**SECURITIES
AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549**
 
 **FORM
10-KSB**
  
  **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 
 **For
the fiscal year ended**
 **December
31, 2004**
 
 **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.
Employer
 incorporation
organization)  identification
No.)
 
 **100
Caster Avenue**
 **Vaughan,
Ontario, Canada**  **L4L
5Y9**
 (Address
of principal executive offices)  (Zip
Code)
 
 (Issuer’s
telephone number)  **(905)
264-1991**
 
 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 (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 ___
  
  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 a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB
 
 During
the year ended December 31, 2004, we had no revenue.
 
 On March
29, 2005, the quoted bid and asked prices for our common stock were $2.60 and
$2.40 respectively. Based on the average of the bid and asked prices, the
aggregate market value of the 3,826,233 shares of voting common stock held by
non-affiliates was $9,565,582 .
 
 On March
29, 2005, the
number of shares of common stock issued and outstanding was
14,536,933.
 
  Parts of
our definitive Proxy Statement for the 2005 Annual Meeting of Shareholders are
incorporated by reference in Parts I and III of this Annual Report on Form
10-KSB.
   
  Transitional
Small Business Disclosure Format (Check one):  Yes
___  No X
  
  **TABLE
OF CONTENTS**
 
 
 **PART
      I****ITEM
      1**
    **DESCRIPTION
      OF BUSINESS**
    
    **3****ITEM
      2**
    **DESCRIPTION
      OF PROPERTY**
    
    **25****ITEM
      3**
    **LEGAL
      PROCEEDINGS**
    
    **26****ITEM
      4**
    **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**
    
    **26****PART
      II****ITEM
      5**
    **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
    
    **26****ITEM
      6**
    **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
    
    **28****ITEM
      7**
    **FINANCIAL
      STATEMENTS**
    
    **33****ITEM
      8**
    **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**
    
    **53****ITEM
      8A**
    **CONTROLS
      AND PROCEDURES**
    
    **53****ITEM
      8B**
    **OTHER
      INFORMATION**
    
    **54****PART
      III****ITEM
      9**
    **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT**
    
    **54****ITEM
      10**
    **EXECUTIVE
      COMPENSATION**
    
    **54****ITEM
      11**
    **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**
    
    **54****ITEM
      12**
    **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**
    
    **55****ITEM
      13**
    **EXHIBITS
      AND REPORTS ON FORM 8-K**
    
    **55****ITEM
      14**
    **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**
    
    **56****SIGNATURES**
    
    **56**
 
  
  **PART
I**
 
 **ITEM
1. — DESCRIPTION OF BUSINESS**
 
 **Cautionary
Statement Regarding Forward-Looking Information**
 
 This
Annual Report on Form 10-KSB and other documents incorporated by reference
contain certain “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These forward-looking statements represent our expectations, beliefs, intentions
or strategies concerning future events, including, but not limited to, any
statements regarding our current assumptions about future financial performance;
the continuation of historical trends; the sufficiency of our cash balances for
future liquidity and capital resource needs; the expected impact of changes in
accounting policies on our results of operations, financial condition or cash
flows; anticipated problems and our plans for future operations; and the economy
in general or the future of the electrical storage device industry, all of which
are subject to various risks and uncertainties.
 
 When used
in this Form 10-KSB and our other filings with the Securities and Exchange
Commission (the “SEC”), in our press releases, presentations to securities
analysts or investors, in oral statements made by or with the approval of an
executive officer, the words or phrases “believes,” “may,” “will,” “expects,”
“should,” “continue,” “anticipates,” “intends,” “will likely result,”
“estimates,” “projects” or similar expressions and variations thereof are
intended to identify such forward-looking statements. However, any statements
contained in this Form 10-KSB that are not statements of historical fact may be
deemed to be forward-looking statements.
 
 We
caution that these statements by their nature involve risks and uncertainties,
certain of which are beyond our control, and actual results may differ
materially depending on a variety of important factors, including, but not
limited to such factors as our ability to successfully implement our business
plan; our ability to raise an adequate level of capital to fund our operations;
market demand and pressures on the pricing for our propose products; changing
market conditions, competition and growth rates within the electrical storage
device industry; changes in accounting policies; risks associated with
operations outside of the U.S.; changing economic conditions such as general
economic slowdown, decreased consumer confidence and the impact of war on the
economy; and other risks and uncertainties.
 
 **INTRODUCTION**
 
 Our
company was incorporated in Delaware on January 9, 1997 and operated a cigar
manufacturing and distribution business until late 1998. We were inactive from
January 1999 until December 2003 when we acquired Axion Power Corporation in a
business combination that was structured as a reverse takeover. We changed our
name from Tamboril Cigar Company to Axion Power International, Inc. in June
2004. Unless we tell you otherwise, references to “Tamboril” and “Axion
(Ontario)” refer to the constituent companies before the business combination
and references to “Axion,” “our company,” “we,” “us,” and “our” refer to our
combined companies.
 
 We are
developing a foundation technology for asymmetrically supercapacitive
lead-acid-carbon energy storage devices that we refer to as “e 3 Supercells.”
Instead of using two lead electrodes like a conventional lead-acid battery,
e 3 Supercells
replace the lead-based negative electrodes with nanoporous carbon electrodes.
The result is a new class of hybrid energy storage device that offers both
battery and supercapacitor performance characteristics and has a much longer
service life. If ongoing development and testing continue to confirm our
laboratory results, we believe e 3 Supercell
power systems may offer a cost-effective alternative to conventional lead-acid
batteries that:
 
 ·
    Charges
      three to five times faster;
 
 ·
    Offers
      three to four times as many charge/discharge cycles in deep discharge
      applications;
 
 ·
    Withstands
      repetitive 90% depth of discharge without significant loss of battery
      performance; and
 
 ·
    Requires
      minimal maintenance.
 
 Initially,
we plan to focus on developing e 3 Supercells
for use in uninterruptible power supplies, which are also known as UPS systems,
and DC power systems for communications networks. We selected these markets
because worldwide sales of batteries for UPS and communications power systems
exceed $2 billion per year, our current prototypes have a form factor that
approximates prevailing industry standards and our chief executive has
substantial experience and contacts in these markets. Our second target market
will be short-term energy storage and buffering systems for grid-connected wind
and solar power generating facilities and conventional electric utilities. Our
third target market will be power systems for hybrid automobiles. If we can
establish a credible presence in one or more of these high value sectors, we may
also develop specialized e 3 Supercells
for a variety of industrial and consumer products including forklifts,
wheelchairs and golf carts. There is no assurance that we will be able to
develop a product based on our e 3 Supercell
technology or that we will have the ability to manufacture and market any
products we develop.
 
 Since
early 2004, we have focused on fabricating and testing material and design
evaluation prototypes that range from single cells to complete
laboratory prototype multi-cell assemblies. The purpose of these “ **Laboratory
Prototypes** ” has
been to refine our electrochemistry, optimize our production techniques and
provide a series of standardized e 3 Supercells
that can be used for comprehensive performance analysis. Our Laboratory
Prototypes cannot be used outside a laboratory setting. However, they are
suitable for characterization and performance testing by our principal technical
consultants and manufacturing partners.
 
 We have
begun preparing detailed drawings and design specifications for a series of
application evaluation prototypes that will be tailored to specific uses. We do
not expect to begin production of “ **Application
Prototypes** ” until
the second half of 2005. Our Application Prototypes will not be suitable for
sale to end-users. However we expect them to be suitable for performance testing
by a wide variety of third parties, including UPS manufacturers, communication
network operators and other end-users.
 
 Our third
development stage will involve producing commercial products in limited
quantities for sale to end-users. We plan to develop our “ **Pilot
e** **3** **Supercells** ” in
cooperation with established manufacturers and intend to produce power systems
in sufficient quantities to allow an analysis of each product’s commercial
potential.
 
 We do not
expect to generate revenue from product sales for a period of 18 to 24 months.
Our development plan currently contemplates the following market entry schedule
for our proposed Pilot e 3 Supercell
power systems:
 
 **June
      2006**
    UPS
      and DC Power for communications networks.**September
      2006**
    Storage
      and buffering for conventional electric utilities.**November
      2006**
    Storage
      for wind and solar power generating facilities.**First
      Quarter 2007**
    Power
      systems for hybrid automobiles.
 
 There is
no assurance that we will be able to resolve the known and unknown technical
issues and complete the development of our proposed products in a timely manner;
or that the cost of future development work will not exceed current budget
estimates. Moreover, there is no assurance that power systems based on our
e 3 Supercell
technology will offer the competitive advantages we presently anticipate.
Accordingly, there is no assurance that we will ever produce Pilot e 3 Supercells
or that our proposed products will ultimately be competitive.
 
 **RISK
FACTORS**
 
 Investing
in our securities is speculative and involves a very high degree of risk.
Stockholders should carefully consider and evaluate all of the information in
this report. The following are among the risks we face related to our business,
assets and operations. They are not the only risks we face. Any of these risks
could materially and adversely affect our business, results of operations and
financial condition, which in turn could materially and adversely affect the
trading price of our common stock.
 
 **We
are an early stage company and our business and prospects are extremely
difficult to evaluate.**
 
 Axion
(Ontario) commenced operations in September 2003 and then entered into a
business combination with Tamboril that closed on December 31, 2003. We do not
have a long or stable operating history that you can rely on in connection with
your evaluation of our business and prospects. Our business and prospects must
be carefully considered in light of the history of the e 3 Supercell
technology, the origins of our company and the many business risks,
uncertainties and difficulties that are typically encountered by development
stage companies that have no revenues and intend to focus on research,
development and product testing for an extended period of time. Some of the
principal risks and difficulties we expect to encounter include our ability to:
 
 ·
    Raise
      the necessary capital to finance the continuation of our business until we
      can introduce a product;
 
 ·
    Maintain
      effective control over the cost of our research, development and product
      testing activities;
 
 ·
    Develop
      cost effective manufacturing methods for essential components of our
      proposed products;
 
 ·
    Improve
      the performance of our Laboratory Prototypes and develop Application
      Prototypes;
 
 ·
    Produce
      Application Prototypes in sufficient quantities to support our planned
      testing activities;
 
 ·
    Establish
      facilities and relationships for the manufacturing of our proposed Pilot
      e3Supercells;
 
 ·
    Adapt
      and successfully execute our rapidly evolving and inherently unpredictable
      business plan;
 
 ·
    Implement
      and improve operational, financial and management control systems and
      processes;
 
 ·
    Defend
      our intellectual property rights against potential adverse
      claims;
 
 ·
    Respond
      effectively to competitive developments and changing market conditions;
 
 ·
    Attract,
      retain and motivate qualified personnel;
and
 
 ·
    Manage
      each of the other risks set forth below.
 
 Because
of our brief operating history and our early stage of development, we have
limited insight into trends and conditions that may exist or might emerge and
affect our business. There is no assurance that our business strategy will be
successful or that we will successfully address the risks identified in this
report.
 
 **We
have no revenue and we do not expect to introduce our first products for 18 to
24 months.**
 
 We are
engaged in research and development. Our e 3 Supercell
technology has not reached a point where we can offer products based on the
technology. We incurred a net loss of ($506,300) for the year ended
December 31, 2003 and a net loss of ($2,908,118) for the year ended
December 31, 2004. We expect our net losses for 2005 and 2006 to be
significantly higher than our historical losses. We will not be in a position to
sell products based on our e 3 Supercell
technology until we complete the development and testing activities described in
this report. We believe the development and testing process will require a
minimum of 18 to 24 months. There can be no assurance that our development and
testing activities will be successful or that our proposed products will achieve
market acceptance or be sold in sufficient quantities and at prices necessary to
make them commercially successful.
 
 **We
depend on proceeds from the sale of our securities to pay our operating
costs.**
 
 During
our first 18 months of operations, our financing activities kept pace with our
operating expenditures but our working capital was very limited. We recently
received $3,775,000 in net proceeds from a private placement of 381,000 shares
of 8% Convertible Senior Preferred Stock that gave investors rights, privileges
and preferences that are senior to the rights of common stockholders. We believe
our available financial resources and the anticipated proceeds from the exercise
of certain warrants will be sufficient to finance our operations for a period of
9 to 12 months from the date of this report. We will probably not be able to
complete the development of Application Prototypes or begin production of Pilot
e 3 Supercell
power systems without substantial additional financing. We cannot assure you
that additional capital will be available to us on favorable terms, or at all.
If we are unable to obtain additional capital when needed, our research,
development and testing activities will be materially and adversely affected and
we may be forced to delay the introduction of our proposed
products.
 
 **We
are involved in litigation.**
 
 Mega-C
Power Corporation (“ **Mega-C** ”) is a
former licensee of our technology that encountered legal and regulatory problems
in the spring of 2003 and subsequently ceased operations. When we purchased the
technology in December 2003, we created a trust for the benefit of Mega-C’s
creditors and shareholders (the “ **Mega-C
Trust** ”) that
currently holds 7,827,500 shares of our common stock. Our purchase of the
technology and our creation of the Mega-C Trust were vigorously opposed by one
of Mega-C’s principal promoter groups, which filed a lawsuit against Mega-C, our
company and 31 other defendants in February 2004. In response, we filed an
involuntary Chapter 11 proceeding against Mega-C for the purpose of protecting
our company and our technology. While the litigation against us has been stayed;
we believe the Chapter 11 case will ultimately resolve the underlying factual
issues in our favor; and we believe the Mega-C Trust has sufficient resources to
pay the cost of the Chapter 11 case and provide substantial distributions to
Mega-C’s creditors and shareholders, we cannot be certain that our strategy will
insulate us from all potential claims arising from the activities of Mega-C. If
new or additional claims are asserted, we may incur substantial legal fees and
other expenses to defend our position or settle the claims. Substantial outlays
for legal fees or settlements could adversely affect our financial condition and
operations.
 
 **Being
a public company has increased our administrative costs.**
 
 As a
public company, we incur significant legal, accounting and other expenses that
would not be incurred by a comparable private company. Rules and regulations
promulgated by the SEC have made some activities more time consuming and costly
and required us to implement corporate governance and internal control
procedures that are not typical for development stage companies. In addition, we
incur a variety of internal and external costs associated with the preparation,
filing and distribution of the periodic public reports and proxy statements
required by the Exchange Act. During the year ended December 31, 2004, we spent
approximately $289,000 for the legal and accounting fees and other costs
associated with Exchange Act reporting and compliance. We expect SEC rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
rules and regulations could also make it more difficult for us to attract
qualified executive officers and retain qualified individuals to serve on our
board of directors, particularly to serve on our audit committee.
 
 **The
growth we seek is rare and inherently problematic.**
 
 The
realization of our business objectives will require substantial future growth.
Growth of this magnitude is rare. If we are able to complete the development of
our Application Prototypes, develop Pilot e 3 Supercells,
introduce our products to the market and grow our business, we expect that rapid
growth will place a significant strain on our managerial, operational and
financial resources. We must manage our growth, if any, through appropriate
systems and controls. We must also establish, train and manage a much larger
work force. If we do not manage the growth of our business effectively, our
potential could be materially and adversely affected.
 
 **We
need to improve the performance of our Laboratory
Prototypes.**
 
 Our
Laboratory Prototypes do not satisfy all our performance expectations and we
need to improve various aspects of our e 3 Supercell
technology before we can
begin production
of Application Prototypes. In particular, we need to increase the energy density
of our Laboratory Prototypes and further refine our electrochemistry. There is
no assurance that we will be able to resolve the known technical issues. Future
testing of our existing Laboratory Prototypes and our proposed Application
Prototypes may reveal additional technical issues that are not currently
recognized as obstacles. If we cannot improve the performance of our Laboratory
Prototypes in a timely manner, we may be forced to redesign or delay the
production of Application Prototypes, reconsider our plans to introduce Pilot
e 3 Supercell
power systems or abandon our product development efforts
altogether.
 
 **We
may be unable to develop cost effective manufacturing methods for our carbon
electrodes.**
 
 The
nanoporous carbon electrodes that are the foundation of our e 3 Supercell
technology are more complex than the lead-based negative electrodes used in
conventional batteries. The production of nanoporous carbon electrodes requires
extensive processing of carefully selected raw materials and precision
fabrication of the finished electrodes. Minor variations in processing and
fabrication methods can have a major impact on the performance of the finished
electrodes. There is no assurance that we will be able to develop cost effective
fabrication methods for our carbon electrodes or manufacture commercial
quantities of carbon electrodes that exhibit the performance characteristics of
our Laboratory Prototypes. Moreover, there is no assurance that our nanoporous
carbon electrodes can be produced at a cost that is reasonably competitive with
conventional lead electrodes. If we are unable to develop manufacturing methods
that allow us to consistently produce quality carbon electrodes at a competitive
cost we will be unable to develop a competitive product based on our
technology.
 
 **We
cannot begin production of Pilot e** **3** **Supercells
for 18 to 24 months.**
 
 We will
not be able to begin production of power systems based on our e 3 Supercell
technology until we complete our current material and design evaluation, our
planned application evaluation and our planned product development. We believe
our commercialization path will require a minimum of 18 to 24 months. Even if
our material and design evaluation and application evaluation activities are
successful, there can be no assurance that we will be able to establish
facilities and relationships for the manufacturing, distribution and sale of our
proposed Pilot e 3 Supercells
or that any future products will achieve market acceptance and be sold in
sufficient quantities and at prices necessary to make them commercially
successful. Even if our proposed products are commercially successful there can
be no assurance that we will realize enough revenue from the sale of products to
achieve profitability.
 
 **We
do not have any vendor contracts.**
 
 We
currently purchase the raw materials for our carbon electrodes and a variety of
other components from third parties. We then fabricate our carbon electrodes and
build our Laboratory Prototypes in-house. We do not have any long-term contracts
with suppliers of raw materials and components and our current suppliers may be
unable to satisfy our future requirements on a timely basis. Moreover, the price
of purchased raw materials and components could fluctuate significantly due to
circumstances beyond our control. If our current suppliers are unable to satisfy
our long-term requirements on a timely basis, we may be required to seek
alternative sources for necessary materials and components, or redesign our
proposed products to accommodate available substitutes.
 
 **We
do not have any manufacturing facilities or manufacturing
experience.**
 
 Our
research and prototype development facility can only accommodate limited
production of Engineering and Application Prototypes. Our current facility will
not be able to produce our proposed Pilot e 3 Supercell
power systems. We will not be able to manufacture our proposed products or begin
commercial sales unless we establish dedicated manufacturing facilities or enter
into agreements for the outsourcing of the manufacturing function. Each of our
manufacturing alternatives has a unique risk profile and different financial and
managerial requirements. There can be no assurance that we will have the
necessary financial resources to establish or acquire suitable manufacturing
facilities if and when needed; or that we can negotiate suitable arrangements
for the outsourcing of our manufacturing functions. We do not have any
manufacturing experience and there is no assurance that we will be able to
retain a qualified manufacturing staff or effectively manage the manufacturing
of our proposed products.
 
 **We
will be a small player in an intensely competitive market and may be unable to
compete.**
 
 The
lead-acid battery industry is large, intensely competitive and resistant to
technological change. If our product development efforts are successful, we will
have to compete or enter into partnering arrangements with well-established
companies that are much larger and have greater financial, capital and other
resources than we do. We may be unable to convince end users that products based
on our e 3 Supercell
technology are superior to available alternatives. Moreover, if competitors
introduce similar products, they may have a greater ability to withstand price
competition and finance their marketing programs. There is no assurance that we
will be able to compete effectively.
 
