**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      10-KSB**




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


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





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


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





**Commission
      File Number 000-22573**





**AXION
      POWER INTERNATIONAL, INC.**


(Exact
      name of small business issuer in its charter)





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




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





Securities
      Registered under Section 12(b) of the Act


**None**





Securities
      Registered under Section 12(g) of the Act


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





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o




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




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


Yes
o No x





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




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




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




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





**TABLE
      OF CONTENTS**




**[TO
      BE UPDATED]**


PART
                  I
              
              3Item
                  1.
              Description
                  of Business.
              3Item
                  2.
              Description
                  of Property.
              11Item
                  3.
              Legal
                  Proceedings.
              11Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              14PART
                  II
              
              14Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters and Small Business
                  Issuer Purchases of Equity Securities.
              14Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              17Item
                  7.
              Financial
                  Statements.
              27Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              41Item
                  8A(T).
              Controls
                  and Procedures.
              xxPART
                  III
              
              44Item
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act.
              44Item
                  10.
              Executive
                  Compensation.
              49Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              54Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence.
              56Item
                  13.
              Exhibits.
              57Item
                  14.
              Principal
                  Accountant Fees and Services
              60


i


**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING INFORMATION**




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




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




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




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




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




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




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




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




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




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




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




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




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




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


ii


**PART
      I**




**Item
      1.**  **Description
      of Business.**




**Our
      corporate history**




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




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




**The
      battery industry**




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




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




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




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




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


3


**Our
      business**




We
      are a
      development stage company that has invested four years and approximately $9.1
      million in research and development expense to develop a patented energy storage
      device that uses carbon electrode assemblies to replace the lead-based negative
      electrodes found in conventional lead-acid batteries. The end result is the
      PbC
      battery, a battery-supercapacitor hybrid that combines the simplicity of
      lead-acid batteries and the faster recharge rates and longer cycle lives of
      supercapacitors in a low-cost device that can be designed to deliver maximum
      power for fast discharge applications; maximum energy for slow discharge
      applications; or a range of balances between the two.




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




In
      February 2007, our PbC technology received the prestigious Frost & Sullivan
      Technology Innovation Award for the best development in the field of lead acid
      batteries for 2006.




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




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




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




·
            Refine
                our planned fabrication methods for carbon electrode
                assemblies;




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




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




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




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




·
            Motive
                power applications;




·
            Stationary
                power applications;




·
            Hybrid
                electric vehicle applications; and




·
            Military
                applications.


4


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




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




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




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




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




·
            The
                availability of raw materials and key components;




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




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




·
            Our
                ability to establish and expand a customer base;




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




·
            The
                market for batteries in general;
                and




·
            Our
                ability to retain key personnel.




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




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




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




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




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


5


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




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




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




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




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




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




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




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




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




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


6


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




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




We
      incorporated APC in September 2003, for the purpose of acquiring rights to
      our
      proprietary lead/carbon technology from the original owner of the patents,
      an
      Ontario corporation named C and T Co., Inc., which we refer to in this report
      as
“C&T.” The founders of APC were shareholders of Mega-C Power Corporation,
      which we refer to in this report as “Mega-C,” which from 2001 until mid 2003
      held a limited, nonexclusive license to market products utilizing our
      proprietary lead/carbon device technology that we currently own. In February
      2003, the Ontario Securities Commission began an investigation into Mega-C’s
      stock sales that terminated Mega-C’s ability to finance its operations and
      continue in business. The founders of APC had collectively invested
      approximately $3.9 million in Mega-C and were facing a total loss of this
      investment when Mega-C was unable to continue in business. In connection with
      the organization of APC, the founders invested well over a million
      dollars.




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




·
            A
                reverse acquisition between Tamboril and APC;




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




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




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




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




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




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




·
            We
                purchased all of C&T’s interest in the proprietary lead/carbon (PbC)
                device technology for 1,562,900 warrants;
                and




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




We
      acquired full ownership of C&T, including its capital stock, in March 2005
      upon final satisfaction of the payments noted above and extinguished all rights
      to future payments under the November 2003 development and license agreement.
      C&T’s assets other than the intellectual property were insignificant. The
      Company purchased $84,000 in equipment from an affiliate of C&T.  7


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




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




The
      settlement agreement resulted in the return of 1,500,000 of our shares for
      cancellation, of which, 500,000 represented a return of the 500,000 share
      augmentation and the remaining 1,000,000 were accounted for as a retroactive
      adjustment to the 10,739,500 shares issued as consideration in the reverse
      acquisition. This settlement is discussed in detail in “Item 3, Legal
      Proceedings” of this report.




**Our
      patents and intellectual property**




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




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




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




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




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




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




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




Patents
      generally expire 17 years from date of issue.




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


8


Our
      ability to compete effectively with other companies will depend on our ability
      to maintain the proprietary nature of our lead/carbon (PbC) device technology.
      We plan to file additional patent applications in the future. However, the
      degree of protection offered by our existing patents or the likelihood that
      our
      future applications will be granted is uncertain. Competitors in both the United
      States and foreign countries, many of which have substantially greater resources
      and have made substantial investment in competing technologies, may have, or
      may
      apply for and obtain patents that will prevent, limit or interfere with our
      ability to make and sell products based on our proprietary lead/carbon (PbC)
      device technology. Competitors may also intentionally infringe on our patents.
      The prosecution and defense of patent litigation is both costly and
      time-consuming, even if the outcome is favorable to us. An adverse outcome
      in
      the defense of a patent infringement suit could subject us to significant
      liabilities to third parties. Although third parties have not asserted any
      infringement claims against us, there is no assurance that third parties will
      not assert such claims in the future .
      Although not a patent infringement suit, as set forth more fully in Item 3,
      Legal Proceedings, a collection of individuals and entities that describe
      themselves as the “Taylor Group” sued the Company and claimed an interest in
      some of the Company’s intellectual property. In orders dated February 11, 2008,
      the United States Bankruptcy Court for the District of Nevada held that the
      Taylor Group has no interest in or rights to the technology.




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




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




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




**Our
      competition**




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


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




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




·
            symmetric
                supercapacitors;




·
            asymmetric
                supercapacitors with organic electrolytes;




·
            nickel
                metal hydride batteries;


9


·
            lithium
                ion batteries; and




·
            advanced
                lead-acid batteries.




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




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




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




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




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




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




**Raw
      materials**




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




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




**Environmental
      protection**




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


10


**Our
      research and development**




We
      engage
      in extensive research and development to improve our proprietary lead/carbon
      (PbC) device technology and our proposed products. Our goal is to increase
      efficiency and reduce costs in order to maximize our competitive advantage.
      Our
      research and development organization works closely with our engineering team,
      our suppliers and potential customers to improve our product design and lower
      manufacturing costs. During the years ended December 31, 2006 and 2007, we
      spent
      $2,001,506 and $1,308,345 respectively on company sponsored research and
      development, and $9,143,233 since inception. While our limited financial
      resources and short operating history makes it difficult for us to estimate
      our
      future expenditures, we expect to incur research and development expenditures
      of
      consistent magnitude for the foreseeable future.




**Our
      employees**




***New
      Castle, Pennsylvania*** *:* While we
      have not made our final staffing decisions at New Castle, we presently employ
      a
      staff of 28, including a 6-member scientific and engineering team, and 13 people
      who are involved principally in manufacturing. We are not subject to any
      collective bargaining agreements and believe our relations with our employees
      are good.




**Item
      2.**  **Description
      of Property.**




New
      Castle Pennsylvania. In April of 2008 the company signed a new lease that also
      added to our existing space at our manufacturing plant in New Castle,
      Pennsylvania. The new lease calls for a monthly payment of $16,142 with an
      initial term of two (2) years beginning April 2008. The lease includes two
      successive five-year renewal options, with future rent to be negotiated at
      a
      commercially reasonable rate. The battery manufacturing facility includes
      approximately 70,438 square feet of floor space, including 7,859 square feet
      of
      office, locker, lab and lunch area, 46,931 square feet of manufacturing space,
      1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings
      and 5,000 square feet of basement area. In addition to the monthly rental,
      we
      are obligated to pay all required maintenance costs, taxes and special
      assessments, maintain public liability insurance, and maintain fire and casualty
      insurance for an amount equal to 100% of the replacement value of the leased
      premises. Our battery manufacturing operations at this facility are conducted
      through a wholly owned subsidiary named Axion Power Battery Manufacturing,
      Inc
      (APB). APB was organized in February of 2006. Management believes our property
      is in good condition.




**Item
      3.****Legal
      Proceedings.**




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




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


11


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




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




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




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




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




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




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




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




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




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




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




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




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


12


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




The
      Taylors have filed motions for relief from the order granting partial summary
      judgment in favor of the Company.  The Company believes the Taylors'
      motions are without merit.  The Company intends to file additional motions
      for summary judgment on its remaining claims for relief, namely for an
      appropriate order to require dismissal of the Taylor Litigation against the
      Company and for damages caused by the Taylors' violation of the permanent
      injunction of the confirmed chapter 11 plan.




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




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




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




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




A
      prior
      Chief Financial Officer, Mr. Roston filed a lawsuit for the full amount of
      compensation and benefits provided for as express remedies for breaches in
      his
      employment agreement after he was discharged for cause. The Company determined
      the range of potential loss to be CAD $250,000 to CAD $275,000, however the
      risk
      of loss as a result of this lawsuit is considered by the Company to be remote
      as
      that term is used in Statement of Financial Accounting Standards number 5,
      “ *Accounting
      for Contingencies”.* No
      amount was recorded for this contingency.


13




**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, 2007.




**PART
      II**




**Item
      5.****Market
      for Common Equity and Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities.**




**Market
      information**




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




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


**Period**
              
              **High**
              
              **Low**First
                  Quarter 2006
              
              $
              6.00
              
              $
              2.50Second
                  Quarter 2006
              
              $
              4.10
              
              $
              1.75Third
                  Quarter 2006
              
              $
              3.50
              
              $
              1.60Fourth
                  Quarter 2006
              
              $
              4.00
              
              $
              1.10First
                  Quarter 2007
              
              $
              4.05
              
              $
              2.25Second
                  Quarter 2007
              
              $
              3.15
              
              $
              2.50Third
                  Quarter 2007
              
              $
              3.10
              
              $
              2.20Fourth
                  Quarter 2007
              
              $
              2.50
              
              $
              2.00




On
      March
      31, 2008, the sale price for our common stock as reported on the Pink Sheets
      was
      $2.30 per share.




**Securities
      outstanding and holders****of record**




On
      March
      31, 2008 there were approximately 386 record holders of our common stock.




**Dividend
      Policy** ****




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


14


**Information
      respecting equity compensation plans**




Summary
      Equity Compensation Plan Information The
      following table provides summary information on our equity compensation plans
      as
      of December 31, 2007.


**Plan
                category:**
            
            **Number of shares**
              **issuable on exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **Weighted average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **Number of shares**
              **available for future**
              **issuance under equity**
              **compensation plans****Equity compensation plans approved
                by stockholders**2004
                Incentive Stock Plan
            
            
            51,950
            
            $
            3.48
            
            
            1,437,0502004
                Directors’ Option Plan
            
            
            140,035
            
            $
            2.83
            
            
            330,400**Equity
                compensation plans not approved by stockholders**Contract
                options held by officers
            
            
            905,000
            
            $
            4.86Contract
                options held by consultants
            
            
            753,900
            
            $
            5.22**Total
                equity awards**
            
            
            1,850,885
            
            $
            4.81




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




***Equity
      Incentives Plans Not Approved by Stockholders*** : The
      Company has issued 300,000, 629,300, and 228,000 stock purchase options in
      the
      fiscal years ended December 31, 2005, 2006 and 2007, respectively, to officers,
      employees, attorneys and consultants in connection with contractual agreements
      that do not reduce the shares available under the shareholder’s approved plans.
      The following paragraphs summarize these contractual stock options.




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




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




15


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




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




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




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




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




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




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




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




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




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


16


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






In
      January 2007, Walker Wainwright, a director of the Company, was granted an
      option to purchase 40,000 shares of common stock at an exercise price of $5.00
      as compensation for services related to due diligence, negotiation and sale
      of
      the 2006 Series A Preferred Stock offering. These three-year options were
      immediately vested on the date of grant, and are valued at $52,230 utilizing
      the Black-Scholes-Merton
      option pricing model and are recorded as offering costs in 2007.




In
      August
      2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
      granted a contractual option to purchase 80,000 shares of common stock at an
      exercise price of $4.50. 20,000 vest immediately upon contract inception and
      the
      remainder vest at a rate of 10,000 per month over the life of his six-month
      employment contract. These two-year options are valued at $37,356 utilizing
      the Black-Scholes-Merton
      option pricing model with $24,904 recorded as compensation in 2007.




In
      December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
      Nelson, was granted a contractual option to purchase 108,000 shares of common
      stock at an exercise price of $5.00. The options vest at a rate of 3,000 per
      month over a three year period, but are being amortized over the term of his
      two
      year employment contract. These five-year options are valued at $108,504
      utilizing the Black-Scholes-Merton
      option pricing model with $4,521 recorded as compensation in 2007.




