallagher Elevator Co.
                (Gallagher) under an agreement whereby Mr. Granville’s services are
                provided to us through Gallagher.





We
      have
      entered into executive employment agreements with Thomas Granville, Edward
      Buiel, Peter Roston, Charles Mazzacat o,
      Andrew
      Carr Conway, Jr. and Robert Nelson. These agreements generally require each
      executive to devote substantially all of his business time to our affairs,
      establish standards of conduct, prohibit competition with our company during
      their term, affirm our rights respecting the ownership and disclosure of
      patents, trade secrets and other confidential information, provide for the
      acts
      and events that would give rise to termination of such agreements and provide
      express remedies for a breach of the agreement. Each of our executives will
      participate, without cost, in our standard employee benefit programs, including
      medical/hospitalization insurance and group life insurance, as in effect from
      time to time. Each of the covered executives will generally receive an
      automobile allowance and reimbursement for all reasonable business expenses
      incurred by him on behalf of the Company in the performance of his
      duties.





Under
      the
      terms of his employment agreement effective April 2005, which has a term of
      two
      years, Mr. Granville receives an annual salary of $261,000, bonuses as
      determined by the compensation committee and an option to purchase 180,000
      shares of our common stock at a price of $2.50 per share that vests over 24
      months beginning in April 2005. In April 2007, his  agreement
      was automatically extended for another 24 months through April 2009 with no
      change in terms. As described above, cash remuneration to Mr. Granville is
      paid
      to Gallagher.





Under
      the
      terms of his employment agreement effective September 2005, which has a term
      of
      three years, Mr. Buiel receives an annual salary of $120,000 and bonuses as
      determined by the compensation committee. In addition, Mr. Buiel receives an
      option to purchase 90,000 shares of our common stock at a price of $4.00 per
      share that vest over three years from September 2005 and 6,000 shares of
      restricted common stock that vest over six months from September 2005. In
      December 2006, Mr. Buiel was promoted to the post of Vice President and Chief
      Technology Officer. Pursuant to his promotion, a new employment agreement was
      approved retroactive to October 2006 in which Mr. Buiel receives an annual
      salary of $168,000 and bonuses as determined by the compensation committee.
      In
      addition, Mr. Buiel receives an option to purchase 100,000 shares of our common
      stock at a price of $3.75 per share that vest over two years commencing December
      2008 and 250,000 shares of restricted common stock that fully vest in December
      2009.





Under
      the
      terms of his employment agreement effective July 2004, which had a term of
      four
      years, Mr. Roston received an annual salary of $145,000 (Cdn.), bonuses as
      determined by the compensation committee and an option to purchase 200,000
      shares of our common stock at a price of $4.00 per share that vests over four
      years beginning in July 2005. His employment agreement ceased and the related
      options forfeited unvested when he was terminated for cause in 2006. Mr. Roston
      subsequently filed a lawsuit for the full amount of compensation and benefits
      provided for as express remedies for breaches in his employment agreement.
      The
      Company determined the range of potential loss to be CAD $250,000 to CAD
      $275,000, however the risk of loss as a result of this lawsuit is considered
      by
      the Company to be remote as that term is used in Statement of Financial
      Accounting Standards number 5, “ *Accounting
      for Contingencies” (FASB 5).*




Under
        the
        terms of his employment agreement effective July 2004, which had a term of
        four
        years, Mr. Mazzacato received an annual salary of $185,000 (Cdn.), bonuses
        as
        determined by the compensation committee and an option to purchase 240,000
        shares of our common stock at a price of $4.00 per share that vests over
        four
        years beginning in July 2005. His employment agreement ceased and the related
        options forfeited unvested when he resigned from the Company in
        2006.




34







Under
      the
      terms of his employment agreement effective August 2007, which has a term of
      six
      months, Mr. Conway receives an annualized salary of $180,000, bonuses as
      determined by the compensation committee and an option to purchase 80,000 shares
      of our common stock at a price of $4.50 per share. 30,000 options vested with
      the execution of the contract, and the balance vest periodically over the
      remainder of the contract. The contract automatically renews for an additional
      six month term if an express renewal is not reached between Mr. Conway and
      the
      Company.





Under
      the
      terms of his employment agreement effective December 2007, which has a term
      of
      two years, Mr. Nelson receives an annual salary of $132,000 and bonuses as
      determined by the compensation committee. In addition, Mr. Nelson receives
      an
      option to purchase 108,000 shares of our common stock at a price of $5.00 per
      share and 36,000 shares of restricted common stock, each that vest over three
      years from the effective date of his employment agreement.





We
      have
      no retirement plans or other similar arrangements for any directors, executive
      officers or employees.