 **We
may be unable to enforce or defend our ownership of proprietary
technology.**
 
 Our
ability to compete effectively will depend in part on our ability to maintain
the proprietary nature of our e 3 Supercell
technology. The intellectual property we purchased from C&T includes three
issued patents that cover various aspects of the e 3 Supercell
technology. We plan to file additional patent applications in the future.
However the degree of protection offered by our existing patents or the
likelihood that our future applications will be granted is uncertain.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investment in
competing technologies, may have, or may apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell products based on
our e 3 Supercell
technology. Competitors may also intentionally infringe on our patents. The
defense and prosecution of patent litigation is both costly and time-consuming,
even if the outcome is favorable to us. An adverse outcome in the defense of a
patent infringement suit could subject us to significant liabilities to third
parties. Although third parties have not asserted any infringement claims
against us, there is no assurance that third parties will not assert such claims
in the future.
 
 **New
technology may lead to the development of superior competitive
products.**
 
 Research
into the electrochemical applications for carbon nanotechnology is proceeding at
a rapid pace and many private and public companies and research institutions are
actively engaged in the development of new battery technologies based on carbon
nanotubes, nanostructured carbon materials and other non-carbon materials. These
new technologies may, if successfully developed, offer significant performance
or price advantages when compared with our e 3 Supercell
technology. There is no assurance that our existing patents or our pending and
proposed patent applications will offer meaningful protection if a competitor
develops a novel product based on a new technology.
 
 **We
depend on key personnel and our business may be severely disrupted if we lose
the services of our key executives and employees.**
 
 Our
business is dependent upon the knowledge and experience of our key scientists
and engineers, many of whom are Russian expatriates living in Canada. Given the
competitive nature of our industry and our reliance on expatriates, the risk
that one or more of our key scientists and engineers will resign their positions
is high and could have a disruptive impact on our operations. If any of our key
scientists or engineers is unable or unwilling to continue in their present
positions, we may not be able to easily replace them and our business may be
severely disrupted. If any of our key scientists or engineers joins a competitor
or forms a competing company, we could lose important know-how and experience
and incur substantial expense to recruit and train suitable replacements. We do
not maintain key-man insurance for any of our key employees.
 
 **Our
directors and officers effectively control management and the outcome of any
stockholder vote.**
 
 We had
14,536,933 common shares outstanding on the date of this report, including
7,827,500 shares held by the Mega-C Trust. The Mega-C Trust is required to vote
its shares proportionally with the votes cast by our other stockholders.
Therefore, the holders of the 6,709,433 shares that are not owned by the trust
will decide all matters that are submitted for a stockholder vote. Since our
directors and officers own or control 2,580,500 shares of common stock, 82,000
shares of preferred stock that are presently convertible into 411,200 shares of
common stock, and warrants and options that are presently exercisable to
purchase 1,774,300 additional shares of common stock, they will have the
effective power to control management and the outcome of any stockholder vote
until a substantial number of shares are sold or distributed by the
trustee.
 
 **Our
certificate of incorporation and by-laws provide for indemnification and
exculpation of our officers and directors.**
 
 Our
Certificate of Incorporation provides for indemnification our officers,
directors and employees to the fullest extent permitted by Delaware law. It also
provides exculpation of our directors for monetary damages arising from breach
of their fiduciary duties in cases that do not involve fraud or willful
misconduct. Insofar as indemnification for liabilities arising under the
securities laws may be permitted to directors, officers or persons controlling
our company pursuant to any of the foregoing, we have been advised that the SEC
believes such indemnification is against public policy as expressed in the
securities laws and is therefore unenforceable.
 
 **We
intend to offer generous equity compensation packages to our management and
employees.**
 
 As a key
component of our growth strategy, we intend to offer generous equity
compensation packages to our management and employees. We believe such
compensation packages will allow us to provide substantial incentives while
minimizing our cash outflow. Nevertheless, we will be required to account for
the fair market value of compensatory stock issuances as operating expenses.
During the year ended December 31, 2004 we incurred $18,225 in non-cash
compensation expense associated with equity compensation arrangements. We expect
to incur increasing amounts of non-cash compensation expense in future periods.
The non-cash expenses associated with equity compensation are expected to
materially and adversely affect our future operating results.
 
 **We
have issued a large number of convertible securities, warrants and options that
may significantly increase the number of shares
outstanding.**
 
 We had
14,536,933 shares of common stock outstanding on the date of this report and our
outstanding preferred stock is presently convertible into 1,880,417 shares of
common stock. We have also issued:
 
 ·
    3,129,700
      warrants that presently entitle the holders to purchase common stock at
      prices ranging from $1.00 to $4.00 per share and average $2.25 per
      share;
 
 ·
    383,300
      vested stock options that presently entitle the holders to purchase common
      stock at prices ranging from $1.00 to $3.20 per share and average $1.33
      per share; and
 
 ·
    493,050
      unvested stock options that will, in the future, entitle the holders to
      purchase common stock at prices ranging from $3.20 to $5.60 per share and
      average $4.14 per share.
 
 In
addition, we are authorized to issue additional options and incentive awards for
1,027,850 shares under our incentive stock and directors’ option plans. If all
holders of our derivative securities immediately exercised their conversion and
stock purchase rights, we would receive $7,542,490 in cash proceeds from the
exercise of warrants and vested options and have a total of 19,930,350 shares of
common stock outstanding.
 
 P **lanned
registrations of our outstanding securities and future sales under Rule 144 are
likely to substantially increase the supply of freely transferable shares and
depress the market price of our stock.**
 
 A total
of 623,200 outstanding shares are freely transferable under the Securities Act,
7,327,500 shares have been registered for resale and approximately 4,988,300
shares are presently eligible for resale pursuant to SEC Rule 144 (subject to
volume and manner of sale restrictions). Our planned registrations of additional
securities have the short-term potential to significantly increase the number of
potentially transferable shares. In particular:
 
 ·
    We
      are obligated to promptly file a registration statement under the
      Securities Act for the resale of up to 1,880,417 shares of common stock
      that are presently issuable upon the conversion of the preferred stock we
      sold in a recent private placement;
 
 ·
    We
      are obligated to promptly file a registration statement under the
      Securities Act for the resale of 365,200 shares of common stock that have
      been issued and 3,319,700 shares of common stock that are presently
      issuable upon the exercise of outstanding
warrants;
 
 ·
    We
      plan to file a registration statement under the Securities Act for 779,200
      shares of common stock underlying our outstanding contractual stock
      options and 1,250,000 shares that are issuable in connection with
      incentive awards under our incentive stock and directors’ option
      plans.
 
 When the
foregoing registration statements are declared effective, all of the shares
included in the registration statements will be eligible for resale under the
Securities Act. A substantial increase in the supply of transferable shares is
likely to depress the market price of our stock. If holders of our stock were to
offer a substantial number of shares for sale at or about the same time, the
price decline would probably be dramatic. The availability of a large supply of
transferable shares might make it more difficult for us to sell common stock in
the future or reduce the price at which we could sell shares of our common
stock.
 
 **We
do not control the Mega-C Trust and we have no power to control the trustee’s
decisions to effect sales or in-kind distributions of our shares.**
 
 While we
believe the provisions of the trust agreement will be adequate to protect our
company from the potential claims of Mega-C’s creditors and shareholders, we do
not control the Mega-C Trust and we have no power to control the trustee’s
decisions to effect sales or in-kind distributions of our shares. As a result of
the involuntary Chapter 11 bankruptcy case that we commenced against Mega-C, the
activities of the trustee became subject to Bankruptcy Court supervision. The
disposition of the shares held by the Mega-C Trust will ultimately be governed
by the terms of Mega-C’s Chapter 11 plan of reorganization. There can be no
assurance that the Mega-C Trust will not distribute shares to persons that we
would choose to exclude from share ownership if we had the power to do
so.
 
 **We
will try to use our stock to finance acquisitions.**
 
 As a key
component of our growth strategy, we intend to acquire complimentary
technologies, facilities and other assets. Whenever possible, we will try to use
our stock as an acquisition currency in order to conserve our available cash
resources for operational needs. Future acquisitions may give rise to
substantial charges for the impairment of goodwill and other intangible assets
that would materially and adversely affect our reported operating results. Any
future acquisitions will involve numerous business and financial risks,
including:
 
 ·
    Difficulties
      in integrating new operations, technologies, products and staff;
 
 ·
    Diversion
      of management attention from other business concerns;
  and
 
 ·
    Cost
      and availability of acquisition financing.
 
 We will
need to be able to successfully integrate any businesses we may acquire in the
future, and the failure to do so could have a material adverse effect on our
business, results of operations and financial condition.
 
 **Because
of factors unique to us, the market price of our common stock is likely to be
volatile.**
 
 Daily
trading in our common stock commenced in January 2004. Because of the manner in
which we became a public company; the relatively small number of shares
currently available for resale; the large number of shares that will be sold or
distributed by the Mega-C Trust; the early stage of our business and numerous
other factors, the trading price of our common stock is likely to be highly
volatile. In addition, actual or anticipated variations in our quarterly
operating results; the introduction of new products by competitors; changes in
competitive conditions or trends in the battery industry; changes in
governmental regulation and changes in securities analysts' estimates of our
future performance or that of our competitors or our industry in general, could
adversely affect our future stock price. Investors should not purchase our
shares if they are unable to suffer a complete loss of their
investment.
 
 **Our
current “bid” and “asked” prices may not stabilize at current
levels**
 
 During
our first year of operations, our stock was only quoted on the OTC Pink Sheets.
While our stock has been quoted on the OTC Bulletin Board since January 20,
2005, trading has been sporadic, trading volumes have been low and the market
price has been volatile. The closing bid and asked prices were $2.60 and
$2.40 per
share, respectively, on March 29, 2005. The current quotations are not
necessarily a reliable indicator of value and there is no assurance that the
market price of our stock will stabilize at or near current levels.
 
 **There
is no assurance that our Amex listing application will be approved in a timely
manner.**
 
 We filed
an American Stock Exchange (“ **Amex** ”)
listing application in April 2004. When we filed a registration statement for
the resale of the shares held by the Mega-C Trust, the Amex suspended the
processing of our application until the SEC review process was completed. While
our registration statement for the shares held by the Mega-C Trust was declared
effective on January 7, 2005, we did not satisfy the Amex’s quantitative listing
standards until we sold $3.8 million of our preferred stock in March 2005. Those
stock sales gave us sufficient net worth to satisfy the quantitative listing
standards. However, there can be no assurance respecting the length of time it
may take to complete the application process or obtain an Amex listing. Until
our common stock is approved for listing on the Amex, the only available market
will be the OTC Bulletin Board.
 
 **Our
common stock is presently subject to the "penny stock" rules which may make it a
less attractive investment.**
 
 SEC rule
3a51-1 defines a "penny stock" as any equity security that is not listed on the
Nasdaq system or a national securities exchange and has an inside bid price of
less than $5 per share. Our common stock is currently subject to the penny stock
rules. Before effecting a transaction that is subject to the penny stock rules,
a broker-dealer must make a determination respecting the suitability of the
purchaser; deliver certain disclosure materials to the purchaser and receive the
purchaser's written approval of the transaction. Because of these restrictions,
most broker-dealers refrain from effecting transactions in penny stocks and many
actively discourage their clients from purchasing such securities. Therefore,
both the ability of a broker-dealer to recommend our common stock and the
ability of holders of our common stock to sell their shares in the secondary
market is likely be adversely affected. Until the inside bid price of our stock
exceeds $5 per share, the penny stock rules will decrease market liquidity and
make it difficult for you to use our stock as collateral.
 
 **HISTORICAL
OVERVIEW**
 
 C and T
Co. Inc. (“ **C&T** ”) was
the original developer of the e 3 Supercell
technology. In December 1999 C&T entered into a joint venture for the
commercialization of the e 3 Supercell
technology and in September 2001 the joint venture granted Mega-C a license to
develop the e 3 Supercell
technology for use in “stationary applications.” Over the next 18 months, Mega-C
raised substantial capital from investors and spent a portion of those funds to
develop the e 3 Supercell
technology. In March 2003 the Ontario Securities Commission (the “ **OSC** ”) began
an investigation into the fundraising activities of Mega-C and its promoters. As
a result, Mega-C became unable to finance its business activities and C&T
terminated the joint venture agreement and Mega-C’s license in June
2003.
 
 The
termination of Mega-C’s business and license precipitated two lawsuits and an
arbitration involving Mega-C and its principal promoter groups. While the
pleadings in those cases focus on conflicting claims to the ownership of Mega-C
shares, disagreements over the resale of Mega-C shares and disagreements over
the parties’ respective interests in the e 3 Supercell
technology, we believe the primary objective of all parties was to avoid
responsibility by blaming somebody else for Mega-C’s business
failure.
 
 The
founders of Axion (Ontario) included the operations manager of Mega-C, the
president of C&T and nine Mega-C shareholders who together with family
members had invested approximately $4.3 million in Mega-C and collectively owned
approximately 10% of Mega-C’s outstanding stock. These previously unrelated
parties decided
to join forces in the summer of 2003 in an effort to salvage their investments
by developing a restructuring plan for Mega-C. In connection with their initial
restructuring efforts, the founders of Axion (Ontario) loaned $390,000 to Mega-C
and received 780,000 shares of Mega-C stock as partial consideration for the
loans, effectively increasing their combined ownership to approximately 15%.
While their combined ownership did not give the founders of Axion (Ontario)
control over Mega-C, the $390,000 in loans gave them substantial influence over
Mega-C’s affairs.
 
 When it
became apparent that Mega-C’s numerous problems could not be resolved without
extraordinary effort and expense, the founders
of Axion (Ontario) concluded that the only reasonable course of action would be
to organize a new company to
develop the e 3 Supercell
technology. Axion (Ontario) was incorporated in September 2003 and negotiated a
new license from C&T that gave Axion (Ontario) the right to purchase the
patents, patent applications, technical know how and other intellectual property
embodied in the e 3 Supercell
technology, together with all of C&T’s reserved royalties and other rights
to the e 3 Supercell
technology.
 
 The
opportunity to acquire ownership of the e 3 Supercell
technology was the driving force behind the business combination between Axion
(Ontario) and Tamboril. When we negotiated the business combination, we believed
that consolidation of ownership and development work in a single entity would
reduce the cost and complexity of future research and development, mitigate the
risks associated with the prior activities of Mega-C, facilitate the development
of the e 3 Supercell
technology and simplify the introduction of products based on the technology.
Since there was little question that the royalties retained by C&T in its
original license to Mega-C would constitute the bulk of Mega-C’s potential
profit from the sale of e 3 Supercell
products, we concluded that Mega-C’s potential claims to residual license rights
were irrelevant. In our worst-case scenario, we believed our company would
have:
 
 ·
    The
      unrestricted right to commercialize the e3Supercell
      technology in all applications; and
 
 ·
    The
      right to receive all royalties and other payments that C&T had
      reserved under its original agreements with Mega-C and its
      promoters.
 
 In
December 2003, we closed a business combination with Axion (Ontario) and C&T
that was structured as a reverse takeover of Axion (Ontario) coupled with a
purchase of the e 3 Supercell
technology from C&T. In connection with the business
combination:
 
 ·
    We
      issued 233,400 common stock purchase warrants in satisfaction of certain
      debts we owed to our former principal
stockholders;
 
 ·
    We
      issued 10,739,500 shares of common stock and 842,000 common stock purchase
      warrants in exchange for 100% of the outstanding securities of Axion
      (Ontario);
 
 ·
    C&T
      purchased 1,250,000 shares of common stock from our former principal
      stockholders;
 
 ·
    We
      purchased all of C&T’s interest in the e3Supercell
      technology for 1,592,600 common stock purchase warrants;
    and
 
 ·
    C&T
      reserved its rights to receive $1,794,000 in cash license fees provided
      for in the original agreement with Axion
(Ontario).
 
 In light
of the OSC investigation, the participation of Mega-C’s operations manager and
C&T’s president and their earlier efforts to develop a restructuring plan
for Mega-C, the founders of Axion (Ontario) believed it would be imprudent to
implement a go-forward strategy that protected their personal interests but left
the remaining Mega-C shareholders exposed. Therefore, as a negotiated element of
the business combination, we created the Mega-C Trust for the purpose
of:
 
 ·
    Preserving
      the equitable interests of Mega-C’s creditors and shareholders in the
      e3Supercell
      technology;
 
 ·
    Insulating
      our company and the technology from risks associated with Mega-C’s legal
      problems; and
 
 ·
    Holding
      a substantial interest in our company until Mega-C’s legal problems were
      resolved.
 
 Of the
10,739,500 shares that we issued in exchange for the stock of Axion (Ontario),
7,327,500 shares, or 68.2%, were contributed to the Mega-C Trust. The remaining
3,412,000 shares were distributed among the shareholders of Axion (Ontario). In
February 2005, we agreed to contribute $100,000 in cash and 500,000 additional
shares to the Mega-C Trust, thereby increasing the total trust corpus to
7,827,500 shares.
 
 The Mega-C
Trust was intended as a bankruptcy alternative that would pay Mega-C’s debts;
distribute our stock to Mega-C shareholders who purchased shares for cash or
held a small number of shares; and distribute cash to other Mega-C shareholders
who did not pay cash but were not involved in illegal activities.
 
 The
decisions to create Axion (Ontario), negotiate a new license for the
e 3 Supercell
technology, engage in the business combination transaction and create the Mega-C
Trust were vigorously opposed by one of Mega-C’s principal promoter groups. In
February 2004, these promoters filed a lawsuit against Mega-C, our company and
31 other defendants that claimed an ownership interest in the e 3 Supercell
technology and a conspiracy to deprive Mega-C and its promoters of their rights
to the technology. We believed the lawsuit was without merit and ultimately
concluded that a Chapter 11 reorganization of Mega-C would be the most efficient
way to
determine the rights and responsibilities of the various parties. Based on our
prior loans to Mega-C, w e filed
an involuntary Chapter 11 bankruptcy petition against Mega-C in April
2004.
 
 For the
last 13 months, we have devoted substantial energy and financial resources to
defending the pending litigation and helping Mega-C reconstruct its history from
inadequate records. In February 2005, the Bankruptcy Court appointed an
independent trustee to manage Mega-C’s reorganization and stayed all of the
pending litigation pending a report from the Chapter 11 trustee respecting the
impact of the lawsuit on Mega-C’s Chapter 11 case. In connection with the
appointment of an independent trustee, we amended the trust agreement to
eliminate certain protocols, procedures and requirements that are inconsistent
with the Bankruptcy Act. While the Mega-C Trust will sell shares of our stock
for the purpose of financing Mega-C’s bankruptcy, we have no duty to underwrite
or pay the costs of resolving Mega-C’s problems.
 
 **DESCRIPTION
OF OUR BUSINESS**
 
 **Introduction**
 
 We are
developing a foundation technology for a new class of lead-acid-carbon energy
storage devices that we refer to as “e 3 Supercells.”
Reduced to fundamentals, we have combined elements of an advanced lead-acid
battery with elements of a carbon-carbon supercapacitor to produce a hybrid
energy storage device that offers a unique combination of battery and
supercapacitor performance characteristics. The following sections summarize the
basic differences between batteries, supercapacitors and e 3 Supercells.
 
 ***How
batteries work*** Batteries store energy in chemical form and have three basic components in each
cell:
 
 ·
    a
      positively charged electrode which is called an “anode;”
 
 ·
    a
      negatively charged electrode which is called a “cathode;”
    and
 
 ·
    an
      electrolyte that transports electricity through the
  system.
 
 When a
battery is discharged the anode, cathode and electrolyte all undergo major
chemical reactions that release and transport electricity. In rechargeable
batteries, the chemical reactions are “reversible.” So the battery can be
discharged and then recharged for subsequent use. Nevertheless, the chemical
reactions are never perfectly reversible and performance degrades over time. As
a result, rechargeable batteries invariably have limited service lives that are
frequently described in terms of an expected number of charge/discharge cycles
at a specified depth of discharge. In most cases, discharge beyond design limits
significantly shortens battery life.
 
 ***How
supercapacitors work*** A
supercapacitor also has two electrodes and an electrolyte, but instead of
storing energy in chemical form, a supercapacitor stores electricity as an
electrostatic charge that clings to the surface of the electrodes. Since the
electrodes and the electrolyte in supercapacitors do not undergo major chemical
changes with each charge/discharge cycle, their service lives are effectively
unlimited and they are not subject to the depth of discharge limitations that
are typical in rechargeable batteries.
 