**Item
      6.****Management’s
      Discussion and Analysis or Plan of Operation.**




**Overview**




We
      are a
      development stage company that was formed in September of 2003 to acquire and
      develop certain innovative battery technology. Since inception APC has been
      engaged in research and development of the new technology for the production
      of
      lead-acid-carbon energy storage devices that we refer to as our “proprietary
      lead/carbon (PbC) devices.” As of December 31, 2003 APC engaged in a reverse
      acquisition with a public shell company. The shell company was originally
      incorporated in Delaware in January 1997 as Tamboril Cigar Company (“Tamboril”),
      operated a wholesale cigar business until December 1998 and was an inactive
      public shell thereafter until December 2003. The information presented herein
      relates to the operations of APC, the accounting acquirer. Tamboril, the legal
      acquirer, changed its name to Axion Power International, Inc. We formed a new
      corporation, Axion Power Battery Manufacturing Inc., which purchased the
      foreclosed assets of the failed battery manufacturing plant and now conducts
      our
      manufacture of specialty batteries.




For
      the
      year ended December 31, 2007, we had cumulative net losses of approximately
      $14.3 million. This includes approximately $ 8.4 million in preferred stock
      dividends and beneficial conversion feature charges. **** We
      had $
      1.6 million in current assets and $ 4.5 million in current liabilities at
      December 31, 2007, which left net working capital deficit of approximately
      $ **** 2.9
      million. As discussed below, we received approximately $4 million in long term
      equity financing on January 14 th of 2008
      from the Quercus Trust. Management believes those funds will support operations
      through, September 30, 2008, even if the anticipated, and contractually agreed
      to, second and third closings with the Quercus Trust, as described below) do
      not
      occur.




**Key
      Performance Indicators**




Because
      of our early stage of development the usual financial measures are not
      particularly relevant or helpful in the assessment of company operations. The
      single most significant financial metric for us is the adequacy of working
      capital in order to continue research and development. Capital is also necessary
      to fund the equipment and methods required to progress from demonstration
      projects to full commercial readiness for deployment. After consideration of
      the
      investment by the Quercus Trust (Quercus) in January of 2008 our working capital
      was approximately $850,000. We believe we can maintain operations and fund
      R&D to approximately September of 2008 with the current working capital.
      This is true even without the additional contractual investments from the
      Quercus Trust, as described below.


17


**Pro
      Forma Balance Sheet for Fiscal Year Ended December 31,
      2007**




12/31/2007
              Historical
            
            Quercus
              Trust
              Investment
            
            12/31/2007
              Pro
                FormaAudited
            
            
            
            Unaudited**ASSETS****Current
                Assets:****Cash
                & cash equivalents**
            
            $
            671,244
            
            $
            3,680,000
            
            $
            4,351,244**Other
                current assets**
            
            
            933,184
            
            
            
            
            
            933,184**Total
                current assets**
            
            
            1,604,428
            
            
            
            
            
            5,284,428**Property
                & equipment, net**
            
            
            2,119,252
            
            
            
            
            
            2,119,252**TOTAL
                ASSETS**
            
            $
            3,723,680
            
            
            
            
            
            7,403,680**LIABILITIES
                & STOCKHOLDERS' EQUITY****Liabilities**
            
            $
            4,523,036
            
            
            
            
            $
            4,523,036**Deferred
                Revenue**
            
            
            840,945
            
            
            
            
            
            840,945**Equity**
            
            
            37,088,226
            
            
            3,680,000
            
            
            40,768,226**Deficit
                accumulated during development stage**
            
            
            (38,728,527
            )
            
            
            
            
            (38,728,527
            )**Total
                Stockholders' Equity**
            
            
            (1,640,301
            )
            
            
            
            
            (2,039,699
            )**TOTAL
                LIABILITIES & STOCKHOLDERS' EQUITY**
            
            $
            3,723,680
            
            
            
            
            $
            7,403,680




As
      discussed below the Quercus Trust invested approximately $4,000,000 in the
      Company in January of 2008. The pro forma balance sheet above gives effect
      to
      that investment net of expenses.


18


Beyond
      the adequacy of working capital the next most critical factor for our continued
      growth to market is successful completion of existing and planned demonstration
      projects. We believe we need to perfect our products through a limited number
      of
      these projects before moving into mass production. While the results of those
      projects are promising, we cannot assure you that they will be successfully
      completed or that further research and development will not be needed. The
      successful completion of present and future demonstration projects is critical
      to the development and acceptance of our technology.




We
      must
      devise methodologies to manufacture our energy storage devices in quantity.
      While we have assembled a management team that we believe can accomplish this,
      there is no assurance that we be able to successfully mass produce our product.




If
      we
      successfully complete our demonstration projects we must present sufficiently
      compelling evidence to prospective users of energy storage devices in order
      to
      persuade them to purchase our technology.




We
      do not
      use any non-financial measures to evaluate our performance other than the degree
      of success of our R&D and demonstration projects as time passes. The
      demonstration projects entail extended periods of time to assess our energy
      devices over multiple charge and deep discharge cycles. Further, the results
      of
      our demonstration projects do not lend themselves to simple measurement and
      presentation.




**Material
      Trends and Uncertainties**




We
      will
      continue to require substantial funds for research and development. Even with
      adequate funding there is no assurance our new technology can be successfully
      commercialized. While we intend to continue to manufacture specialty batteries
      and commence contract manufacturing there is no assurance of profits or whether
      those profits will be sufficient to sustain us as we continue to develop our
      new
      technology.




**Recent
      Financing Activities**




As
      further described below, in January the Quercus Trust entered into a funding
      agreement with us that obligated them to invest $18,000,000 over a 5 month
      period if we hit certain milestones, one of which has been met (See the
      description of the “Second Quercus Closing” below. We have already received the
      first $4,000,000 which should enable us to conduct operations through September
      2008. Based on projections for increased revenues for the next twelve months
      and
      assuming the closing of each of the two additional equity financing transactions
      with Quercus totaling $14 million, we believe that our available cash resources
      will provide sufficient cash resources to finance our operations and expected
      capital expenditures over the next twelve months. To obtain the remaining $14
      million the company is obligated to meet two milestones. We have met the first
      milestone, bringing our filings current, which allows us to apply for the $4
      million second funding. We anticipate that the Second Quercus Closing will
      occur
      sometime before April 15, 2008. Those proceeds will be deployed for the purchase
      of previously approved equipment and for general operating purposes. If we
      do
      not significantly increase our revenues to meet our projections, close on the
      Quercus financings or obtain additional financing within the next twelve months,
      we will likely be unable to implement our business plan, fund our liquidity
      needs or even continue our operations. Any equity or debt financings, if
      available at all, may be on terms which are not favorable to us and, in the
      case
      of equity financings, most likely will result in dilution to our
      stockholders.




In
      November of 2007 we began discussions related to a bridge loan offer with our
      directors, officers, and significant investors. We eventually structured a
      short
      term Secured Bridge Loan arrangement in increments of $100,000, such loans
      to
      bear interest at the rate of 14% and are secured by all of the assets, including
      the intellectual property assets of Axion Power International and all of the
      equipment and inventory assets of Axion Power Battery Manufacturing Inc. (the
      “Secured Bridge Loan”). Total funding received under the Secured Bridge Loan as
      of December 31, 2007 amounted to $2,540,000, with an additional funding of
      $100,000, received in January of 2008, bringing the entire loan total to
      $2,640,000. The new loans made to the Company since October 1, 2007, exclusive
      of extinguishment of existing debt on October 1, 2007, Secured Bridge Loan
      agreements, aggregate to approximately $1,740,000 in new working
      capital.




The
      bridge loan has an original maturity date of March 31, 2008, with three
      extensions of the maturity date at the option of the Company with higher
      interest rates to apply to each such extension. On March 31, 2008, the Company
      sent notice to the investors of its intention to extend the loan until April
      30,
      2008.. The extension entitles the investors to earn an additional 1% extension
      fee based on the original loan amount and interest at the annual rate of 15%.
      .
      If extended to May 31, 2008, the interest rate during the extension period
      increases to 16% with an extension fee equal to 1% of the original loan. If
      extended to June 30, 2008, the interest rate during the extension period
      increases to 18% with an extension fee equal to 2% of the original loan. A
      loan
      origination fee was paid, equal to 8% of the original loan. The origination
      fee
      decreased by one-half percent each week after December 15, 2007 until it closed
      on January 7, 2008. Warrants exercisable at $2.35 until December 31, 2012 are
      included with each $100,000 Secured Bridge Loan note. Warrants to be issued
      are
      as follows: 3,405 warrants upon occurrence of the loan, 851 additional warrants
      upon extension of the loan to April 30, 2008, 1,276 additional warrants upon
      extension of the loan to May 31, 2008, and 2,128 additional warrants upon
      extension to June 30, 2008. Anti-dilution provisions apply to the
      warrants.




As
      the
      Secured Bridge Loan financing will mature no later than June 30, 2008, we will
      not have sufficient capital to pay our day-to-day operating costs, finance
      our
      research and development, cover costs associated with our manufacturing
      activities, pay for the development of a sales and marketing organization and
      finance the acquisition of complimentary assets, technologies and businesses
      unless we obtain additional significant financing within the next 6 months.
      The
      Quercus Trust provided that financing and the Quercus transaction is discussed
      below.


19






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




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




In
      the
      second closing (the “Second Quercus Closing”), which will occur within five
      business days after we file the last of our delinquent reports under the
      Securities Exchange Act of 1934 (the “Delinquency Cure Date”), Quercus has
      agreed to purchase 1,904,762 additional units for $4,000,000. Each Quercus
      Second Closing unit will consist of one share of common stock, and a 5-year
      warrant to purchase 1.25 additional shares of common stock at an exercise price
      of $2.60 per share. We became current in our reporting obligations on March
      31,
      2008 and will remain current upon the filing of this Annual Report on or before
      April 15, 2008.




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




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




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




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




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




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




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




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




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




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




20




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




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




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




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




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




C
&
T
      and Series A Warrants


In
      January of 2004 the Company issued warrants (the “C&T Warrants”) to the
      shareholders of C&T (the “C&T Warrant Holders”) in exchange for the
      acquisition of certain intellectual property rights associated with the
      lead/carbon hybrid supercapacitor formerly referred to as the E3 Cell. In
      February of 2005 we issued shares of our Series A Convertible Preferred Stock
      (the “Series A Preferred Stock”) to a group of investors (the “Series A
      Holders”), and in recognition of certain concessions, we issued warrants to the
      Series A Holders (the “Series A Warrants”). Both the C&T Warrants and the
      Series A Warrants expired during the period of time in which the Company was
      not
      current in its Exchange Act Reporting Obligations. In recognition of this,
      our
      board has authorized management to commence discussions and potential
      negotiations with the C&T Warrant Holders and the Series A Holders in an
      effort to recognize that the economic benefits that these parties and the
      Company expected at the time these warrants were issued was frustrated by the
      length of the time the Company was out of compliance with its Exchange Act
      reporting obligations and to provide some form of tangible value to the C&T
      Warrant Holders and the Series A Holders.




21




**Results** **of Operations**




The
      comparative data below presents our Company’s results of operations for the
      fiscal years ended December 31 2006 and 2007. While certain of the data is
      not
      strictly comparable because some line items are positive and some negative,
      the
      percentages calculated demonstrate the relative significance of the various
      line
      items and the line items where there were significant changes from year to
      year:




1.
            SG&A
                expenses declined substantially from 2006 to 2007. While there were
                a
                number of factors that contributed, the decline reflects a decrease
                in
                legal expenses, as well as the consolidation of our total operations
                in
                New Castle Pennsylvania.




2.
            Research
                and development declined from 2006 to 2007. This was the result of
                the
                closing of our Toronto facility and the gradual transition from a
                full
                R&D company to the present entity that has both manufacturing and
                R&D components.




3.
            There
                was a $1.1 million credit to total expenses in 2006, as a result
                of the
                return of Mega C Trust Augmentation Shares which is not expected
                to recur.
                This line item reduced total expenses by $1.1 million in 2006 compared
                to
                2007.




4.
            There
                were non-cash preferred stock dividends and beneficial conversion
                features
                of $8.4 million in 2007 with a comparable amount of $.8 million in
                2006.
                This non-cash item is not expected to recur in this dollar
                amount.




5.
            The
                non-cash preferred stock dividends and beneficial conversion feature
                were
                the primary reason for the $6 million increase in net loss attributable
                to
                common shareholders in 2007.




6.
            The
                Pennsylvania capital stock tax was accrued to cover and recorded
                as income
                tax for 2007.




