**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      10-KSB/A**


Amendment
      No. 1




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


**For
      the fiscal year ended December 31, 2007**





 ̈ **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 x No o




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
o No x





The
      issuer’s revenue for the year ended December 31, 2007 was $534,000




Based
      on
      the sale prices reported on the Pink Sheets, the aggregate market value of
      the
      7,696,665 shares of voting common stock held by non-affiliates was $17,702,330
      on March 31, 2008.




On **** March
      31,
      2008, the number of shares of common stock issued and outstanding was
      18,156,060.




Transitional
      Small Business Disclosure Format (Check one): Yes oNo  x





**Explanatory
      Note**


The
          amendments of this Amended Annual Report on Form 10-KSB/A corrects the
          Company’s
          Form 10-KSB for the year ended December 31, 2007. We are amending and restating
          Item 7 - Consolidated Financial Statements to amend notes 8 and 10 in the
          consolidated statements of our Form 10-KSB for the year ended December
          31, 2007.
          We are filing this amendment to correct the number of warrants lapsed and
          outstanding, the weighted average exercise price of outstanding warrants
          and the
          weighted average years remaining on the warrants as of December 31, 2007.
          We are also correcting the weighted average number of common shares outstanding
          if the Company had recorded income to common shareholders as of December
          31,
          2007. Other than these corrections, we have not undertaken to update any
          other
          information from the originally filed Form 10-KSB for the year ended December
          31, 2007, and you should not rely on such information especially information,
          that constitutes forward-looking information. In accordance with SEC rules,
          this
          Amended Annual Report on Form 10-KSB/A includes updated certifications
          from our
          Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2,
          32.1
          and 32.2




2


**Item
      7**  **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 sheets of Axion Power
      International, Inc. as of December 31, 2007  and
      2006,
      and the related consolidated statements of operations, cash flows, and changes
      in stockholders’ equity and comprehensive income for the years then ended and
      for the period since inception (September 18, 2003) through December 31, 2007.
      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 audits.





We
      conducted our audits 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 audits provide 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, 2007 and 2006, and the results of its operations and
      its
      cash flows for the years then ended and for the period since inception
      (September 18, 2003) through December 31, 2007 in conformity with accounting
      principles generally accepted in the United States of America.





/s/
      Rotenberg & Co., LLP





Rotenberg
      & Co., LLP


Rochester,
      New York


April
      3,
      2008 except
      for the restatement in notes 8 and 10 to the consolidated financial statements,
      as to which the date is May 12, 2008


3




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      BALANCE SHEETS**


**(A
      Development Stage Company)**







December 31, 2007
            
            December 31, 2006**ASSETS****Current
                Assets:**Cash
                & cash equivalents
            
            $
            671,244
            
            $
            3,610,280Accounts
                receivable
            
            
            133,646
            
            
            45,007Other
                receivables
            
            
            341,801
            
            
            429,035Inventory
            
            
            375,635
            
            
            267,186Prepaid
                expenses
            
            
            82,102
            
            
            92,579**Total
                current assets**
            
            
            1,604,428
            
            
            4,444,087**Property
                & equipment, net**
            
            
            2,119,252
            
            
            1,044,805**TOTAL
                ASSETS**
            
            $
            3,723,680
            
            $
            5,488,892**LIABILITIES
                & STOCKHOLDERS' EQUITY****Current
                Liabilities:**Accounts
                payable
            
            $
            1,573,436
            
            $
            911,466Other
                current liabilities
            
            
            583,591
            
            
            840,330Notes
                payable to related parties
            
            
            2,259,826
            
            
            499,482Liability
                to issue equity instrument
            
            
            106,183
            
            
            -**Total
                current liabilities**
            
            
            4,523,036
            
            
            2,251,278Deferred
                revenue
            
            
            840,945
            
            
            -**Total
                liabilities**
            
            
            5,363,981
            
            
            2,251,278**Stockholders'
                Equity:**Convertible
                preferred stock-12,500,000 shares authorizedSenior
                preferred - 1,000,000 shares designated.137,500 issued and outstanding (137,500 in 2006)
            
            
            1,515,376
            
            
            1,548,989Series
                A preferred - 2,000,000 shares designated.822,997
                shares issued and outstanding (782,997 in 2006)
            
            
            9,802,894
            
            
            1,578,235Common
                  stock-50,000,000 shares authorized $0.0001 par value 16,248,298
                  issued
                  & outstanding (16,247,298 in 2006)
            
            
            1,625
            
            
            1,625Additional
                paid in capital
            
            
            25,768,331
            
            
            24,574,346Deficit
                accumulated during development stage
            
            
            (38,498,704
            )
            
            (24,214,622
            )Cumulative
                foreign currency translation adjustment
            
            
            (229,823
            )
            
            (250,959
            )**Total
                Stockholders' Equity**
            
            
            (1,640,301
            )
            
            3,237,614**TOTAL
                LIABILITIES & STOCKHOLDERS' EQUITY**
            
            $
            3,723,680
            
            $
            5,488,892




**The
      Accompanying Notes are an Integral Part of the Financial
      Statements**




4




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(A
      Development Stage Company)**




**Years
                Ended**
            
            **Inception****December
                31,**
            
            **(9/18/2003)
                to****2007**
            
            **2006**
            
            **December
                31, 2007****Revenues**
            
            $
            533,911
            
            $
            275,377
            
            $
            809,288Cost
                of tangible products sold
            
            
            1,130,885
            
            
            557,983
            
            
            1,688,868Gross
                profit / (loss)
            
            
            (596,974
            )
            
            (282,606
            )
            
            (879,580
            )**Expenses**Selling,
                general & administrative
            
            
            3,720,632
            
            
            4,788,986
            
            
            13,169,192Research
                & development
            
            
            1,308,345
            
            
            2,001,506
            
            
            9,143,233Impairment
                of assets
            
            
            -
            
            
            6,581
            
            
            1,391,485Interest
                expense - related party
            
            
            276,651
            
            
            713,048
            
            
            1,014,487Derivative
                revaluation
            
            
            (72,236
            )
            
            437,588
            
            
            365,352Mega
                C Trust Share Augmentation (Return)
            
            
            -
            
            
            (1,125,000
            )
            
            400,000Other,
                net
            
            
            (47,708
            )
            
            (77,352
            )
            