 ***How
e*** ***3*** ***Supercells
work*** Our
e 3 Supercells
replace the lead-based cathodes in conventional lead-acid batteries with
nanoporous activated carbon cathodes similar to those found in supercapacitors.
The result is a new class of hybrid energy storage device that has elements of
both batteries and supercapacitors, offers both battery and supercapacitor
performance characteristics and has a much longer service life. If ongoing
development and testing continue to confirm our laboratory results, we believe
e 3 Supercells
may offer a cost-effective alternative to conventional lead-acid batteries
that:
 
 ·
    Charges
      three to five times faster;
 
 ·
    Offers
      three to four times as many charge/discharge cycles in deep discharge
      applications;
 
 ·
    Withstands
      repetitive 90% depth of discharge without significant loss of battery
      performance; and
 
 ·
    Requires
      minimal maintenance.
 ******
***Where
e3 Supercells fit in energy storage***There
are four basic classes of energy storage devices: capacitors, supercapacitors,
batteries and flywheels. Within these basic classes, individual devices are
usually described in terms of “energy,” which refers to the amount of
electricity that can be stored in the device, and in terms of “power,” which
refers to how quickly the stored electricity can be delivered by the device. The
following chart provides a basic overview of the range of energy and power
densities that are typical for lead acid batteries and supercapacitors. It also
shows the range of energy and power densities that we believe we will be able to
achieve if our e3 Supercell technology can be successfully
developed.


We have
no products and no revenue. Initially, we plan to focus on developing
e3Supercells
for use in UPS systems and DC power systems for communications networks. Our
second target market will be short-term energy storage and buffering systems for
grid-connected wind and solar power generating facilities and conventional
electric utilities. Our third target market will be power systems for hybrid
automobiles. If we can establish a credible presence in one or more of these
high value sectors, we may also attempt to develop specialized e3Supercells
for a variety of industrial and consumer products including forklifts,
wheelchairs and golf carts. There is no assurance that we will be able to
develop a product based on our e3Supercell
technology or that we will have the ability to manufacture and market any
products we develop.

**Industry
overview**

The
battery industry manufactures devices that store electrical energy in chemical
form for use on demand by an electrical apparatus. The products produced by
battery manufacturers range from simple batteries that provide electricity at
the flip of a switch to smart batteries that use sophisticated systems to
control charging, discharging and other operating parameters. The battery
industry is experiencing a period of rapid growth that is fueled in part
by:

·
    Environmental
      concerns over transportation systems that rely on fossil
      fuels;

·
    Economic
      concerns over the availability and cost of fossil fuels;

·
    The
      emergence of new technologies for communications, transportation and power
      generation; and

·
    Rapid
      development and industrialization in less developed
    countries.

Notwithstanding
the rapid and sustained growth, the battery industry faces a number of important
technical challenges, including:

·
    Developing
      products that have improved power output to weight ratios;

·
    Developing
      products that have faster charge and discharge rates;

·
    Developing
      products that can withstand repeated charge/discharge cycling without loss
      of performance;

·
    Developing
      products that make a greater proportion of the stored energy available for
      use; and

·
    Developing
      products that can be recycled using existing technologies and
      infrastructures.

In
response to these challenges, the battery industry is developing and introducing
new products based on technologies that are increasingly complex, sophisticated
and expensive. We believe growth and technical change in the battery industry
will continue to accelerate for the foreseeable future.

**Overview
of lead-acid battery technology**

The most
common form of electrochemical battery is the lead-acid battery. Lead-acid
batteries are essential components in a wide variety of consumer and industrial
products including:

·
    Automotive
      electrical systems;

·
    Golf
      carts, wheelchairs, forklifts and other motive
    applications;

·
    UPS
      systems for computers and sensitive electronics;
and

·
    DC
      power systems for communications networks.

Despite
their market prominence, lead-acid batteries have a number of significant
limitations, including:

·
    Limitations
      on acceptable charge and discharge rates;

·
    Life
      spans that are limited by internal chemical processes that deteriorate
      over time and significantly impact battery performance after a predictable
      number of discharge cycles;

·
    Limitations
      on the proportion of stored energy that can be used without damaging the
      battery; and

·
    Substantial
      maintenance requirements.

A
conventional lead-acid battery contains two lead-based electrodes, one negative
and one positive. In most cases, these lead electrodes are the primary
life-limiting components. Over the life of a typical lead-acid battery, internal
chemical processes including sulfate crystallization, mass shedding and
electrode grid corrosion result in progressive and irreversible deterioration of
the electrodes. As the electrodes deteriorate, the battery loses its ability to
accept and hold a charge. Eventually, the only alternative is to replace the
battery.

Lead-acid
batteries deteriorate at different rates due to a variety of factors including
the number of times the battery is charged and discharged; the rate of charge;
the rate and depth of discharge; and environmental conditions that effect
internal electrochemistry.

Despite
the inherent weaknesses of lead-acid technology, the global market for lead-acid
batteries accounts for approximately $30 billion in annual sales. We believe
demand for lead-acid batteries will continue to expand rapidly for the
foreseeable future.

**Enabling
technology platform**

We
believe our e3Supercell
represents an enabling technology for key commercial and industrial markets
including UPS systems and D.C. Power Systems for communications networks that
currently account for almost $2 billion in annual battery sales. We also believe
power systems based on our e3Supercell
have the potential to offer substantial cost and performance advantages over the
power systems for hybrid electric vehicles, a market that is projected to grow
to approximately $10 billion annually over the next 15 years.

Since
power systems based on our e3Supercell
technology have the potential to offer three to four times as many
charge/discharge cycles in deep discharge applications and reduce per cycle
battery costs by up to 70%, we also believe our e3Supercell
may represent an enabling technology for cost-effective short-term storage of
electricity produced by alternative generating facilities and traditional grid
connected utilities. If we can engineer cost effective short-term energy storage
systems, the demand could be substantial.

**Applied
nanotechnology solutions**

The
National Nanotechnology Initiative (the “NNI”) is a federal research and
development program created by the White House to coordinate multi-agency
efforts in nanoscale science, engineering, and technology. Seventeen Federal
agencies including the Department of Energy participate directly in the NNI and
a variety of other education and research organizations contribute to the NNI
through studies, cooperative research and development projects and other
collaborations. The NNI broadly defines a new technology as "nanotechnology" if
it includes each of the following elements:

·
    Research
      and technology development at the atomic, molecular or macromolecular
      levels, in the length scale of approximately 1 to 100 nanometers;

·
    Creating
      and using structures, devices and systems that have novel properties and
      functions because of their small and/or intermediate size;
    and

·
    Ability
      to control or manipulate on the atomic scale.

We do not
build nanostructures by manipulating individual atoms or molecules. Instead, we
begin with activated carbon and use proprietary technology to:

·
    Optimize
      naturally occurring porosity in the 10- to 100-nanometer in size range;

·
    Create
      massive structural permeability; and

·
    Integrate
      processed carbon into a self-regulating system results in a unique
      combination of battery and supercapacitor characteristics.

In a
small but important way, we believe our methods for making nanostructure
enhanced carbon electrodes are properly classified as applied
nanotechnology.

**Our
e****3****Supercell
design**

The full
technical description of power storage system based on our e3Supercell
technology is a “multi-celled asymmetrically supercapacitive lead-acid-carbon
hybrid battery.” Where a lead-acid battery uses two lead-based electrodes in
each cell, our e3Supercell
battery uses a lead-based electrode for the positive poles and polarizable
nanoporous carbon electrodes for the negative poles. This eliminates the
physical deterioration associated with lead-based negative electrodes and gives
our e3Supercells
a number of supercapacitive characteristics. As a result, our e3Supercells
are expected to perform better in high performance applications where rapid
charge rates and the ability to withstand a large number of charge and deep
discharge cycles are critical requirements.

We are
devoting substantial financial and technical resources to the development of
manufacturing techniques will allow us to manufacture nanoporous carbon
electrodes at a cost that is reasonably competitive with the cost of
conventional lead electrodes. If we are unable to manufacture quality electrodes
at a competitive cost we will be unable to develop a competitive product based
on our e3Supercell
technology

In many
respects, the configuration of our e3Supercells
will be similar to conventional lead-acid batteries. Our e3Supercells,
each of which has a maximum power output of approximately 2.4 volts, will be
arranged in a multi-cell configuration and use similar positive electrodes,
separators, terminals, electrolytes and assembly techniques. Because of the
parallels, our finished product is expected to look similar to a conventional
battery. We believe the production of e3Supercells
should be largely compatible with existing lead-acid battery production
facilities and assembly processes. If our e3Supercell
technology is well received, we believe lead-acid battery manufacturers will be
able to adapt existing production lines to our e3Supercell
technology for a fraction of the cost of a new facility.

**Our
Commercialization Path**

Our
commercialization path involves a four-stage process that began with several
years of basic research and has now progressed through the fabrication and
testing of Laboratory Prototypes. When our material and design evaluation and
characterization activities are sufficiently advanced, we intend to begin
fabricating and testing more robust Application Prototypes that are designed to
meet the requirements of specific applications. If our application specific
testing is successful, we intend to manufacture Pilot e3Supercell
power systems in sufficient volume to determine whether our proposed products
can be successfully commercialized.

***Material
and design evaluation stage***Our
principal laboratory research is complete. Since early 2004, we have focused on
fabricating and testing a variety of Laboratory Prototypes that
include:

·
    e3Supercells
      with a single lead electrode (“single plate cells”) that are used to
      evaluate the performance of specific components and electrochemical
      formulations;

·
    e3Supercells
      with multiple lead electrodes (“multi-plate cells) that are used to
      evaluate the likely performance characteristics of our proposed
      products;

·
    e3Supercell
      power systems fabricated from single-plate cells that are used to
      determine how our e3Supercell
      technology functions in an integrated system;
and

·
    e3Supercell
      power systems fabricated from multi-plate cells that are used to determine
      whether our proposed designs will consistently meet our performance
      expectations.

The
primary goal of our material and design evaluation activities has been to
further refine our electrochemistry, optimize our production techniques and
provide a series of standard prototypes that can be used for comprehensive
performance analysis. Our current Laboratory Prototypes cannot be used outside a
laboratory setting. However, they are suitable for independent testing by third
party technical consultants and manufacturing partners.

The three
key participants in our material and design evaluation activities are Dr. Brian
Conway, a Professor Emeritus of Chemistry at the University of Ottawa and a
recognized expert in the field of advanced batteries and electrochemistry, East
Penn Manufacturing Company, Inc., one of the largest independent battery
manufacturers in North America, and Sandia National Laboratories, an independent
testing facility owned by the U.S. Department of Energy and managed by Lockheed
Martin Corporation.

Dr.
Conway has been actively involved in the development and testing of our
e3Supercell
technology for several years. His earlier testing of early laboratory prototypes
and his more recent testing of our Laboratory Prototypes demonstrated the
principal performance characteristics of our e3Supercell
technology and provided substantial technical guidance to our scientific and
engineering teams. We believe our technical consulting relationship with Dr.
Conway will continue for the foreseeable future.

We have
entered into a memorandum of understanding with East Penn that establishes the
framework for a three-phase joint development and testing program that includes
pre-commercial laboratory testing; pre-commercial product testing; and
co-development of a series of Pilot e3Supercells.
We believe this joint development and testing program will, if successfully
completed, advance our e3Supercell
technology from the material evaluation stage to initial product rollout. Our
MOU with East Penn only provides a general framework for our planned cooperation
and does not include a detailed listing of the tasks to be completed, a complete
allocation of the anticipated costs or the specific terms of the future economic
relationship between our companies. Instead, the MOU contemplates that each
stage of the testing and development process will be described in a more
detailed agreement that clearly defines the respective rights and
responsibilities of the parties.

In
cooperation with East Penn, we have negotiated the terms and testing protocols
for an independent testing contract with the U.S. Department of Energy’s Sandia
National Laboratories. We are presently engaged in performing an in-house
version of the proposed Sandia tests using our Laboratory Prototypes. When our
in-house testing is completed, we will send the Laboratory Prototypes to Sandia
for independent confirmation of our test results. We expect Sandia to complete
its formal independent testing of our Laboratory Prototypes in the first quarter
of 2005. Based on the results of that testing, we intend to finalize the designs
for our first Application Prototypes and begin the procurement process for the
necessary components.

***Application
evaluation stage***If our
material evaluation activities continue to yield favorable results, we plan
to commence an application-specific testing program in the second half of 2005.
We have begun the process of designing Application Prototypes that are tailored
to the particular requirements of the UPS and communications markets. During the
first stage of the application evaluation process, we intend to:

·
    Fabricate
      a series of preliminary Application Prototypes;

·
    Conduct
      extensive in-house performance testing;

·
    Design
      a standardizedApplication
      Prototypefor
      use in field testing; and

·
    Establish
      the necessary manufacturing and quality control protocols;

There is
no assurance that our preliminary application evaluation activities will be
successful or that we will ever be in a position to proceed to the field-testing
phase of the application evaluation process. We believeour
proposedfield-testingprogram
will include the following additional tasks:

·
    FabricateApplication
      Prototypesin
      sufficient quantities to support the field testing
  program;

·
    DeliverApplication
      Prototypesto
      our testing partners for assessment, evaluation and testing in specific
      environments;

·
    Provide
      engineering and technical support to our testing partners in connection
      with their assessment, evaluation and testing
  activities;

·
    Analyze
      the performance of our Application Prototypesand
      make any required changes to accommodate the needs of our testing partners
      and their customers; and

·
    Finalize
      the designs and specifications for our first generation of Pilot
      e3Supercell
      power systems.

We
believe the design and testing of Application Prototypes will require a minimum
of twelve months. During the application evaluation stage, our goal will be to
test Application Prototypes under carefully monitored real world conditions. We
believe the application evaluation process will give us a fuller understanding
of the strengths and weaknesses of our e3Supercell
technology and the needs of our potential customers. We also believe our
application evaluation activities are likely to reveal additional technical
issues and opportunities that cannot be accurately assessed at the present
time.

We plan
to work directly with the Powerware division of Eaton Corporation, a major
manufacturer of UPS equipment, during the application evaluation stage.
Powerware is a worldwide leader in the UPS equipment market and generates over
$1 billion in annual sales.During
the early months of the application evaluation process, we will work closely
with Powerware to develop detailed technical specifications for theApplication
Prototypesthat will
be used in our planned field tests. We will also finalize the design of ourApplication
Prototypesand begin
fabrication.

While
certain details of our relationship with Powerware remain unresolved at the date
of this report, we believe our proposed testing partnership with Powerware will
give us the advantage of their significant technical expertise and field support
while giving them an opportunity to participate in the early development of a
promising technology. Once our Application Prototypes have been designed and
built, we believe several other leaders in the UPS and telecommunications power
systems industry will participate as testing partners.

***Pilot
commercial production***If our
proposed Application Prototypes retain the performance characteristics of our
Laboratory Prototypes and offer the competitive advantages we presently
anticipate, our final development stage will involve the production of Pilot
e3Supercells
for limited sale to end users. These Pilot e3Supercells
will typically be developed in cooperation with established manufacturers and
produced in sufficient quantities to permit a detailed analysis of the proposed
product’s commercial potential. We do not expect to begin production of Pilot
e3Supercells
until the second half of 2006. If we proceed to the pilot commercial production
stage we will need to:

·
    Develop
      fabrication and assembly processes for standardized Pilote3Supercell
      power systems;

·
    Plan,
      design and build a dedicated facility for the production of Pilote3Supercells
      in commercial lots;

·
    Expand
      the application evaluation process to additional testing partners in our
      selected market segments for the purpose of developing a customer base for
      our Pilot e3Supercell
      power systems; and

·
    Develop
      a strategy for the production and commercial introduction of ourPilot
      e3Supercells.

There is
no assurance that we will be able to resolve the known technical issues and
complete development of our proposed Pilot e3Supercells
in a timely manner; or that the cost of future development work on our proposed
Pilot e3Supercells
will not exceed current budget estimates.

***Anticipated
testing costs***We
believe our material and design evaluation and application evaluation activities
can be conducted using our existing facilities and resources. The budgeted cost
of our material and design evaluation and application evaluation activities is
approximately $6 million. The eventual production of Pilot e3Supercells
will be considerably more expensive and require an investment of approximately
$10 million. We believe the anticipated proceeds from the exercise of our
outstanding warrants will be sufficient to pay the anticipated costs of our
planned material and design evaluation and our initial application evaluation
activities. Our available resources, however, will not be sufficient to pay the
anticipated costs of producing Application Prototypes for field-testing. We
believe, however, that financing opportunities will become available as our
evaluation and testing progress, particularly if the intermediate results we
obtain are favorable.

***Testing
and development facilities***Our
current research and development facility is the cornerstone of our testing and
prototype development program. The principal function of this facility is to
insure that formulations, constructs and fabrication methods that succeed in the
laboratory are tested in-house under controlled conditions. We have the in-house
ability to process our raw materials, fabricate our electrodes and build
prototype e3Supercells
in small quantities for material, design and application evaluation purposes.
Performing the entire fabrication process in-house gives us better control over
the quality of our prototypes and helps integrate the work of our research team
with the practical issues faced by our engineering team. We believe our research
and development facility is likely to shorten our product development cycles and
improve the coordination between our scientific and engineering teams. Our
research and development facility will never generate an operating profit,
however we believe the ability to combine scientific research and prototype
production in a single facility will increase the probability that any new
facilities we establish in the future will be able to produce quality products
at predictable competitive prices.

***Market
entry schedule***We do
not expect to generate revenue from product sales for a period of 18 to 24
months. Our current development plan contemplates the following market entry
schedule for our Pilot e3Supercells:

**June
      2006**
    UPS
      and DC Power for communications networks.**September
      2006**
    Storage
      and buffering for conventional electric utilities.**November
      2006**
    Storage
      for wind and solar power generating facilities.**First
      Quarter 2007**
    Power
      systems for hybrid automobiles.

There is
no assurance that our proposed Pilot e3Supercells
will offer the competitive advantages we presently anticipate. Accordingly,
there is no assurance that we will ever begin production of Pilot e3Supercells
or that any Pilot e3Supercells
we produce will ultimately be competitive.

***Commercial
rollout***We do
not have a well-defined strategy for the mass production and commercial rollout
of our proposedproducts.
We may decide to build our own production facilities and develop our own
distribution capacities, or we may decide to enter into partnerships, joint
ventures and other arrangements with existing battery manufacturers who have
excess production and distribution capabilities. There is no assurance that we
will be able to establish the necessary manufacturing facilities when needed, or
effectively manage the manufacturing, marketing and distribution of a new class
of power storage product.

**Our
growth strategy**

Our
strategy is to establish a foundation for products based on our e3Supercell
technology in a limited number of high-value market segments where performance
is a primary consideration and cost is secondary. We have chosen three market
segments where we believe the e3Supercell
has key features that will be readily recognized and rapidly accepted. These
market segments are:

·
    UPS
      equipment and DC power supplies for communications networks;

·
    Storage
      and buffering systems for grid-connected wind and solar power generating
      facilities and conventional utilities; and

·
    Power
      systems for hybrid automobiles.

By
focusing on these high-value markets we believe we will be able to efficiently
deploy a small and sophisticated marketing team that can concentrate on the
needs of the relatively small number of manufacturers who compete in these
specialty markets. We believe this strategy is likely to:

·
    Provide
      sufficient revenue to make our company self-sustaining at an early stage;

·
    Provide
      a credible track record for larger and more conservative market segments
      that are not likely to rapidly adopt an emerging technology;

·
    Provide
      a level of insulation from the superior marketing, financial and
      production resources of our better-established competitors;
      and

·
    Provide
      multiple opportunities for high-level networking among sophisticated
      users.