**2007**
            
            **2006****Statements
                of Operations**
            
            
            
            Percent of line item to
              net loss applicable to
              common shareholders
            
            
            
            Percent of line item to
              net loss applicable to
              common shareholders**Revenues**
            
            
            533,911
            
            
            3.7%
            
            
            275,377
            
            
            3.5%Cost
                of tangible products sold
            
            
            1,130,855
            
            
            7.9%
            
            
            557,983
            
            
            7.1%Gross
                profit / (loss)
            
            
            (596,974
            )
            
            4.2%
            
            
            (282,606
            )
            
            3.6%**Expenses**Selling,
                general & administrative
            
            
            3,720,632
            
            
            26.0%
            
            
            4,788,986
            
            
            60.9%Research
                & development
            
            
            1,308,345
            
            
            9.2%
            
            
            2,001,506
            
            
            25.5%Impairment
                of assets
            
            
            -
            
            
            
            
            
            6,581
            
            
            0.1%Interest
                expense - related party
            
            
            276,651
            
            
            1.9%
            
            
            713,048
            
            
            9.1%Derivative
                revaluation
            
            
            (72,236
            )
            
            0.5%
            
            
            437,588
            
            
            5.6%Mega
                C Trust Share Augmentation (Return)
            
            
            -
            
            
            
            
            
            (1,125,000
            )
            
            14.3%Other,
                net
            
            
            (47,708
            )
            
            0.3%
            
            
            (77,352
            )
            
            1.0%**Net
                loss before income taxes**
            
            
            (5,782,658
            )
            
            40.5%
            
            
            (7,027,963
            )
            
            89.4%Income
                Taxes
            
            
            83,469
            
            
            
            
            
            -**Deficit
                accumulated during development stage**
            
            
            (5,866,127
            )
            
            41.1%
            
            
            (7,027,963
            )
            
            89.4%Less
                preferred stock dividends and beneficial conversion
                feature
            
            
            (8,417,955
            )
            
            58.9%
            
            
            (835,529
            )
            
            10.6%**Net
                loss applicable to common shareholders**
            
            
            **(14,284,082**
            **)**
            
            **100.0**%****
            
            
            **(7,863,492**
            **)**
            
            **100.0**%****Basic
                and diluted net loss per share
            
            
            (0.88
            )
            
            
            
            
            (0.47
            )Weighted
                average common shares outstanding
            
            
            16,247,299
            
            
            
            
            
            16,628,290




22




**Summary
      of Consolidated Results for the Year Ended December 31, 2007 compared with
      Year
      Ended December 31, 2006**




*Revenue*




Our
      revenues were approximately $534,000 for the fiscal year ended December 31,
      2007
      compared to revenues of approximately $275,000 for the fiscal year ended
      December 31, 2006. Total revenues nearly doubled for fiscal 2007 compared to
      fiscal 2006. The increase in revenue was primarily due to 12 months of operation
      at the New Castle plant as opposed to 9 months in 2006. In 2007 we had a better
      plant facility with more licensed products to produce than we had in 2006.
      Our
      purchase of the assets of a battery manufacturing plant in early 2006 enabled
      us
      to realize the revenues to date primarily from the sale of specialty batteries
      (classic car and 16 volt racing car batteries). These revenues will be dependent
      upon the number of enthusiasts for classic cars and for auto racing. We have
      one
      customer that accounted for 11.4% of revenues in 2007.




*Cost
      of Tangible Products Sold and Gross Profit (Loss)*




Costs
      of
      tangible products sold (“COTPS”) include several raw materials with lead being
      the most prominent and costly. We also use other components such as plastic
      battery cases and covers, acid and separators. Our PbC batteries use specialty
      activated carbon for the negative electrode component of the battery. Lead
      in
      particular has increased substantially in price in the last two years as
      available quantities have shrunk. In manufacturing batteries we also incur
      labor
      and overhead expense as well as normal costs of packaging and shipping. COTPS
      increased by approximately $.57 million, or 102%, to $1.13 million for the
      fiscal year ended December, 2007 compared with approximately $0.56 million
      for
      the fiscal year ended December 31, 2006. The increase in COTPS from fiscal
      2006
      to fiscal 2007 was primarily attributable to:




1.
            Sales
                revenues very nearly doubled,




2.
            2007
                was the first full season for the sale of our specialty batteries
                after
                the New Castle battery plant remained dormant for nine months from
                June of
                2005 into March of 2006,




3.
            In
                2007 the company had a history of one year in production to meet
                customer’s needs,




4.
            We
                were able to do more advertising for the 2007 sales
                season.




Gross
      loss (margin on sales) increased from approximately ($0.3) million, or in fiscal
      year 2006 to $.6 million, in fiscal year 2007. The increased loss on gross
      margin was attributable to continued operations of the plant at a very low
      level
      or production. We believe we will produce profitable gross margins on sales
      as
      we ramp up production but there is no assurance of profits.




23




*Selling,
      General & Administrative Expenses*




Selling,
      general & administrative (“SG&A”) expenses include salaries and
      services, non-cash compensation, sales and marketing expenses as well as public
      company costs which include fund raising, investor relations, directors’
compensation, legal and audit fees. Total SG&A expenses decreased $1.1
      million, or 22%, to $3.7 million for the fiscal year ended December 31, 2007
      compared with the fiscal year ended December 31, 2006 expenses of approximately
      $4.8 million. As a comparison of revenues to SG&A, SG&A expenses were 7
      times revenues for fiscal 2007 compared to 17.4 times revenues for fiscal 2006.
      The decrease in marketing and selling expenses from fiscal 2006 to fiscal 2007
      was primarily attributable to a decrease in legal fees and the consolidation
      of
      operations into a single facility at New Castle.




*Research
      & Development Expenses*




Research
      and development expenses include salaries for our scientists as well as test
      equipment and general overhead. **** Total
      research and product development expenses decreased $.7 million or 35% to $1.3
      million for the fiscal year ended December 31, 2007 compared with the fiscal
      year ended December 31, 2006 expenses of $2.0 million. As a percentage of
      revenues, research and development expenses were 245% for fiscal 2007 and 727%
      for fiscal 2006. The decrease in product development expenses from the levels
      for fiscal 2006 to the levels for fiscal 2007 was due to reduced salaries
      resulting from the closure of the operations in Canada and lower legal fees
      related to patents.




*Interest
      Expense - Related Party*




Interest
      Expense - Related Party includes the coupon value of interest on debt, debt
      discount on detachable warrants, and the beneficial conversion opportunities
      inherent to the debt itself. Interest expense - related party for the fiscal
      year ended December 31, 2007 was approximately $.3 million compared with $0.7
      million in the fiscal year ended December 31, 2006, representing a decrease
      of
      approximately $.4 million. As the Company funded its capital needs in 2006
      though loan instruments, the bulk of these loans were converted to equity during
      the fourth quarter of 2007. Unlike 2006, the 2007 loans were not convertible
      and
      warrant modifications involved preferred dividends and not interest as in
      2006.




*Derivative
      Revaluation*




Derivative
      Revaluations are recognized whenever the company incurs a liability to issue
      an
      equity instrument. The instrument is revalued quarterly until the point in
      time
      that the liability is settled. Derivative revaluation expenses for the fiscal
      year ended December 31, 2007 was approximately a credit of ($.072) million
      compared with a charge of $0.43 million in the fiscal year ended December 31,
      2006, representing a decrease of approximately $.5 million. Throughout 2006,
      the
      Company funded its capital needs with debt that offered detachable warrants.
      These warrants were not settled until December 2006 at which point the Company’s
      stock values were at their peak. Whereas 600,000 warrants were subject to
      revaluation during 2006, only 400,000 were subject to revaluation during 2007.




*Mega
      C Trust Share Augmentation (Return)*




Mega
      C
      Trust Share Augmentation (Return) includes the valuation of 500,000 shares
      of
      our common stock as described in the financial statement footnote titled
“ Mega-C Power
      Corp (Mega-C), **** Mega-C **** Trust **** (the
      Trust), The **** Taylor
      Litigation.” This type of transaction is not expected to recur after the
      transaction in 2006. ****




For
      the
      fiscal year ended December 31, 2007, our net loss before income taxes decreased
      $1.2 million, or 18%, to $5.8 million on revenue of $.5 million, from an
      operating loss of approximately ($7.0 million) on revenue of $0.3 million for
      the fiscal year ended December 31, 2006. As discussed above, the factors
      primarily affecting this decrease in operating loss were a decrease in legal
      expenses, the absence of a $1.1 million dollar credit as occurred in 2006 and
      a
      decrease in expenses from the closure of our Canadian facilities.




Included
      in the net loss applicable to common shareholders are non-cash compensation
      expense related to preferred stock dividends and beneficial conversion feature
      of $8.4 million in 2007 compared with $.8 million in 2006.




Our
      revenues and expenses do not include any items that do not arise from continuing
      operations. However, our operational costs have included significant legal
      costs
      that we believe will decline based on the status of the litigation described
      in
      the litigation section herein.




Our
      net
      loss attributable to common stockholders in 2007 of $14 million included $8.4
      million dollars of preferred stock dividends and charges related to a beneficial
      conversion feature. We do not anticipate these levels of non-cash charges will
      recur.




24




The
      year
      2006 reflects a line item captioned “Mega C Trust Share Augmentation (Return)”
with a credit of $1,125,000. This credit reduced the Company’s overall loss by
      $1.1 million dollars and is not expected to recur.




There
      are
      limited seasonal aspects to our specialty battery business. Sales for batteries
      for race cars and classic cars typically peak in the spring with another smaller
      peak in the fall.




**Liquidity
      and Capital Resources**




Our
      primary source of liquidity has historically been cash generated from sales
      of
      our equity or debt securities. From inception until the fiscal year ended
      December 31, 2006, we generated no revenue from operations. Based on projections
      for increased revenues for the next twelve months and assuming the closing
      of
      each of the two additional equity financing transactions with Quercus, we
      believe that our available cash resources will provide sufficient cash resources
      to finance our operations and expected capital expenditures over the next twelve
      month period. If we do not significantly increase our revenues to meet our
      projections, close on the Quercus financing or obtain additional financing
      within the next twelve months, we will likely be unable to implement our
      business plan, fund our liquidity needs or even continue our operations. Any
      equity or debt financings, if available at all, may be on terms which are not
      favorable to us and, in the case of equity financings, most likely will result
      in dilution to our stockholders.




*Cash,
      Cash Equivalents and Working Capital*




At
      December 31, 2007, we had approximately $.67 million of cash and cash
      equivalents compared to approximately $3.6 million at December 31, 2006. At
      December 31, 2007 working capital deficit was $2.9 million compared to $2.1
      million at December 31, 2006.




*Cash
      Flows from Operating Activities*




Net
      cash
      used in operations for the year ended December 31, 2007 was $3.7 million,
      primarily due to ongoing research and development, accounting and legal fees,
      and normal costs of operations. This was partially offset by the following
      sources of cash and non-cash items governmental grants, equity instruments
      and
      loans from related parties. Cash used in operations for the year ended December
      31, 2006 was approximately $4.6 million, primarily due to a deficit accumulated
      during development stage of approximately $7.0 million and the following uses
      of
      cash inventory and other prepaid expenses. This was partially offset by cash
      and
      non-cash items by sale of equity instruments and related party debt. Future
      fluctuations in inventory balances, accounts receivable and accounts payable
      will be dependent upon several factors, including, but not limited to, quarterly
      sales, our strategy in building inventory in advance of receiving orders from
      customers, and the accuracy of our forecasts of product demand and component
      requirements.




*Cash
      Flows from Investing Activities*




Net
      cash
      used in investing activities for the fiscal year ended December 31, 2007 was
      $1.2 million compared to $0.8 million for the fiscal year ended December 31,
      2006. The cash used by investing activities included the purchase of equipment
      for both production and research and development.




*Cash
      Flows from Financing Activities*




Net
      cash
      provided by financing activities in the fiscal year ended December 31, 2007
      was
      approximately $2.0 million compared to $8.4 million for the fiscal year ended
      December 31, 2006, primarily due to the proceeds from related party
      debt.




*Significant
      Financing Arrangements*




2006
      Private Placement of Series A Preferred Stock *:* ****** On
      October 18, 2006, the Company’s board of directors designated, from the
      Company’s total authorized 12,500,000 shares, a new series of preferred stock
      consisting of up to 2,000,000 shares designated Series A Convertible Preferred
      Stock (the “series A preferred”). During the fourth quarter of 2006, the Company
      sold an aggregate of 782,997 shares of series A preferred at a price of $10
      per
      share for net proceeds of $7,722,470 including $4,352,500 in cash and $3,369,970
      in liability conversion. In connection with the private placement, the Company
      incurred total offering expenses of $258,202, of which $107,500 was paid in
      cash, while the remainder was paid through the issuance of options to acquire
      shares of the Company’s common stock. The proceeds were used to fund ongoing
      operations.




25




April
      2006 Common Stock Private Placement: On April
      21, 2006, two unaffiliated individual accredited investors purchased a total
      of
      80,000 shares of common stock for a purchase price of $2.50 per share or
      $200,000 in aggregate proceeds. In addition, the Company issued warrants to
      purchase 80,000 shares of common stock with an exercise price of $4.00 per
      share
      to the investors. Also on April 21, 2006, the Company’s chief executive officer
      exercised his $2.00 warrants to purchase 56,700 shares for $113,400. The
      proceeds were used to fund ongoing operations.




January
      2007 Series A Preferred Stock Financing :
      In
      January 2007, the Company sold 40,000 additional shares of series A preferred
      to
      accredited investors for gross cash proceeds of $400,000. The proceeds were
      used
      to fund ongoing operations.




August
      2007 Debt Financing :
      In
      August 2007, the Company borrowed an additional $460,000 from Robert Averill,
      a
      director of the Company and $115,000 of this sum was repaid on September 28,
      2007. In October 2007, Igor Filipenko, a former Board Member and majority
      shareholder of C&T, loaned the Company $115,000 at 12% interest per annum.
      On November 1, 2007, the Company borrowed an additional $267,900 from Robert
      Averill. The proceeds were used to fund ongoing operations.




December
      2007 Secured Bridge Loan Transaction .
      In
      December 2007, the Company offered certain of its directors, officers, and
      significant investors the opportunity to participate in a short term bridge
      loan
      arrangement in increments of $100,000, each such loan to bear interest at 14%
      and to be secured by all of the assets, including the intellectual property
      assets of Axion Power International and Axion Power Battery Manufacturing Inc.
      (the “Secured Bridge Loan”). Total funding received under the Secured Bridge
      Loan as of December 31, 2007 amounted to $2,540,000, with additional funding
      of
      $100,000 in January of 2008. The proceeds were used to fund ongoing
      operations.