35


**Outstanding
      Equity Awards At Fiscal Year-End Table**





Option
                  Awards
              
              Stock
                  Awards
 Equity
                  Incentive Plan Awards
              
              
              
              
              
              
              
              
              
              Equity
                  Incentive Plan AwardsNon-PlanNumber
                  of shares underlying unexercised options
              
              
              
              Market
              
              
              
              MarketNumber
              Value
              #
                  Shares
              ValueName
              
              #
                  Exercisable
              
              #
                  UnExercisable
              
              Unearned
              
              Exercise
                  Price
              
              Expiration
                  Date
              
              Shares
                  or units of stock that have not vested
              
              Unearned
                  shares, units, or other rights that have not vested
              Footnotes(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Granville,Tom
              
              
              
              
              
              0
              
              
              2,200
              
              $
              5.6
              
              
              2/2/2009
              
              
              
              
              
              
              
              
              
              
              
              
              Director's
                  plan award - Fully vestedIssued
                  pursuant to April 2005 ExecutiveEmployment
                  Agreement. Options150,000
              
              
              30,000
              
              
              
              
              $
              2.5
              
              
              varies
                  through 4/30/12
              
              
              
              
              
              
              
              
              
              
              
              
              Expire
                  5 years after monthly vest dateNon-Plan
                  Performance-based awardgranted
                  by the CompensationCommittee
                  Feb 2006 - Vesting is400,000
              
              
              100,000
              
              
              
              
              $
              6
              
              
              2/10/2009
              
              
              
              
              
              
              
              
              
              
              
              
              contingent
                  upon future eventsIssued
                  pursuant to Sept 2005 ExecutiveBuiel,
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              Employment
                  Agreement. Options expireEdward
              
              
              40,000
              
              
              50,000
              
              
              
              
              $
              4
              
              
              varies
                  through 8/31/13
              
              
              
              
              
              
              
              
              
              
              
              
              5
                  years after monthly vest dateRestricted
                  Stock Grant issued pursuant toDec
                  2006 Executive EmploymentAgreement
                  - Lump sum Vesting Date250,000
              
              $
              937,500
              12/29/2009Non-Plan
                  Performance-based awardgranted
                  by the CompensationCommittee
                  Feb 2006 - Vesting is15,000
              
              
              20,000
              
              
              
              
              $
              6
              
              
              2/10/2009
              
              
              
              
              
              
              
              
              
              
              
              
              contingent
                  upon future eventsOptions
                  issued pursuant to Dec 2006Executive
                  Employment Agreement.0
              
              
              50,000
              
              
              
              
              $
              3.75
              
              
              12/29/2015
              
              
              
              
              
              
              
              
              
              
              
              
              Lump
                  sum vesting date - 12/29/2009Options
                  issued pursuant to Dec 2006Executive
                  Employment Agreement.0
              
              
              50,000
              
              
              
              
              $
              3.75
              
              
              12/29/2016
              
              
              
              
              
              
              
              
              
              
              
              
              Lump
                  sum vesting date - 12/29/2009


**Nonqualified
      deferred compensation**




We
      had no
      non-qualified deferred compensation plans during 2006.




**Post-Termination
      Compensation**




We
      have
      not entered into change in control agreements with any of our Named Executive
      Officers or other members of the executive management team. Awards of equity
      incentives under our 2004 Incentive Stock Plan and awards of options under
      our
      2004 Outside Directors Stock Option Plan do not provide for immediate vesting
      upon a change in control.   However, the Compensation Committee has
      the full and exclusive power to interpret the plans, including the power to
      accelerate the vesting of outstanding, unvested awards.  A “change in
      control” is generally defined as (i) the acquisition by any person of 30%
      or more of the combined voting power of the Company’s outstanding securities, or
      (ii) the occurrence of a transaction requiring shareholder approval and
      involving the sale of all or substantially all of the Company’s assets or the
      merger of the Company with or into another corporation.




**Director
      Compensation**




The
      members of our Board of Directors are actively involved in various aspects
      of
      our business ranging from relatively narrow board oversight functions to
      providing hands-on guidance to our executives and scientific staff with respect
      to matters within their personal experience and expertise. We believe that
      the
      active involvement of all board members in our principal business and policy
      decisions increases our Board of Director’s understanding of our needs and
      improves the overall quality of our management decisions. In recognition of
      the
      substantial time and personal effort that we require from our board members,
      we
      have adopted director compensation policies that provide for higher director
      compensation than is typically found in companies at our early stage of
      development.




36




Only
      independent directors are compensated separately for service as members of
      our
      Board of Directors. Each of our independent directors received the following
      compensation for the period April 2006 through April 2007:




·
            A
                basic annual retainer of $25,000 for service as a board member;




·
            A
                supplemental retainer of $6,000 for service as chairman of audit
                committee
                or technology committee, and supplemental annual retainer $4,000
                for
                service as chairman of any other board
                committee




·
            A
                supplemental annual retainer of $3,000 for service as a committee
                member




·
            A
                meeting fee of $1,500 per day for each board or committee meeting
                attended
                in person or $500 for each board or committee meeting attended by
                telephone; and




·
            Reimbursement
                for all reasonable travel, meals and lodging costs incurred on our
                behalf.




At
      our
      2004 Annual Meeting, our stockholders ratified a stock option plan for
      independent directors that authorized the issuance of options to purchase
      $20,000 of our common stock for each year of service as a director of our
      company. At our 2005 Annual Meeting, the number of shares reserved for issuance
      under the outside directors’ stock option plan was increased to
      500,000.




We
      have
      issued, for the years ended December 31, 2006, 2005 and 2004, 60,000, 70,000
      and
      54,000 respectively of options pursuant to our director’s stock option plan. Of
      this total, no options were exercised during the year ended December 31, 2006,
      52,035 **** options
      are currently vested and exercisable at a weighted average price of $5.11 per
      share, and **** 88,000
      options are unvested and will be exercisable at a weighted average price of
      $3.60 **** per
      share.




37




**Director
      Compensation Table**




The
      following table provides information regarding compensation paid to non-employee
      directors for services rendered during the year
      ended December 31, 2006 .