            (476,928
            )**Net
                loss before income taxes**
            
            
            (5,782,658
            )
            
            (7,027,963
            )
            
            (25,886,401
            )Income
                Taxes
            
            
            83,469
            
            
            -
            
            
            83,469**Deficit
                accumulated during development stage**
            
            
            (5,866,127
            )
            
            (7,027,963
            )
            
            (25,969,870
            )Less
                preferred stock dividends and beneficial conversion
                feature
            
            
            (8,417,955
            )
            
            (835,529
            )
            
            (12,528,835
            )Net
                loss applicable to common shareholders
            
            $
            (14,284,082
            )
            $
            (7,863,492
            )
            $
            (38,498,705
            )Basic
                and diluted net loss per share
            
            $
            (0.88
            )
            $
            (0.47
            )
            $
            (2.73
            )Weighted
                average common shares outstanding
            
            
            16,247,299
            
            
            16,628,290
            
            
            14,080,181




**The
                Accompanying Notes are an Integral Part of the Financial
                Statements**




5




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(A
      Development Stage Company)**




**Years
                Ended**
            
            **Inception****December
                31,**
            
            **(9/18/2003)
                to****2007**
            
            **2006**
            
            **12/31/2007****Cash
                Flows from Operating Activities:**Deficit
                accumulated during development stage
            
            $
            (5,866,127
            )
            $
            (7,027,963
            )
            $
            (25,969,870
            )Adjustments
                required to reconcile deficitaccumulated
                during development stage to cash flowsused
                by operating activitiesDepreciation
            
            
            176,196
            
            
            96,249
            
            
            353,482Impairment
                of assets
            
            
            -
            
            
            6,582
            
            
            1,391,486Non-cash
                interest expense
            
            
            224,536
            
            
            713,048
            
            
            962,372Extinguishment
                loss
            
            
            -
            
            
            -
            
            
            -Derivative
                revaluations
            
            
            (72,236
            )
            
            437,588
            
            
            365,352Equity
                instruments issued for services
            
            
            478,113
            
            
            1,577,147
            
            
            3,488,794Mega
                C Trust Share Augmentation (Return)
            
            
            -
            
            
            (1,125,000
            )
            
            400,000Changes
                in Operating Assets & LiabilitiesAccounts
                receivable
            
            
            (88,639
            )
            
            (51,878
            )
            
            (140,517
            )Other
                receivables
            
            
            87,233
            
            
            (88,206
            )
            
            (319,841
            )Prepaid
                expenses
            
            
            10,478
            
            
            (47,933
            )
            
            (79,514
            )Inventory
            
            
            (108,449
            )
            
            (267,186
            )
            
            (375,635
            )Accounts
                payable
            
            
            661,969
            
            
            619,977
            
            
            3,228,080Other
                current liabilities
            
            
            (252,500
            )
            
            555,109
            
            
            604,721Deferred
                revenue
            
            
            840,945
            
            
            -
            
            
            840,945Liability
                to Issue equity Instruments
            
            
            178,419
            
            
            -
            
            
            178,419**Net
                cash used by operating activities**
            
            
            (3,730,062
            )
            
            (4,602,466
            )
            
            (15,071,726
            )**Cash
                Flows from Investing Activities**Investments
                in notes receivable
            
            
            -
            
            
            -
            
            
            (1,217,016
            )Purchase
                of property & equipment
            
            
            (1,250,643
            )
            
            (801,870
            )
            
            (2,381,967
            )Investment
                in intangible assets
            
            
            -
            
            
            -
            
            
            (167,888
            )**Net
                cash used by investing activities**
            
            
            (1,250,643
            )
            
            (801,870
            )
            
            (3,766,871
            )**Cash
                Flow from Financing Activities**Proceeds
                from related party debt
            
            
            1,630,032
            
            
            3,309,714
            
            
            6,663,256Proceeds
                from sale of common stock; net of costs
            
            
            -
            
            
            788,900
            
            
            3,717,405Proceeds
                from exercise of warrants
            
            
            -
            
            
            -
            
            
            1,655,500Proceeds
                from sale of preferred stock, net of costs
            
            
            390,500
            
            
            4,352,500
            
            
            7,472,181Net
                cash provided by financing activities
            
            
            2,020,532
            
            
            8,451,114
            
            
            19,508,342Net
                Change in Cash and Cash Equivalents
            
            
            (2,960,173
            )
            
            3,046,778
            
            
            669,745Effect
                of Exchange Rate on Cash
            
            
            21,137
            
            
            10,501
            
            
            1,499Cash
                and Cash Equivalents - Beginning
            
            
            3,610,280
            
            
            553,001
            
            
            -Cash
                and Cash Equivalents - Ending
            
            $
            671,244
            
            $
            3,610,280
            
            $
            671,244




**The
                Accompanying Notes are an Integral Part of the Financial
                Statements**




6




Axion
      Power International, Inc.


Consolidated
      Statement of Stockholders' Deficit-US$


For
      Periods Ended December 31, 2003; 2004; 2005; 2006; 2007


(A
      Development Stage Company)


Deficit
                Accumulated
                During
                Development
                Stage
              
              Other
                Comprehensive
                Income
                Cumulative
                Translation
                Adjustments
              
              Total
                Stockholders'
                EquityPreferred
              
              CommonShares
              
              Senior
                Preferred
              
              Series A
                Preferred
              
              Shares
              
              Common
                Stock
                Amount
              
              Additional
                Paid-In
                Capital
              
              Subscriptions
                ReceivableInception 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
              )
              $
              179,029
  7
  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
              )
              $
              3,237,614Preferred
                  Series A Proceeds
              
              
              40,000
              
              
              
              
              
              337,270
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              337,270Preferred
                  - Dividends
              
              
              
              
              
              130,566
              
              
              1,790,755
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,921,321
              )
              
              
              
              
              0Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              1,000
              
              
              -
              
              
              315,950
              
              
              
              
              
              
              
              
              
              
              
              315,950Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              215,393
              
              
              
              
              
              
              
              
              
              
              
              215,393Fair
                  value of warrants with related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              98,463
              
              
              
              
              
              
              
              
              
              
              
              98,463Modification
                  of preexisting warrants
              
              
              
              
              
              (164,179
              )
              
              
              
              
              
              
              
              
              
              
              164,179
              
              
              