*Capital
      Expenditure Commitments*




We
      plan
      the following capital expenditures:




1.
            New
                equipment for negative electrode
                production.




2.
            New
                equipment for carbon sheeting
                production.




3.
            New
                plant equipment for standard lead-acid battery
                production.




4.
            Renovate
                and install already purchased lead-acid battery production
                equipment.




With
      the
      $4 million the Quercus Trust invested in our Company in January of 2008 we
      believe we can sustain operations until September of 2008. To obtain the
      remaining $14 million the company is obligated to meet two milestones. We have
      met the first milestone, bringing our filings current, which allows us to apply
      for the $4 million second funding. We anticipate that the Second Quercus Closing
      will occur sometime during April 2008. Those proceeds will be deployed for
      the
      purchase of previously approved equipment and for general operating purposes.
      For us to fully pursue our business plan, we will need additional funding,
      either from the final Quercus closing or from some other funding source. We
      expect to obtain the final Quercus milestone but there can be no assurance
      we
      will meet it., or that it will be available if we do.




**Critical
      Accounting Policies, Judgments and Estimates**




Our
      Management’s Discussion and Analysis of Financial Condition or Plan of Operation
      section discusses our financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      To prepare these financial statements, we must make estimates and assumptions
      that affect the reported amounts of assets and liabilities. These estimates
      also
      affect our reported revenues and expenses. On an ongoing basis, Management
      evaluates its estimates and judgment, including those related to revenue
      recognition, accrued expenses, financing operations and contingencies and
      litigation. Management bases its estimates and judgment on historical experience
      and on various other factors that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. The following represents a summary of our critical
      accounting policies, defined as those policies that we believe are the most
      important to the portrayal of our financial condition and results of operations
      and that require management’s most difficult, subjective or complex judgments,
      often as a result of the need to make estimates about the effects of matters
      that are inherently uncertain.




26




***Use
      of Estimates:*** **** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect reported amounts of assets and liabilities
      and disclosure of contingent assets and liabilities at the date of the financial
      statement and the reported amounts of revenues and expenses during the reporting
      period. Actual results could differ from the estimates.




***Principles
      of Consolidation*** **:** The
      consolidated financial statements include the accounts of Axion, and its wholly
      owned subsidiaries, APB, APC and C&T (collectively, the Company). All
      significant inter-company balances and transactions have been eliminated in
      consolidation.




***Revenue
      Recognition:*** The
      Company recognizes revenue upon transfer of title at the time of shipment
      (F.O.B. shipping point), when all significant contractual obligations have
      been
      satisfied, the price is fixed or determinable and collection is reasonably
      assured. ****




***Stock-Based
      Compensation:*** Prior to
      January 1, 2006, the Company accounted for stock option awards in accordance
      with the recognition and measurement provisions of Accounting Principles Board
      Opinion No. 25, “ *Accounting
      for Stock Issued to Employees,* (APB
      25) *”* and
      related interpretations, as permitted by Statement of Financial Accounting
      Standard No. 123, “ *Accounting
      for Stock-Based Compensation* ”,
      (SFAS
      123). Under APB 25, compensation cost for stock options issued to employees
      was
      measured as the excess, if any, of the fair value of the Company’s stock at the
      date of grant over the exercise price of the option granted. Compensation cost
      was recognized for stock options, if any, ratably over the vesting period.
      As
      permitted by SFAS 123, the Company reported pro-forma disclosures presenting
      results and earnings as if the Company had used the fair value recognition
      provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.




Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123 (revised 2004), *“Share-Based
      Payment”* ,
      (SFAS
      123(R)) using the modified prospective transition method. See footnote captioned
      “Equity Compensation” for further detail on the impact of SFAS 123(R) to the
      Company’s consolidated financial statements.




Stock-based
      compensation related to non-employees is recognized as compensation expense
      in
      the accompanying consolidated statements of operations and is based on the
      fair
      value of the services received or the fair value of the equity instruments
      issued, whichever is more readily determinable **.** The
      Company’s accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF 96-18, *“Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services”* and EITF
      00-18, *“Accounting
      Recognition for Certain Transactions Involving Equity Instruments granted to
      Other Than Employees.”* The
      measurement date for the fair value of the equity instruments issued is
      determined at the earlier of (i) the date at which a commitment for performance
      by the consultant or vendor is reached or (ii) the date at which the consultant
      or vendor’s performance is complete. In the case of equity instruments issued to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement.




***Research
      and Development*** **:** Research
      and development costs are recorded in accordance with FASB No, 2, “ *Accounting
      for Research and Development Costs,* ”
which
      requires that costs incurred in research and development activities covering
      basic scientific research and the application of scientific advances to the
      development of new and improved products and their uses be expensed as incurred.
      The policy of expensing the costs of research and development activities relate
      to (i) in-house work conducted by the Company; (ii) costs incurred in
      connection with contracts that outsource research and development to third
      party
      developers; and (iii) costs incurred in connection with the acquisition of
      intellectual property that is properly classified as in-process research and
      development. All research and development costs have been expensed.




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




**Item
      7**  **Consolidated
      Financial Statements**




27





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Stockholders of


Axion
      Power International, Inc.




We
      have
      audited the accompanying consolidated balance sheets of Axion Power
      International, Inc. as of December 31, 2007  and
      2006,
      and the related consolidated statements of operations, cash flows, and changes
      in stockholders’ equity and comprehensive income for the years then ended and
      for the period since inception (September 18, 2003) through December 31, 2007.
      Axion Power International Inc.’s management is responsible for these
      consolidated financial statements. Our responsibility is to express an opinion
      on these consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements, assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall consolidated financial statement presentation. We believe
      that our audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Axion Power International,
      Inc. as of December 31, 2007 and 2006, and the results of its operations and
      its
      cash flows for the years then ended and for the period since inception
      (September 18, 2003) through December 31, 2007 in conformity with accounting
      principles generally accepted in the United States of America.





/s/
      Rotenberg & Co., LLP





Rotenberg
      & Co., LLP


Rochester,
      New York


April
      3,
      2008


28




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      BALANCE SHEETS**


**(A
      Development Stage Company)**







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




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




29




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(A
      Development Stage Company)**




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




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




30




**AXION
      POWER INTERNATIONAL, INC**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(A
      Development Stage Company)**




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




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




31




Axion
      Power International, Inc.


Consolidated
      Statement of Stockholders' Deficit-US$


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


(A
      Development Stage Company)


Deficit
                Accumulated
                During
                Development
                Stage
              
              Other
                Comprehensive
                Income
                Cumulative
                Translation
                Adjustments
              
              Total
                Stockholders'
                EquityPreferred
              
              CommonShares
              
              Senior
                Preferred
              
              Series A
                Preferred
              
              Shares
              
              Common
                Stock
                Amount
              
              Additional
                Paid-In
                Capital
              
              Subscriptions
                ReceivableInception September 18, 2003
              
              
              0
              
              $
              0
              
              
              
              
              
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Shares
                  to founders upon formulation of APC
              
              
              
              
              
              
              
              
              
              
              
              1,360,000
              
              
              137
              
              
              (137
              )
              
              0
              
              
              
              
              
              
              
              
              0Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              170,000
              
              
              17
              
              
              48,936
              
              
              
              
              
              
              
              
              
              
              
              48,953Conversion
                  of debt to equity
              
              
              
              
              
              
              
              
              
              
              
              1,108,335
              
              
              111
              
              
              1,449,889
              
              
              (350,000
              )
              
              
              
              
              
              
              
              1,100,001Debt
                  Discount from convertible debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,402
              
              
              
              
              
              
              
              
              
              
              
              86,402Unamortized
                  discount on convertible debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (77,188
              )
              
              
              
              
              
              
              
              
              
              
              (77,188
              )Fair
                  value of options issued as loan inducements
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,574
              
              
              
              
              
              
              
              
              
              
              
              15,574Shared
                  issued during Recapitalization-
                  Shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              6,147,483
              
              
              615
              
              
              (615
              )
              
              
              
              
              
              
              
              
              
              
              0-
                  Equity acquired in recapitalization
              
              
              
              
              
              
              
              
              
              
              
              1,875,000
              
              
              188
              
              
              (188
              )
              
              
              
              
              
              
              
              
              
              
              0Net
                  Loss December 31, 2003
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,097,030
              )
              
              
              
              
              (3,097,030
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (56,547
              )
              
              (56,547
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,153,577
              )Balance
                  at December 31, 2003
              
              
              0
              
              
              0
              
              
              
              
              
              10,660,818
              
              $
              1,067
              
              $
              1,522,674
              
              $
              (350,000
              )
              $
              (3,097,030
              )
              $
              (56,547
              )
              $
              (1,979,836
              )Shares
                  issued to founders
              
              
              
              
              
              
              
              
              
              
              
              445,000
              
              
              45
              
              
              (45
              )
              
              
              
              
              
              
              
              
              
              
              0Augmentation
                  shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              180,000
              
              
              18
              
              
              (18
              )
              
              
              
              
              
              
              
              
              
              
              0Conversion
                  of debt
              
              
              
              
              
              
              
              
              
              
              
              283,333
              
              
              28
              
              
              451,813
              
              
              350,000
              
              
              
              
              
              
              
              
              801,841Warrants
                  in consideration for technology purchased
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              563,872
              
              
              
              
              
              
              
              
              
              
              
              563,872Common
                  stock offering - net of cost
              
              
              
              
              
              
              
              
              
              
              
              823,800
              
              
              81
              
              
              1,607,053
              
              
              
              
              
              
              
              
              
              
              
              1,607,134Proceeds
                  from exercise of warrants
              
              
              
              
              
              
              
              
              
              
              
              475,200
              
              
              48
              
              
              867,972
              
              
              
              
              
              
              
              
              
              
              
              868,020Liability
                  converted as partial prepayment on options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              306,000
              
              
              
              
              
              
              
              
              
              
              
              306,000Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              45,000
              
              
              5
              
              
              191,738
              
              
              
              
              
              
              
              
              
              
              
              191,742Fraction
                  Shares Issued Upon Reverse Spilt
              
              
              
              
              
              
              
              
              
              
              
              48,782
              
              
              5
              
              
              (5
              )
              
              
              
              
              
              
              
              
              
              
              0Net
                  Loss December 31, 2004
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,653,637
              )
              
              
              
              
              (3,653,637
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (74,245
              )
              
              (74,245
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,727,882
              )Balance
                  at December 31, 2004
              
              
              0
              
              
              0
              
              
              
              
              
              12,961,933
              
              $
              1,296
              
              $
              5,511,054
              
              $
              0
              
              $
              (6,750,667
              )
              $
              (130,792
              )
              $
              (1,369,109
              )Proceeds
                  From Exercise of Warrants & Options
              
              
              
              
              
              
              
              
              
              
              
              853,665
              
              
              85
              
              
              1,283,395
              
              
              (496,000
              )
              
              
              
              
              
              
              
              787,480Common
                  Stock Offering Proceeds
              
              
              
              
              
              
              
              
              
              
              
              600,000
              
              
              60
              
              
              1,171,310
              
              
              (200,000
              )
              
              
              
              
              
              
              
              971,370Preferred
                  Stock Offering proceeds
              
              
              385,000
              
              
              3,754,110
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (25,000
              )
              
              
              
              
              
              
              
              3,729,110Conversion
                  of preferred to common
              
              
              (245,000
              )
              
              (2,475,407
              )
              
              
              
              
              1,470,000
              
              
              147
              
              
              2,475,260
              
              
              
              
              
              
              
              
              
              
              
              0Stock
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              50
              
              
              1,524,950
              
              
              
              
              
              
              
              
              
              
              
              1,525,000Fair
                  Value of Options for Non-Employee Services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              237,568
              
              
              
              
              
              
              
              
              
              
              
              237,568Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              219,000
              
              
              22
              
              
              647,480
              
              
              
              
              
              
              
              
              
              
              
              647,502Impact
                  of beneficial conversion feature
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,099,156
              
              
              
              
              
              (3,099,156
              )
              
              
              
              
              0Preferred
                  Stock Dividends
              
              
              
              
              
              176,194
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (176,194
              )
              
              
              
              
              0Net
                  Loss December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,325,113
              )
              
              
              
              
              (6,325,113
              )Other
                  Comprehensive income (loss):Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (24,780
              )
              
              (24,780
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,349,893
              )Balance
                  at December 31, 2005
              
              
              140,000
              
              $
              1,454,897
              
              
              
              
              
              16,604,598
              
              $
              1,661
              
              $
              15,950,173
              
              $
              (721,000
              )
              $
              (16,351,130
              )
              $
              (155,572
              )
              $
              179,029
  32
  Balance
                  at December 31, 2005
              
              
              140,000
              
              $
              1,454,897
              
              
              
              
              
              16,604,598
              
              $
              1,661
              
              $
              15,950,173
              
              $
              (721,000
              )
              $
              (16,351,130
              )
              $
              (155,572
              )
              $
              179,029Preferred
                  Series A Proceeds
              
              
              782,997
              
              
              
              
              
              7,571,768
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,571,768Preferred
                  - Dividends
              
              
              
              
              
              119,092
              
              
              103,101
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (222,193
              )
              
              
              
              
              0Senior
                  Preferred Cancellation
              
              
              (2,500
              )
              