Name
              
              Fees
                  Earned or Paid in Cash ($)
              
              Stock
                  Awards ($)
              
              Option
                  Awards ($)
              
              Non-Equity
                  Incentive Plan Compensation ($)
              
              Nonqualified
                  Deferred Compensation Earnings
              
              All
                  Other Compensation ($)
              
              Total
                  ($)Thomas
                  Granville
              
              
              0
              (1)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0John
                  PetersenFefer
                  & Petersen, Attorneys
              
              
              
              
              
              
              
              
              193,449
              (2)
              
              
              
              
              
              
              
              319,955
              (3)
              
              513,404Dr.
                  Igor Filipenko
              
              
              
              
              
              
              
              
              9,120
              (5)
              
              
              
              
              
              
              
              
              
              
              9,120Robert
                  G. Averill
              
              
              38,500
              
              
              
              
              
              9,120
              (5)
              
              
              
              
              
              
              
              
              
              
              47,620Dr.
                  Howard K. Schmidt
              
              
              58,000
              
              
              
              
              
              16,740
              (5)
              
              
              
              
              
              
              
              
              
              
              74,740Michael
                  Kishinevsky
              
              
              31,000
              
              
              
              
              
              8,650
              (5)
              
              
              
              
              
              
              
              
              
              
              39,650Glenn
                  Patterson
              
              
              45,500
              
              
              
              
              
              39,097
              (5)
              
              
              
              
              
              
              
              
              
              
              84,597Stanley
                  A. Hirschman
              
              
              28,056
              
              
              
              
              
              35,840
              (5)
              
              
              
              
              
              
              
              
              
              
              63,896Joe
                  Souccar
              
              
              15,778
              
              
              
              
              
              3,257
              (5)
              
              
              
              
              
              
              
              
              
              
              19,035




(1)
            See
                Executive Compensation Table




(2)
            John
                Petersen, the Company’s legal counsel, served as a member of our Board of
                Directors through January 15, 2007. John did not receive payment
                for
                serving as a member of the Board. All payments, both cash and non-cash
                were made to either his company, Fefer Petersen & CIE, Attorneys at
                Law, or his affiliates. On February 6, 2006, the compensation committee
                granted Fefer Petersen & CIE 240,000 3-year fully vested options for
                John’s exceptional efforts and achievements since April 2005. An
                additional 120,000 3-year options were granted pursuant to his 2006
                retainer agreement; these options vested monthly over the course
                of 2006.
                The 360,000 grant, has an exercise price of $6.00 per share andare
                valued at$193,449.




(3)
            During
                2006, while John Petersen served as a member of the Board of Directors,
                Fefer & Petersen, Attorneys at Law, billed the company $319,955 for
                services related to their 2006 retainer agreement. The amount was
                paid in
                full during 2006, and includes a non cash settlement of $107,100
                towards
                his 2005 subscription to purchase common stock.




(4)
            Director’s
                awards issued pursuant to the Corporation’s Outside Directors’ Stock
                Option plan provides for the issuance of $20,000 of the Corporation’s
                common stock to newly elected independent directors for each year
                of their
                contemplated service. In 2006, Glenn Patterson and Stan Hirschman
                were
                each issued 5-year options to purchase 30,000 of the Company’s common
                stock. The options have an exercise price of $2.00 per share and
                vest over
                a three year period. The options are exercisable through the fifth
                anniversary of each vesting date. The options are valued using the
                Black-Scholes-Merton option pricing model, each at $35,840. In addition,
                Mr. Patterson’s compensation includes$3,257
                in compensation during 2006 from theCorporation’s
                Outside Directors’ Stock Option grant of April2005, which compensation is being reported consistent with the modified
                prospective transition method, pursuant with FAS 123R.




(5)
            Amounts
                entered as compensation relate to prior years’Outside
                Directors’ Stock Option Planawards,
                and are being reported consistent with the modified prospective transition
                method, pursuant with FAS 123R.




38




**ITEM
      11 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




We
      had
      18,157,060 shares of common stock, 137,500 shares of Senior Preferred Stock
      and
      822,997 shares of Series A Preferred Stock outstanding on the date of this
      report. Th e
      follow ing
      table
      sets forth certain information with respect to the beneficial ownership of
      our
      securities as of February 29, 2008, for (i) each of our directors and executive
      officers; (ii) all of our directors and executive officers as a group; and
      (iii)
      each person who we know beneficially owns more than 5% of our common
      stock.




Beneficial
      ownership data in the table has been calculated based on SEC rules that require
      us to identify all securities that exercisable for or convertible into shares
      of
      our common stock within 60 days of February 29, 2008 and treat the underlying
      stock as outstanding for the purpose of computing the percentage of ownership
      of
      the holder.




Except
      as
      indicated by footnotes, and subject to applicable community property laws,
      each
      person identified in the table possesses sole voting and investment power with
      respect to all capital stock held by that person. The address of each named
      executive officer and director, unless indicated otherwise by footnote, is
      c/o
      Axion Power International, Inc. 3601 Clover Lane, New Castle PA
      16105.