              
              
              
              
              
              
              
              
              0Beneficial
                  conversion feature on Preferred Stock
              
              
              
              
              
              
              
              
              6,096,634
              
              
              
              
              
              
              
              
              400,000
              
              
              
              
              
              (6,496,634
              )
              
              
              
              
              0Net
                  Loss December 31, 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,866,127
              )
              
              
              
              
              (5,866,127
              )Other
                  Comprehensive income (loss):
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,136
              
              
              21,136Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,844,991
              )Balance
                  at December 31, 2007
              
              
              960,497
              
              $
              1,515,376
              
              $
              9,802,894
              
              
              16,248,298
              
              $
              1,625
              
              $
              25,768,331
              
              
              -
              
              $
              (38,498,704
              )
              $
              (229,823
              )
              $
              (1,640,301
              )
  **The
        Accompanying Notes are an Integral Part of the Financial
        Statements**




8


**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 —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.




***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.




9




***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,
      2007 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, 2007 and
      2006.




***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, 2007, no reserve for
      obsolescence was deemed necessary. Cost is determined using the first-in
      first-out (FIFO) method. As of December 31, 2007, inventory included $375,635
      of
      lead-acid battery components, consisting of $301,701 of raw materials, $55,323
      of work-in-process and $18,611 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 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 had no
      impairment for notes receivable for the years ended December 31, 2007 and 2006.




10




***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.




***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.




11




Refundable
      tax credits are recorded, to the extent receipt is assured, in the year that
      they are earned and included in other income.




The
      provision for taxes represents corporate-level franchise taxes which may be
      based on assets, equity, capital stock or a variation thereof.




***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 adoption of FIN 48 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 currently evaluating the impact FASB No. 157 will have on its
      consolidated financial statements.




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 adoption of EITF 00-19-2 did not have a material impact on
      the
      Company’s consolidated financial position, results of operations or cash flows.




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.




12




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 adoption of SFAS No. 156
      did not have a material impact on the Company’s consolidated financial position,
      results of operations or cash flows.




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 adoption of SFAS No. 155 did not have a material impact
      on the Company’s consolidated financial position, results of operations or cash
      flows.




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. The Company will continue
      to
      use the simplified method until it has sufficient historical exercise data
      to
      provide a reasonable basis upon which to estimate the expected term of its
      options.




**Note
      3 -**  **Grant
      Revenue**




***Grant
      from Commonwealth of Pennsylvania:*** On April
      30, 2007, the Company was awarded a series of retroactive grants from the
      Commonwealth of Pennsylvania with an aggregate value of $1.2 million. Grants
      for
      $900,000 were specifically designated for equipment purchases and the remaining
      $300,000 for job training and tax credits, The $150,000 OGP grant requires
      the
      Company to hire 86 full-time employees by March 31, 2009, spend a total of
      $6,492,300 of non-public funds as part of the company’s operating and equipment
      purchases by March 31, 2008 and maintain an operation in Neshannock Township
      through March 31, 2011. Failure to meet these goals could result in a partial
      return of the $150,000 grant allocation. During the year ended December 31,
      2007, the Company recognized amounts related to these grants for the purchase
      of
      equipment. The Company records equipment grants as other receivables and
      deferred revenue based on qualifying equipment purchases that are billed to
      the
      Commonwealth for reimbursement at a rate of 75% of the amount paid by the
      Company. Deferred revenue is amortized into income over the estimated useful
      life of the related equipment. As of December 31, 2007, other receivables
      included $239,861 and deferred revenue of $840,945 was recorded for equipment
      grants. During the year ended December 31, 2007, $662,000 of cash was received
      and $60,916 of income was recorded for the amortization of the deferred revenue.




**Note
      4 — Property and Equipment**




A
      summary
      of property and equipment at December 31, 2007 and 2006 is as follows:


**Estimated**
                **useful****life**
              
              **2007**
              
              **2006**Asset
                  deposit
              
              
              
              
              $
              -
              
              $
              -Leasehold
                  improvements
              
              
              10
              
              
              92,525
              
              
              84,975Machinery
                  & equipment
              
              
              3-22
                  years
              
              
              2,382,749
              
              
              1,139,657Less
                  accumulated depreciation
              
              
              
              
              
              356,022
              
              
              179,827Net
              
              
              
              
              $
              2,119,252
              
              $
              1,044,805Depreciation
                  expense
              
              
              
              
              $
              176,195
              
              $
              96,249




13




**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. (“APB”) 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, APB 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 APB 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:*** APB 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 APB 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, APB 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, APB 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)**




***Research
      and development payments to C&T:*** During
      2005, 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.
      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.




***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.




14


**Note
      7 - Related Party Debt Financing**




**2006
      Activity:**




In
      January 2006, APB 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 APB’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 APB 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 APB’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. With the November loan
      modification, Mr. Averill received a warrant to purchase an additional 20,000
      shares of common stock with a commitment to issue a warrant for an additional
      20,000 shares of common stock at each three-month anniversary thereafter, until
      the loan is paid in full. With the extension of the maturity into 2008, Mr.
      Averill is to receive an additional 50,000 shares of common stock at each
      three-month anniversary of the original loan, until the loan is paid in full.
      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 APB’s obligations. APB 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.




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”.




15


***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.




**2007
      Activity:**




The
      Company issued a total of 270,000 warrants against the 2006 loan agreement
      executed with Mr. Averill during 2006 and has an obligation to issue an
      additional 230,000 warrants from these loans through the November 2007 date
      of
      extinguishment. In November 2007, the 2006 loan was subsequently extinguished
      in
      exchange for the security provided under the Secured Bridge Loan program offered
      during the fourth quarter of 2007. (See discussion of this loan under the
      caption “Secured Bridge Loan Financing” below).