If we are
able to establish a credible presence in these industrial sectors, we will
attempt to develop products for use in a variety of consumer markets including
hybrid electric vehicles, forklifts and golf carts.

**Our
development partners**

The
development and commercialization of our e3Supercell
technology will require experience and expertise that is beyond the capabilities
of our scientific and engineering staff. Accordingly we have started the process
of forging working relationships with a number of development partners with
specialized expertise in our industry. At the date of this memorandum our
principal development partners include:

·
    Dr.
      Brian Conway, Professor Emeritus of Chemistry at the University of Ottawa
      and a recognized expert in the field of
  electrochemistry;

·
    East
      Penn Manufacturing Company, Inc., one of the largest independent battery
      manufacturers in North America;

·
    Sandia
      National Laboratories, an independent testing facility owned by the U.S.
      Department of Energy and managed by Lockheed Martin Corporation;
      and

·
    The
      Powerware division of Eaton Corporation, an industry leader in the field
      of UPS systems.

**Patents
and intellectual property**

In
connection with the business combination, we purchased all of C&T’s patents,
patent applications, trade secrets, know-how and other intellectual property
associated with the e3Supercell
technology. We have no duty to pay any royalties or license fees with respect to
the future commercialization of the e3Supercell
technology and we are not subject to any field of use restrictions. We believe
the C&T patents and patent applications, along with our trade secrets, know
how and other intellectual property will be critical to our
success.

In
connection with pending litigation described elsewhere in this memorandum,
adverse parties have asserted certain claims that could impair our rights to
develop the e3Supercell
technology for use in certain markets. In particular certain promoters of Mega-C
have asserted:

·
    That
      their license and Mega-C’s sublicense were not properly terminated and
      that their license to exploit the e3Supercell
      technology in stationary applications continues in full force and effect;
      and

·
    That
      their oral agreements with C&T gave them an interest in the
      e3Supercell
      technology and they are entitled to a proportional share of the
      consideration we paid to C&T in connection with the business
      combination.

We
believe the stationary applications that were sublicensed to Mega-C represent a
small percentage of the potential market for the e3Supercell
technology. We also believe the royalties retained by C&T are likely to
constitute the bulk of the potential profit from the sale of e3Supercell
products for use in stationary applications. Therefore, we believe that the
resolution of the conflicting claims to the ownership of the e3Supercell
technology will not materially impact our long-term business
potential.

Our
ability to compete effectively with other companies will depend on our ability
to maintain the proprietary nature of our e3Supercell
technology. The intellectual property we purchased from C&T includes three
issued patents that cover various aspects of the e3Supercell
technology. We plan to file additional patent applications in the future.
However the degree of protection offered by our existing patents or the
likelihood that our future applications will be granted is uncertain.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investment in
competing technologies, may have, or may apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell products based on
our e3Supercell
technology. Competitors may also intentionally infringe on our patents. The
defense and prosecution of patent litigation is both costly and time-consuming,
even if the outcome is favorable to us. An adverse outcome in the defense of a
patent infringement suit could subject us to significant liabilities to third
parties. Although third parties have not asserted any infringement claims
against us, there is no assurance that third parties will not assert such claims
in the future.

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

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

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

**Staff
and facilities**

Our
company has 25 full-time employees including a 10-member scientific research and
support team, a seven member engineering team, a three-member management and
business development team and five clerical employees. Over the next twelve
months, we plan to hire five to ten additional employees for our engineering and
manufacturing teams. We are not subject to any collective bargaining agreements
and believe our relations with our employees are good.

All of
our employees work at an integrated office, research and prototype development
facility located at 100 Caster Avenue in Vaughan, a suburb of Toronto. Mega-C
originally leased the property for a minimum term of 36 months under a
commercial lease that provides for monthly rental of $5,000. We rent the
facility from Mega-C on a month-to-month basis for a rental equal to the lease
payment. This facility has approximately 14,000 square feet of floor space,
including 5,000 square feet of management, administrative and engineering
offices and 4,000 square feet of research laboratories. The balance is devoted
to fabrication and testing.

We
conduct all of our fabrication functions at our facility in Vaughan, and we have
the capacity necessary for the small-scale production of material and
application evaluation prototypes. We believe our facilities will be suitable
for our anticipated needs until we expand our application evaluation prototype
testing activities. At that time, we will need to acquire or build a dedicated
assembly facility.We
believe that suitable facilities will be available within a reasonable distance
from our current facility.There is
no assurance that we will have adequate resources to pay the costs of acquiring
such a facility.

**Research
and development**

Axion
(Ontario) was incorporated in September 2003 and is primarily engaged in
research and development on the e3Supercell
technology. During the year ended December 31, 2003, we spent $253,435 on
company sponsored research and development. During the year ended December 31,
2004, we spent $1,551,790 on company sponsored research and development. While
our limited financial resources and short operating history make it difficult
for us to estimate our future expenditures, we expect to incur research and
development expenditures and operating losses of increasing magnitude for the
foreseeable future.

**Production
and supply**

Since our
present management has limited experience in manufacturing, we will need to
either employ qualified personnel to establish pilot assembly facilities or
enter into appropriate manufacturing agreements with others. There is no
assurance that we will be successful in attracting experienced personnel or
financing the cost of establishing additional manufacturing facilities, if
required. Accordingly, there is no assurance that we will ever be capable of
producing a quality product for sale at competitive prices. Since our company
currently has no long-term manufacturing plans, there can be no assurance that
we will be able to successfully manufacture our products.

The only
component of our e3Supercells
that we plan to manufacture in-house is our nanoporous carbon electrode. For all
other components, we will either order “off-the-shelf” items from established
manufacturers or have the necessary components manufactured according to
specifications and designs established by us. To date, we have encountered no
difficulty in obtaining necessary parts or components. We are not dependent upon
any single supplier. Although there are alternate sources of supply for
substantially all of the components that will be included in our e3Supercell
power systems, we will depend on outside suppliers for substantially all of our
raw materials and component parts. Therefore, there can be no assurance that our
current or alternative sources will be able to meet all of our future demands on
a timely basis. Unavailability of parts or components used in the manufacture of
our products could require us to reengineer our products to accommodate
available substitutions, which could increase our costs or have an adverse
effect on manufacturing schedules, product performance and market acceptance.

**DESCRIPTION
OF THE MEGA-C TRUST**

***Overview***The
Mega-C Trust is an irrevocable trust that we established as an integral element
of the business combination between Tamboril and Axion (Ontario). It was
originally intended as an informal bankruptcy alternative that would provide
mechanisms to:

·
    Pay
      Mega-C’s debts and the administrative costs of processing shareholder
      claims;

·
    Distribute
      shares of our stock to investors who bought Mega-C shares for
      cash;

·
    Distribute
      cash to shareholders who did not buy Mega-C shares for cash, but acquired
      them in other good faith transactions; and

·
    Exclude
      Mega-C’s promoters and their accomplices unless they negotiated
      settlements with the trustee.

***Recent
amendments to trust agreement***As an
informal bankruptcy alternative, the trust agreement included a variety of
requirements and procedures and that are inconsistent with the Bankruptcy Act.
We amended the trust agreement in February 2005 to minimize the potential
conflicts and avoid a duplication of effort. None of these amendments adversely
impacted the rights of Mega-C’s creditors and shareholders.

***Term
and trustee***The
Mega-C Trust is a separate legal entity that will continue in existence until
all property contributed to the trust has been sold, distributed, or surrendered
to our company. The sole trustee is Sally Fonner, a resident of Dunedin, Florida
who was an officer, director and principal stockholder of Tamboril before the
business combination with Axion (Ontario).

***Trust
corpus***The
initial corpus of the trust was 7,327,500 shares of our stock. In February 2005,
we contributed 500,000 additional shares to the Mega-C Trust, for the purpose of
creating a contingency reserve for the additional expenses that will arise in
connection with the Chapter 11 case. We also agreed to contribute $100,000 in
cash from the proceeds of this offering. We have no duty to make additional
contributions to the trust.

***Priority
for Mega-C’s creditors***The
interests of Mega-C’s shareholders are subordinate to and subject to reduction
for the claims of any Mega-C creditors that are entitled to priority under
applicable law. These claims include the debts incurred by Mega-C prior to the
filing of the Chapter 11 case and all administrative and legal costs incurred in
connection with the Chapter 11 case. Subject to the supervision of the
Bankruptcy Court, the trustee is authorized and required to sell all or any
portion of the trust assets and use the sale proceeds to pay creditors’ claims
and administrative costs before any remaining assets are distributed to or sold
for the benefit of shareholders. We have registered 7,327,500 shares under
Securities Act to facilitate future sales and distributions.

***Identification
of potential beneficiaries***The
potential beneficiaries under the trust include all of Mega-C’s creditors and
shareholders. While we believe the identification of Mega-C’s creditors will be
a simple matter, the identification of the Mega-C shareholders will likely be
difficult because Mega-C’s history is complex and poorly documented. Mega-C did
not observe the normal corporate formalities in connection with its operations
and it did not obtain the advice of counsel before issuing stock certificates or
accommodating the resale and transfer of shares. The stock issue and transfer
records that do exist are incomplete. As a result, it is impossible to determine
from the records how many Mega-C shares were issued and whether the shares were
properly issued under Nevada law. The trustee will petition the Bankruptcy Court
for a certified shareholders list that includes the following
information:

·
    The
      identity of each lawful Mega-C shareholder

·
    The
      number of shares owned by each Mega-C shareholder;
and

·
    The
      average price per share paid by each Mega-C
shareholder.

Mega-C
shareholders will have no interest in either the trust or the trust assets until
the Bankruptcy Court has certified their status. All costs of the shareholder
certification process will be paid as an administrative expense of the Chapter
11 case.

***Classification
of court certified beneficiaries***Based on
the information included in the certified shareholders list, the trustee will
classify each Mega-C shareholder in one of the following
categories:

·
    Category-Iincludes all Mega-C shareholders who purchased their shares for a price of
      at least $1 per share that was paid in money, property or services
      actually performed and reasonably valued.

·
    Category-IIincludes all Mega-C shareholders who did not pay at least $1 per share,
      provided that the trustee may administratively reclassify small
      shareholders as Category-I beneficiaries.

·
    Category-IIIincludes all Mega-C shareholders who have allegedly violated applicable
      law in connection with the offer, sale or resale of Mega-C’s securities
      unless there has been a judicial or administrative determination that the
      alleged activity did not occur or was not
illegal.

The trust
has not been divided into shares and certified beneficiaries have no right to
vote or otherwise influence the activities of the trust or the distribution
decisions of the trustee. All certified shareholders who fall in a particular
category will be treated equally.

***Contingent
reduction of trust corpus***When the
Bankruptcy Court approves a certified shareholders list, the corpus of the trust
will be subject to reduction if the total number of Mega-C shares held by
certified shareholders is less than 14,655,000. In that event, the trustee will
divide the total number of certified shares by two and then add 500,000 to
determine the final number of shares that will constitute the entire corpus of
the trust. If the number of shares held exceeds the number calculated by the
trustee, any excess will be surrendered to us for cancellation. There will be no
adjustments to trust corpus if more than 14,655,000 Mega-C shares are lawfully
issued and outstanding. We cannot estimate the number of shares that will
ultimately be surrendered for cancellation, if any.

***Sale
and distribution of shares***Until a
certified shareholders list is provided to the trustee, the assets of the trust
cannot be used for any purpose other than the payment of administrative expenses
of the Chapter 11 case. In addition, the trustee cannot sell, distribute or
dispose of trust property without an express order of the Bankruptcy Court.
Until court has approved a certified shareholder list, the trustee may not sell
more than 250,000 shares to pay the administrative costs of the Chapter 11 case.
When the court has certified the stockholder list, all creditors’ claims have
been paid and any excess shares have been returned to us for cancellation, the
trustee will distribute the remaining shares as follows:

·
    Category-I
      beneficiarieswill be entitled to receive a prompt in-kind distribution of our
      shares;

·
    Category-II
      beneficiarieswill not be entitled to receive in-kind distributions, but will be
      entitled to receive their proportional share of the cash proceeds received
      from the sale of those shares; and

·
    Category-III
      beneficiarieswill not be entitled to receive any distributions unless they enter into a
      separate settlement agreement with the trustee. In the absence of an
      agreement, any sale proceeds that would otherwise be allocated to a
      Category-III beneficiary will be given to the American Red Cross in the
      name of the Category-III beneficiary.

***Trustee
fees***The
trustee will not charge the claim processing fees provided for in the original
agreement, but will receive a fixed salary of $20,000 per month until the
Bankruptcy Court delivers a certified shareholders list and the trustee
completes the beneficiary classification process. Thereafter, the trustee will
receive a variable administrative fee equal to 2% of the net proceeds (after
brokerage commissions and other direct expenses) from the sale of trust assets
to pay creditors’ claims and provide cash distributions to beneficiaries. All
payments to the trustee will be treated as an operating expense of the trust and
financed from the sale of assets.

***Books,
records and reporting***The
trustee is required to keep adequate books and records of the trust in
accordance with generally accepted accounting principles. Within 90 days after
the end of each calendar year the trustee is required to deliver an audited
annual report to the Category-II beneficiaries. In addition to the audited
annual report, the trustee is required to deliver an unaudited quarterly report
to the Category II beneficiaries within 45 days after the end of interim fiscal
quarter.

***Binding
arbitration of disputes***The
trust agreement authorizes the trustee to refer any disputes between our
company, the trustee and the beneficiaries to binding arbitration. If
arbitration is required, the party whose actions necessitated the arbitration
will be required to pay the reasonable attorney’s fees incurred by trustee,
together with any other disbursements, expenses, losses, costs and damages
resulting from such actions.

***Trustee’s
power to vote***The trust
agreement requires the trustee to vote the shares held by the trust
proportionally with the votes actually cast by persons other than the trust,
thereby insuring the presence of a quorum at all stockholder meetings while
preventing the trustee from exercising voting control over our
company.

***Amendments
of trust agreement***With the
consent of the trustee which may not be unreasonably withheld, the trust
agreement may be amended at any time at the request of our company, the trustee,
the OSC or the SEC, provided that no amendment may reduce, diminish or qualify
the rights, privileges and preferences of the Category-I and Category-II
beneficiaries or the trustee.

**ITEM
2. — DESCRIPTION OF PROPERTY**

All of
our operations are conducted at our research and development center located at
100 Caster Avenue in Vaughan, a suburb of Toronto, Ontario, Canada. Mega-C
originally leased the property for a minimum term of 36 months under a
commercial lease that provides for monthly rental of $5,000. We rent the
facility from Mega-C on a month-to-month basis for a rental equal to the lease
payment. Our research and development center includes approximately 14,000
square feet of floor space, including 5,000 square feet of management,
administrative and engineering offices, 5,000 square feet of manufacturing
facilities and 4,000 square feet of research laboratories.

We
presently conduct all of our manufacturing functions at our research and
development center in Vaughan, and we have the capacity necessary for the small
scale manufacturing of the e3Supercells
that will be used in our evaluation and testing programs. We believe our
existing manufacturing facilities will be suitable for our anticipated needs
until we complete our preliminary product testing. When we are ready to commence
second-stage testing, we will need to acquire or build a dedicated manufacturing
facility for our Pilot e3Supercells.We
believe that suitable facilities are and will continue to be available within a
reasonable distance from our Vaughan research and development center.There is
no assurance that we will have adequate financial resources to pay the costs of
acquiring such a facility.

**ITEM
3. — LEGAL PROCEEDINGS**

On
February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor,
Elgin Investments, Inc. and Mega-C Technologies, Inc. filed a lawsuit in the
Ontario Superior Court of Justice Commercial List (Case No. 04-CL-5317) that
named our company, Axion (Ontario), 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 And T Co. Incorporated,
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.

With
respect to our company, this lawsuit alleges a broad conspiracy to damage the
value of the plaintiffs’ investment in Mega-C and deprive the plaintiffs of
their alleged interests in our technology. We believe the lawsuit is without
merit and was filed for the sole purpose of blaming someone else for Mega-C’s
business failure. On February 4, 2005, the Bankruptcy Court appointed an
independent trustee to manage Mega-C’s reorganization and pursue Mega-C’s claims
against the individuals who were responsible for its business failure.
Concurrently, the Court stayed all litigation pending a report from the trustee
respecting the impact of the lawsuit on Mega-C’s Chapter 11 case. We believe
that future proceedings in the Chapter 11 case are likely to resolve the key
factual issues surrounding Mega-C’s business failure; minimize our involvement
in the process; and minimize the potential for future litigation against us.
Therefore, we do not expect legal fees and litigation costs to be a substantial
element of our go-forward operating budget. While the court could find that our
creation of the Mega-C Trust was not reasonable compensation for the potential
equitable rights held by Mega-C’s shareholders, we believe that risk is
inconsequential. We have offered to provide a coordinated legal defense for all
individual defendants who agree to be represented by our law firm. Any named
defendant will be free to retain independent legal counsel, but we will not
advance the costs of separate legal counsel. We have not agreed to indemnify any
party against damage awards rendered against them or amounts paid in settlement
of claims.

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

No
matters were submitted to a vote of the stockholders during the fourth quarter
of the fiscal year ended December 31, 2004.

**PART
II**

**ITEM
5. — MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS**

**Securities
outstanding and holders**

The
following equity securities and stock purchase rights were issued and
outstanding on the date of this report.

**Common
      stock**
    14,536,933
      shares, including 7,827,500 shares held in by the Mega-C Trust;**Preferred
      stock**
    381,000
      shares presently convertible into 1,800,417 shares of common
      stock;**Warrants**
    3,129,700
      warrants exercisable at a weighted average price of $2.26 per share;**Stock
      options**
    876,350
      options, including 383,300 vested options exercisable at a weighted
      average price of $1.33 per share and 493,050 unvested options that will be
      exercisable at a weighted average price of $4.14 per
  share.

There are
337 record holders of common stock and approximately 3 million shares are held
in street name for the accounts of an indeterminate number of beneficial owners.
There are 17 holders of preferred stock.

**Market
Information**

During
our first year of operations, our stock was only quoted on the OTC Pink Sheets.
While our stock has been quoted on the OTC Bulletin Board since January 20, 2005
(Symbol: AXPW), trading has been sporadic, trading volumes have been low and the
market price has been volatile.Over the
past 15 months, the quoted price of our common stock varied from a low of $2.50
to a single transaction high of $12.00. The market for our shares remains
volatile and both prices and trading volumes vary significantly from day to day.
On March 29 2004, the quoted bid and asked prices were $2.60 and $2.40 per
share, respectively.

**Dividend
policy**

We have
never paid cash dividends on our common stock and do not intend to pay cash
dividends in the foreseeable future. Our company is not likely to pay cash
dividends for an extended period of time, if ever. You should not subscribe to
purchase our shares if you require current income from your
investments.

**Securities
authorized for issuance under equity compensation plans**

The
following table provides summary information on our equity compensation plans as
of the date of this report.

**Equity
      Compensation Plan Information****Plan
      category**
    
    **Number
      of shares to be issued upon exercise of outstanding options, warrants and
      rights**
    
    **Weighted-average
      exercise price of outstanding options, warrants and
      rights**
    
    **Number
      of shares available for future issuance under equity compensation plans****Equity
      compensation plans approved by stockholders**2004
      Incentive Stock Plan
    
    
    
    
    
    43,150
    
    
    
    
    $
    4.20
    
    
    
    
    
    956,8502004
      Directors' Option Plan
    
    
    
    
    
    54,000
    
    
    
    
    $
    4.48
    
    
    
    
    
    71,000**Equity
      compensation plans not approved by stockholders**Contractual
      option grants to officers, consultants and attorneys
    
    
    
    
    
    779,200
    
    
    
    
    $
    2.73**Total
      equity awards**
    
    
    
    
    
    876,350
    
    
    
    
    $
    2.91
    
    
    
    
    
    1,027,850

In
January 2004, members of the law firm of Petersen & Fefer were granted a
contractual option to purchase 189,300 shares of our common stock at a price of
$2.00 per share as partial compensation for services rendered. In August 2004,
the exercise price of the options was reduced to $1.00 per share for their
remaining term. The options are fully vested and may be exercised at any time
prior to December 31, 2005.