**Common
                Stock**
            
            **Preferred
                Conversion**
              **(1)**
            
            **Warrant
                &  Options**
              **(2)**
            
            **Combined
                Ownership**
            
            **Percentage****Quercus
                Trust 1835**
              **Newport
                Blvd**
              **A109
                - PMB 467**
              **Cosa
                Mesa, CA 92627**
            
            
            1,904,762
            
            
            -
            
            
            2,857,143
            
            
            4,761,905
            
            
            22.7
            %**Trust
                for the Benefit of the Shareholders of Mega-C Power
                Corp**
              **c/o
                Cecilia L Rosenauer Ltd**
              **510
                W Plumb Lane Suite A**
              **Reno
                NV 89509**
            
            
            5,385,002
            
            
            -
            
            
            -
            
            
            5,385,002
            
            
            29.7
            %**Fursa
                Master Global Event Driven Fund LP**
              **200
                Park Avenue, 54th Floor**
              **New
                York, New York 10166**
            
            
            -
            
            
            1,946,941
            
            
            -
            
            
            1,946,941
            
            
            9.7
            %**Directors
                and Named Executive Officers:**
            
            
            
            
            
            
            
            
            
            
            
            -**Averill,
                Robert**
            
            
            792,901
            
            
            1,555,823
            
            
            789,464
            
            
            3,138,188
            
            
            15.3
            %**Glenn
                Patterson**
            
            
            915,030
            
            
            1,196,724
            
            
            577,388
            
            
            2,689,142
            
            
            13.5
            %**Peterson,
                John**
            
            
            217,500
            
            
            1,009,170
            
            
            369,900
            
            
            1,596,570
            
            
            8.2
            %**Granville,
                Tom**
            
            
            421,300
            
            
            194,694
            
            
            582,200
            
            
            1,198,194
            
            
            6.3
            %**Filipenko,
                Igor**
            
            
            785,900
            
            
            316,889
            
            
            74,311
            
            
            1,177,100
            
            
            6.4
            %**Buiel,
                Edward**
            
            
            31,000
            
            
            -
            
            
            122,500
            
            
            153,500
            
            
            0.8
            %**Conway**
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000
            
            
            0.4
            %**Wainwright,
                Walker**
            
            
            -
            
            
            -
            
            
            40,000
            
            
            40,000
            
            
            0.2
            %**Schmidt,
                Howard**
            
            
            -
            
            
            -
            
            
            18,000
            
            
            18,000
            
            
            0.1
            %**Hirschman,
                Stan**
            
            
            -
            
            
            -
            
            
            10,000
            
            
            10,000
            
            
            0.1
            %**Nelson
                , Robert**
            
            
            5,000
            
            
            -
            
            
            18,000
            
            
            23,000
            
            
            0.1
            %**Kishinevsky**
            
            
            -
            
            
            -
            
            
            10,000
            
            
            10,000
            
            
            0.1
            %Directors
                and officers as a group(12 persons)
            
            
            3,168,631
            
            
            4,273,300
            
            
            2,691,763
            
            
            10,133,694
            
            
            40.3
            %





39




Note:
      Information in the above table comes from Company records & does not reflect
      the beneficial ownership which our Officers and Directors have in the Trust
      funds listed above.





(1)
            Represents
                shares of common stock issuable upon conversion of preferred stock
                held by
                the stockholder.


(2)
            Represents
                shares of common stock issuable upon exercise of warrants and options
                held
                by the stockholder that arepresently
                exercisable or will become exercisable within 60days.


(3)
            Includes
                956,759 shares held by Dr. Igor Filipenko and 220,341 shares held
                by his
                wife, including175,000
                shares of common stock and 45,341 shares issuable upon the conversion
                of
                6,100 shares of preferred stock.


(4)
            Includes
                13,000 shares of common stock held by Mr. Petersen, 4,500 shares
                of common
                stock held by Mr. Petersen’s wife, and 200,000 shares of common stock
                deposited in a segregated account at Credit Suisse under the dual
                signature control of John Petersen and Stephan Seigenthaler. Mr.
                The
                shares are pledged as collateral security for a second mortgage on
                Mr.
                Petersen’s principal residence. Mr. Petersen retains the sole power to
                vote and make decisions respecting the sale or other disposition
                of the
                Axion shares. However Mr. Siegenthaler is entitled to receive full
                payment
                of his second mortgage before Mr. Petersen will be entitled to receive
                any
                sale proceeds. Under the terms of the applicable agreements, after
                the
                second mortgage has been paid in full, Mr. Siegenthaler will have
                the
                right to purchase 10% of any equity securities remaining in the account
                for a predetermined price of $3 per
                share.





**ITEM
      12** **—
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.**




**Technology
      acquisition**




In
      connection with the purchase of C&T, C&T agreed to transfer technology
      underlying our proprietary lead/carbon (PbC), battery technology to us in
      exchange for 1,562,900 warrants that were exercisable at $2.00 per share until
      January 2007. This agreement was subject to and conditioned upon our payment
      of
      the balance of the license fees provided for in the original license agreement
      with APC. At December 31, 2004, the unpaid balance of our obligation to C&T
      was $1,100,500. In March 2005, we paid $100,500 in cash and issued 100,000
      shares of senior preferred stock to C&T in full and final settlement of all
      amounts due under the technology license and acquisition agreements. C&T
      then distributed the shares of our senior preferred stock to its shareholders. **** During
      the year ended December 31, 2006, the term of the warrants granted were
      modified. The modification resulted in additional expense of approximately
      $342,000, which has been classified as research and development expense. The
      warrants expired December 31, 2007.




In
      connection with the acquisition of C&T stock, the Company was granted the
      option to purchase certain tangible personal property owned by C&T labs,
      Inc., an affiliate of C&T, for the appraised value up to a year subsequent
      to the transaction. In April 2006 the option was exercised and the Company
      took
      ownership of the equipment and a liability for approximately $84,000 was
      recorded related to the purchase. The liability remains unpaid as of the date
      of
      this report.