In
      August
      2007, Mr. Averill loaned the Company an additional $460,000 earning interest
      at
      a coupon rate of 12% per annum. The debt matures in two parts, with the $230,000
      payable no later than September 30, 2007 and the final balance to be paid no
      later than December 31, 2007. As additional consideration for this loan, Mr.
      Averill is to receive a 3-year warrant to purchase 30,000 shares of common
      stock
      upon loan inception, an additional 2,000 warrants for each business day between
      the loan inception date and first repayment date, with the number of warrants
      pegged to the first repayment not to exceed 42,000 warrants, and an additional
      1,000 warrants for each business day between the date of first repayment and
      second repayment date, with the number of warrants pegged to the second
      repayment not to exceed 64,000 warrants. The Company repaid Mr. Averill $115,000
      on September 28, 2007, from which he is to receive the maximum number of
      warrants pegged to the first repayment date. On November 27, 2007 this loan
      was
      subsequently extinguished in exchange for the security provided under the
      Secured Bridge Loan program offered during the fourth quarter of 2007. The
      Company has an obligation to issue an additional 64,000 warrants from these
      loans through the November 27, 2007 extinguishment date. (See discussion of
      this
      loan under the caption “Secured Bridge Loan Financing” below).




On
      November 1, 2007, the Company borrowed an additional $267,900 from Robert
      Averill. This amount was invested in anticipation of the Secured Bridge Loan
      discussed below, earning interest at 14% per annum.




On
      November 27, 2007, Mr. 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
      $544,090 and $144,000 of loan origination fees recognized as a note discount,
      resulting in Mr. Averill holding a note for $1,800,000 under the Secured Bridge
      Loan financing. The loan has an original maturity of March 31, 2008, bears
      an
      initial interest rate of 14% per annum, and is jointly secured, along with
      all
      other investors in the Secured Bridge Loan, by all the assets including
      intellectual property assets of the Company and its subsidiaries. As additional
      consideration for this loan, Mr. Averill is to receive a warrant to purchase
      61,290 shares of common stock. The warrants are exercisable for a period of
      five
      years from loan inception at a price of $2.35 per share.




16


Mr.
      Averill’s loan obligations specifically state that the warrant will be dated
      three years from date of issue. Whereas none of these warrants have yet been
      issued, the expiration date on his warrants relating to both the 2006 carryover
      and the 2007 have yet to be determined.




In
      October 2007, Igor Filipenko, a former Board Member and majority shareholder
      of
      C&T, loaned the Company $115,000 under substantially the same agreement as
      Mr. Averill’s loan agreement of August 2007. Mr. Filipenko earns interest at a
      coupon rate of 12% per annum with a scheduled maturity of December 31, 2007.
      As
      additional consideration for this loan, Mr. Filipenko is to receive a 3-year
      warrant to purchase 5,250 shares of common stock upon loan inception, and an
      additional on 500 warrants for each business day between the loan inception
      date
      and repayment date. The number of warrants pegged to repayment is not to exceed
      26,500 warrants. The Company has an obligation to issue an additional 26,500
      warrants from this loan upon extinguishment on December 17, 2007. (See
      discussion of this loan under the caption “Secured Bridge Loan Financing”
below).




In
      December 2007, Mr. Filipenko elected to participate in the fourth quarter
      short-term bridge loan arrangement whereby he converted his October loan of
      $115,000, contributed an additional $92,000 in cash, and received a note
      discount of $18,000 reflecting loan origination fees, resulting in Mr. Filipenko
      holding a note for $225,000 under the Secured Bridge Loan. The loan has an
      original maturity of March 31, 2008, bears an initial interest rate of 14%
      per
      annum, and is jointly secured, along with all other investors in the Secured
      Bridge Loan, by all the assets including intellectual property assets of the
      Company and its subsidiaries. As additional consideration for this loan, Mr.
      Filipenko is to receive a warrant to purchase 7,661 shares of common stock.
      The
      warrants are exercisable for a period of five years from loan inception at
      a
      price of $2.35 per share. (See discussion of this loan under the caption
“Secured Bridge Loan Financing” below).




In
      December 2007, Glenn Paterson, a member of the Board of Directors, contributed
      $92,000 in cash and received a note discount of $8,000 reflecting loan
      origination fees by participating in the fourth quarter short-term bridge loan
      arrangement offered by the Company. The loan has an original maturity of March
      31, 2008, bears an initial interest rate of 14% per annum, and is jointly
      secured, along with all other investors in the Secured Bridge Loan, by all
      the
      assets including intellectual property assets of the Company and its
      subsidiaries. As additional consideration for this loan, Mr. Patterson is to
      receive a warrant to purchase 3,405 shares of common stock. The warrants are
      exercisable for a period of five years from loan inception at a price of $2.35
      per share. (See discussion of this loan under the caption “Secured Bridge Loan
      Financing” below).




***Options
      and Warrants:*** The loan
      agreements disclosed above provided for the aggregate issuance of 484,278 common
      stock purchase warrants, with only 86,528 having been issued as of December
      31,
      2007, and the remainder yet to be issued. As of December 31, 2007, the warrants
      due under these agreements have been valued at 276,882 and recorded as a note
      discount. Note discount of $154,201 has been amortized during the year ended
      December 31, 2007, of which $152,884 relates to these 2007 warrants obligations,
      and the balance relating to the carryover of unamortized discount from 2006.
      $289,075 of debt discount remains outstanding as of December 31, 2007. The
      obligation to issue the 397,750 unissued warrants is recorded as a liability
      rather than equity discussed in the “Liability ****** to
      issue
      equity instruments” section below. See the footnotes captioned “Stockholder's
      Equity” and “Subsequent Events” for additional disclosure of these transactions.




***Liability
      to issue equity instruments:*** During
      the year ended December 31, 2007, the Company entered into financing agreements
      discussed above that included detachable warrants to purchase common stock.
      As
      of December 31, 2007, 397.750 of these warrants had not yet been issued to
      the
      holders. The liability originally recorded related to these warrants amounted
      to
      $178,419, which was treated as a note discount and is being recognized as
      interest expense as described within the “Options and Warrants” section above.
      For each reporting period that the warrants are not issued, the liability is
      re-valued and adjusted through the caption “derivative revaluation” on the
      statement of operations. As of December 31, 2007, the value of these warrants
      amounted to $106,183, which has been recorded into liabilities pending physical
      issue of the warrant documents.




***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 have been 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.




17


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.
      $2,125,000 was funded by three members and former members of the Board of
      Directors, with the balance funded by four accredited investors.




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.  On
      March
      31, 2008, the Company sent notice to the investors of its intention to extend
      the loan for until April 30, 2008. The extension entitles the investors to
      earn
      an additional 1% extension fee based on the original loan amount and interest
      at
      the annual rate of 15%. 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 was paid equal to 8% of the original
      loan.
      The origination fee decreased by one-half percent each week after December
      15,
      2007 until the loan opportunity closed on 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 additional warrants upon extension of the loan to April 30,
      2008, 1,276 additional warrants upon extension of the loan to May 31, 2008,
      and
      2,128 additional 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.