In March
2005, members of the law firm of Petersen & Fefer were granted an additional
contractual option to purchase 140,000 shares of our common stock at a price of
$1.00 per share as partial compensation for services rendered. The options are
fully vested and may be exercised at any time prior to March 15,
2007.

In
connection with the execution of a four-year employment agreement, our chief
executive officer Charles Mazzacato was granted a non-plan option to purchase
240,000 shares of our common stock at a price of $4.00 per share. This option
will vest at the rate of 60,000 shares per year commencing July 1, 2005 and be
exercisable for a period of five years after each vesting date.

In
connection with the execution of a four-year employment agreement, our chief
financial officer Peter Roston was granted a non-plan option to purchase 200,000
shares of our common stock at a price of $4.00 per share. This option will vest
at the rate of 50,000 shares per year commencing July 1, 2005 and be exercisable
for a period of five years after each vesting date.

**Recent
Sales of Unregistered Securities**

***Fourth
quarter stock sales***In the
fourth quarter of 2004, we sold 427,433 shares of common stock for cash proceeds
of $641,150 in the following transactions:

·
    66,800
      shares were sold to three directors of our company at a price of $1.50 per
      share upon the exercise of outstanding investor warrants;

·
    313,933
      shares were sold to 10 investors in November 2004 at a price of $1.50 per
      share in a transaction that was initiated by our board and structured as a
      voluntary cash call; and

·
    46,700
      shares were sold to three directors of our company and one founder of
      Axion (Ontario) in December 2004 at a price of $1.50 per share.

The
fourth quarter stock sale transactions were exempt under Section 4(2) of the
Securities Act. Our securities were issued to a total of eleven investors,
including four directors of our company, six other who had purchased our
securities in connection with the business combination between Tamboril and
Axion Ontario and one new stockholder. The eight investors who are citizens or
residents of the United States are accredited investors as defined in Rule 501
of Regulation D. Each purchaser was provided with information analogous to the
information that would have been required in a registration statement under the
Securities Act. We did not use any form of advertising or general solicitation
in connection with the sale of these securities. The securities are
non-transferable in the absence of an effective registration statement under the
Act, or an available exemption therefrom, and all certificates are imprinted
with a restrictive legend to that effect.

***Augmentation
of Mega-C Trust***In
February 2005, we issued 500,000 shares of our common stock to the Mega-C Trust.
For accounting and financial reporting purposes, the stock issuance transaction
will be valued at $1,000,000, or $2 per share, which will be charged to expense
in the first quarter of 2005. After giving effect to the transaction, the Mega-C
Trust owns 7,827,500 shares, or approximately 54.1% of our issued and
outstanding common stock. The augmentation of the Mega-C Trust was a negotiated
private placement transaction that was exempt under Section 4(2) of the
Securities Act. Our securities were issued to a special purpose entity that was
created by our company in December 2003 and owns over half of our outstanding
securities. In connection with the transaction, the Trustee of the Mega-C Trust
was provided with information analogous to the information that would have been
required in a registration statement under the Securities Act. We did not use
any form of advertising or general solicitation in connection with the
transaction. The securities issued to the Mega-C Trust are not transferable in
the absence of an effective registration statement under the Act, or an
available exemption therefrom, and all certificates issued to the Mega-C Trust
are imprinted with a restrictive legend to that effect.

***Preferred
stock offering***In March
2005, we sold 381,000 shares of preferred stock at a price of $10 per share.
After deducting offering expenses and commissions, the net proceeds of the
preferred stock offering included $2,775,000 in cash and $1,000,000 in debt
settlements. Each share of preferred stock is presently convertible into 5
shares of common stock, provided that the conversion value of the preferred
stock will be increased to the extent of any unpaid dividends and the conversion
price may be decreased if we encounter unexpected delays in our planned
registration of the underlying common stock. The preferred stock transactions
were exempt under Section 4(2) of the Securities Act. Our securities were issued
to a total of 17 investors, including six shareholders of C&T, three
directors of our company, two adult children of directors; four current
stockholders of our company; and two new investors. The seven investors who are
citizens or residents of the United States are accredited investors as defined
in Rule 501 of Regulation D. Each purchaser was provided with information
analogous to the information that would have been required in a registration
statement under the Securities Act. We did not use any form of advertising or
general solicitation in connection with the sale of these securities. The
securities are non-transferable in the absence of an effective registration
statement under the Act, or an available exemption therefrom, and all
certificates are imprinted with a restrictive legend to that
effect.

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

*The
following discussion of the financial condition and results of operations of our
company should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Please
see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”
elsewhere in this report.*

**Overview**

We had no
revenues and incurred net losses of ($2,908,118) and ($506,300) respectively,
during the years ended December 31, 2004 and 2003. We do not expect to generate
revenue for a period of 18 to 24 months from the date of this
report.

We had
net stockholders’ equity of $1,293,871 at December 31, 2004 and recently
received $3,775,000 in net proceeds from a private placement of preferred stock.
We believe our available financial resources and the anticipated proceeds from
the exercise of certain warrants will be sufficient to finance our operations
for a period of 9 to 12 months from the date of this report. We will probably
not be able to complete the development of Application Prototypes or begin
production of Pilot e3Supercell
power systems without substantial additional funds from the sale of securities
or other sources. We believe we will need at least $10 million in additional
capital before we can begin production of Pilot e3Supercells;
however, capital requirements are difficult to plan in companies that are
developing new products. We expect that we will need additional capital to pay
the expenses of our research and testing activities, pay our day-to-day
operating costs, finance additions to our infrastructure, pay for the
development of manufacturing capabilities and the testing of our proposed
products, pay for the development of a sales and marketing organization and
finance the acquisition of complimentary assets, technologies and businesses. We
intend to pursue additional financing as opportunities arise.

**Results
of Operations**

***No
revenue***We have
no revenue generating assets or business activities. We will not generate
revenue from the sale of products until we complete the development and testing
activities described in this report. While we expect to generate modest revenues
from the sale of Pilot e3Supercells,
the amount and timing of future revenues are uncertain. We do not expect to
generate revenue from the sale of products for 18 to 24 months.

***Increasing
net losses***During
the fourth quarter of 2003 and the first three quarters of 2004 we incurred
selling, general and administrative expenses, research and development expenses
and net losses as follows:

**Fourth**
      **Quarter**
      **2003**
    
    **First**
      **Quarter**
      **2004**
    
    **Second**
      **Quarter**
      **2004**
    
    **Third**
      **Quarter**
      **2004**
    
    **Fourth**
      **Quarter**
      **2004**Selling,
      general and administrative
    
    $
    252,865
    
    $
    311,350
    
    $
    400,857
    
    $
    356,191
    
    $
    307,663Research
      and development
    
    $
    253,435
    
    $
    281,629
    
    $
    365,736
    
    $
    428,591
    
    $
    475,834Net
      loss
    
    $
    (506,300
    )
    $
    (592,979
    )
    $
    (766,592
    )
    $
    (784,782
    )
    $
    (763,765
    )

A
detailed breakdown of our selling, general and administrative expenses over the
last four fiscal quarters is set forth in the following table:

**Fourth**
      **Quarter**
      **2003**
    
    **First**
      **Quarter**
      **2004**
    
    **Second**
      **Quarter**
      **2004**
    
    **Third**
      **Quarter**
      **2004**
    
    **Fourth**
      **Quarter**
      **2004**Legal
      fees and expenses
    
    $
    252,865
    
    $
    118,116
    
    $
    55,560
    
    $
    82,416
    
    $
    114,723Directors
      and officers compensation
    
    
    0
    
    
    36,776
    
    
    168,541
    
    
    84,639
    
    
    79,820Administrative
      staff expenses
    
    
    0
    
    
    78,225
    
    
    91,438
    
    
    34,536
    
    
    119,801Exchange
      Act compliance and reporting
    
    
    0
    
    
    45,749
    
    
    54,475
    
    
    123,911
    
    
    64,629Facilities,
      utilities and maintenance
    
    
    0
    
    
    32,484
    
    
    30,843
    
    
    30,689
    
    
    31,755

***Litigation
costs***Over the
last 18 months, we have spent over $600,000 on legal fees to defend nuisance
litigation that was instituted by a group of Mega-C’s promoters. On February 4,
2005, the Bankruptcy Court appointed an independent trustee to manage Mega-C’s
reorganization and pursue Mega-C’s claims against the individuals who were
responsible for its business failure. Concurrently, the Court stayed all
litigation pending a report from the trustee respecting the impact of the
lawsuit on Mega-C’s Chapter 11 case. While the Mega-C Trust will sell shares of
our stock for the purpose of financing Mega-C’s reorganization, we have no duty
to underwrite or pay the costs of resolving Mega-C’s problems. We believe that
future proceedings in the Chapter 11 case are likely to resolve the key factual
issues surrounding Mega-C’s business failure; minimize our involvement in the
process; and minimize the potential for future litigation against us. Therefore,
we do not expect legal fees and litigation costs to be a substantial element of
our go-forward operating budget. While the court could find that our creation of
the Mega-C Trust was not reasonable compensation for the potential equitable
rights held by Mega-C’s shareholders, we believe that risk is
inconsequential.

***Non-cash
compensation***We expect
to incur substantial non-cash expenses for equity compensation awards to our
officers, employees and others. In August 2004 we signed employment agreements
with Charles Mazzacato and Peter Roston. In connection with these agreements, we
granted Mr. Mazzacato an option to purchase 240,000 shares and we granted Mr.
Roston an option to purchase 200,000 shares. Both options provide for an
exercise price of $4.00 per share and vest over a period of four years from the
grant date. The estimated fair value of these options, determined using the
Black-Scholes option-pricing method, together with the estimated fair value of
any additional options we issue in the future will be charged to expense over
the option vesting period. These non-cash charges are likely to significantly
increase our reported operating expenses and losses for an extended period of
time.

***Non-financial
metrics***We do not
presently use any non-financial metrics as indicators of our current and future
financial condition and operating performance.

***Outlook
for 2005***After
giving effect to known and anticipated operating conditions and our current
operating plans, the following table summarizes our anticipated cash outlays,
anticipated non-cash expenses and anticipated operating losses for each of the
next four fiscal quarters.

**First**
      **Quarter**
    
    **Second**
      **Quarter**
    
    **Third**
      **Quarter**
    
    **Fourth**
      **Quarter**Anticipated
      cash outlays
    
    $
    743,750
    
    $
    990,000
    
    $
    1,089,000
    
    $
    1,197,900Anticipated
      non-cash expenses
    
    
    56,250
    
    
    56,250
    
    
    56,250
    
    
    56,250Anticipated
      net loss
    
    $
    (800,000
    )
    $
    (1,046,250
    )
    $
    (1,145,250
    )
    $
    (1,254,150
    )

Our cash
outlays and operating losses over the next four quarters may be significantly
higher than current estimates because of unforeseen developments. While our
limited operating history makes it difficult for us to predict future operating
results, we expect to incur ongoing losses of increasing magnitude for the
foreseeable future.

**Liquidity
and Capital Resources**

Since
inception, we have financed our operations through private sales of equity
securities. We raised $1.9 million in capital during 2003 and $2.6 million in
capital during 2004. During our first 18 months of operations, our financing
activities kept pace with our operating expenditures but our working capital was
very limited. At December 31, 2004, we had $61,486 in current assets and
$1,744,258 in current liabilities, including a $1 million obligation payable to
C&T, which left us with a working capital deficit of
($1,682,780).

***Sale
of preferred stock***In March
2005, we sold 381,000 shares of preferred stock and 503,500 common stock
purchase warrants in private placement transactions. The proceeds of the
preferred stock sale included $2.8 million in cash and a $1 million settlement
of our obligation payable to C&T.

***Short-term
warrants***In 2003
and 2004, we issued short-term warrants that provide for substantial increases
in the exercise prices of any warrants that are not exercised within 30 days
after the effective date of a registration statement for the underlying common
stock. A total of 829,900 short-term warrants are outstanding at the date of
this report. The following table provides summary information on our outstanding
short-term warrants.

**Warrant**
    
    **Number
      of**
    
    **Until
      Step-Up Date**
    
    **After
      Step-Up Date****Series**
    
    **Warrants**
    
    **Price**
    
    **Proceeds**
    
    **Price**
    
    **Proceeds**Series
      I
    
    
    350,300
    
    $
    1.50
    
    $
    525,450
    
    $
    2.00
    
    $
    700,600Series
      II
    
    
    225,000
    
    $
    3.00
    
    $
    675,000
    
    $
    4.00
    
    $
    900,000Series
      III
    
    
    254,600
    
    $
    4.00
    
    $
    1,018,400
    
    $
    5.00
    
    $
    1,273,000

Since we
intend to file a registration statement for the shares of common stock
underlying the short-term warrants within 30 days from the date of this report,
and all of the short-term warrants will expire seven months after the effective
date of our planned registration statement, we believe those warrants are likely
to be a material source of short-term liquidity for our company.

***Long-term
warrants***In
addition to our short-term warrants, we have issued two series of warrants that
have longer exercise periods. A total of 1,796,300 capital warrants were issued
in connection with the business combination between Tamboril and Axion
(Ontario), are presently exercisable at an average price of $1.94 per share, and
will expire 19 months after the effective date of our planned registration
statement for the common stock underlying the warrants. In addition, 503,500
warrants were issued in connection with our recent private placement of
preferred stock, are presently exercisable at a price of $2 per share, and will
expire on the second anniversary of the issue date.

***Outlook
for 2005***We
believe our available financial resources and the anticipated proceeds from the
exercise of certain warrants will be sufficient to finance our operations for a
period of 9 to 12 months from the date of this report. We will probably not be
able to complete the development of Application Prototypes or begin production
of Pilot e3Supercell
power systems without substantial additional funds from the sale of securities
or other sources. We are presently seeking additional capital.

**Contractual
Obligations**

We have
contractual obligations that may affect our financial condition. The following
table summarizes our significant contractual obligations as of the date of this
memorandum:

**Total**
    
    **Less
      than**
      **1 year**
    
    **1
      to 3**
      **years**
    
    **3
      to 5**
      **years**
    
    **More than**
      **5 years**Long
      term debt, capital lease and
      operating
      lease obligations
    
    $
    0
    
    $
    0
    
    $
    0
    
    $
    0
    
    $
    0Employment
      contracts
    
    
    700,000
    
    
    175,000
    
    
    350,000
    
    
    175,000Total
    
    $
    700,000
    
    $
    175,000
    
    $
    350,000
    
    $
    175,000
    
    $
    0

**Off-Balance
Sheet Arrangements**

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

**Critical
Accounting Policies and Estimates**

Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The preparation of our
financial statements requires us to make certain estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Our estimates, judgments and
assumptions are continually re-evaluated based upon available information and
experience. Because of the use of estimates inherent in the financial reporting
process, actual results could differ from those estimates. Areas in which
significant judgment and estimates are used include, but are not limited to,
notes receivable and equity-based compensation.

***Technology
acquisition***We agreed
to purchase the E3Cell
technology from C&T for $1.8 million in cash and deferred payments, plus
1,562,900 capital warrants. In order to insulate our company and protect the
E3Cell
technology from potential claims by Mega-C’s creditors and shareholders, we
contributed 7,327,500 shares of common stock to the Mega-C Trust. A group of
Mega-C promoters vigorously opposed these actions and filed a lawsuit against
Mega-C, our company and 31 other named defendants in February 2004. Over the
last 16 months, we have spent over $650,000 on legal fees and advanced over
$1,200,000 to Mega-C for administrative and litigation expenses. In connection
with recent amendments to the trust agreement, we contributed 500,000 additional
shares to the trust and have agreed to contribute $100,000 in cash from the
proceeds of this offering. We expect to recover the bulk of our cash advances in
connection with Mega-C’s Chapter 11 case and believe a substantial number of
shares held by the Mega-C Trust may be returned to us for cancellation.
Nevertheless the total cost of buying and defending the E3Cell
technology has been far greater than the amount shown in our financial
statements.

***Notes
receivable***We review
the recoverability of our assets including notes receivable, equipment, goodwill
and patents, when events or changes in circumstances occur that indicate that
the carrying value of the asset may not be recoverable. The assessment of
possible impairment is based on our 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 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. Our 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. Our financial statements
include notes receivable from Mega-C that totaled $739,100 at September 30,
2004. In connection with Mega-C’s Chapter 11 reorganization, we expect to be
classified as a general unsecured creditor. While we believe Mega-C’s assets
will be sufficient to satisfy our claims, the reported values may be subject to
impairment based on future events.

***Equity-based
compensation***We have
adopted the fair value method of accounting for employee stock options contained
in Statement of Financial Standards No.123 "Accounting for Stock-Based
Compensation," which is considered the preferred method of accounting for
stock-based employee compensation. All employee stock options granted subsequent
to January 1, 2003 will be expensed over the stock option vesting period based
on fair value, determined using the Black-Scholes option-pricing method, at the
date the options were granted. Previously, we accounted for employee stock
options using the intrinsic value method of APB 25.

***Internal
controls***In
connection with the preparation of our Report on Form 10-QSB for the period
ended September 30, 2004, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. The evaluation was
conducted under the supervision and with the participation of our chief
executive officer and our chief financial officer. Based on that evaluation, our
company’s management including our chief executive officer and our chief
financial officer concluded that the design of our system of disclosure controls
and procedures was effective to ensure that material information relating to our
company is made known to them and that our system of disclosure controls and
procedures is operating to provide a reasonable level of assurance that
information required to be disclosed in our reports is recorded, processed,
summarized and reported in a timely manner. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls between the date of our evaluation and the date of this
memorandum.

**Quantitative
and Qualitative Disclosures Regarding Market Risk**

Historically,
we have been exposed to immaterial levels of market risk and have not been
significantly exposed to fluctuations in currency exchange rates. However, our
financial statements are reported in U.S. dollars and the functional currency of
Axion (Ontario) is the Canadian dollar. Our financial statements reflected a
cumulative currency translation adjustment of $35,064 as of September 30, 2004.
We believe the bulk of our future expenses and a substantial portion of any
future revenues are likely to be denominated in currencies other than the U.S.
dollar, thereby increasing our exposure to exchange rate gains and losses on
non-U.S. currency transactions. We do not currently enter into forward exchange
contracts to hedge exposure denominated in foreign currencies or any other
derivative financial instruments for trading or speculative purposes. In the
future, if we believe our currency exposure merits, we may consider entering
into transactions to help mitigate that risk.

Our cash
is invested in bank deposits denominated in U.S. dollars and Canadian dollars.
The carrying value of these cash equivalents approximates fair market value. Our
investments are subject to interest rate risk, which is the risk that our
financial condition and results of operation could be adversely affected due to
movements in interest rates. Given our historically low cash balances, however,
we believe interest rate risks are immaterial.
**ITEM
7.****FINANCIAL
STATEMENTS.**

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

**Audited
      Financial Statements:**
    
    **Page**Report
      of Michael F. Cronin, CPA on financial statements for the years ended
      December 31, 2004 and 2003
    
    34Consolidated
      Balance Sheet as of December 31, 2004
    
    35Consolidated
      Statement of Operations for the years ended
      December
      31, 2004 and 2003, and the period from Inception through December 31,
      2004
    
    36Consolidated
      Statement of Cash Flow for the years ended
      December
      31, 2004 and 2003, and the period from Inception through December 31,
      2004
    
    37Consolidated
      Statement of Changes in Stockholders’ Equity for the years ended December
      31, 2004 and 2003
    
    38Summary
      of Significant Accounting Policies
    
    39Notes
      to Consolidated Financial Statements
    
    43
**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**


**Michael
F. Cronin**


**Certified
Public Accountant**


**687
Lee Road**


**Rochester,****NY****14606**





Board of
Directors and Shareholders


Axion
Power International, Inc.