**Transactions
      with directors**




***--Robert
      Averill—financing transactions-2006.*** Mr.
      Averill was one of the original founders of APC. During the first quarter of
      2006, Mr. Averill loaned us $1,000,000 under the terms of a one-year promissory
      note that bore interest at the rate of 10% per annum, requires monthly payments
      of accrued interest, and was secured by a lien on all of our property. Over
      the
      course of the year 2006, Mr. Averill continued to advance monies to the company,
      increasing the loaned amount to $1,955,000, with interest rates ranging from
      10-12%. The interest rate varied because of different loans and interest rate
      escalators under certain circumstances. Accrued interest from these loans
      amounted to $127,260 during 2006. By the terms of these loans, he received
      345,000 common stock purchase warrants with a debt discount valued at $127,243
      in 2006. Mr. Averill was eligible to receive an additional 230,000 3-year
      warrants at an exercise price of $6 per share from these loans through the
      date
      of extinguishment in November 2007. Some of his loans were convertible into
      offering units at a price of $2.50 per unit, consisting of one share of common
      stock and one five year warrant to purchase one share of common stock at a
      price
      of $4.00 per share. Mr. Averill elected not to exercise this feature; instead,
      he converted $1,645,000 of his loans plus interest into Series A Preferred
      Stock
      during the fourth quarter of 2006, and carried over $428,675 of principle plus
      $8,585 of interest into 2007.




40





***--Robert
      Averill—financing transactions***  **2007** -During
      2007, Mr. Averill continued to advance monies to the company in the amount
      of
      $1,267,751. From the 2007 loan agreements, Mr. Averill earned 136,000 3-year
      warrants at an exercise price of $6.00 per share, and 61,290 5-year warrants
      at
      an exercise price of $2.35 per share. $115,000 of these loans were repaid in
      September 2007 and the balance of these loans, including the 2006 carryover,
      was
      extinguished along with $70,335 in interest by conversion into a $1,800,000
      Private Placement Secured Bridge Loan, with the Company on November 27, 2007.
      This short term bridge loan earns interest at a rate of 14%, origination fees
      of
      $8,000 (on each $100,000) over a 4 month period, and the 61,290 warrants as
      referenced above. The $1.8M loan has an initial maturity date of March
      2008.





***--Glenn
      Patterson—financing transactions.*** In
      April
      2006, Mr. Patterson loaned us $100,000 on a short-term note.


Over
      the
      year 2006, Mr. Patterson continued to advance monies to the company, increasing
      the loaned amount to $1,105,000, with interest rates ranging from 10-12%. The
      interest rate varied because of different loans and interest rate escalators
      under certain circumstances. Accrued interest from these loans amounted to
      $43,577 during 2006. By the terms of these loans, he received 353,113 common
      stock purchase warrants with a debt discount valued at $93,334. Some of his
      loans were convertible into offering units at a price of $2.50 per unit,
      consisting of one share of common stock and one five year warrant to purchase
      one share of common stock at a price of $4.00 per share. Mr. Patterson elected
      not to exercise this feature; instead, he converted $1,080,000 of his loans
      plus
      interest into Series A Preferred Stock during the fourth quarter of 2006.
      $72,124 principle and $2,114 interest carried over into 2007 and was paid on
      January 25, 2007 prior to the maturity date of his loans. In December 2007,
      Mr.
      Patterson loaned the Company $92,000 pursuant to the Company’s Private Placement
      Secured Bridge Loan offering, earning interest at 14% per annum, origination
      fees of $8,000 over 3 1⁄2 months, and 3,405 5-year warrants at an exercise price
      of $2.35 per share. This short term bridge loan has an initial maturity date
      of
      March 2008.





***Glenn
      Patterson--compensatory transactions.*** During
      2006, Mr. Patterson received 30,000 director’s stock options with an exercise
      price of $2.00 per share, valued at $35,840. The options vest at a rate of
      10,000 shares per year and are exercisable over a 5 year period from vest date.




***Tom
      Granville-compensatory transactions:*** In
      February 2006, Mr. Granville, was granted an option to purchase 500,000 shares
      of common stock at an exercise price of $6.00. Of this total 300,000 options
      vested immediately and the balance is expected to vest, subject to the
      attainment of certain specified objectives, over the next one to three years.
      These options are valued at $300,187 utilizing the Black-Scholes-Merton option
      pricing model with $259,027 of compensation recorded in 2006. In December 2006,
      Mr. Granville received a $200,000 non-cash bonus toward the purchase of 20,000
      shares of the Company's Series A Preferred Stock.  For services rendered
      partially in 2005 and during 2006, the Company paid Gallagher Elevator, a
      company in which Mr. Granville owns a minority interest, approximately $608,700
      (of which $300,000 was actually paid in the first half of 2007) as part of
      an
      employee lease arrangement to secure the services of Mr. Granville as our Chief
      Executive Officer, none of which was paid directly to Mr. Granville but has
      been
      included in the Summary Compensation Table in this annual report.




***Joseph
      Souccar—financing transactions.*** During
      June 2006, Mr. Souccar loaned the company $60,000, earning $2,022 in interest
      and 6,000 3-year common stock purchase warrants with a debt discount valued
      at
      $8,274. During the fourth quarter of 2006, Mr. Souccar elected to convert both
      principle and interest into 6,210 shares of the Company’s Series A Preferred
      Stock.