              (25,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,000
              
              
              
              
              
              
              
              
              0Common
                  Stock Offering Proceeds
              
              
              
              
              
              
              
              
              
              
              
              80,000
              
              
              8
              
              
              199,992
              
              
              696,000
              
              
              
              
              
              
              
              
              896,000Proceeds
                  from exercise of warrants
              
              
              
              
              
              
              
              
              
              
              
              56,700
              
              
              6
              
              
              113,394
              
              
              
              
              
              
              
              
              
              
              
              113,400Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              6,000
              
              
              1
              
              
              23,999
              
              
              
              
              
              
              
              
              
              
              
              24,000Augmentation
                  shares issued to Mega-C trust
              
              
              
              
              
              
              
              
              
              
              
              (500,000
              )
              
              (50
              )
              
              (1,124,950
              )
              
              
              
              
              
              
              
              
              
              
              (1,125,000
              )Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,241,231
              
              
              
              
              
              
              
              
              
              
              
              1,241,231Fair
                  value of warrants with related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              885,126
              
              
              
              
              
              
              
              
              
              
              
              885,126Modification
                  of preexisting warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              392,811
              
              
              
              
              
              
              
              
              
              
              
              392,811Fair
                  value warrants issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,848
              
              
              
              
              
              
              
              
              
              
              
              86,848Beneficial
                  conversion feature on related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              95,752
              
              
              
              
              
              
              
              
              
              
              
              95,752Beneficial
                  conversion feature on Preferred Stock
              
              
              
              
              
              
              
              
              (6,096,634
              )
              
              
              
              
              
              
              
              6,709,970
              
              
              
              
              
              (613,336
              )
              
              
              
              
              0Net
                  Loss December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,027,963
              )
              
              
              
              
              (7,027,963
              )Other
                  Comprehensive income (loss):
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (95,387
              )
              
              (95,387
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,123,350
              )Balance
                  at December 31, 2006
              
              
              920,497
              
              $
              1,548,989
              
              $
              1,578,235
              
              
              16,247,298
              
              
              1,625
              
              
              24,574,346
              
              
              -
              
              
              (24,214,622
              )
              
              (250,959
              )
              $
              3,237,614Preferred
                  Series A Proceeds
              
              
              40,000
              
              
              
              
              
              337,270
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              337,270Preferred
                  - Dividends
              
              
              
              
              
              130,566
              
              
              1,790,755
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,921,321
              )
              
              
              
              
              0Employee
                  incentive share grants
              
              
              
              
              
              
              
              
              
              
              
              1,000
              
              
              -
              
              
              315,950
              
              
              
              
              
              
              
              
              
              
              
              315,950Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              215,393
              
              
              
              
              
              
              
              
              
              
              
              215,393Fair
                  value of warrants with related party debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              98,463
              
              
              
              
              
              
              
              
              
              
              
              98,463Modification
                  of preexisting warrants
              
              
              
              
              
              (164,179
              )
              
              
              
              
              
              
              
              
              
              
              164,179
              
              
              
              
              
              
              
              
              
              
              
              0Beneficial
                  conversion feature on Preferred Stock
              
              
              
              
              
              
              
              
              6,096,634
              
              
              
              
              
              
              
              
              400,000
              
              
              
              
              
              (6,496,634
              )
              
              
              
              
              0Net
                  Loss December 31, 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,866,127
              )
              
              
              
              
              (5,866,127
              )Other
                  Comprehensive income (loss):
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,136
              
              
              21,136Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,844,991
              )Balance
                  at December 31, 2007
              
              
              960,497
              
              $
              1,515,376
              
              $
              9,802,894
              
              
              16,248,298
              
              $
              1,625
              
              $
              25,768,331
              
              
              -
              
              $
              (38,498,704
              )
              $
              (229,823
              )
              $
              (1,640,301
              )
  **The
        Accompanying Notes are an Integral Part of the Financial
        Statements**




33


**AXION
      POWER INTERNATIONAL, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**(A
      DEVELOPMENT STAGE COMPANY)**




**Note
      1 — Organization and Operations**




These
      consolidated financial statements of Axion Power International, Inc., a Delaware
      corporation (API), include the operations of its wholly owned subsidiaries;
      Axion Power Battery Manufacturing, Inc (APB), Axion Power Corporation, a
      Canadian Federal corporation (“APC”), and C & T Co. Inc., an Ontario
      corporation (“C&T”) (collectively, the Company).




Axion
      is
      developing innovative battery/energy storage device technology. The Company
      continues its research and development and has entered the testing phase of
      its
      unique battery designs. The Company also acquired the equipment and inventory
      from a closed battery manufacturing plant from a bank (which had acquired the
      assets in foreclosure) and commenced limited manufacture of specialty batteries
      (see footnote captioned “Purchase of Assets of Failed Battery Manufacturing
      Company [Asset Purchase]).”




**Note
      2 —Accounting Policies**




***Use
      of Estimates:*** **** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect reported amounts of assets and liabilities
      and disclosure of contingent assets and liabilities at the date of the financial
      statement and the reported amounts of revenues and expenses during the reporting
      period. Actual results could differ from the estimates.




***Principles
      of Consolidation*** **:** The
      consolidated financial statements include the accounts of Axion, and its wholly
      owned subsidiaries, APB, APC and C&T (collectively, the Company). All
      significant inter-company balances and transactions have been eliminated in
      consolidation.




***Basis
      of Presentation*** **:** The
      financial statements have been presented in a “development stage” format in
      accordance with the provisions of Statement of Financial Accounting Standards
      (FASB) No. 7, *Accounting
      and Reporting by Development Stage Enterprises* .
      Since
      inception, the Company’s primary activities have been raising capital, obtaining
      financing, developing Axion’s energy storage technology and testing its proposed
      products.




***Segment
      Reporting:*** Management
      has determined that the Company is organized, managed and internally reported
      as
      one business segment. Segments are determined based on differences in products,
      internal reporting and how operational decisions are made.




***Foreign
      Currency Translation:*** ** The
      accounts of APC and C&T are measured using the Canadian dollar as the
      functional currency for all the periods presented in the financial statements.
      The translation from Canadian dollars to U.S. dollars is performed for the
      balance sheet accounts using current exchange rates in effect at each of the
      balance sheet dates, and for the revenue and expense accounts using the average
      rate in effect during the periods. The resulting translation adjustments are
      recorded as a component of accumulated other comprehensive income (loss) within
      stockholders’ equity. Gains or losses resulting from transactions denominated in
      currencies other than the functional currency are included in the results of
      operations as incurred. The gains or losses arising from the inter-company
      loan
      denominated in U.S. dollars are directly reflected in other comprehensive
      income, as the amounts are not expected to be repaid in the foreseeable
      future.




***Comprehensive
      Income:*** The
      Company follows FASB No. 130, “ *Reporting
      Comprehensive Income* .”
      Comprehensive income, as defined by Statement 130, is the change in equity
      of a
      business enterprise during a reporting period from transactions and other events
      and circumstances from non-owner sources. In addition to the Company’s net loss,
      the change in equity components under comprehensive income include the foreign
      currency translation adjustment.




34




***Fair
      Value of Financial Instruments:*** **** FASB
      No.
      107, " *Disclosures
      about Fair Value of Financial Instruments* ,"
      requires disclosure of fair value information about certain financial
      instruments, including, but not limited to, cash and cash equivalents, accounts
      receivable, refundable tax credits, prepaid expenses, accounts payable, accrued
      expenses, notes payable to related parties and convertible debt-related
      securities. Fair value estimates discussed herein are based upon certain market
      assumptions and pertinent information available to management as of December
      31,
      2007 and 2006. The carrying value of the balance sheet financial instruments
      included in the Company’s consolidated financial statements approximated their
      fair values.




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




***Concentration
      of Credit Risk:*** The
      Company’s cash and cash equivalents are on deposit with banks. Only a portion of
      the cash and cash equivalents would be covered by deposit insurance and the
      uninsured balances are substantially greater than the insured amounts. Although
      cash and cash equivalent balances exceed insured deposit amounts, management
      does not anticipate non-performance by the banks.




***Accounts
      Receivable:*** The
      Company records its accounts receivable at the original invoice amount less
      an
      allowance for doubtful accounts. An account receivable is considered to be
      past
      due if any portion of the receivable balance is outstanding beyond its scheduled
      due date. On a quarterly basis, the Company evaluates its accounts receivable
      and establishes an allowance for doubtful accounts, based on its history of
      past
      write-offs and collections, and current credit conditions. No interest is
      accrued on past due accounts receivable. The Company has concluded that there
      is
      no need for an allowance for doubtful accounts at December 31, 2007 and
      2006.




***Inventory:*** Inventory is recorded at the lower of cost or market value, and adjusted as
      appropriate for decreases in valuation and obsolescence. Adjustments to the
      valuation and obsolescence reserves are made after analyzing market conditions,
      current and projected sales activity, inventory costs and inventory balances
      to
      determine appropriate reserve levels. As of December 31, 2007, no reserve for
      obsolescence was deemed necessary. Cost is determined using the first-in
      first-out (FIFO) method. As of December 31, 2007, inventory included $375,635
      of
      lead-acid battery components, consisting of $301,701 of raw materials, $55,323
      of work-in-process and $18,611 of finished goods.




***Property
      and Equipment:*** **** Property
      and equipment are recorded at cost. Depreciation is computed using the straight
      line method over the estimated useful lives of the assets, ranging from 3 to
      22
      years. This method represents a change in accounting policy effective January
      1,
      2006; previously the Company depreciated its assets using the double declining
      balance method of depreciation. In connection with the change in policy, the
      Company reassessed the useful lives assigned and changed its estimate therefore.
      The changes in accounting estimate and policy did not have a material impact
      on
      depreciation expense for the period ended December 31, 2006, or the Company’s
      financial statements as a whole,




Expenditures
      for renewals and betterments are capitalized. Expenditures for minor items,
      repairs and maintenance are charged to operations as incurred. Gain or loss
      upon
      sale or retirement due to obsolescence is reflected in the operating results
      in
      the period the event takes place.




***Impairment
      or Disposal of Long-Lived Assets:*** The
      Company adopted the provisions of FASB No. 144 (FASB 144), “ *Accounting
      for the Impairment or Disposal of Long-lived Assets* .”
This
      standard requires, among other things, that long-lived assets be reviewed for
      potential impairment whenever events or circumstances indicate that the carrying
      amounts may not be recoverable. The assessment of possible impairment is based
      on the ability to recover the carrying value of the asset from the expected
      future pre-tax cash flows (undiscounted and without interest charges) of the
      related operations. If these expected cash flows are less than the carrying
      value of such asset, an impairment loss is recognized for the difference between
      estimated fair value and carrying value. The primary measure of fair value
      is
      based on discounted cash flows. The measurement of impairment requires
      management to make estimates of these cash flows related to long-lived assets,
      as well as other fair value determinations.




***Impairment
      of Notes Receivable*** (Mega-C) ***:*** The
      Company tests its notes receivable for collectability pursuant to the standards
      in the FASB No. 5, *Accounting
      for Contingencies* (FASB
      5) ***.*** Based
      on
      management’s assessment of substantial doubt as to collectability pursuant to
      FASB 5, the Company had no
      impairment for notes receivable for the years ended December 31, 2007 and 2006.




35




***Revenue
      Recognition:*** The
      Company recognizes revenue upon transfer of title at the time of shipment
      (F.O.B. shipping point), when all significant contractual obligations have
      been
      satisfied, the price is fixed or determinable, and collectability is reasonably
      assured.




***Shipping
      and Handling Costs:*** All
      shipping and handling costs charged to customers are recorded as Net Sales
      and
      all related expenses are included in Cost of Sales. Shipping and handling costs
      not billed to customers are included in selling, general and administrative
      expense.




***Stock-Based
      Compensation:*** Prior to
      January 1, 2006, the Company accounted for stock option awards in accordance
      with the recognition and measurement provisions of Accounting Principles Board
      Opinion No. 25, “ *Accounting
      for Stock Issued to Employees,* (APB
      25) *”* and
      related interpretations, as permitted by Statement of Financial Accounting
      Standard No. 123, “ *Accounting
      for Stock-Based Compensation* ”,
      (SFAS
      123). Under APB 25, compensation cost for stock options issued to employees
      was
      measured as the excess, if any, of the fair value of the Company’s stock at the
      date of grant over the exercise price of the option granted. Compensation cost
      was recognized for stock options, if any, ratably over the vesting period.
      As
      permitted by SFAS 123, the Company reported pro-forma disclosures presenting
      results and earnings as if the Company had used the fair value recognition
      provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.




Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123 (revised 2004), *“Share-Based
      Payment”* ,
      (SFAS
      123(R)) using the modified prospective transition method. See footnote captioned
      “Equity Compensation” for further detail on the impact of SFAS 123(R) to the
      Company’s consolidated financial statements.




Stock-based
      compensation related to non-employees is recognized as compensation expense
      in
      the accompanying consolidated statements of operations and is based on the
      fair
      value of the services received or the fair value of the equity instruments
      issued, whichever is more readily determinable **.** The
      Company’s accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF 96-18, *“Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services”* and EITF
      00-18, *“Accounting
      Recognition for Certain Transactions Involving Equity Instruments granted to
      Other Than Employees.”* The
      measurement date for the fair value of the equity instruments issued is
      determined at the earlier of (i) the date at which a commitment for performance
      by the consultant or vendor is reached or (ii) the date at which the consultant
      or vendor’s performance is complete. In the case of equity instruments issued to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement.