Vaughan,
Ontario


I have
audited the accompanying consolidated balance sheet of Axion Power
International, Inc. (the "Company") as of December 31, 2004 and December 31,
2003 and the related statements of operations, stockholders' equity and cash
flows for the years then ended. The financial statements are the responsibility
of the directors. My responsibility is to express an opinion on these financial
statements based on my audits.

I
conducted my audits in accordance with auditing standards established by the
Public Company Accounting Oversight Board. Those standards require that I plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor was I engaged to perform, an audit of its internal control
over financial reporting. My 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, I express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. I believe that my audits provide a
reasonable basis for my opinion.

In my
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Axion Power
International, Inc. as of December 31, 2004 and December 31, 2003 and the
results of its operations, its cash flows and changes in stockholders' equity
for the years then ended in conformity with accounting principles generally
accepted in the United States.




March 28,
2005

/s/
      Michael F. CroninMichael
      F. CroninCertified
      Public Accountant











**Axion
      Power International, Inc.****Consolidated
      Balance Sheet****(A
      Development Stage Company)****December
      31,****2004**
    
    **2003***Assets*Current
      AssetsCash
      & cash equivalent's
    
    $
    46,486
    
    $
    455,369Refundable
      Taxes
    
    
    8,848
    
    
    0Prepaid
      expenses
    
    
    6,144
    
    
    0Total
      current assets
    
    
    61,478
    
    
    455,369Property
      & equipment (net)
    
    
    97,606
    
    
    0Other
      Assets:Amortizable
      intangible assets
    
    
    126,522
    
    
    0Notes
      receivable
    
    
    958,523
    
    
    388,148Contingent
      future interest in affiliate company
    
    
    1,794,000
    
    
    1,794,000Total
      Assets
    
    $
    3,038,129
    
    $
    2,637,517*Liabilities
      & Equity*Current
      Liabilities:Accounts
      payable
    
    $
    579,066
    
    $
    88,000Accrued
      expenses
    
    
    64,692
    
    
    0Balance
      payable to acquire future interest in affiliate company
    
    
    100,500
    
    
    159,000Contingent
      portion payable to acquire future interest in affiliate
      company
    
    
    1,000,000
    
    
    1,000,000Total
      current liabilities
    
    
    1,744,258
    
    $
    1,247,000Equity:Preferred
      stock-12,500,000 authorized-none issuedCommon
      stock-50,000,000 authorized $0.0001 par value13,962,933
      issued & outstanding (12,614,152 in 2003)
    
    
    1,396
    
    
    1,261Additional
      paid in capital
    
    
    4,670,497
    
    
    1,895,557Deficit
      accumulated during development stage
    
    
    (3,414,418
    )
    
    (506,300
    )Cumulative
      translation adjustment
    
    
    36,396
    
    
    0Total
      Equity
    
    
    1,293,871
    
    
    1,390,518Total
      Liabilities & Equity
    
    $
    3,038,129
    
    $
    2,637,518**See
      Summary of Significant Accounting Policies and Notes to Financial
      Statements**

**Axion
      Power International, Inc.****Consolidated
      Statement of Operations****(A
      Development Stage Company)****Years
      Ended December 31,**
    
    **Inception
      (September 30, 2003) through**
      **December
      31, 2004****2004**
    
    **2003**Net
      Sales
    
    $
    0
    
    $
    0
    
    $
    0Selling,
      General & Administrative Expenses
    
    
    1,376,031
    
    
    252,865
    
    
    1,628,896Research
      & Development
    
    
    1,551,790
    
    
    253,435
    
    
    1,805,225Other
    
    
    (19,703
    )
    
    0
    
    
    (19,703
    )(Loss)
      Before Income Taxes
    
    
    (2,908,118
    )
    
    (506,300
    )
    
    (3,414,418
    )Income
      Taxes
    
    
    0
    
    
    0Deficit
      accumulated during development stage
    
    $
    (2,908,118
    )
    $
    (506,300
    )
    $
    (3,414,418
    )Basic
      and Diluted Net Loss Per Share
    
    $
    (0.22
    )
    $
    (0.17
    )Weighted
      Average Common Shares Outstanding
    
    
    13,180,689
    
    
    3,002,515**See
      Summary of Significant Accounting Policies and Notes to Financial
      Statements**


























**Axion
      Power International, Inc.****Consolidated
      Statement of Cash Flows****(A
      Development Stage Company)****Years
      Ended December 31,**
    
    **Inception
      (September 30, 2003) through**
      **December
      31, 2004****2004**
    
    **2003**Cash
      Flows from Operating Activities:Deficit
      accumulated during development stage
    
    $
    (2,908,118
    )
    $
    (506,300
    )
    $
    (3,414,418
    )Adjustments
      required to reconcile net loss to cash flows from operating
      activities:Depreciation,
      amortization
    
    
    23,031
    
    
    0
    
    
    23,031Options
      issued for services
    
    
    18,225
    
    
    0
    
    
    18,225Changes
      in Operating Assets & LiabilitiesPrepaid
      expenses
    
    
    (14,993
    )
    
    0
    
    
    (14,993
    )Accounts
      payable & accrued expenses
    
    
    691,588
    
    
    88,000
    
    
    779,588Net
      cash used by operating activities
    
    
    (2,190,267
    )
    
    (418,300
    )
    
    (2,608,567
    )Cash
      Flows from Investing Activities:Purchase
      of equipment
    
    
    (120,637
    )
    
    0
    
    
    (120,637
    )Investment
      in Patents
    
    
    (126,522
    )
    
    
    
    
    (126,522
    )Incremental
      investments in notes receivable
    
    
    (570,372
    )
    
    (388,149
    )
    
    (958,521
    )Payments
      made on obligation to acquire affiliated company
    
    
    (59,000
    )
    
    (635,000
    )
    
    (694,000
    )Net
      cash used by investing activities
    
    
    (876,531
    )
    
    (1,023,149
    )
    
    (1,899,680
    )Cash
      Flows from Financing Activities:Proceeds
      from the exercise of warrants
    
    
    868,020
    
    
    
    
    
    868,020Proceeds
      from sale of Common Stock
    
    
    1,753,500
    
    
    1,896,818
    
    
    3,650,318Net
      cash provided by financing activities
    
    
    2,621,520
    
    
    1,896,818
    
    
    4,518,338Effect
      of Exchange Rate on Cash
    
    
    36,395
    
    
    0
    
    
    36,395Net
      Change In Cash
    
    
    (445,278
    )
    
    455,369
    
    
    10,091Cash-Beginning
    
    
    455,369
    
    
    0
    
    
    0Cash-Ending
    
    $
    46,486
    
    $
    455,369
    
    $
    46,486**See
      Summary of Significant Accounting Policies and Notes to Financial
      Statements**










**Axion
      Power International, Inc.****Consolidated
      Statement of Stockholders' Equity****(A
      Development Stage Company)****Preferred
      Stock**
    
    **Common
      Stock**
    
    
    
    **Other****Shares**
    
    **Par**
      **Value**
    
    **Shares**
    
    **Par**
      **Value**
    
    **Additional
      Paid-In Capital**
    
    **Deficit
      Accumulated During Development Stage**
    
    **Comprehensive
      Income Cumulative Translation Adjustments**Balance
      at December 31, 2002
    
    
    33,227
    
    $
    3
    
    
    834,790
    
    $
    83
    
    $
    6,283,486
    
    $
    (6,622,531
    )
    $
    0Conversion
      of Preferred Stock
    
    
    (33,227
    )
    
    (3
    )
    
    2,076,688
    
    
    208
    
    
    3,115Settlement
      of Debt
    
    
    
    
    
    
    
    
    250,000
    
    
    25
    
    
    199,975Cancellation
      of Shares
    
    
    
    
    
    
    
    
    (1,286,478
    )
    
    (129
    )
    
    129Acquisition
      of Axion Power & Effect of Reverse Merger
    
    
    
    
    
    
    
    
    10,739,152
    
    
    1,074
    
    
    (4,622,906
    )
    
    6,622,531Fair
      Value of Options Issued for Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,758Net
      Loss December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (506,300
    )Balance
      at December 31, 2003
    
    
    0
    
    
    0
    
    
    12,614,152
    
    
    1,261
    
    
    1,895,557
    
    
    (506,300
    )
    
    0Proceeds
      of Series II Private Placement
    
    
    
    
    
    
    
    
    175,000
    
    
    18
    
    
    349,983Proceeds
      of Series III Private Placement
    
    
    
    
    
    
    
    
    287,667
    
    
    29
    
    
    862,971Proceeds
      of Additional Private Placement
    
    
    
    
    
    
    
    
    361,000
    
    
    36
    
    
    540,464Proceeds
      From Exercise of Warrants
    
    
    
    
    
    
    
    
    475,200
    
    
    48
    
    
    1,173,972Fair
      Value of Options Issued for Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,225Fractional
      Shares Issued Upon Reverse
    
    
    
    
    
    
    
    
    49,914
    
    
    5
    
    
    (5
    )Private
      Placement offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170,670
    )Foreign
      Currency Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,396
    )Net
      Loss December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,908,118
    )Balance
      at December 31, 2004
    
    
    0
    
    
    0
    
    
    13,962,933
    
    $
    1,396
    
    $
    4,670,497
    
    $
    (3,414,418
    )
    
    ($36,396
    )**See
      Summary of Significant Accounting Policies and Notes to Financial
      Statements**

****
**AXION
POWER INTERNATIONAL, INC.**
**SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES**
**DECEMBER
31, 2004**


***Basis
of Presentation*****:**The
financial statements have been presented in a “development stage” format. Since
inception, our primary activities have been raising of capital, obtaining
financing and of developing and testing our primary products. We have not
commenced our principal revenue producing activities.

***Use
of Estimates:*******The
preparation of financial statements in conformity with generally accepted
accounting principles requires our 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.

***Cash
and Cash Equivalents:*******For
financial statement presentation purposes, we consider those short-term, highly
liquid investments with original maturities of three months or less to be cash
or cash equivalents.

***Fair
Value of Financial Instruments:*******Statements
of Financial Accounting Standards No. 107, "*Disclosures
about Fair Value of Financial Instruments*,"
requires disclosure of fair value information about financial instruments. Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2004. The
respective carrying value of certain on-balance sheet financial instruments
approximated their fair values.

These
financial instruments include cash and cash equivalents, accounts payable and
accrued expenses. Fair values were assumed to approximate carrying values for
these financial instruments since they are short-term in nature and their
carrying amounts approximate fair values or they are receivable or payable on
demand. The carrying value approximates the fair value of the notes
payable

***Property
and Equipment:*******Property
and equipment are recorded at cost. Depreciation is computed using the double
declining balance method over the estimated useful lives of the assets,
generally 5 years. 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.

***Valuation
of Long-Lived Assets:***We
review the recoverability of our long-lived assets, including buildings,
equipment and intangible assets, when events or changes in circumstances occur
that indicate that the carrying value of the asset may not be recoverable. The
assessment of possible impairment is based on our 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
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.
Our 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.

We
amortize the costs of other intangibles (excluding goodwill) over their
estimated useful lives unless such lives are deemed indefinite.Amortizable
intangible assets are tested for impairment based on undiscounted cash flows
and, if impaired, written down to fair value based on either discounted cash
flows or appraised values. Intangible assets with indefinite lives are tested
for impairment, at least annually, and written down to fair value as
required.

***Comprehensive
Income:***Comprehensive
income is defined as changes in the equity of an enterprise except those
resulting from shareholder transactions. The amounts shown on our consolidated
statement of stockholders’ equity relate to the cumulative effect of minimum
pension liabilities, translation adjustments, and unrealized gain or loss on
securities.

***Foreign
Currency Translation:*****We
translate assets and liabilities of our foreign subsidiary, where the functional
currency is the Canadian dollar, into US dollars at the December 31
exchange rate and record the related translation adjustments as a component of
other comprehensive income (loss). We translate revenues and expenses using
average exchange rates prevailing during the year. Foreign currency transaction
gains and losses are included in other (income) expense.

***Stock-Based
Compensation Plans:***We
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board, or APB, Opinion No. 25, “*Accounting
for Stock Issued to Employees*,” or APB
25, and related interpretations. Under APB 25, compensation cost is measured as
the excess, if any, of the closing market price of our stock at the date of
grant over the exercise price of the option granted. We recognize compensation
cost for stock options, if any, ratably over the vesting period. Generally, we
grant options with an exercise price equal to the closing market price of our
stock on the grant date. Accordingly, we have not recognized any compensation
expense for our stock option grants. We provide additional pro forma disclosures
as required under SFAS No. 123, “*Accounting
for Stock-Based Compensation*,” or
SFAS 123, as amended by SFAS No. 148, “*Accounting
for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB
Statement No. 123*,” or
SFAS 148, using the Black-Scholes pricing model. We charge the value of the
equity instrument to earnings and in accordance with FASB Interpretation No. 28,
“*Accounting**for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an
interpretation of APB Opinions No. 15 and 25*.”

We have
also granted restricted common stock awards to certain employees and officers
with a purchase price of $4.00 per share. Our restricted common stock awards
generally vest over a four-year period from the date of grant based on continued
service. We record to deferred compensation within stockholders’ equity the
aggregate amount by which the closing price of our common stock on the date of
grant exceeds the cash purchase price of the restricted common stock. Deferred
compensation associated with these grants is amortized to operating expenses
over the respective vesting term

***Earnings
per Common 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 assumes
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.

If we had
generated earnings during the year ended December 31, 2004, we would have added
1,619,874 common equivalent shares to the weighted average shares outstanding to
compute the diluted weighted average shares outstanding. There were no such
warrants or options that would have been required to be added to the weighted
shares in 2003.

**Year
      Ended December 31,******
    
    **2004**
    
    **2003**Numerator-Net
      Loss
    
    $
    (2,908,118
    )
    $
    (506,300
    )Denominator:Weighted
      average-Basic
    
    
    13,180,689
    
    
    3,002,515Assumed
      conversion warrants
    
    
    1,582,861
    
    
    0Assumed
      conversion employees & non-employee director plans
    
    
    13,898
    
    
    0Assumed
      conversion non-plan options
    
    
    23,115
    
    
    0Denominator-diluted
    
    
    14,800,563
    
    
    3,002,515Per
      share:Net
      Loss-basic
    
    $
    (0.22
    )
    $
    (0.17
    )Numerator-diluted
    
    $
    (0.20
    )
    $
    (0.17
    )

The
impact of options to purchase 50,400 shares of common stock were not included in
the computation of diluted net income per share at December 31, 2004 because the
exercise price of these options was greater than the average market price of a
share of common stock during 2004 and the inclusion of such options would have
been antidilutive.

2004
includes the impact of 490,350 shares of non-vested restricted common stock
awards.

***Income
Taxes:***We must
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and financial
statement purposes.

Deferred
income taxes are recorded in accordance with SFAS No. 109, “*Accounting
for Income Taxes*,” or
SFAS 109. Under SFAS No. 109, 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. SFAS 109 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not to occur.
Realization of our net deferred tax assets is dependent upon our 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. We have determined it more likely than
not that these timing differences will not materialize and have provided a
valuation allowance against substantially all of our net deferred tax asset.
Management will continue to evaluate the realizability of the deferred tax asset
and its related valuation allowance. If our assessment of the deferred tax
assets or the corresponding valuation allowance were to change, we would record
the related adjustment to income during the period in which we make the
determination. Our tax rate may also vary based on our results and the mix of
income or loss in domestic and foreign tax jurisdictions in which we operate.

In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and to the extent to which,
additional taxes will be due. If we ultimately determine that payment of these
amounts is unnecessary, we will reverse the liability and recognize a tax
benefit during the period in which we determine that the liability is no longer
necessary. We will record an additional charge in our provision for taxes in the
period in which we determine that the recorded tax liability is less than we
expect the ultimate assessment to be

***Research
and Development*****:**Costs
incurred in the research and development (covering basic scientific research and
the application of scientific advances to the development of new and improved
products and their uses) are expensed as incurred until technological
feasibility is established. We incur costs related to contracts we enter into
that outsource research and development to third party developers. Development
costs are capitalized beginning when a product’s technological feasibility has
been established and ending when the product is available for general release to
customers. Technological feasibility is reached when the product reaches the
working model stage. To date, all research and development costs have been
expensed.

***Recent
Accounting Pronouncements:***

In
December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based
Payment,” or SFAS No. 123(R). SFAS No. 123(R) revises FASB Statement No. 123
“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
and its related implementation guidance. This Statement eliminates the ability
to account for share-based compensation using the intrinsic value method under
APB Opinion No. 25. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award, known as the requisite service
period, which is usually the vesting period. SFAS No. 123(R) is effective for
companies filing under Regulation SB as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005, which for us will
be our first quarter of the year ending December 31, 2006. We anticipate
adopting SFAS No. 123(R) beginning in the quarter ending March 31, 2006.
Accordingly, the provisions of SFAS No. 123(R) will apply to new awards and to
awards modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the required
effective date must be recognized as the requisite service is rendered on or
after the required effective date. These new accounting rules will lead to a
decrease in reported earnings. Although our adoption of SFAS No. 123(R) could
have a material impact on our financial position and results of operations, we
are still evaluating the potential impact from adopting this
statement.

In
December 2003, the FASB released a revised version of Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FIN 46”) called FIN 46R, which
clarifies certain aspects of FIN 46 and provides certain entities with
exemptions from requirements of FIN 46. FIN 46R only slightly modified the
variable interest model from that contained in FIN 46 and did change guidance in
many other areas. We adopted FIN 46 during 2003. FIN 46R was adopted and
implemented in the first quarter of fiscal 2004 and had no impact on the
Company’s financial position or results of operations.

In
September 2004, the EITF reached a consensus regarding Issue No. 04-1,
"Accounting for Preexisting Relationships Between the Parties to a Business
Combination" ("EITF 04-1"). EITF 04-1 requires an acquirer in a business
combination to evaluate any preexisting relationship with the acquiree to
determine if the business combination in effect contains a settlement of the
preexisting relationship. A business combination between parties with a
preexisting relationship should be viewed as a multiple element transaction.
EITF 04-1 is effective for business combinations after October 13, 2004,
but requires goodwill resulting from prior business combinations involving
parties with a preexisting relationship to be tested for impairment by applying
the guidance in the consensus. We will apply EITF 04-1 to acquisitions
subsequent to the effective date and in our future goodwill impairment testing.


In
December 2004, the FASB issued FASB Staff Position No. FAS 109-2, or FAS 109-2,*“Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creations Act of 2004.”*The AJCA
introduces a limited time 85% dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer (repatriation provision),
provided certain criteria are met. FAS No. 109-2 provides accounting and
disclosure guidance for the repatriation provision. Although FAS 109-2 is
effective immediately, we have not begun our analysis and do not expect to be
able to complete our evaluation of the repatriation provision until after
Congress or the Treasury Department provides additional clarifying language on
key elements of the provision


In
December 2004, the FASB issued SFAS No. 153,*“Exchanges
of Nonmonetary Assets—an amendment of APB Opinion No. 29,”*which is
effective for us starting July 1, 2005. In the past, we were frequently required
to measure the value of assets exchanged in non-monetary transactions by using
the net book value of the asset relinquished. Under SFAS No. 153, we will
measure assets exchanged at fair value, as long as the transaction has
commercial substance and the fair value of the assets exchanged is determinable
within reasonable limits. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. The adoption of SFAS No. 153 is not anticipated to have
a material effect on our consolidated financial position, results of operations
or cash flows.


**AXION
POWER INTERNATIONAL, INC.**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**DECEMBER
31, 2004**


**1.
Organization and Operations**

Our
company was incorporated in Delaware on January 9, 1997 and operated a cigar
manufacturing and distribution business until late 1998. We were inactive from
January 1999 until December 2003.