***John
      Petersen— compensatory transactions.*** John
      Petersen is a director of our company and a partner in the law firm of Petersen
      & Fefer, which serves as our legal counsel. During 2006 and 2007, we paid
      Petersen & Fefer **$** 225,000 **** and **** $180,000
      in cash, respectively. In February 2006, we granted Petersen & Fefer a
      three-year option to purchase 240,000 shares of common stock at a price of
      $6.00
      per share as a bonus for services performed during 2005 and an additional
      three-year option to purchase 120,000 shares at a price of $6.00 per share
      that
      will vest on a monthly basis during 2006, and are valued at $193,449. All
      settlement transactions between our company Petersen & Fefer were negotiated
      and approved by the compensation committee and we believe the terms of our
      agreements with Petersen & Fefer are at least as favorable as the terms that
      would have resulted from arms-length negotiations between unaffiliated parties.




***Stanley
      Hirschman— compensatory transactions.*** During
      2006, Mr. Hirschman received 30,000 director’s stock options with an exercise
      price of $2.00 per share, valued at $35,840. The options vest at a rate of
      10,000 shares per year and are exercisable over a 5 year period from vest date.




41




***Walker
      Wainwright— compensatory transactions.*** In
      January 2007, Mr. Wainwright received 40,000 stock options for services, with
      an
      exercise price of $5.00 per share. The options are fully vested and valued
      at
      $40,000. The options are exercisable over a 3 year period. These options were
      valued at $53,230.




Transactions
      with Executive Management




See  “EXECUTIVE
      COMPENSATION” above for a discussion of the material elements of compensation
      awarded to, earned by or paid to our Chief Executive Officer, Thomas Granville,
      and our Chief Technical Officer, Edward Buiel. These individuals are referred
      to
      as “Named Executive Officers.”




42




**ITEM
      13** **—
      EXHIBITS**




2.1
            
            Reorganization
                Agreement (without exhibits) between Tamboril Cigar Company, Axion
                Power
                Corporation and certain stockholders of Axion Power Corporation dated
                December 31, 2003.
            
            (1)2.2
            
            First
                Addendum to the Reorganization Agreement between Tamboril Cigar Company,
                Axion Power Corporation and certain stockholders of Axion Power
                Corporation dated January 9, 2004.
            
            (1)3.1
            
            Amended
                and Restated Certificate of Incorporation of Tamboril Cigar Company
                dated
                February 13, 2001.
            
            (2)3.3
            
            Amendment
                to the Certificate of Incorporation of Tamboril Cigar Company dated
                June 4, 2004.
            
            (3)3.4
            
            Amendment
                to the Certificate of Incorporation of Axion Power International,
                Inc.
                dated June 4, 2004.
            
            (3)3.5
            
            Amended
                By-laws of Axion Power International, Inc. dated June 4,
                2004.
            
            (3)4.1
            
            Specimen
                Certificate for shares of Company’s $0.00001 par value common
                stock.
            
            (9)4.2
            
            Trust
                Agreement for the Benefit of the Shareholders of Mega-C Power Corporation
                dated December 31, 2003.
            
            (1)4.3
            
            Succession
                Agreement Pursuant to the Provisions of the Trust Agreement for the
                Benefit of the Shareholders of Mega-C Power Corporation dated March
                25,
                2004.
            
            (4)4.4
            
            Form
                of Warrant Agreement for 1,796,300 capital warrants.
            
            (9)4.5
            
            Form
                of Warrant Agreement for 667,000 Series I investor
                warrants.
            
            (9)4.6
            
            Form
                of Warrant Agreement for 350,000 Series II investor
                warrants.
            
            (9)4.7
            
            Form
                of Warrant Agreement for 313,100 Series III investor
                warrants.
            
            (9)4.8
            
            First
                Amended and Restated Trust Agreement for the Benefit of the Shareholders
                of Mega-C Power Corporation dated February 28, 2005.
            
            (11)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.
            
            (12)4.10
            
            Certificate
                of Powers, Designations, Preferences and Rights of the Series A
                Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion
                Power
                International, Inc. dated November 18, 2006.
            
            (13)4.11
            
            Amended
                Certificate of Powers, Designations, Preferences and Rights of the
                Series
                A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion
                Power
                International, Inc. dated November 18, 2006.
            
            (13)9.1
            
            Agreement
                respecting the voting of certain shares beneficially owned by the
                Trust
                for the Benefit of the Shareholders of Mega-C Power
                Corporation.
            
            Included
                in Exhibit 4.210.1
            
            Development
                and License Agreement between Axion Power Corporation and
                C and T Co. Incorporated dated November 15,
                2003.
            
            (1)10.2
            
            Letter
                Amendment to Development and License Agreement between Axion Power
                Corporation and C and T Co. Incorporated dated November 17,
                2003.
            
            (1)10.3
            
            Letter
                Amendment to Development and License Agreement between Axion Power
                Corporation and C and T Co. Incorporated dated January 9,
                2004.
            
            (1)10.4
            
            Purchase
                and sale agreement among John L. Petersen, Sally A. Fonner and
                C and T Co. Incorporated dated January 9, 2004.
            
            (1)10.5
            
            First
                Amendment to Development and License Agreement between Axion Power
                Corporation and C and T Co. Incorporated dated as of January 9,
                2004.
            
            (5)10.6
            
            Definitive
                Incentive Stock Plan of Axion Power International, Inc. dated June
                4,
                2004.
            