***Research
      and Development*** **:** Research
      and development costs are recorded in accordance with FASB No, 2, “ *Accounting
      for Research and Development Costs,* ”
which
      requires that costs incurred in research and development activities covering
      basic scientific research and the application of scientific advances to the
      development of new and improved products and their uses be expensed as incurred.
      The policy of expensing the costs of research and development activities relate
      to (i) in-house work conducted by the Company; (ii) costs incurred in
      connection with contracts that outsource research and development to third
      party
      developers; and (iii) costs incurred in connection with the acquisition of
      intellectual property that is properly classified as in-process research and
      development. All research and development costs have been expensed.




***Income
      Taxes:*** Deferred
      income taxes are recorded in accordance with FASB No. 109, “ *Accounting
      for Income Taxes* ,”
or
      FASB 109, and deferred tax assets and liabilities are determined based on the
      differences between financial reporting and the tax basis of assets and
      liabilities using the tax rates and laws in effect when the differences are
      expected to reverse. FASB 109 provides for the recognition of deferred tax
      assets if realization of such assets is more likely than not to occur.
      Realization of net deferred tax assets is dependent upon generating sufficient
      taxable income in future years in appropriate tax jurisdictions to realize
      benefit from the reversal of temporary differences and from net operating loss,
      or NOL, carryforwards. The Company has determined it more likely than not that
      the deferred tax asset resulting from these timing differences will not
      materialize and have provided a valuation allowance against the entire net
      deferred tax asset. Management will continue to evaluate the realizability
      of
      the deferred tax asset and its related valuation allowance. If the assessment
      of
      the deferred tax assets or the corresponding valuation allowance were to change,
      the Company would record the related adjustment to income during the period
      in
      which the determination is made. The tax rate may also vary based on actual
      results and the mix of income or loss in domestic and foreign tax jurisdictions
      in which operations take place.




36




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




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




***Recent
      Accounting Pronouncements:***




In
      June
      2006, The FASB issued Interpretation No. 48 “ *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* ”
(“FIN
      48”). This Interpretation clarifies the accounting for uncertainty in income
      taxes recognized in an enterprise’s financial statements in accordance with FASB
      No. 109, “ *Accounting
      for Income Taxes* ” *.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 is effective for fiscal years beginning
      after
      December 15, 2006. The adoption of FIN 48 did not have a material impact on
      the
      Company's consolidated financial position, results of operations, or cash flows.




In
      September 2006, the FASB issued FASB No. 157, “ *Fair
      Value Measurements* ”
which
      establishes a framework for measuring fair value, and expands disclosures about
      fair value measurements. While FASB No. 157 does not apply to transactions
      involving share-based payment covered by FASB No. 123, it establishes a
      theoretical framework for analyzing fair value measurements that is absent
      from
      FASB No. 123. We have relied on the theoretical framework established by FASB
      No. 157 in connection with certain valuation measurements that were made in
      the
      preparation of these financial statements. FASB No. 157 is effective for years
      beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
      FASB issued an exposure draft that provides a one year deferral for
      implementation of the Standard for non-financial assets and liabilities. The
      Company is currently evaluating the impact FASB No. 157 will have on its
      consolidated financial statements.




In
      February 2007, Statement of Financial Accounting Standards No. 159,
“ *The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      Amendment of FASB Statement No. 115* ,”
(FASB
      159), was issued. This standard allows a company to irrevocably elect fair
      value
      as the initial and subsequent measurement attribute for certain financial assets
      and financial liabilities on a contract-by-contract basis, with changes in
      fair
      value recognized in earnings. The provisions of this standard are effective
      as
      of the beginning of our fiscal year 2008, with early adoption permitted. The
      Company is currently evaluating what effect the adoption of FASB 159 will have
      on its consolidated financial statements.




In
      December of 2006 the Financial Accounting Standards Board issued FSP No. EITF
      00-19-2, “ *Accounting
      for Registration Payment Arrangements* .”
This
      FSP specifies that the contingent obligation to make future payments or
      otherwise transfer consideration under a registration payment arrangement should
      be separately recognized and measured. The FSP also clarifies that a financial
      instrument subject to a registration payment arrangement should be separately
      accounted for in accordance with the applicable guidance without regard to
      the
      registration payment arrangement’s contingent obligation. The FSP is effective
      immediately for registration payment arrangements and the financial instruments
      subject to those arrangements that are entered into or modified subsequent
      to
      December 21, 2006. For registration payment arrangements and financial
      instruments subject to those arrangements that were entered into prior to
      December 21, 2006, the guidance is effective for financial statements issued
      for
      fiscal years beginning after December 15, 2006, and interim periods within
      those
      fiscal years. The adoption of EITF 00-19-2 did not have a material impact on
      the
      Company’s consolidated financial position, results of operations or cash flows.




In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* and SFAS
      No. 160, *Accounting
      and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
      an amendment of ARB No. 51* .
      These
      new standards will significantly change the accounting for and reporting of
      business combinations and non-controlling (minority) interests in consolidated
      financial statements. Statement Nos. 141(R) and 160 are required to be
      adopted simultaneously and are effective for the first annual reporting period
      beginning on or after December 15, 2008. Earlier adoption is prohibited.
      The Company is currently evaluating the impact of adopting SFAS Nos. 141(R)
      and SFAS 160 on its consolidated financial statements.




37




In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets-an amendment of FASB Statement No. 140" This Statement amends SFAS No.
      140, "Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities", with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. The provisions of this
      Statement are effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156
      did not have a material impact on the Company’s consolidated financial position,
      results of operations or cash flows.




In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140". This
      Statement, among other things, allows a preparer to elect fair value measurement
      of instruments in cases in which a derivative would otherwise have to be
      bifurcated.  The provisions of this Statement are effective for all
      financial instruments acquired or issued in fiscal years beginning after
      September 15, 2006. The adoption of SFAS No. 155 did not have a material impact
      on the Company’s consolidated financial position, results of operations or cash
      flows.




In
      December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB
      110 permits companies to continue to use the simplified method, under certain
      circumstances, in estimating the expected term of “plain vanilla” options beyond
      December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously
      stated that the Staff would not expect a company to use the simplified method
      for share option grants after December 31, 2007. The Company will continue
      to
      use the simplified method until it has sufficient historical exercise data
      to
      provide a reasonable basis upon which to estimate the expected term of its
      options.




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




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




**Note
      4 — Property and Equipment**




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


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




38




**Note
      5 - Purchase of Assets of Failed Battery Manufacturing Company (Asset Purchase)**




***Incorporation
      of new subsidiary:*** In
      January 2006, the Company incorporated a new wholly owned subsidiary named
      Axion
      Battery Products, Inc. (“APB”) under the laws of the Commonwealth of
      Pennsylvania for the purpose of operating a battery manufacturing facility
      in
      New Castle, Pennsylvania. The Company changed the name of this subsidiary to
      Axion Power Battery Manufacturing Inc.




***Purchase
      of battery manufacturing assets:*** In
      February 2006, APB entered into an agreement to purchase all of the equipment,
      inventory and other tangible assets of the New Castle Battery Manufacturing
      Company, Inc. from National City Bank, Pennsylvania in a foreclosure sale
      conducted pursuant to the provisions of Article 9 of the Pennsylvania Uniform
      Commercial Code. The assets were purchased by APB and include all equipment,
      molds, inventories, parts and supplies that were subject to the bank’s security
      interest. Since the former New Castle Battery Manufacturing Company had been
      closed for several months prior to the acquisition and there were no employees,
      distribution systems, sales force, customer base, vendor relationships, or
      established revenue stream, the transaction was accounted for as a purchase
      of
      assets rather than as a business combination.




***Consideration
      paid:*** APB paid
      $800,000 for the assets and incurred $20,244 of legal expenses directly
      associated with negotiating and executing this transaction. Of the $800,000
      paid, $710,000 was paid to the seller at closing and $90,000 was initially
      placed in an interest bearing escrow account pending the seller’s resolution of
      certain encumbrances on a portion of the purchased assets. In August 2006,
      it
      was determined that the encumbered assets would not be transferred to APB and
      $83,250 of the deposit was returned resulting in a final purchase price of
      $736,994 that was allocated to manufacturing equipment and inventory valued
      at
      approximately $540,000 and $197,000, respectively, on the date of the purchase.




***Property
      rental:*** In
      February 2006, APB entered into a lease agreement for an industrial building
      located in New Castle, Pennsylvania. The agreement provides for an initial
      term
      of two years with two renewal terms of five years each. The monthly rent payable
      for the initial term of the agreement is $11,265. During the two extension
      terms, the rent will be based on market rates as determined by negotiation
      between the parties, or if the parties are unable to reach a mutually agreed
      rental rate, by an independent appraisal process. The renewal and extension
      of
      the lease is being negotiated as of the date of filing of this report. In
      addition to the monthly rental, APB is obligated to pay all required maintenance
      costs, taxes and special assessments, maintain public liability insurance in
      the
      amount of $1 million, and maintain fire and casualty insurance for an amount
      equal to at least 80% of the replacement value of the leased
      premises.




**Note
      6 — Transactions with a related party (C&T)**




***Research
      and development payments to C&T:*** During
      2005, the Company issued 1,562,900 warrants to the former shareholders of
      C&T to purchase intangible assets from C&T. These warrants were valued
      at approximately $564,000 and recorded as in-process research and development.
      During the year ended December 31, 2006, the terms of the warrants granted
      were
      modified. The modification resulted in additional expense of approximately
      $342,000, which has been classified as research and development expense. See
      note captioned “Stockholders’ Equity for further discussion.




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




39


**Note
      7 - Related Party Debt Financing**




**2006
      Activity:**




In
      January 2006, APB entered into a secured loan agreement with Robert Averill,
      a
      director of the Company, whereby Mr. Averill agreed to provide $1 million in
      acquisition and working capital financing for APB’s purchase of the battery
      manufacturing facility which was increased to $1.2 million in September 2006
      and
      amended to incorporate the conversion terms of the second and third quarter
      loans discussed below. The loan agreements require APB to pay interest on the
      outstanding balance at the annual rate of 10%. Interest payments are due on
      the
      first day of each month and commenced in February 2006. The entire principal
      balance of the loan was initially due on February 1, 2007, provided that the
      loan may be repaid at any time without notice or penalty. The loan was secured
      by a first priority interest in all of APB’s equipment, inventory, furniture and
      fixtures, together with all substitutions or replacements and all proceeds
      from
      the sale thereof. The amount of the secured loan was further increased to
      $1,510, 000
      in
      November 2006, at which time the interest rate was amended retroactively to
      an
      annual rate of 12% and
      amended to extend the maturity date to February 2008. With the November loan
      modification, Mr. Averill received a warrant to purchase an additional 20,000
      shares of common stock with a commitment to issue a warrant for an additional
      20,000 shares of common stock at each three-month anniversary thereafter, until
      the loan is paid in full. With the extension of the maturity into 2008, Mr.
      Averill is to receive an additional 50,000 shares of common stock at each
      three-month anniversary of the original loan, until the loan is paid in full.
      In
      November 2007, the loan was subsequently extinguished in exchange for the
      security provided under the Secured Bridge Loan program offered during the
      fourth quarter of 2007. See Note captioned “Subsequent Events” for further
      discussion.




The
      Company has signed the loan agreement as an accommodation party and assumed
      direct liability for the payment of APB’s obligations. APB and the Company each
      granted Mr. Averill a first priority security interest in all of their
      equipment, inventory, furniture, fixtures and intellectual property, together
      with all substitutions or replacements and all proceeds from any bulk sale
      thereof. As additional consideration for the loan, the Company issued Mr.
      Averill 50,000 common stock purchase warrants in January 2006 with an additional
      50,000 warrants each quarter the loan was outstanding, resulting in the issuance
      of an additional 200,000 warrants in December 2006. The warrants are exercisable
      for a period of three & four years from the issue date at a price of $6 per
      share. The warrants have been valued as of each date of grant using the
      Black-Scholes-Merton option pricing model. This amount was recorded as a note
      discount and amortized into interest expense over the term of the
      loan.




During
      2006, the Company borrowed an additional $1,985,000 from three directors of
      the
      Company, including Mr. Averill, along with two of the original founders of
      APC.
      Certain of the loan agreements provided for a second priority security interest
      in the Company’s property consisting of all accounts receivable, equipment,
      inventory, furniture and fixtures, and intellectual property, together with
      all
      substitutions, replacements, developments or accessions thereto and all proceeds
      from the sale thereof. The loan agreements required the Company to pay interest
      on the outstanding balance at annual rates of 10% to 12% and provided for the
      issuance of 553,000 common stock purchase warrants that were partially
      redeemable if the loans were repaid in a timely manner. The warrants are
      exercisable for a period of three & four years from the date of issuance at
      a price of $6 per share, and provide that the holders would be entitled to
      tender their respective notes in full or partial payment of the subscription
      price of any equity securities the Company elected to offer while the loans
      were
      outstanding.




Borrowings
      under the loan arrangements discussed above are convertible into offering units
      at a price of $2.50 per unit. The unit consists of one share of common stock
      and
      one warrant to purchase one share of common stock at a price of $4.00 per share.
      The warrants are exercisable up until the first anniversary of the effective
      date of the common stock registration statement. The
      effective conversion price of certain of these loans was at a price lower than
      the market price of the common stock at the date of the issuance, resulting
      in a
      non-cash beneficial conversion feature of $95,792. This beneficial conversion
      feature was immediately recognized as additional interest expense during
      the year ended December 31, 2006.