***Interest
      Expense:*** Interest
      expense recognized for the year ended December 31, 2007 in connection with
      these
      notes and related liabilities amounted to $276,650, of which $117,058 relates
      to
      the amortization of the note discount for warrants granted, $37,143 relates
      to
      the amortization of note discount reflected by the Secured Bridge Loan’s
      origination fees, and the remainder relates to the stated interest rate on
      the
      outstanding balance. In December 2007, loan origination fees of $202,216 were
      recognized as note discounts related to funding received in the fourth quarter
      on the Secured Bridge Loan. In January 2008, $7,500 in origination fees were
      recognized as a note discount in connection with an additional $92,500 of cash
      received for these notes. These note discounts are being amortized as interest
      expense over the life of the respective notes.




**Note
        8 — Stockholders' Equity**
  ***Authorized
        Capitalization:*** The
        Company’s authorized capitalization includes 50,000,000 shares of common stock
        and 12,500,000 shares of preferred stock.
  ***Common
        Stock:*** At
        December 31, 2007, 16,248,298 shares of common stock were issued and
        outstanding. 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.
  18
  At
        December 31, 2007, 137,500 shares of 8% Cumulative Convertible Senior Preferred
        stock were issued and outstanding, and 822,997 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.
  19
  ***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 are 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 476,000
        $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior
        Preferred private placement offering. See “Warrant Modifications” in the note
        captioned “Subsequent Events” below.
  20
  Holders
        of senior preferred have 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 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 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 elect 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.
  21
  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 2007 and
        the
        expected future stated value of the senior preferred at the end of each quarter
        through December 31, 2008.
  **Quarter**
                **Ended**
              
              **Adjusted Stated**
                **Value**
              
              **Quarter**
                **Ended**
              
              **Adjusted Stated**
                **Value**31-Mar-07
              
              $
              11.75
              
              
              31-Mar-08
              
              $
              12.7230-Jun-07
              
              $
              11.99
              
              
              30-Jun-08
              
              $
              12.9730-Sep-07
              
              $
              12.23
              
              
              30-Sep-08
              
              $
              13.2331-Dec-07
              
              $
              12.47
              
              
              31-Dec-08
              
              $
              13.50
  ***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.
  22
  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 earnings through 2007 and the expected future
        stated value of the series A preferred at the end of each quarter through
        December 31, 2008.
  **Quarter**
                **Ended**
              
              **Adjusted Stated**
                **Value**
              
              **Quarter**
                **Ended**
              
              **Adjusted Stated**
                **Value****31-Mar-07**
              
              **$**
              **10.63**
              
              
              31-Mar-08
              
              $
              13.46**30-Jun-07**
              
              **$**
              **11.16**
              
              
              30-Jun-08
              
              $
              14.13**30-Sep-07**
              
              **$**
              **11.72**
              
              
              30-Sep-08
              
              $
              14.84**31-Dec-07**
              
              **$**
              **12.30**
              
              
              31-Dec-08
              
              $
              15.58
  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.
  23
  *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.
  ***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.
  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 in 2006 resulting from the revaluations was recorded
        into
        R&D ($342,131) and SG&A ($50,680).
  ***Equity
        Transactions –Year ended December 31, 2007***
  ***Senior
        Preferred:*** At
        December 31, 2007, 137,500 shares of 8% Cumulative Convertible Senior Preferred
        stock were issued and outstanding. As of December 31, 2007 $425,852 in dividends
        has been accrued to cover the Company’s obligations with regard to the 8%
        Cumulative Convertible Senior Preferred stock. No cash dividends have been
        paid
        with respect to these shares. Non-cash dividends have increased the value
        of the
        Senior Preferred shares by $2.72 to a stated value of $12.72 per share.
  ***Series
        A Preferred*** :
        782,997
        shares of Series A Preferred were issued during 2006. 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 through the first date these shares are convertible,
        being
        April 23, 2007. This straight line calculation did not differ materially
        from
        the effective yield method. With the 2007 subscription, the aggregate non-cash
        beneficial conversion feature attributable to the Series A Preferred shares
        is
        valued at $7,109,970. $613,336 was recognized as additional non-cash dividends
        in the fourth quarter of 2006, with the remaining balance of $6,496,634
        recognized as additional non-cash dividends during the year ending December
        31,
        2007. Beginning on April 23, 2007, the shares of Series A Preferred became
        convertible at the option of the holders of record at an initial conversion
        of
        $1.25 per share. The conversion price is subject to adjustment if Axion issues
        any shares less than the then existing conversion price.
  24
  The
        holders of the shares of Series A Preferred receive dividends at the annual
        rate
        of 20% of the Stated Value of the Series A Preferred so long as the Company
        is
        behind with respect to its reporting obligations under the Securities Exchange
        Act of 1934 on any dividend payment date. Once the company is current with
        respect to these reporting obligations, the dividend rate will be reduced
        to an
        annual rate of 10% of the Stated Value. As of December 31, 2007, $1,893,855
        in
        dividends has been accrued. No cash dividends have been paid with respect
        to the
        Series A Preferred shares. Non-cash dividends have increased the value of
        Series
        A Preferred shares by $3.46 to a stated value of $13.46 per share. As of
        December 31, 2007, 822,997 shares of Series A Convertible Preferred stock
        were
        issued and outstanding.
  **Common
        Stock Issuances:** The
        following table represents per share issuances of common stock from inception
        through December 31, 2007, 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
  25
  **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
  26
  **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
  27
  **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
 
  **2007**Officer
              
              
              12/01/07
              
              
              1,000
              
              
              2.30
              
              
              Unrestricted
                  share grant to VP Mfg Engineering2007
                  Totals
              
              
              
              
              
              1,000
              
              $
              2.30
 
  ***Warrants:*** ** 397,750
        warrants are to be issued to related parties in conjunction with the financing
        of debt. See the “Related Party” footnote above. The following table provides
        summary information on warrants outstanding as of December 31, 2007, including
        the 301,700 warrants that were issued in escrow to facilitate the pending
        stock
        sale described above. The 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.
  *2007
                  (Restated)*
              