            (3)10.6
            
            Definitive
                Outside Directors’ Stock Option Plan of Axion Power International, Inc.
                dated June 4, 2004.
            
            (3)10.8
            
            Executive
                Employment Agreement of Charles Mazzacato.
            
            (9)10.9
            
            Executive
                Employment Agreement of Peter Roston.
            
            (9)10.10
            
            Retainer
                Agreement dated January 2, 2004 between the law firm of Petersen
&
                Fefer and Tamboril Cigar Company.
            
            (10)10.11
            
            Second
                Amendment to Development and License Agreement between Axion Power
                International, Inc. and C and T Co. Incorporated dated as of
                March 18, 2005.
            
            (12)10.12
            
            Loan
                agreement dated January 31, 2006 between Axion Battery Products,
                Inc. as
                borrower, Axion Power International, Inc. as accommodation party
                and
                Robert Averill as lender respecting a $1,000,000 purchase money and
                working capital loan.
            
            (14)10.13
            
            Security
                agreement dated January 31, 2006 between Axion Battery Products,
                Inc. as
                debtor and Robert Averill as secured party.
            
            (14)10.14
            
            Security
                agreement dated January 31, 2006 between Axion Power International,
                Inc.
                as debtor and Robert Averill as secured party.
            
            (14)10.15
            
            Promissory
                Note dated February 14, 2006 between Axion Battery Products, Inc.
                as maker
                and Robert Averill as payee.
            
            (14)10.16
            
            Form
                of Warrant Agreement between Axion Power International, Inc. and
                Robert
                Averill.
            
            (14)10.17
            
            Commercial
                Lease Agreement dated February 14, 2006 between Axion Battery Products,
                Inc. as lessee and Steven F. Hoye and Steven C. Warner as
                lessors.
            
            (14)10.18
            
            Asset
                Purchase Agreement dated February 14, 2006 between Axion Battery
                Products,
                Inc. as buyer and National City Bank of Pennsylvania as
                seller.
            
            (14)10.19
            
            Escrow
                Agreement dated February 14, 2006 between Axion Battery Products,
                Inc. and
                National City Bank of Pennsylvania as parties in interest and William
                E.
                Kelleher, Jr. and James D. Newell as escrow agents.
            
            (14)




43


10.20
            
            Executive
                Employment Agreement of Edward Buiel, dated December 29,
                2006.
            
            (15)10.21
            
            Consulting
                Agreement, dated as of September 27, 2007, by and between Axion Power
                International, Inc. and Andrew Carr Conway, Jr.
            
            (16)10.22
            
            Amendment
                No. 1 to Consulting Agreement, dated as of October 31, 2007, by and
                between Axion Power International, Inc. and Andrew Carr Conway,
                Jr.
            
            (16)10.23
            
            Securities
                Purchase Agreement dated as of January 14, 2008, by and between Axion
                Power International, Inc. and Quercus Trust.
            
            (17)10.24
            
            Common
                Stock Purchase Warrant dated January 14, 2008, executed by Axion
                Power
                International, Inc.
            
            (17)14.1
            
            Code
                of Business Conduct and Ethics
            
            (6)16.1
            
            Letter
                from Want & Ender CPA, PC Re: Change in Certifying
                Accountant.
            
            (8)16.2
            
            Letter
                from Freed Maxick & Battaglia CPAs, PC, dated January 31,
                2008.
            
            (18)23.1
            
            Consent
                of Freed Maxick & Battaglia CPAs, PC23.2
            
            Consent
                ofRotenberg
                & Co. LLP31.1
            
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a).31.2
            
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a).32.1
            
            Statement
                of Chief Executive Officer Pursuant to Section   1350 of Title 18 of
                the United States Code.32.2
            
            Statement
                of Chief Financial Officer Pursuant to Section   1350 of Title 18 of
                the United States Code.




(1)
            Incorporated
                by reference from our Current Report on Form 8-K dated January 15,
                2003.(2)
            Incorporated
                by reference from our Current Report on Form 8-K dated February 5,
                2003.(3)
            Incorporated
                by reference from our Current Report on Form 8-K dated June 7,
                2004.(4)
            Incorporated
                by reference from our Current Report on Form 8-K dated April 13,
                2004.(5)
            Incorporated
                by reference from our Form S-3 registration statement dated May 20,
                2004.(6)
            Incorporated
                by reference from our Annual Report on Form 10-KSB dated March 29,
                2004(7)
            Incorporated
                by reference from our Current Report on Form 8-K dated April 13,
                2003.(8)
            Incorporated
                by reference from our Current Report on Form 8-K dated February 16,
                2004.(9)
            Incorporated
                by reference from our Form S-1 registration statement dated September
                2,
                2004.(10)
            Incorporated
                by reference from our Form S-1 registration statement dated November
                24,
                2004.(11)
            Incorporated
                by reference from our Current Report on Form 8-K dated February 28,
                2005.(12)
            Incorporated
                by reference from our Current Report on Form 8-K dated March 21,
                2005.(13)
            Incorporated
                by reference from our Current Report on Form 8-K dated November 8,
                2006.(14)
            Incorporated
                by reference from our Current Report on Form 8-K dated February 16,
                2006(15)
            Incorporated
                by reference from our Current Report on Form 8-K dated January 3,
                2007.(16)
            Incorporated
                by reference from our Current Report on Form 8-K dated November 6,
                2007.(17)
            Incorporated
                by reference from our Current Report on Form 8-K dated January 17,
                2008.(18)
            Incorporated
                by reference from our Current Report on Form 8-K dated January 31,
                2008.