Axion
Power Corporation, a Canadian Federal corporation (“Axion (Ontario)”), was
incorporated on September 18, 2003 for the purpose of licensing, developing and
commercializing a foundation technology for the production of asymmetrically
supercapacitive lead-acid-carbon energy storage devices that we refer to as
“e3Supercells.”
The original developer of the e3Supercell
technology was an Ontario corporation named C and T Co., Inc.
(“C&T”).

In
December 2003, we closed a business combination with Axion (Ontario) that was
structured as a reverse takeover of Axion (Ontario) coupled with a purchase of
the e3Supercell
technology from C&T. In connection with the business
combination:

·
    We
      issued 233,400 common stock purchase warrants in satisfaction of certain
      debts we owed to our former principal
stockholders;

·
    We
      issued 10,739,500 shares of common stock and 842,000 common stock purchase
      warrants in exchange for 100% of the outstanding securities of Axion
      (Ontario);

·
    C&T
      purchased 1,250,000 shares of common stock from our former principal
      stockholders;

·
    We
      purchased all of C&T’s interest in the e3Supercell
      technology for 1,592,600 common stock purchase warrants;
    and

·
    C&T
      reserved its rights to receive $1,794,000 in cash license fees provided
      for in the original agreement with Axion
(Ontario).

Of the
10,739,500 shares that we issued in exchange for the stock of Axion (Ontario),
7,327,500 shares, or 68.2%, were contributed to a special purpose trust (the
“Mega-C Trust”) that we established for the benefit of the creditors and
shareholders of Mega-C Power Corporation (“Mega-C”), a Nevada corporation that
was a prior licensee of our e3Supercell
technology. The remaining 3,412,000 shares were distributed among the
shareholders of Axion (Ontario). Immediately after the closing the Mega-C Trust,
the shareholders of Axion (Ontario) and the shareholders of C&T owned
approximately 95% of our outstanding shares.

For
financial reporting purposes, Axion was treated as the acquiring company and the
transaction accounted for as areverse
merger. Axion had substantially more assets (we had virtually no assets or
operating revenue). The financial statements contained herein are those of Axion
carried forward at historical cost. The consolidated financial statements for
the year ended December 31, 2003 include Axion's results of operations and cash
flows for the period from September 18, 2003 (the date of Axion's incorporation)
to December 31, 2003. The consolidated financial statements for the year ended
December 31, 2004 include our results of operations and cash flows for the
entire fiscal year.

**2.
Principles of Consolidation**

Our
consolidated financial statements include the accounts of two legal entities
Axion Power International, Inc., a Delaware corporation (formerly Tamboril Cigar
Company), and its wholly owned subsidiary, Axion (Ontario). All significant
inter-company balances and transactions have been eliminated in
consolidation.

**3.
Mega-C Trust**

TheMega-C
Trust is an irrevocable grantor trust that was established in connection with
the business combination between our company and Axion (Ontario). The original
corpus of the Mega-C Trust was 7,327,500 shares of the common stock that we
issued in exchange for the outstanding securities of Axion
(Ontario).

Mega-C
Trust was intended as an informal bankruptcy alternative that would pay Mega-C’s
debts; distribute our stock to Mega-C shareholders who purchased shares for cash
or held a small number of shares; and distribute cash to other Mega-C
shareholders who did not pay cash but were not involved in illegal activities.
Under the terms of the trust agreement, the trustee is authorized and required
to sell all or any portion of the trust assets and use the sale proceeds to pay
the claims of Mega-C’s creditors before any remaining assets are distributed to
or sold for the benefit of Mega-C’s shareholders. We have registered 7,327,500
shares under Securities Act to facilitate future sales and distributions by the
Mega-C Trust. These shares have a current market value in excess of $ 21
million.

**4.
Notes Receivable**

Our notes
receivable consist of non-interest bearing advances to Mega-C. In April 2004, we
filed an involuntary Chapter 11 bankruptcy petition against Mega-C in the U.S.
Bankruptcy Court for the District of Nevada. We have filed a proof of claim in
the Mega-C bankruptcy case and expect full payment of our notes receivable in
connection with that Chapter 11 reorganization proceeding.

**5.
Property and Equipment**

A summary
of property & equipment is as follows:

**Estimated
      useful life**
    
    **2004**
    
    **2003**Machinery
      & equipment
    
    
    5
      years
    
    $
    120,637
    
    $
    0Less
      accumulated depreciation
    
    
    
    
    
    23,031
    
    
    0Net
    
    
    
    
    $
    97,606
    
    $
    0Depreciation
      expense
    
    
    
    
    $
    23,031
    
    $
    0

**6.
Intangible Assets**

In
connection with our acquisition of the e3Supercell
technology and certain immaterial assets from C&T we assumed Axion
(Ontario)’s obligation to the balance of the license fees provided for in the
original development and license agreement between Axion (Ontario) and C&T.
During the year ended December 31, 2004, we spent $126,522 to solidify our
intellectual property position and secure additional patents, patent
applications, trade secrets, know-how and other intellectual property embodied
in the e3Supercell
technology. The following table summarizes the components of gross and net
intangible asset balances:

**Useful
      Life**
    
    **2004**
    
    **2003**Patents
    
    
    10
      years
    
    $
    126,522
    
    $
    0Accumulated
      amortization
    
    
    
    
    
    0
    
    
    0Net
      carrying value
    
    
    
    
    $
    126,522
    
    $
    0Actual
      and Expected Amortization for each of the next 5 years is as
      follows:Recognized
      amortization expense
    
    
    
    
    $
    0
    
    $
    0Expected
      amortization expense:2005
    
    
    
    
    $
    6,3262006
    
    
    
    
    
    12,6522007
    
    
    
    
    
    12,6522008
    
    
    
    
    
    12,6522009
    
    
    
    
    
    12,652

**7.
Stockholders' Equity**

**Description
of Securities**

***Common
Stock:***Our
certificate of incorporation authorizes the issuance of 50,000,000 shares of
common stock. In general, the holders of our 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.

Notwithstanding
the voting rights generally accorded to holders of our common stock, the trust
agreement for the Mega-C Trust requires the trustee to vote any shares held by
the Mega-C Trust proportionally with the votes actually cast at a meeting of our
stockholders by persons other than the Mega-C Trust, thereby insuring the
presence of a quorum at all stockholder meetings while preventing the trustee
from exercising voting control over our company.

Holders
of common stock are entitled to receive dividends when, as and if declared by
our board out of funds legally available. In the event of our liquidation,
dissolution or winding up, our 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. Our 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.

***Reverse
Stock Split:***On June
4, 2004, our shareholders approved the equivalent of a 1 for 16 reverse stock
split. The mechanics of the reverse split involved a two-stage process that
included a 1 for 1,600 reverse split followed immediately by a 100 for 1 forward
split. We did not issue scrip or purchase fractional shares for cash in
connection with the 1 for 1,600 reverse split. Instead, all calculations that
would have resulted in the issuance of a fractional share were rounded up to the
next whole number. Except as otherwise noted, all share, option and warrant
numbers have been restated to give retroactive effect to this reverse split. All
per share disclosures retroactively reflect shares outstanding or issuable as
though the reverse split had occurred January 1, 2003.

***Preferred
Stock:***Our
certificate of incorporation authorizes the issuance of 12,500,000 shares of a
blank check preferred stock. Our board of directors will have the power to
establish the designation, rights and preferences of any preferred stock we
issue in the future. Accordingly, our 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.

**Recent
Sales of Unregistered Securities**

Business
Combination Transaction and Reverse Take-Over ("RTO")

In
December 2003, we agreed to acquire Axion (Ontario). In preparation for the
acquisition:

·
    our
      former principal stockholders surrendered 1,286,478 shares of our common
      stock to us, without consideration, for the purpose of canceling those
      shares; and

·
    we
      issued 233,400 common stock purchase warrants to our former principal
      stockholders in settlement of $484,123 in accrued compensation and other
      related party debt.


On
December 31, 2003, we acquired approximately 86.7% of Axion (Ontario) in a
business combination that was structured as a reverse takeover. In connection
with the December closing, we issued 9,786,200 shares of common stock and
608,600 common stock purchase warrants to the former principal owners of the
outstanding securities of Axion(Ontario).

On
January 9, 2004, we acquired the remaining outstanding securities of Axion
(Ontario) in exchange for 953,400 additional shares and 233,400 additional
warrants. Concurrently, we issued 1,562,900 common stock purchase warrants to
the shareholders of C&T in connection with our purchase of the e3Supercell
technology and our former principal stockholders sold 1,250,000 shares to
C&T for $200,000.

Of the
10,739,600 shares that we issued in exchange for the stock of Axion (Ontario),
7,327,500 shares, or 68.2%, were contributed to the Mega-C Trust. The remaining
3,412,100 shares were distributed among the shareholders of Axion (Ontario).
Immediately after the January closing, the Mega-C Trust, the shareholders of
Axion (Ontario) and the shareholders of C&T owned approximately 95% of our
outstanding shares.

Post-RTO
Private Placements of Securities

During
the year ended December 31, 2004, we sold 823,733 shares of common stock and
463,100 warrants in private placement transactions that generated net proceeds
of $1,753,500. We also received net proceeds of $868,020 from the exercise of
475,200 outstanding warrants.

Summary
of Warrant Activity

The
following table provides summary information on the various warrants issued by
our company in private placement transactions; the warrants exercised to date;
the warrants that are presently exercisable****and the
current exercise prices of such warrants.

**Total**
      **Issued**
    
    **Previously**
      **Exercised**
    
    **Outstanding**
      **Balance**
    
    **Exercise**
      **Price**Capital
      Warrants
      (issued
      for debt settlement)
    
    
    
    
    
    233,400
    
    
    
    
    
    233,400
    
    $
    2.00Capital
      Warrants
      (issued
      for technology purchase)
    
    
    
    
    
    1,562,900
    
    
    
    
    
    1,562,900
    
    $
    2.00Series
      I Investor Warrants
      (issued
      December 2003)
    
    
    533,600Series
      I Investor Warrants
      (issued
      January 2004)
    
    
    133,400
    
    
    667,000
    
    
    316,700
    
    
    350,300
    
    $
    1.50Series
      II Investor Warrants
      (issued
      December 2003)
    
    
    75,000Series
      II Investor Warrants
      (issued
      January 2004)
    
    
    100,000Series
      II Investor Warrants
      (issued
      after January 2004)
    
    
    175,000
    
    
    350,000
    
    
    125,000
    
    
    225,000
    
    $
    3.00Series
      III Investor Warrants
      (issued
      after January 2004)
    
    
    
    
    
    288,100
    
    
    33,500
    
    
    254,600
    
    $
    4.00

Our
capital warrants are presently exercisable at a price of $2.00 per share. While
the original expiration date of the capital warrants was December 31, 2005, the
warrant agreements provide for an automatic extension of the expiration date
until the 19-month anniversary of the date we receive an order of effectiveness
for a Securities Act registration statement that covers the underlying common
stock.

Our
Series I Investor Warrants are presently exercisable at a price of $1.50 per
share. While the warrant agreements provide that the exercise price will
increase to $2.00 per share on the six-month anniversary of the issue date and
the warrants will expire on the one-year anniversary of the issue date, they
also provide for automatic extensions of the exercise price step-up and
expiration dates until the one month and seven month anniversaries of the date
we receive an order of effectiveness for a Securities Act registration statement
that covers the underlying common stock.

Our
Series II Investor Warrants are presently exercisable at a price of $3.00 per
share. While the warrant agreements provide that the exercise price will
increase to $4.00 per share on the six-month anniversary of the issue date and
the warrants will expire on the one-year anniversary of the issue date, they
also provide for automatic extensions of the exercise price step-up and
expiration dates until the one month and seven month anniversaries of the date
we receive an order of effectiveness for a Securities Act registration statement
that covers the underlying common stock.

Our
Series III Investor Warrants are presently exercisable at a price of $4.00 per
share. While the warrant agreements provide that the exercise price will
increase to $5.00 per share on the six-month anniversary of the issue date and
the warrants will expire on the one-year anniversary of the issue date, they
also provide for automatic extensions of the exercise price step-up and
expiration dates until the one month and seven month anniversaries of the date
we receive an order of effectiveness for a Securities Act registration statement
that covers the underlying common stock.

Other
Equity Compensation

In
January 2004, members of the law firm of Petersen & Fefer were granted a
contractual option to purchase 189,300 shares of our common stock at a price of
$2.00 per share as partial compensation for services rendered. In August 2004,
and in exchange for billed services, Petersen & Fefer agreed to accept
payment of a portion of their fees through a credit of $1.00 per share,
effectively reducing the amount due upon exercise to the exercise price of the
options to $1.00 per share for their remaining term. The options are fully
vested and may be exercised at any time prior to December 31, 2005. John
Petersen, a partner in the law firm of Petersen & Fefer, is a member of our
board of directors.

In
connection with the execution of a four-year employment agreement, our chief
executive officer was granted a contractual option to purchase 240,000 shares of
common stock at a price of $4.00 per share. This option will vest at the rate of
60,000 shares per year commencing in July 2005 and be exercisable for a period
of five years after each vesting date.

In
connection with the execution of a four-year employment agreement, our chief
financial officer 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 at the rate of
50,000 shares per year commencing in July 2005 and be exercisable for a period
of five years after each vesting date.

A former
principal shareholder of Axion (Ontario) that does not serve as a member of our
board has been retained to serve as an advisor to the board with respect to
promotional and market development activities. As partial compensation for those
services, this consultant has been granted contractual stock options to purchase
6,300 shares of common stock at a price of $3.20 per share and 3,600 shares of
common stock at a price of $5.60 per share

A summary
of our non-plan warrant and option activity is as follows:

**2004**
    
    
    
    **2003****Weighted
      average exercise price**
    
    
    
    
    
    **Weighted
      average exercise price****Shares**
    
    
    
    **Shares**Shares
      outstanding January 1, 2004
    
    
    2,827,600
    
    $
    1.94
    
    
    
    
    
    0Granted
      during 2004
    
    
    913,000
    
    $
    3.81
    
    
    
    
    
    2,827,600
    
    $
    1.94Exercised
    
    
    (475,200
    )
    $
    1.83
    
    
    
    
    
    0Lapsed
    
    
    0
    
    $
    0.00
    
    
    
    
    
    0Outstanding
      at December 31
    
    
    3,265,400
    
    $
    2.39
    
    
    
    
    
    2,827,600
    
    $
    1.94Weighted
      average months remaining
    
    
    
    
    
    31.3
    
    
    
    
    
    
    
    
    20.4

The
following table summarizes the status of our aggregate non-plan warrants and
options as of December 31, 2004:

**Options
      Outstanding**
    
    
    
    **Options
      Exercisable****Range
      of exercise prices**
    
    **Shares**
    
    **weighted
      average exercise price**
    
    **Weighted
      average remaining life in months**
    
    **Shares**
    
    **weighted
      average exercise price**$
      1.00-$ 3.20
    
    
    2,567,200
    
    $
    1.95
    
    
    16.9
    
    
    2,560,900
    
    $
    1.95$
      3.21-$ 5.60
    
    
    698,200
    
    $
    4.01
    
    
    84.2
    
    
    254,600
    
    $
    4.00*Total
      Shares*
    
    
    3,265,400
    
    
    
    
    
    
    
    
    2,815,500

**Equity
Compensation Under Stockholder Approved Plans**

Adoption
of Incentive Stock PlanOur
stockholders have adopted an incentive stock plan for the benefit of our
employees, consultants and advisors. Under the terms of the plan, we are
authorized to grant incentive awards for up to 1,000,000 shares of common stock.
The plan authorizes a variety of incentive awards including incentive stock
options, non-qualified stock options, shares of restricted stock, shares of
phantom stock and stock bonuses. In addition, the plan authorizes the payment of
cash bonuses when a participant is required to recognize income for federal
income tax purposes because of the vesting of shares of restricted stock or the
grant of a stock bonus.

The plan
provides for the grant of incentive awards to full-time employees of our company
who are not eligible to receive awards under the terms of their employment
contract or another specialty plan. The plan also provides for the grant of
incentive awards to directors who are not eligible to participate in our outside
directors stock option plan, independent agents, consultants and advisors who
have contributed to our 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 our 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 owning more than 10% of our
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.

Adoption
of Outside Directors' Stock Option PlanOur
stockholders have adopted an outside directors' stock option plan for the
benefit of our non-employee directors in order to encourage their continued
service as directors. Under the terms of the plan, we are authorized to grant
incentive awards for up to 125,000 shares of common stock. Shares of stock
subject to option may be either authorized and unissued shares or shares issued
and later acquired by the Company;

The
effective date of the plan is February 2, 2004, The Plan and shall terminate
upon the tenth anniversary of the effective date. 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 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.

Activity
Under Stockholder Approved PlansIn
February 2004, each member of our board was granted an option to purchase 6,300
shares of common stock at a price of $3.20 per share. The option grants to our
four independent directors were issued pursuant to the terms of our Directors’
Plan. The option grants to our three non-independent directors were issued
pursuant to the terms of our Incentive Plan. All of these options vested in
February 2005.

In June
2004, the members of our board were granted options to purchase an aggregate of
46,800 shares of common stock at a price of $5.60 per share, including options
for 28,800 shares that were granted to our four independent directors under the
terms of our Directors Plan and options for 14,400 shares that were granted to
non-independent directors under the terms of our Incentive Plan. Of the 46,800
options granted, 25,200 will vest in June 2005, 14,400 will vest in June 2006
and 7,200 will vest in June 2007.

In
November 2004, a member of our board resigned to facilitate the appointment of
our chief executive officer as a board member. In connection with the
resignation, the 9,900 options previously granted to the withdrawing director
were immediately vested. Concurrently, our chief executive officer was granted
an option to purchase 6,250 shares of common stock at a price of $3.20 per share
under the terms of our Incentive Plan. This option will vest in November
2005.

A summary
of the activity under our stockholder approved equity compensation plans is as
follows:

**2004
      Incentive Stock Plan**
    
    
    
    **2004
      Outside Director Stock Option Plan****Weighted
      average exercise price**
    
    
    
    
    
    **Weighted
      average exercise price****Shares**
    
    
    
    **Shares**Shares
      reserved under each plan
    
    
    1,000,000
    
    
    
    
    
    
    
    
    125,000Shares
      outstanding January 1, 2004
    
    
    0
    
    
    
    
    
    
    
    
    0Granted
      during 2004
    
    
    43,150
    
    $
    4.20
    
    
    
    
    
    54,000
    
    $
    4.48Exercised
    
    
    0
    
    
    
    
    
    
    
    
    0Lapsed
    
    
    0
    
    
    
    
    
    
    
    
    0Outstanding
      at December 31, 2004
    
    
    43,150
    
    $
    4.20
    
    
    
    
    
    54,000
    
    $
    4.48Reserved shares at December 31, 2004
    
    
    956,850
    
    
    
    
    
    
    
    
    71,000Weighted
      average months remaining
    
    
    
    
    
    62.8
    
    
    
    
    
    
    
    
    51.2

The
weighted average fair value of options granted under our 2004 Incentive Plan in
2004 was $1.92 and the weighted average fair value of options granted under our
Outside Director Plan was $2.11. All of the foregoing options have been valued
on the date of grant using the Black-Scholes pricing model. Following summarizes
the assumptions used in our model for options granted during the year ended
December 31:

**Year**
    **Interest
      Rate**
    **Dividend
      Yield**
    **Expected
      Volatility**
    **Expected
      Life**2004
    4.00%
    0.00%
    58.00%
    60
      mos.2003
    2.00%
    0.00%
    20.00%
    60
      mos.
The
following table summarizes the status of our aggregate stock options as of
December 31, 2004:

***Options
      Outstanding***
    
    
    
    ***Options
      Exercisable*****Range
      of exercise prices**
    
    **Shares**
    
    **weighted
      average exercise price**
    
    **Weighted
      average remaining life in months**
    
    **Shares**
    
    **weighted
      average exercise price**$3.20
    
    
    50,350
    
    $
    3.20
    
    
    55.1
    
    
    6,300
    
    $
    3.20$5.60
    
    
    46,800
    
    $
    5.60
    
    
    57.7
    
    
    3,600
    
    $
    5.60*Total
      Shares*
    
    
    97,150
    
    
    
    
    
    
    
    
    9,900

**8.
Income Taxes**

The
Company has approximately $ 3,400,000 in net operating loss carryovers available
to reduce future income taxes. These carryovers expire at various dates through
the year 2024. The Company has adopted SFAS 109 which provides for the
recognition of a deferred tax asset based upon the value the loss carry-forwards
will have to reduce future income taxes and management's estimate of the
probability of the realization of these tax benefits. We have determined it more
likely than not that these timing differences will not materialize and have
provided a valuation allowance against substantially all of our net deferred tax
asset. A summary of the deferred tax asset presented on the accompanying balance
sheets is as follows:

**2004**
    
    **2003**The
      provision (benefit) for income taxes consists of the
      following:Currently
      payable:Federal
    
    $
    0
    
    $
    0State
    
    
    0
    
    
    0Total
      currently payable
    
    
    0
    
    
    0Deferred:Federal
    
    
    957,857
    
    
    145,000State
    
    
    148,221
    
    
    22,500Total
      deferred
    
    
    1,106,078
    
    
    167,500Less
      increase in allowance
    
    
    (1,106,078
    )
    
    (167,500
    )Net
      deferred
    
    
    0
    
    
    0Total
      income tax provision (benefit)
    
    $
    0
    
    $
    0**2004**
    
    
    **2003**Individual
      components of deferred taxes are as follows:Deferred
      tax asset arising from net operating loss carry forwards
    
    $
    1,273,578
    
    $
    167,500Less
      valuation allowance
    
    
    (1,273,578
    )
    
    (167,500
    )Net
      deferred
    
    $
    0
    
    $
    0

Utilization
of federal and state NOL and tax credit carryforwards 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.
The annual limitation may result in the expiration of NOL and tax credit
carryforwards before full utilization.

