**SECURITIES
      AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549**





**FORM
        10-KSB/A**
 **Amendment
        No. 2**









**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
                incorporation
                  organization)
              (I.R.S.
                  Employer
                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**















EXPLANATORY
        NOTE
 
 This
        Amendment No. 2 to our Annual Report on Form 10-KSB for the year ended December
        31, 2004, as originally filed on March 30, 2005 and amended on May 31, 2005
        is
        being filed solely to amend the table of exhibits under Item
        13,
        to update exhibits 31.1 and 31.2 and to correct typographical errors in exhibits
        32.1 and 32.2
  No
        other
        changes have been made to this Report. This Amendment No. 1 does not update
        any
        other disclosures to reflect developments since the original date of
        filing.







**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
      e 3 Supercells
      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 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.





**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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercells
      a number of supercapacitive characteristics. As a result, our e 3 Supercells
      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 e 3 Supercell
      technology





In
      many
      respects, the configuration of our e 3 Supercells
      will be similar to conventional lead-acid batteries. Our e 3 Supercells,
      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 e 3 Supercells
      should be largely compatible with existing lead-acid battery production
      facilities and assembly processes. If our e 3 Supercell
      technology is well received, we believe lead-acid battery manufacturers will
      be
      able to adapt existing production lines to our e 3 Supercell
      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 e 3 Supercell
      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
      e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercells.
      We believe this joint development and testing program will, if successfully
      completed, advance our e 3 Supercell
      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 believe our
      proposed field-testing program
      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 e 3 Supercell
      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 the Application
      Prototypes that
      will
      be used in our planned field tests. We will also finalize the design of our Application
      Prototypes and
      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
      e 3 Supercells
      for limited sale to end users. These Pilot e 3 Supercells
      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
      e 3 Supercells
      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 e 3 Supercells
      in a timely manner; or that the cost of future development work on our proposed
      Pilot e 3 Supercells
      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 e 3 Supercells
      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 e 3 Supercells
      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 e 3 Supercells:





**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 e 3 Supercells
      will offer the competitive advantages we presently anticipate. Accordingly,
      there is no assurance that we will ever begin production of Pilot e 3 Supercells
      or that any Pilot e 3 Supercells
      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 proposed products.
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      technology. We have no duty to pay any royalties or license fees with respect
      to
      the future commercialization of the e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      technology. We also believe the royalties retained by C&T are likely to
      constitute the bulk of the potential profit from the sale of e 3 Supercell
      products for use in stationary applications. Therefore, we believe that the
      resolution of the conflicting claims to the ownership of the e 3 Supercell
      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 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.





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 e 3 Supercell
      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 e 3 Supercells
      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 e 3 Supercell
      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 e 3 Supercells
      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 e 3 Supercells . 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 e 3 Supercell
      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 e 3 Supercells;
      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 e 3 Supercells,
      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 e 3 Supercell
      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 E 3 Cell
      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
      E 3 Cell
      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 E 3 Cell
      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
      “e 3 Supercells.”
      The original developer of the e 3 Supercell
      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 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).





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 e 3 Supercell
      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 a reverse
      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**





The Mega-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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 Plan Our
      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 Plan Our
      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 Plans In
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      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 e 3 Supercell
      (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 e 3 Supercell
      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
      e 3 Supercell
      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)31.1
            
            Certification
                of Principal Executive Officer31.2
            
            Certification
                of Principal Financial Officer32.1
            
            Corrected
                Statement of Chief Executive Officer Pursuant to Section1350
                of Title 18 of the United States Code32.2
            
            Corrected
                Statement of Chief Financial Officer Pursuant to Section1350 of Title
                18
                of the United States Code





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





**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/
      Thomas
      Granville


Thomas
        Granville


Date
      June
      16, 2005





By  /s/
      Peter Roston


Peter
      Roston, Chief Financial Officer


Date
      June
      16, 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/
                Thomas
                GranvilleThomas
                  Granville
            Chief
                Executive Officer and Director
            June
                16, 2005/s/
                John
                L. PetersenJohn
                L. Petersen
            Director
            June
                16, 2005/s/
                Robert
                AverillRobert
                Averill
            Director
            June
                16, 2005/s/
                Glenn
                PattersonGlenn
                Patterson
            Director
            June
                16, 2005/s/Joseph
                SouccarJoseph
                Souccar
            Director
            June
                16, 2005/s/
                Igor
                FilipenkoIgor
                Filipenko
            Director
            June
                16, 2005