              *2006*Shares
              
              Weighted Average
                Exercise
                  price
              
              Shares
              
              Weighted Average
                Exercise
                  priceWarrants
                  outstanding January 1
              
              
              3,761,213
              
              $
              3.21
              
              
              3,242,400
              
              $
              2.66Granted
                  during year
              
              
              484,278
              
              
              5.35
              
              
              1,030,613
              
              
              5.26Exercised
              
              
              -
              
              
              0.00
              
              
              (56,700
              )
              
              2.00Lapsed
              
              
              (1,657,100
              )
              
              2.00
              
              
              (455,100
              )
              
              1.33Outstanding
                  at December 31
              
              
              2,588,391
              
              $
              4.39
              
              
              3,761,213
              
              $
              3.21Weighted
                  average years remaining
              
              
              2.10
              
              
              
              
              
              1.57
  28
  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. These warrants, originally scheduled
        to
        expire on March 17, 2007 were modified to March 17, 2008, so that the holders
        of
        these warrants would have a reasonable opportunity to realize the benefit
        of
        their original bargain.  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 in the amount of $164,179.
  **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.
  29
  **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, compensation expense is recorded 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
        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 fair
        value of the equity instruments is determined by the earlier of (i) the date
        at
        which commitment for performance by the vendor or consultant 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.
  The
        compensation cost that has been charged against income for options granted
        under
        the plans was approximately $162,163
        for the year ended December 31, 2007. The impact of these expenses to basic
        and
        diluted loss per share was approximately $0.01 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, 2007, 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.
  30
  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 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.
  31
  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.
  In
        December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
        Nelson, was granted 36,000 shares of restricted common stock pursuant to
        his
        2007 employment agreement which were valued at $82,800 on the date of grant.
        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.
        The Company will recognize this as compensation over the 2 year employment
        contract, with $3,450 of compensation expense recorded for the year ended
        December 31, 2007.
  ***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.
  32
  ***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 Fefer, Petersen & Cie, 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.
  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.
  33
  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.
  In
        February 2006, members and affiliates of the law firm of Fefer, Petersen
&
Cie, 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.
  In
        January 2007, Walker Wainwright, a director of the Company, was granted an
        option to purchase 40,000 shares of common stock at an exercise price of
        $5.00
        as compensation for services related to due diligence, negotiation and sale
        of
        the 2006 Series A Preferred Stock offering. These three-year options were
        immediately vested on the date of grant, and are valued at $52,230 utilizing
        the Black-Scholes-Merton
        option pricing model and are recorded as offering costs in 2007.
  In
        August
        2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
        granted a contractual option to purchase 80,000 shares of common stock at
        an
        exercise price of $4.50. 20,000 vested immediately upon contract inception
        and
        the remainder vest at a rate of 10,000 per month over the life of his six-month
        employment contract. These two-year options are valued at $37,356 utilizing
        the Black-Scholes-Merton
        option pricing model with $24,904 recorded as compensation in 2007.
  34
  In
        December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
        Nelson, was granted a contractual option to purchase 108,000 shares of common
        stock at an exercise price of $5.00. The options vest at a rate of 3,000
        per
        month over a three year period, but are being amortized over the term of
        his two
        year employment contract. These five-year options are valued at $108,504
        utilizing the Black-Scholes-Merton
        option pricing model with $4,521 recorded as compensation in 2007.
  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
                  months2007
              
              
              3.9%
              
              
              0.0%
              
              
              54.4%
              
              
              62
                  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, 2006
        and
        2007.
  *2004*Weighted Average**All Plan & Non-Plan Compensatory Options**
              
              Number of
                Options
              
              Exercise
              
              Fair Value
              
              Remaining
                Life (years)
              
              Aggregate
                Intrinsic
                ValueOptions outstanding
                  at December 31,2003
              
              
              -
              
              $
              0.00
              
              $
              $0.00Granted
              
              
              736,350
              
              $
              3.53
              
              $
              $2.87Exercised
              
              
              -
              
              $
              0.00
              
              $
              $0.00Forfeited
                  or lapsed
              
              
              -
              
              $
              0.00
              
              $
              $0.00Options
                  outstanding at December 31,2004
              
              
              736,350
              
              $
              3.53
              
              $
              $2.87
              
              
              6.34
  *2005*Weighted Average**All Plan & Non-Plan Compensatory Options**
              
              Number of
                Options
              
              Exercise
              
              Fair Value
              
              Remaining
                Life (years)
              
              Aggregate
                Intrinsic
                ValueOptions
                  outstanding at December 31,2004
              
              
              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
  *2006*Weighted Average**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
              
              $
              0.82Exercised
              
              
              -
              
              $
              0.00
              
              $
              0.00Forfeited
                  or lapsed
              
              
              (894,000
              )
              $
              3.24
              
              $
              1.94Options
                  outstanding at December 31,2006
              
              
              1,746,885
              
              $
              4.62
              
              $
              1.05
              
              
              3.70
              
              $
              634,903Options
                  exercisable at December 31,2006
              
              
              1,192,385
              
              $
              5.11
              
              $
              0.97
              
              
              2.90
              
              $
              254,903
  35
 
 *2007*Weighted
                  Average**All
                  Plan & Non-Plan Compensatory Options**
              
              Number
                  of
                Options
              
              Exercise
              
              Fair
                  Value
              
              Remaining
                Life
                  (years)
              
              Aggregate
                Intrinsic
                ValueOptions
                  outstanding at December 31,2006
              
              
              1,746,885
              
              $
              4.65
              
              $
              1.03Granted
              
              
              228,000
              
              $
              4.82
              
              $
              0.87Exercised
              
              
              -
              
              $
              0.00
              
              $
              0.00Forfeited
                  or lapsed
              
              
              (124,000
              )
              $
              2.50
              
              $
              1.14Options
                  outstanding at December 31,2007
              
              
              1,850,885
              
              $
              4.81
              
              $
              1.00
              
              
              1.5
              
              $
              18,000Options
                  exercisable at December 31,2007
              
              
              1,442,385
              
              $
              4.88
              
              $
              0.93
              
              
              2.0
              
              $
              6,000
 
 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,
                  2007**
              
              **Shares**
              
              **Fair
                  Value**Options
                  subject to future vesting atDecember
                  31,2006
              
              
              554,500
              
              $
              1.34Options
                  granted
              
              
              228,000
              
              $
              0.87Options
                  forfeited or lapsed
              
              
              (124,000
              )
              $
              1.14Options
                  vested
              