**9.
Commitments and Contingencies**

***C&T
Acquisition Agreement:*****Pursuant
to a November 15, 2003 Development and License Agreement between Axion and C and
T Co. Inc. (C&T), the original developer of the e3Supercell
technology, the Company agreed to pay C&T a total of $1,794,000 for the
patents and other intellectual property rights embodied in the e3Supercell
technology and necessary for the development and commercial exploitation of the
technology. The agreement was subsequently amended to provide for the purchase
of 100% of the outstanding shares of C&T Common Stock. In January 2004,
C&T transferred the patents and other intellectual property rights embodied
in the e3Supercell
technology to the Company in exchange for 1,592,600 warrants and reserved its
rights to receive balance of the $1,794,000 purchase price specified in the
Development and License Agreement.

At
December 31, 2004, the Company had paid $693,500 to C&T and was obligated to
pay an additional $100,500 in the immediate future. The remaining $1 million was
required to be paid 15 days after the completion of preliminary beta testing of
the e3Supercell
(this amount was paid in full see subsequent events note below-Preferred Stock
Offering). Until the full balance of the $1,794,000 purchase price specified in
the Development and License Agreement was paid, C&T retained the equivalent
of a purchase money security interest in the e3Supercell
patents and other intellectual property.

The
agreement also required the Company to provide funding for ongoing research and
development on a monthly basis. Payments and accruals under this section were
$701,000 and $252,865 through December 31, 2004 and 2003 respectively. The
Company treats this as research and development costs and, accordingly, expenses
such costs in the period incurred.

***Facilities:***All of
our operations are conducted at our research and development center located at
our Caster Avenue facility located in Vaughan, a suburb of Toronto, Ontario,
Canada. We rent this facility under month-to-month arrangement that requires a
minimum monthly rental of $5,000. Our research and development center includes
approximately 14,000 square feet of floor space, including 5,000 square feet of
management, administrative and engineering offices, 5,000 square feet of
manufacturing facilities and 4,000 square feet of research
laboratories***.***Rental
expense under this arrangement was $60,000 and $15,000 for 2004 and 2003
respectively.

***Employment
Agreements:***Our
President and Chief Financial Officer, Messrs. Mazzacato and Roston,
respectively, have executed written employment agreements that provide for
initial terms of four years. Under the terms of his employment agreement, Mr.
Mazzacato will receive a base annual salary of $100,000, bonuses as determined
by the compensation committee and an option to purchase 240,000 shares of our
common stock at a price of $4.00 per share. Under the terms of his employment
agreement, Mr. Roston will receive a base annual salary of $75,000, bonuses as
determined by the compensation committee and an option to purchase 200,000
shares of our common stock at a price of $4.00 per share.

***Litigation:***On
February 10, 2004, Lewis (Chip) Taylor, Chip Taylor in Trust, Jared Taylor,
Elgin Investments, Inc. and Mega-C Technologies, Inc. filed a lawsuit in the
Ontario Superior Court of Justice Commercial List (Case No. 04-CL-5317) that
names our company, Axion, the former Axion shareholders, the Mega-C Group, the
C&T Group, the trustee of the Mega-C Shareholders Trust and others as
defendants. The substantive claims in this new lawsuit are not materially
different from the substantive claims in the other actions, however the new
lawsuit alleges a conspiracy between the Axion Group, the Mega-C Group and the
C&T Group to deprive the Taylor Group of their rights to commercialize the
e3Supercell
technology for use in stationary applications. We believe Taylor Group’s license
was properly terminated by C&T and there is substantial merit to Mega-C’s
securities law claims against the Taylor Group. Since we believe the latest
Taylor Group lawsuit is without substantial merit.

On April
6, 2004, we joined in an involuntary Chapter 11 petition that was filed against
Mega-C in the U.S. Bankruptcy Court for the State of Nevada. The Bankruptcy
Court granted an order for relief in Mega-C’s Chapter 11 case on April 12, 2004.
We believe the Mega-C Chapter 11 proceeding will be advantageous to our company
in several material respects including:

Management
currently estimates the range of loss to be $150,000 to $300,000, including
attorney’s fees. Protracted litigation, or higher than anticipated legal costs,
could significantly reduce available working capital and have a material adverse
impact on the company’s financial position. On February 4, 2005, the Bankruptcy
Court appointed an independent trustee to manage Mega-C’s reorganization and
stayed all litigation pending a report from the trustee respecting the impact of
the lawsuit on Mega-C’s Chapter 11 case.
**10.
Supplementary Cash Flow Disclosure:**

**2004**
    
    **2003**settlement
      of related party debt with warrants
    
    
    
    
    $
    484,123offering
      costs & expenses paid by contribution of capital
    
    $
    306,000equity
      instruments issued for services
    
    $
    18,225


**11.
Subsequent Events**

***Augmentation
of Mega-C Trust:***In
February 2005, we issued 500,000 shares of our common stock to the Mega-C Trust.
For accounting and financial reporting purposes, the stock issuance transaction
will be valued at $1,000,000, or $2 per share, which will be charged to expense
in the first quarter of 2005. After giving effect to the transaction, the Mega-C
Trust owns 7,827,500 shares, or approximately 54.1% of our issued and
outstanding common stock. The augmentation of the Mega-C Trust was a negotiated
private placement transaction that was exempt under Section 4(2) of the
Securities Act. Our securities were issued to a special purpose entity that was
created by our company in December 2003 and owns over half of our outstanding
securities. In connection with the transaction, the Trustee of the Mega-C Trust
was provided with information analogous to the information that would have been
required in a registration statement under the Securities Act. We did not use
any form of advertising or general solicitation in connection with the
transaction. The securities issued to the Mega-C Trust are not transferable in
the absence of an effective registration statement under the Act, or an
available exemption therefrom, and all certificates issued to the Mega-C Trust
are imprinted with a restrictive legend to that effect.

***Equity
Compensation of Legal Counsel:***In March
2005, in exchange for billed services, members of the law firm of Petersen &
Fefer were granted a contractual option to purchase 140,000 shares of our common
stock at a price of $1.00 per share as partial compensation for services
rendered. The options are fully vested and may be exercised at any time prior to
March 31, 2007. John Petersen, a partner in the law firm of Petersen &
Fefer, is a member of our board of directors.

***Preferred
Stock Offering:***In March
2005, we sold 381,000 shares of preferred stock at a price of $10 per share.
After deducting offering expenses and commissions, the net proceeds of the
preferred stock offering included $2,775,000 in cash and $1,000,000 in debt
settlements to C&T shareholders. Each share of preferred stock is presently
convertible into 5 shares of common stock, provided that the conversion value of
the preferred stock will be increased to the extent of any unpaid dividends and
the conversion price may be decreased if we encounter unexpected delays in our
planned registration of the underlying common stock.

A
proforma balance sheet as though theses transaction had occurred at December 31,
2004 is below:

**As
      Stated**
    
    **Trust
      Augmentation**
    
    **Preferred
      Offering**
    
    **Proforma**Current
      assets
    
    $
    61,478
    
    $
    (100,000
    )
    $
    2,675,000
    
    $
    2,636,478Property
      & equipment
    
    
    97,606
    
    
    
    
    
    
    
    
    97,606Notes
      receivable
    
    
    958,523
    
    
    
    
    
    
    
    
    958,523Intangible
      assets
    
    
    1,920,522
    
    
    
    
    
    
    
    
    1,920,522Total
    
    $
    3,038,129
    
    
    
    
    
    
    
    $
    5,613,129Current
      liabilities
    
    $
    1,744,258
    
    
    
    
    $
    (1,100,000
    )
    $
    644,258Shareholders'
      equity
    
    
    1,293,871
    
    
    (100,000
    )
    
    3,775,000
    
    
    4,968,871Total
    
    $
    3,038,129
    
    
    
    
    
    
    
    $
    5,613,129**ITEM
8. — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.**

In
January 2004 Want & Ender CPA, PC, our former certifying accountant, advised
our chief financial officer by telephone that they had not registered with the
Public Company Accounting Oversight Board (PCAOB) and did not intend to do so.
While Want & Ender did not formally resign or decline to stand for
re-election as our certifying accountant, it advised management that our company
should retain a PCAOB registered firm to audit its financial statements for the
year ended December 31, 2003. On February 16, 2004, our board of directors voted
to dismiss the firm of Want & Ender as our company’s certifying accountant
and retain a successor auditor.

The
report of Want & Ender on our financial statements for the years ended
December 31, 2001 and 2002 did not contain an adverse opinion or disclaimer of
opinion. However, the report contained a fourth explanatory paragraph to reflect
the going concern issues occasioned by our prior bankruptcy proceeding, our
history of operating losses and our negative cash flow from
operations.

During
the years ended December 31, 2001 and 2002 and the subsequent interim periods,
there were no disagreements between our company and Want & Ender on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to Want & Ender’s
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. During the years ended
December 31, 2001 and 2002 and the subsequent interim periods, Want & Ender
did not advise our company with respect to any of the matters specified in
sub-paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation
S-K.

On
February 16, 2004, Michael F. Cronin, CPA, was retained to audit our financial
statements for the year ended December 31, 2003 and to serve as our certifying
accountant until the board elects a successor. During the two most recent fiscal
years, our company has not consulted Michael F. Cronin, CPA with respect to
either (a) the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements; or (b) any matter that was either subject
of a disagreement or a reportable event specified in sub-paragraphs (a)(1)(iv)
or (a)(1(v) of Item 304 of Regulation S-K).

**ITEM
8A — CONTROLS AND PROCEDURES**

We
maintain disclosure controls and procedures that are designed to ensure that the
information we are required to disclose in our reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Our disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
is accumulated and communicated to management, including our chief executive
officer and our chief financial officer, to allow timely decisions regarding
required disclosure.

In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. While the design of our disclosure
controls and procedures is adequate for our current needs and anticipated future
conditions, and there can be no assurance that our current design will succeed
in achieving its stated goals under all possible future conditions. Accordingly
we may be required to modify our disclosure controls and procedures in the
future.

Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-KSB for the year ended December 31, 2004, our chief executive officer
and our chief financial officer have concluded that the design of our system of
disclosure controls and procedures was effective to ensure that material
information relating to our company is made known to them and that our system of
disclosure controls and procedures is operating to provide a reasonable level of
assurance that information required to be disclosed in our reports is recorded,
processed, summarized and reported in a timely manner, particularly during the
period in which this Annual Report on Form 10-KSB was being
prepared

There was
no change in our internal control over financial reporting that occurred during
our last fiscal year that materially affected, or is likely to materially
affect, our internal control over financial reporting. Our auditor has not
notified us that any material weakness exists with respect to our internal
financial controls.

**ITEM
8B — OTHER INFORMATION**

In June
2004, Charles Mazzacato was hired to serve as our Chief Executive Officer and
our former president Kirk Tierney was appointed chief technical officer. In
November 2004, Mr. Tierney resigned his positions with our company and Mr.
Mazzacato was appointed to fill a seat on our board of directors that was
vacated by Mr. Tierney. In connection with Mr. Tierney’s resignation, the board
of directors approved the full vesting of 45,000 shares of restricted common
stock and 9,900 common stock purchase options held by Mr. Tierney.

***Charles
Mazzacato***was
hired to serve as our chief executive officer in July 2004 and was subsequently
appointed to fill a vacancy on our board for a term that will expire in 2005.
Mr. Mazzacato has 29 years of experience in commercial and industrial power
systems engineering sales and marketing. From 1996 through 2003, he held various
senior sales and marketing positions with Powerware, a global leader in the UPS
and direct current power systems business. Mr. Mazzacato also served as chairman
of Powerware’s global marketing council, where he provided leadership and
strategic direction for Powerware’s $750 million sales and marketing effort.
Previously, he served as Canadian national sales manager for the UPS group of
Schneider Electric and as Canadian national sales manager for Emerson Electric.
Mr. Mazzacato is a 1975 graduate of Ryerson Polytechnic Institute (Power Systems
Engineering).

**PART
III**

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

**Incorporation
of Information by Reference**

The
information under the heading “Election of Directors” in our definitive Proxy
Statement (the “Proxy Statement”) for our 2004 Annual Meeting of Shareholders,
which will be filed within 120 days after the close of the fiscal year ended
December 31, 2003, is incorporated herein by reference.

The
information under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement is incorporated herein by
reference.

We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, and all employees
performing similar functions. The code of ethics is filed as an exhibit to this
Annual Report on Form 10-KSB.

**ITEM
10. — EXECUTIVE COMPENSATION.**

**Incorporation
of Information by Reference**

The
information under the heading “Executive Compensation” in our definitive Proxy
Statement is incorporated herein by reference.

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

The
information under the heading “Security Ownership of Certain Beneficial Owners
and Management” in our definitive Proxy Statement is incorporated herein by
reference.

**ITEM
12. — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The
information under the heading “Certain Relationships and Related Transactions”
in our definitive Proxy Statement is incorporated herein by
reference.

**ITEM
13.****EXHIBITS
AND REPORTS ON FORM 8-K.**

(a)Exhibits:

2.1
    
    Reorganization
      Agreement (without exhibits) between Tamboril Cigar Company, Axion Power
      Corporation and certain stockholders of Axion Power Corporation dated
      December 31, 2003
    
    (1)2.2
    
    First
      Addendum to the Reorganization Agreement between Tamboril Cigar Company,
      Axion Power Corporation and certain stockholders of Axion Power
      Corporation dated January 9, 2004
    
    (1)3.1
    
    Amended
      and Restated Certificate of Incorporation of Tamboril Cigar Company dated
      February 13, 2001
    
    (2)3.3
    
    Amendment
      to the Certificate of Incorporation of Tamboril Cigar Company dated
      June 4, 2004
    
    (3)3.4
    
    Amendment
      to the Certificate of Incorporation of Axion Power International, Inc.
      dated June 4, 2004
    
    (3)3.5
    
    Amended
      By-laws of Axion Power International, Inc. dated June 4,
    2004
    
    (3)4.1
    
    Specimen
      Certificate for shares of Company’s $0.00001 par value common stock.
    
    (9)4.2
    
    Trust
      Agreement for the Benefit of the Shareholders of Mega-C Power Corporation
      dated December 31, 2003
    
    (1)4.3
    
    Succession
      Agreement Pursuant to the Provisions of the Trust Agreement for the
      Benefit of the Shareholders of Mega-C Power Corporation dated March 25,
      2004.
    
    (4)4.4
    
    Form
      of Warrant Agreement for 1,796,300 capital warrants
    
    (9)4.5
    
    Form
      of Warrant Agreement for 667,000 Series I investor
warrants
    
    (9)4.6
    
    Form
      of Warrant Agreement for 350,000 Series II investor
    warrants
    
    (9)4.7
    
    Form
      of Warrant Agreement for 313,100 Series III investor
    warrants
    
    (9)4.8
    
    First
      Amended and Restated Trust Agreement for the Benefit of the Shareholders
      of Mega-C Power Corporation dated February 28, 2005
    
    (11)4.9
    
    Certificate
      of Powers, Designations, Preferences and Rights of the 8% Convertible
      Senior Preferred Stock of Axion Power International, Inc. dated March 17,
      2005.
    
    (12)9.1
    
    Agreement
      respecting the voting of certain shares beneficially owned by the Trust
      for the Benefit of the Shareholders of Mega-C Power
      Corporation
    
    Included
      in Exhibit 4.210.1
    
    Development
      and License Agreement between Axion Power Corporation and
      C and T Co. Incorporated dated November 15, 2003
    
    (1)10.2
    
    Letter
      Amendment to Development and License Agreement between Axion Power
      Corporation and C and T Co. Incorporated dated November 17,
      2003
    
    (1)10.3
    
    Letter
      Amendment to Development and License Agreement between Axion Power
      Corporation and C and T Co. Incorporated dated January 9,
      2004
    
    (1)10.4
    
    Purchase
      and sale agreement among John L. Petersen, Sally A. Fonner and
      C and T Co. Incorporated dated January 9, 2004
    
    (1)10.5
    
    First
      Amendment to Development and License Agreement between Axion Power
      Corporation and C and T Co. Incorporated dated as of January 9,
      2004
    
    (5)10.6
    
    Definitive
      Incentive Stock Plan of Axion Power International, Inc. dated June 4,
      2004
    
    (3)10.6
    
    Definitive
      Outside Directors’ Stock Option Plan of Axion Power International, Inc.
      dated June 4, 2004
    
    (3)10.8
    
    Executive
      Employment Agreement of Charles Mazzacato
    
    (9)10.9
    
    Executive
      Employment Agreement of Peter Roston
    
    (9)10.10
    
    Retainer
      Agreement dated January 2, 2004 between the law firm of Petersen &
      Fefer and Tamboril Cigar Company
    
    (10)10.11
    
    Second
      Amendment to Development and License Agreement between Axion Power
      Corporation and C and T Co. Incorporated dated as of March 18,
      2005.
    
    (12)14.1
    
    Code
      of Business Conduct and Ethics
    
    (6)16.2
    
    Letter
      from Want & Ender CPA, PC Re: Change in Certifying
      Accountant
    
    (8)

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

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

**Incorporation
of Information by Reference**

The
information under the heading “Principal Accountant Fees and Services” in our
definitive Proxy Statement is incorporated herein by reference,

**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/
Charles Mazzacato
Charles
Mazzacato, Chief Executive Officer and Director
Date
March 30, 2005

By/s/
Peter Roston
Peter
Roston, Chief Financial Officer
Date
March 30, 2005
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/Charles
      Mazzacato
    Chief
      Executive Officer and Director
    March
      30, 2005/s/John
      L. Petersen
    Director
    March
      30, 2005/s/Thomas
      Granville
    Director
    March
      30, 2005/s/Robert
      Averill
    Director
    March
      30, 2005/s/Glenn
      Patterson
    Director
    March
      30, 2005/s/Joseph
      Souccar
    Director
    March
      30, 2005/s/Igor
      Filipenko
    Director
    March
      30, 2005