In
      October 2006, the Company redeemed 15,000 warrants and converted $48,217 of
      interest and $1,491,783 of principal on related party loans into shares of
      the
      Company’s Series A Preferred Stock for a total subscription of $1,540,000. 
In December 2006, lenders converted an aggregate of $1,502,418 in principal
      and
      $130,833 in accrued interest into shares of the Company’s Series A Preferred
      Stock, as discussed below, and the Company redeemed 66,387 warrants at this
      time. The unpaid balance of the Company’s loans was $500,799 plus $11,066 in
      interest at December 31, 2006, with a maturity date of February 1, 2008. $72,124
      of this balance was repaid on January 25, 2007, while the remainder was
      converted into obligations under the Secured Bridge Loan program discussed
      in
      the Note captioned “Subsequent Events”, subheading “Debt Financing”.




40


***Warrants:*** The loan
      agreements disclosed above provided for the aggregate issuance of 741,613 common
      stock purchase warrants, which were issuable as of December 31, 2006. The
      warrants due under these agreements were valued using a Black-Scholes-Merton
      option pricing model at $271,567 and initially recorded as a note discount.
      Of
      this amount, $251,234 has been amortized into interest expense during the
      twelve-month period ended December 31, 2006 with $1,317 to be amortized during
      2007. The remainder of $19,016 was recognized as a loss on extinguishment of
      certain of the loans as described below.  430,000 of these warrants, (the
      amount of warrants net of those subsequently redeemed), were not issued
      consistent with the originating document. Originally valued at $156,080, the
      liability to issue these equity instruments was settled in the fourth quarter
      of
      2006. Using the stock price at the date of issuance, the warrant valuations
      based on their original terms amounted to $593,668 or $437,588 more than the
      original liability. However, the warrants when actually issued were issued
      with
      a four year term extending the exercise period through December 29, 2010. This
      modification added an additional $175,971 in expense recognized during the
      fourth quarter of 2006. See the footnotes captioned “Stockholder's Equity” and
“Subsequent Events” for additional disclosure of these transactions.




***Interest
      Expense:*** Interest
      expense recognized for the year ended December 30, 2006 in connection with
      these
      notes and related liabilities amounted to $713,048, of which $251,234 relates
      to
      the amortization of the note discount related to the warrants granted, $95,752
      relates to the beneficial conversion feature, $175,971 results from the warrant
      extension, and the remainder relates to the stated interest rate on the
      outstanding balance.




**2007
      Activity:**




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




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




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




On
      November 27, 2007, Mr. Averill and the Company entered into an agreement to
      convert all outstanding debt obligations due and owing to Mr. Averill, into
      obligations under the Secured Bridge Loan discussed below, extinguishing the
      security interest Mr. Averill had in all of the assets of Axion Power Battery,
      Inc. in exchange for the security provided under the Secured Bridge Loan. At
      the
      time this indebtedness was converted, the Company owed Mr. Averill outstanding
      principal plus interest amounting to $1,111,910 together with new borrowings
      of
      $544,090 and $144,000 of loan origination fees recognized as a note discount,
      resulting in Mr. Averill holding a note for $1,800,000 under the Secured Bridge
      Loan financing. The loan has an original maturity of March 31, 2008, bears
      an
      initial interest rate of 14% per annum, and is jointly secured, along with
      all
      other investors in the Secured Bridge Loan, by all the assets including
      intellectual property assets of the Company and its subsidiaries. As additional
      consideration for this loan, Mr. Averill is to receive a warrant to purchase
      61,290 shares of common stock. The warrants are exercisable for a period of
      five
      years from loan inception at a price of $2.35 per share.




41


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




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




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




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




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




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




***Secured
      Bridge Loan Financing:*** ** In
      December 2007 the Company offered certain of its directors, officers, and
      significant investors the opportunity to participate in a short-term bridge
      loan
      arrangement in increments of $100,000, each such loan to bear interest at 14%
      and to be secured by all of the assets, including the intellectual property
      assets of Axion Power International and Axion Power Battery Manufacturing Inc.
      (the “Secured Bridge Loan”). Elections to participate must have been made no
      later than January 7, 2008, and if fully subscribed, the Secured Bridge Loan
      could result in up to $3,000,000 in short-term funding for the Company.




42


Total
      funding received under the Secured Bridge Loan as of December 31, 2007 amounted
      to $2,541,216, with additional funding of $100,000 in January of 2008.
      $2,125,000 was funded by three members and former members of the Board of
      Directors, with the balance funded by four accredited investors.




The
      Secured Bridge Loan has an original maturity date of March 31, 2008, with three
      extensions of the maturity date at the option of the Company with higher
      interest rates to apply to each such extension.  On
      March
      31, 2008, the Company sent notice to the investors of its intention to extend
      the loan for until April 30, 2008. The extension entitles the investors to
      earn
      an additional 1% extension fee based on the original loan amount and interest
      at
      the annual rate of 15%. If extended to May 31, 2008, the interest rate during
      the extension period increases to 16% with an extension fee equal to 1% of
      the
      original loan. If extended to June 30, 2008, the interest rate during the
      extension period increases to 18% with an extension fee equal to 2% of the
      original loan. A loan origination fee was paid equal to 8% of the original
      loan.
      The origination fee decreased by one-half percent each week after December
      15,
      2007 until the loan opportunity closed on January 7, 2008. Warrants exercisable
      at $2.35 until December 31, 2012 are included with each $100,000 Secured Bridge
      Loan note. Warrants to be issued are as follows: 3,405 warrants upon occurrence
      of the loan, 851 additional warrants upon extension of the loan to April 30,
      2008, 1,276 additional warrants upon extension of the loan to May 31, 2008,
      and
      2,128 additional warrants upon extension to June 30, 2008. Anti-dilution
      provisions apply to the warrants. The Holders of these notes shall have the
      right to convert the note together with interest, into any security sold by
      the
      Company in an institutional offering. Upon repayment of this note, all
      conversion rights shall terminate forthwith.




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




**Note
      8 — Stockholders' Equity**




***Authorized
      Capitalization:*** The
      Company’s authorized capitalization includes 50,000,000 shares of common stock
      and 12,500,000 shares of preferred stock.




***Common
      Stock:*** At
      December 31, 2007, 16,248,298 shares of common stock were issued and
      outstanding. The holders of common stock are entitled to one vote for each
      share
      held of record on all matters to be voted on by stockholders. There is no
      cumulative voting with respect to the election of directors, with the result
      that the holders of more than 50% of the shares voted for the election of
      directors can elect all of the directors. Holders of common stock are entitled
      to receive dividends when and if declared by the board out of funds legally
      available. In the event of liquidation, dissolution or winding up, the common
      stockholders are entitled to share ratably in all assets remaining available
      for
      distribution to them after payment of liabilities and after provision has been
      made for each class of stock, if any, having preference over the common stock.
      The common stockholders have no conversion, preemptive or other subscription
      rights and there are no redemption provisions applicable to the common stock.
      All of the outstanding shares of common stock are fully paid and
      non-assessable.




***Preferred
      Stock:*** The
      Company’s certificate of incorporation authorizes the issuance of 12,500,000
      shares of blank check preferred stock. The Company’s board of directors has the
      power to establish the designation, rights and preferences of any preferred
      stock. Accordingly, the board of directors has the power, without stockholder
      approval, to issue preferred stock with dividend, liquidation, conversion,
      voting or other rights that could adversely affect the voting power or other
      rights of the holders of common stock.




43


At
      December 31, 2007, 137,500 shares of 8% Cumulative Convertible Senior Preferred
      stock were issued and outstanding, and 822,997 shares of Series A Convertible
      Preferred stock were issued and outstanding.




***Equity
      Transactions –period ended December 31, 2003***




*APC
      and Tamboril Cigar Company (Tamboril, now Axion) reverse
      acquisition* *:* ****** In
      December 2003 Tamboril entered into a reverse acquisition agreement with APC.
      Under the terms of the agreement, all outstanding securities of APC were
      acquired by Tamboril in exchange for newly issued stock. Upon consummation
      of
      the transaction, the former stockholders of APC owned the majority of Tamboril’s
      outstanding shares and controlled Tamboril’s Board of Directors. Accordingly,
      t he
      acquisition of APC by Tamboril was structured as a reverse acquisition under
      which Tamboril was the legal acquirer in the transaction and APC was the
      accounting acquirer. The transaction was treated as a recapitalization of APC
      for accounting purposes. Tamboril had no material assets or liabilities and
      1,875,000 common shares outstanding on December 31, 2003 when it entered into
      a
      reverse acquisition with shareholders of APC. The historical financial
      statements presented prior to December 31, 2003 represent those of APC since
      its
      inception on September 18, 2003. The transactions of Tamboril are included
      beginning January 1, 2004. Subsequently, Tamboril changed its name to Axion
      Power International, Inc.




Prior
      to
      the reverse acquisition, APC issued rights to its founders for 1,360,000 shares
      of APC common stock as additional shares for money contributed through the
      purchase of convertible debt. Accordingly, there was no expense recorded related
      to these issuances of these shares. However, there was one founder that did
      not
      contribute funds in which APC valued the 170,000 shares issued as expense for
      services rendered during the period ending December 31, 2003 amounting to
      $48,953 based on the value of the shares received for the funds contributed
      by
      the other founders. The founders purchased convertible debt from APC for
      $1,450,000 of which $350,000 was not collected until 2004 which is included
      as a
      subscription receivable as of December 31, 2003. These convertible debt
      instruments were converted prior to the merger in which 1,108,335 shares of
      APC
      common stock were issued as consideration for $1,450,000 of convertible debt
      and
      $92,761 in unamortized debt discount attributable to detachable
      warrants.




The
      following transactions were completed in conjunction with the original
      closings:




·
            Tamboril
                had 1,875,000 shares of common stock outstanding at December 31,
                2003
                which is reflected as equity acquired in the
                recapitalization.





·
            Tamboril
                settled $484,123 in pre-merger accrued related party compensation
                debt
                through the issuance of 233,400 warrants. No corresponding expense
                was
                recorded on the Company’s records because the debt was included on the
                legal acquirer’s (Tamboril’s) records prior to the reverse acquisition.





·
            Tamboril
                issued 9,785,818 common shares (prior to the return of 1,000,000
                shares
                from The Trust for the Benefit of the Shareholders of Mega-C Power
                Corp in
                the fiscal year ended December 31, 2006, as disclosed in the note
                captioned “Subsequent Events”) and 608,600 warrants to APC’s stockholders
                in exchange for a substantial controlling interest in APC. This includes
                the common shares issued to the founders, common shares and warrants
                issued in conjunction with the convertible notes, and shares issued
                to the
                Mega C Trust.





·
            As
                part of the above described transaction, APC shareholders, who had
                rights
                to the stock agreed to have 7,147,483 shares of Tamboril shares to
                be
                issued to the Trust and APC shareholders retained the remaining shares.
                As
                a result of the November 21, 2006 Mega C Chapter 11 plan of
                reorganization, the Trust was required to return 1,000,000 shares
                of the
                common stock distributed to the Trust noted above for cancellation
                by the
                Company. The Company retroactively adjusted the return of the shares
                against the shares issued to the Trust resulting in 6,147,483 net
                shares
                issued to the Trust at December 31,
                2003.





·
            The
                original reverse acquisition was amended on January 9, 2004. See
                discussion of the amendment under the explanation of the equity 2004
                below.


44


***Equity
      Transactions –period ended December 31, 2004***




*APC
      and Tamboril Cigar Company (Tamboril, now Axion) reverse
      acquisition* *:* ****** Prior
      to
      the second part of the reverse acquisition on January 9, 2004, the Company
      adjusted the original shares issued to the founders by issuing rights to an
      additional 445,000 shares to the founders and 180,000 shares to the Trust.
      Since
      there was no additional service or money contributed there was no expense
      recorded related to the additional shares issued. Also, the Company issued
      45,000 shares to the CEO which amounted to $72,000 valued at the pink sheet
      bid
      price on the date of grant. Certain related parties purchased convertible debt
      from APC for $400,000. The $400,000 of convertible debt purchased during 2004
      and the remaining $50,000 of convertible debt outstanding at December 31, 2003
      was converted into 283,333 shares of APC common stock during 2004.




*2004
      Private Placements:* ****** During
      the year ended December 31, 2004, the Company sold 823,800 shares of common
      stock and 463,100 warrants for net cash proceeds of $1,607,134. The Company
      also
      received $868,020 in cash proceeds from the exercise of 475,200 outstanding
      common stock purchase warrants. The Company issued 48,782 shares of common
      stock
      for rounding purposes in conjunction with the 2004 one-for-sixteen reverse
      stock
      split.