              
              (250,000
              )
              $
              1.17Options
                  subject to future vesting at December 31,2007
              
              
              408,500
              
              $
              1.25
 
 As
        of
        December 31, 2007, there was $350,754 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 1.3 years. The total fair value of
        options vested during the year ended December 31, 2007 was $236,054
        ($ 830,181 during
        the year ended December 31, 2006).
  **Note
        10—Earnings/Loss Per Share**
  Basic
        earnings per share is computed by dividing income available to common
        shareholders (the numerator) by the weighted-average number of common shares
        outstanding (the denominator) for the period. Diluted earnings per share
        is
        computed by assuming that any dilutive convertible securities outstanding
        were
        converted, with related preferred stock dividend requirements and outstanding
        common shares adjusted accordingly. It also assumes that outstanding common
        shares were increased by shares issuable upon exercise of those stock options
        for which market price exceeds the exercise price, less shares which could
        have
        been purchased by us 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.
  36
  Had
        the
        Company recorded income applicable to common shareholders for the periods
        ended
        December 31, 2003, 2004 2005 2006 and 2007, weighted-average number of common
        shares outstanding would have increased by 785,897, 1,386,612 2,970,730
        2,135,938 and 8,975,643 (restated), 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, 2007) is 4,215,284
        shares.
  **Note
        11 — Income Taxes**
  Following
        is a summary of the components giving rise to the income tax provision for
        the
        periods ended December 31, 2007 and 2006.
  Currently
                  payable:
              
              **2007**
              
              **2006**Federal
              
              $
              -
              
              $
              -State
              
              
              83,469
              
              
              -Foreign
              
              
              -
              
              
              -Total
                  currently payable
              
              
              83,469
              
              
              -Deferred:Federal
              
              
              1,817,000
              
              
              1,386,000State
              
              
              537,000
              
              
              456,000Foreign
              
              
              446,000
              
              
              787,000Total
                  deferred
              
              
              2,800,000
              
              
              2,629,000Less
                  increase in allowance
              
              
              (2,800,000
              )
              
              (2,629,000Net
                  deferred
              
              
              -
              
              
              -Total
                  income tax provision
              
              $
              83,469
              
              $
              -
  Individual
        components giving rise to the deferred tax asset are as follows:
  **2007**
              
              **2006**Future
                  tax benefit arising from net operating loss carry forwards
              
              $
              5,977,000
              
              $
              3,242,000Future
                  tax benefit arising from available tax credits
              
              
              1,026,000
              
              
              864,000Future
                  tax benefit arising from options/warrants issued for
                  Services
              
              
              602,000
              
              
              536,000Other
              
              
              98,000
              
              
              149,000Total
              
              
              7,703,000
              
              
              4,791,000Less
                  valuation allowance
              
              
              (7,703,000
              )
              
              (4,791,000
              )Net
                  deferred
              
              $
              -
              
              $
              -
  37
  The
        components of pretax net loss are as follows:
  **2007**
              
              **2006**United
                  States
              
              $
              (5,776,191
              )
              $
              (4,867,383
              )Foreign
              
              
              (6,467
              )
              
              (2,160,580
              )$
              (5,782,658
              )
              $
              (7,027,963
              )
  The
        Company has net operating loss carryforwards of approximately $10,053,000
        and
        $4,930,000 available to reduce future income taxes in United States and
        Canadian, respectively. The United States carryforwards expire at various
        dates
        between 2024 and 2027. The Canadian carryforwards expire at various dates
        between 2010 and 2026. The Company also has generated Canadian tax credits
        related to research and development activities. A portion of this credit,
        amounting to approximately $102,000 is refundable and has been presented
        as such
        in the accompanying balance sheet. The remaining credit, amounting to
        $1,026,000, is available to offset future taxable income in Canada and expires
        at various dates between 2014 and 2027. 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.
  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:
  **2007**
              
              **2006**Statutory
                  U.S. federal income tax rate
              
              
              (34.0
              )%
              
              (34.0
              )%State
                  taxes
              
              
              (6.4
              )%
              
              (6.4
              )%Mega-C
                  Trust Shares augmentation/return
              
              
              0.0
              %
              
              (5.4
              )%Equity
                  based compensation
              
              
              1.0
              %
              
              2.0
              %Nondeductible
                  research and development
              
              
              0.0
              %
              
              3.2
              %Warrant
                  modifications
              
              
              0.0
              %
              
              5.1
              %Other
                  permanent non-deductible differences
              
              
              1.7
              %
              
              (1.9
              )%Change
                  in valuation allowance
              
              
              37.7
              %
              
              37.4
              %Effective
                  income tax rate
              
              
              0.0
              %
              
              0.0
              %
  38
  **Note
        12 — 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 years ending December 31, 2007 and 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 in
        2006 and through the issuance of the Secured Bridge Financing during the
        fourth
        quarter of 2007. 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.
  ***Legal
        fees:*** John
        Petersen was a director of the Company until January 15, 2007, and a partner
        in
        the law firm of Fefer, Petersen & Cie, 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.
  ***Warrants:*** In
        January 2007, Walker Wainwright, a director of the Company, was granted an
        option to purchase 40,000 shares of common stock at an exercise price of
        $5.00
        as compensation for services related to due diligence, negotiation and sale
        of
        the 2006 Series A Preferred Stock offering. These three-year options were
        immediately vested on the date of grant, and are valued at $52,230 utilizing
        the Black-Scholes-Merton
        option pricing model and are recorded as offering costs in 2007.
  **Note** **13-
        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, 2007 and 2006.
  39
  2007
              
              2006Notes
                  payable to related parties converted to preferred stock
              
              $
              -
              
              $
              3,184,292Preferred
                  Dividends attributable to warrant modifications
              
              $
              164,179
              
              $
              -Dividend
                  accrued to preferred stock – Senior
              
              $
              130,566
              
              $
              103,101Dividend
                  accrued to preferred stock – Series A
              
              $
              1,790,755
              
              $
              119,092Beneficial
                  conversion feature on preferred stock
              