44




**ITEM
      14— PRINCIPAL ACCOUNTANT FEES AND SERVICES**




**Selection
      of Independent Certified Public Accountants**




On
        January 25, 2008, we notified Freed Maxick & Battaglia, CPAs, PC (“FMB”),
        the independent accountants engaged as the principal accountants to audit
        the
        financial statements of the Company, that they would be dismissed subsequent
        to
        the completion of our fiscal year 2006 audit (the “2006 Audit”). On March 19,
        2008, we notified FMB that they were dismissed as our independent accountants,
        effective immediately, and prior to their completion of the 2006 Audit.
  Also
        on
        January 25, 2008, we engaged Rotenberg & Co., LLC (“Rotenberg”), as our
        independent certified public accountants. In addition, due to the dismissal
        of
        FMB prior to FMB’s completion of the 2006 Audit, on March 19, 2008, Rotenberg
        was engaged to complete the 2006 Audit. The decision to change accountants
        was
        recommended and approved by the Audit Committee of the Company’s Board of
        Directors (the “Audit Committee”).
  **Independent
        Auditors’ Fees**





The
      following table summarizes the aggregate fees for services performed by our
      independent registered public accounting firms for the years ended December
      31,
      2006 and 2005.





**Fee
                Category**
            
            **Rotenberg
                & Co. LLP**
              **2006
                Fees**
            
            **Freed
                Maxick & Battaglia CPAs, PC2006 Fees**
            
            **2005
                Fees (1)**Audit
                Fees
            
            $
            50,000
            
            $
            0
            
            $
            571,486Audit-Related
                Fees-registration statement consents
            
            $
            **[
                0**
            **]**
            $
            281,222Tax
                Fees
            
            $
            **[
                0**
            **]**
            $
            **[
                0**
            **]**
            $
            **[
                0**
            **]**All
                Other Fees
            
            $
            **[
                0**
            **]**
            $
            **[
                0**
            **]**
            $
            **[
                0**
            **]**





(1)
            Amount
                relates to fees billed relating to the original audit of 2005 and
                the
                re-audits of the period ended December 31, 2003, and the years ended
                December 31, 2004, and 2005 included in the 2005 Form
                10-KSB/A.





**Audit
      Committee Pre-Approval Policy**





Our
      independent auditor will provide audit, review and attest services only at
      the
      direction of, and pursuant to engagement fees and terms approved by, the Audit
      Committee. Such engagement will be pursuant to a written proposal, submitted
      to
      the Audit Committee for review and discussion. If acceptable, the Audit
      Committee will engage the independent registered public accounting firm pursuant
      to a written retention agreement, duly approved by the Audit Committee. As
      proscribed by Section 10A(g) of the Securities Exchange Act of 1934, certain
      non-audit services may not be provided by our independent registered public
      accounting firm, including bookkeeping or other services related to the
      accounting records or financial statements of the Company; financial information
      systems design and implementation; appraisal or valuation services, fairness
      opinions, or contribution-in-kind reports; actuarial services; internal audit
      outsourcing services; management functions or human resource functions; broker
      or dealer, investment adviser, or investment banking services; legal services
      and expert services unrelated to the audit; and any other service that the
      Public Company Accounting Oversight Board determines, by regulation, is
      impermissible.




45





With
      respect to permissible non-audit services, including tax services, our Chief
      Financial Officer or Chief Executive Officer will submit a request to the Audit
      Committee to retain our independent registered public accounting firm to perform
      non-audit services when management believes it is in the best interest of our
      company to do so. The requesting officer will submit specific reasons supporting
      this determination. In such event, the requesting officer shall submit a written
      proposal from the independent registered public accounting firm for the
      non-audit services, which shall be specific as to the scope of the services
      to
      be provided, and the compensation structure. The Audit Committee will review
      the
      proposed retention for compliance with three basic principles, violations of
      which would impair the independent registered public accounting firms’
independence: (1) an independent registered public accounting firm cannot
      function in the role of management, (2) an independent registered public
      accounting firm cannot audit his or her own work, and (3) an independent
      registered public accounting firm cannot serve in an advocacy role for our
      company. If the Audit Committee determines that the proposed retention does not
      and will not violate these principles, it may authorize, in writing, the
      retention of the independent registered public accounting firm for the agreed
      scope of non-audit services and compensation structure.




46


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
      has duly caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




**AXION POWER INTERNATIONAL,
              INC.**By
            /s/
                Thomas GranvilleThomas
                Granville, Chief Executive Officer and DirectorDate:
                March 31, 2008


By
            /s/
                Andrew Carr Conway, Jr.Andrew
                Carr Conway, Jr., Chief Financial OfficerDate:
                March 31, 2008





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




Signature
            
            Title
            
            Date/s/
                Stanley
                A. HirschmanStanley
                A. Hirschman
            
            Director
            
            March
                31, 2008/s/
                Robert
                G. AverillRobert
                G. Averill
            
            Director
            
            March
                31, 2008/s/
                Glenn
                PattersonGlenn
                Patterson
            
            Director
            
            March
                31, 2008Michael
                Kishinevsky
            
            DirectorIgor
                Filipenko
            
            Director/s/
                Howard
                K. SchmidtHoward
                K. Schmidt
            
            Director
            
            March
                31, 2008/s/
                  D. Walker WainwrightD.
                Walker Wainwright
            
            Director





47