              $
              6,496,634
              
              $
              613,336Amount
                  due for warrants exercised satisfied by extinguishment of
                  liability
              
              $
              -
              
              $
              113,400Satisfaction
                  of accrued legal liability with equity instruments
              
              $
              -
              
              $
              144,097Subscription
                  receivable satisfied extinguishment of liability
              
              $
              -
              
              $
              107,100Equipment
                  purchases included in accounts payable
              
              $
              -
              
              $
              66,813Reversal
                  of stock subscription receivable
              
              $
              -
              
              $
              25,000Conversion
                  of Interest and fees into debt instrument
              
              $
              74,573
              
              $
              -Satisfaction
                  of 2005 Liability to issue stock
              
              $
              -
              
              $
              24,000Warrants
                  issued for commission on sale of preferred
              
              $
              53,230
              
              $
              150,702Fair
                  value of warrants issued with related party note
              
              $
              276,882
              
              $
              271,567
  There
        were only minor cash payments for interest and no payments of income taxes
        during the years ended 2007 and 2006.
  **Note
        14 — 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.
  40
  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.
  ***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)
  41
  ***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.
  ***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
  42
  ·
              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.
  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.
  43
  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.
  ***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
        15 — Commitments and Contingencies**
  ***Facilities*** During
        2006 the Company closed the facilities in Woodbridge, Ontario and moved to
        New
        Castle, Pennsylvania. See the note captioned “Purchase of Assets of Failed
        Battery Manufacturing Company (Equipment Purchase).” The agreement provided 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 was $10,000. During
        the two extension terms, the rent was to 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. In April
        of
        2008, the company signed a new lease that also added to our existing space
        at
        our manufacturing plant in New Castle, Pennsylvania. The new lease calls
        for a
        monthly payment of $16,142 with an initial term of two (2) years beginning
        April
        2008. In addition to the monthly rental, APB 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 1000% of the replacement value of the leased premises.
        Rent expense for the plant in New Castle amounted to approximately $135,800
        and
        $103,000 for the years ended December 31, 2007 and 2006, respectively. Future
        commitments under the initial term of the lease amount to $20,000 in
        2008.
  ***Employment
        Agreements:*** The
        Company’s Chief Executive Officer, President, Chief Financial Officer, Chief of
        Research and Development and Vice President of Manufacturing Engineering
        have
        each executed written employment agreements with the terms set forth in the
        following table.
  **Name**
              
              **Position**
              
              **Date**
              
              **Term**
              
              **Salary**
              
              **Options**
              
              **Price**
              
              **Vesting**Thomas Granville
                  (1)
              
              
              CEO
              
              
              4/4/05
              
              
              24 Months
              
              $
              261,000
              
              
              180,000
              
              $
              2.50
              
              
              MonthlyDr.
                  Edward Buiel (2)
              
              
              CTO
              
              
              9/1/05
              
              
              36 Months
              
              $
              168,000
              
              
              100,000
              
              $
              3.75
              
              
              MonthlyAndrew
                  Carr Conway, Jr. (3)
              
              
              CFO
              
              
              8/31/07
              
              
              6 months
              
              $
              180,000
              
              
              80,000
              
              $
              4.50
              
              
              MonthlyDr.
                  Robert Nelson (4)
              
              
              VP
                  Mfg. Eng.
              
              
              12/1/07
              
              
              24 Months
              
              $
              132,000
              
              
              108,000
              
              $
              5.00
              
              
              Monthly
  44
  (1)
        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.
  (2)
        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.
  (3)
        On
        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 renewed for an additional six month term when the initial six
        months expired with the same terms and conditions. The agreement 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.
        Mr. Conway is also entitled to whatever additional fees and bonuses he and
        the
        Company may agree upon.
  (4)
        Dr.
        Nelson’s employment agreement also provides for a stock grant at a vesting rate
        of 1,000 shares per month with immediate vesting in the event of a change
        in
        control or the acquisition of 20% or more of the Company’s voting securities.
  ***Contingent
        Shares:***  In
        connection with a prospective offering, 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 warrant holders.  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 warrant holders.  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.
  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
        16 — Subsequent Events**
  ***Quercus
        Trust Investment:*** 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.
  45
  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
  46
  ·
              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”).
  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.
  ***C&T
        and Series A Warrants*** . In
        January of 2004 the Company issued warrants (the “C&T Warrants”) to the
        shareholders of C&T (the “C&T Warrant Holders”) in exchange for the
        acquisition of certain intellectual property rights associated with the
        lead/carbon hybrid supercapacitor formerly referred to as the E3 Cell. In
        February of 2005 we issued shares of our Series A Convertible Preferred Stock
        (the “Series A Preferred Stock”) to a group of investors (the “Series A
        Holders”), and in recognition of certain concessions, we issued warrants to the
        Series A Holders (the “Series A Warrants”). Both the C&T Warrants and the
        Series A Warrants expired during the period of time in which the Company
        was not
        current in its Exchange Act Reporting Obligations. In recognition of this,
        our
        board has authorized management to commence discussions and potential
        negotiations with the C&T Warrant Holders and the Series A Holders in an
        effort to recognize that the economic benefits that these parties and the
        Company expected at the time these warrants were issued was frustrated by
        the
        length of the time the Company was out of compliance with its Exchange Act
        reporting obligations and to provide some form of tangible value to the C&T
        Warrant Holders and the Series A Holders.
  47




**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:
                    May 12, 2008By:
                  /s/
                      Andrew Carr Conway, Jr.Andrew
                      Carr Conway, Jr., Chief Financial OfficerDate:
                    May 12, 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
                
                May
                    12, 2008/s/
                    Robert
                    G. AverillRobert
                    G. Averill
                
                Director
                
                May
                        12, 2008/s/
                    Glenn
                    PattersonGlenn
                    Patterson
                
                Director
                
                May
                        12, 2008/s/
                    Michael
                    KishinevskyMichael
                    Kishinevsky
                
                Director
                
                May
                        12, 2008/s/
                    Igor
                    FilipenkoIgor
                    Filipenko
                
                Director
                
                May
                        12, 2008/s/
                    Howard
                    K. SchmidtHoward
                    K. Schmidt
                
                Director
                
                May
                        12, 2008/s/
                    Robert
                    G. AverillD.
                    Walker Wainwright
                
                Director
                
                May
                        12, 2008
  48