***Equity
      Transactions –Year ended December 31, 2005***




*Augmentation
      of Trust and Trust Settlement:* In
      February 2005, the Company issued 500,000 shares of common stock to The Trust
      for the Benefit of the Shareholders of Mega-C Power Corp. For accounting and
      financial reporting purposes, the stock issuance transaction was valued at
      $1,525,000, which represents the value of the shares on the date of issuance.
      This amount was charged to operating expenses during the year ended December
      31,
      2005. There
      were 500,000 shares returned to the Company for cancellation in November 2006
      in
      connection with the bankruptcy court confirmation of the settlement (see note
      captioned “ Mega-C Power
      Corp (Mega-C), Mega-C **** Trust
      (the Trust), The Taylor Litigation”) .
      Those
      shares were effectively the return of the 500,000 shares issued to the Trust
      in
      February, 2005. The return of those shares was recorded as a reversal of the
      expense at fair value on the date of return in 2006 in the amount of $1,125,000
      and has been subsequently cancelled. In addition, under the bankruptcy court
      confirmation of the settlement, the Trust corpus was reduced another 1,000,000
      shares, which were returned to the Company and cancelled. The return in 2006
      was
      the result of a negotiated settlement and there are no contingencies surrounding
      the Trust shares in 2005. This cancellation was considered a retroactive
      adjustment to the shares issued in the 2003 reverse acquisition.




*2005
      Private Placement of Senior Preferred:* In
      February 2005, the board of directors designated 1,000,000 shares of preferred
      stock as 8% Cumulative Convertible Senior Preferred Stock (the “senior
      preferred”). The Company sold 385,000 shares of senior preferred at a price of
      $10 per share. The net proceeds of the offering included $2,754,110 in cash
      and
      $1,000,000 in liability conversion (see Note captioned “Transactions with a
      Related Party (C&T)”). At December 31, 2005, $25,000 of this amount was
      included in stock subscription receivable that was subsequently reversed in
      2006
      when the amount was deemed uncollectible. The senior preferred offering
      originally required the sale of a minimum of 500,000 shares ($5,000,000) before
      the offering proceeds would be available to the Company. The purchasers of
      the
      senior preferred ultimately waived this minimum offering condition. The
      preferred stock has liquidation preference equal to the stated value on the
      payment date before any payment or distribution is made to the holders of common
      stock.




So
      long
      as any senior preferred shares are outstanding, the Company cannot (i) issue
      any
      series of stock having rights senior to or on parity with the senior preferred
      (ii) amend, alter or repeal any provision of its Certificate of Incorporation
      or
      bylaws to adversely affect the relative rights, preferences, qualifications,
      limitations or restrictions of the senior preferred, or (iii) effect a
      reclassification of the senior preferred without the consent of the holders
      of a
      two-thirds majority of the outstanding shares. The Company is not authorized
      to
      issue any additional shares of senior preferred.




To
      provide for immediate cash needs during the offering period, the Company agreed
      to issue warrants to any purchaser of senior preferred who agreed to loan the
      Company the amount of the share proceeds until the $5 million minimum
      subscription was reached. In connection therewith, the purchasers of $565,000
      of
      senior preferred agreed to release their subscription payments notwithstanding
      the minimum subscription and other restrictions in the associated private
      placement memorandum. As a result, the Company issued 282,500 warrants to those
      purchasers. By March 2005, the $5 million minimum was still not met and the
      Company agreed to issue 228,500 additional warrants to the purchasers of
      $2,285,000 of senior preferred who agreed to waive the minimum subscription
      requirement. The foregoing warrants are exercisable at a price of $2 per share,
      and were to expire on March 21, 2007. ** Because
      the warrants were detachable, granted in connection with the offering,
      immediately vested, and exercisable at a price that was less than the reported
      fair market value of the underlying common stock on the date of grant, the proceeds
      of the offering were allocated between the senior
      preferred and the
      warrants based on the relative fair value of each instrument. The assumed value
      of the senior
      preferred was
      determined based on the fair value of the underlying common shares and the
      fair
      value of the warrants was valued using the Black-Scholes-Merton option
      pricing model. The proceeds allocated to the senior
      preferred amounted to $3,440,268. The
      effective conversion price of the senior
      preferred was at a
      price lower than the market price of the common stock at the date of the
      issuance, resulting in a non-cash beneficial conversion feature of $2,315,482.
      This beneficial conversion feature was immediately recognized as additional
      non-cash dividends. On
      March
      9, 2007 the Board of Directors unanimously agreed to extend the life 476,000
      $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior
      Preferred private placement offering. See “Warrant Modifications” in the note
      captioned “Subsequent Events” below.




45


Holders
      of senior preferred have the right to convert their shares into common stock
      at
      any time, at an original conversion price of $2.00. The Company was required
      to
      register the underlying shares by April 30, 2005. The shares were not registered
      until June 2005 and as a result the conversion price was reduced to $1.86 per
      share. This reduction in the conversion price resulted in an additional
      beneficial conversion feature, valued at the fair value of the additional common
      shares issuable as a result of the reduced conversion price, amounting to
      $433,228.




Holders
      of senior preferred are entitled to anti-dilution protection for certain
      subsequent events, including the issuance of equity or debt securities that
      may
      be converted into common stock at a conversion price that is less than the
      conversion price of the senior preferred. As discussed in the note captioned
      “Subsequent Events,” the Company sold approximately 823,000 shares of Series A
      Preferred Stock that is convertible at a price of $1.25 per share. This stock
      sale triggered the anti-dilution provisions of the senior preferred stock and
      giving effect to all required adjustments, the adjusted conversion price of
      the
      senior preferred is now $1.68 per share as of December 31, 2006.




In
      September 2005, the Company offered all holders of preferred stock an early
      conversion incentive that was approximately equivalent to one year’s anticipated
      dividends on the preferred stock. While each share of senior preferred was
      convertible into 5.5 shares of common stock when the Company offered the early
      conversion incentive, 6 shares of common stock were issued for each share of
      senior preferred converted during the incentive period. A total of 245,000
      shares were converted. The fair value of the additional common shares issued
      as
      a result of this inducement was recorded as a preferred dividend, amounting
      to
      $350,446.




The
      total
      of the beneficial conversion feature and conversion inducement for the year
      ended December 31, 2005 that is included in preferred dividends on the
      accompanying statement of operations amounted to $3,099,156. The Company
      analyzed the embedded derivative conversion feature and the free standing
      warrants issued in connection with the senior preferred and determined that
      the
      instruments are equity instruments and accordingly, are not accounted for as
      derivatives, requiring fair value accounting at each reporting
      period.




Holders
      of senior preferred are entitled to receive dividends at the annual rate of
      8%.
      Dividends are payable quarterly on the last day of March, June, September and
      December of each year. Dividends are cumulative from the date of issuance and
      payable to holders of record. In order to conserve available resources, the
      Company did not pay cash dividends on the senior preferred in any quarter where
      the Company reported a net loss. Any accrued dividends that are not paid in
      cash
      will be added to the stated value of the senior preferred. Dividends accrued
      and
      added to the stated value of the senior preferred during the year ended December
      31, 2006 and 2005 amounted to $119,092 and $176,194, respectively.




The
      senior preferred is redeemable by the Company under certain conditions unless
      the holders elect to exercise their conversion rights prior to the redemption
      date. Twenty percent of the senior preferred will become redeemable when the
      market price of the Company’s common stock exceeds $6.00 per share for at least
      30 trading days within any period of 45 consecutive trading days. Thereafter,
      an
      additional twenty percent of the senior preferred will become redeemable for
      each $1.00 increase in the stabilized market price of the Company’s common
      stock. In connection with any proposed redemption of senior preferred, the
      Company will give each holder not less than 30 days notice of its intention
      to
      redeem a portion of the shares.




46


2005
      Private Placement of Common Stock :
      Common
      stock private placement activities during the year ended December 31, 2005
      were
      as follows:




·
            The
                Company sold 600,000 units, each consisting of one share of common
                stock
                and a two-year warrant exercisable at $4.00 for a purchase price
                of $2.00
                per unit, or $1,200,000, before offering costs. As of December 31,
                2005,
                $200,000 is included in stock subscriptions receivable, which was
                received
                in 2006.





·
            A
                director exercised 446,000 - $1 warrants/options and 25,000 - $2
                options
                with a total exercise price of $496,000. The stock was issued and
                included
                in stock subscriptions receivable as of December 31, 2005. As of
                June 19,
                2006, the full amount has been settled.





·
            Other
                holders exercised 382,665 options & warrants with an aggregate
                exercise price of $787,395.





***Equity
      Transactions –Year ended December 31, 2006***




*Augmentation
      of Trust and Trust Settlement:* See
      above 2005 transactions and the discussion in the note captioned “ Mega-C Power
      Corp (Mega-C), **** Mega-C **** Trust
      (the Trust), The **** Taylor
      Litigation” for
      disclosures about shares issued to the Trust, returned from the Trust in
      November 2006 and the accounting for those shares.




*Senior
      Preferred:* During
      2006, a subscription for senior preferred shares was cancelled, reducing the
      balance by 2,500 shares or $25,000. The senior preferred had an initial stated
      value of $10.00 per share. Accrued dividends that are not paid in cash within
      10
      days of a payment date will automatically be added to the stated value and
      the
      stated value, as adjusted, will be used for all future dividend and conversion
      calculations. The following table summarizes the earnings through 2007 and
      the
      expected future stated value of the senior preferred at the end of each quarter
      through December 31, 2008.




**Quarter**
              **Ended**
            
            **Adjusted Stated**
              **Value**
            
            **Quarter**
              **Ended**
            
            **Adjusted Stated**
              **Value**31-Mar-07
            
            $
            11.75
            
            
            31-Mar-08
            
            $
            12.7230-Jun-07
            
            $
            11.99
            
            
            30-Jun-08
            
            $
            12.9730-Sep-07
            
            $
            12.23
            
            
            30-Sep-08
            
            $
            13.2331-Dec-07
            
            $
            12.47
            
            
            31-Dec-08
            
            $
            13.50




***2006
      Private Placement of Series A Preferred Stock:*** ****** On
      October 18, 2006, the Company’s board of directors designated, from the
      Company’s total authorized 12,500,000 shares, a new series of preferred stock
      consisting of up to 2,000,000 shares designated Series A Convertible Preferred
      Stock (the “series A preferred”). During the fourth quarter of 2006, the Company
      sold an aggregate of 782,997 shares of series A preferred at a price of $10
      per
      share for net proceeds of $7,722,470 including $4,352,500 in cash and $3,369,970
      in liability conversion. In connection with the private placement, the Company
      incurred total offering expenses of $258,202, of which $107,500 was paid in
      cash, while the remainder was paid through the issuance of options to acquire
      shares of the Company’s common stock.




Under
      the
      terms of this new series of preferred stock, no more than 1,000,000 shares
      may
      be sold for cash and the remaining shares must be reserved for (i) issuance
      upon exercise of the conversion rights of holders of secured and unsecured
      short-term debt and (ii) to pay in-kind dividends on the series A
      preferred. So long as any series A preferred shares are outstanding, the Company
      cannot (i) issue any series of stock having rights senior to or on parity with
      the series A preferred (ii) amend, alter or repeal any provision of its
      Certificate of Incorporation or bylaws to adversely affect the relative rights,
      preferences, qualifications, limitations or restrictions of the series A
      preferred (iii) effect a reclassification of the series A preferred or (iv)
      issue any additional shares of series A preferred, each without the consent
      of
      the holders of a two-thirds majority of the outstanding shares. The holders
      of
      series A preferred have no pre-emptive rights with respect to any other
      securities of the Company and a liquidation preference equal to the stated
      value
      on the payment date before any payment or distribution is made to the holders
      of
      common stock.




47


Beginning
      on April 23, 2007, the shares of series A preferred shall be convertible at
      the
      option of the holders of record at an initial conversion price of $1.25 per
      share. Holders of series A preferred are entitled to anti-dilution protection
      for certain subsequent events, including the issuance of equity or debt
      securities that may be converted into common stock at a conversion price that
      is
      less than the conversion price of the series A preferred resulting in a
      reduction in the conversion price of the series A preferred. No such other
      securities have been issued through the date of this report which would require
      the reduction of the conversion price of the series A preferred. In addition,
      the effective conversion price of the series A preferred was at a price lower
      than the market price of the common stock at the respective dates of issuance
      in
      the fourth quarter of 2006, resulting in an aggregate non-cash beneficial
      conversion feature of $6,709,970 recognized as additional non-cash dividends
      on
      a straight line basis, which did not differ materially from the effective
      interest method, from the respective dates of issuance of the series A preferred
      in the fourth quarter of 2006 through the first date these shares are
      convertible on April 23, 2007. As a result, $613,336 was recognized as
      additional non-cash dividends in the fourth quarter of 2006 with the remaining
      amount recognized in 2007. In addition, if all holders of the series A preferred
      were to have exercised their conversion rights at their respective dates of
      subscription, these holders would have received an additional $5,597,970 in
      fair
      value in excess of the proceeds paid for their subscriptions to the series
      A
      preferred. The Company further analyzed the embedded conversion feature and
      determined that it is properly classified as an equity instrument and
      accordingly, is not accounted for as a derivative, requiring fair value
      accounting at each reporting period.




Holders
      of the shares of series A preferred shall receive dividends at the annual rate
      of 10% of the stated value of the series A preferred so long as the Company
      is
      current with respect to its reporting obligations under the Securities Exchange
      Act of 1934 on any dividend payment date. Dividends are payable quarterly on
      the
      last day of March, June, September and December in each year. Dividends are
      cumulative from the date of issuance and payable to holders of record. Any
      accrued dividends that are not paid in cash will be added to the stated value
      of
      the series A preferred.




Because
      the Company has not been current with respect to its reporting obligations
      since
      the issuance of the series A preferred, the annual dividend rate increased
      to
      20% of the stated value. All but one of the series A preferred shareholders
      elected to reinvest their preferred dividends back into series A preferred
      shares. As of December 31, 2006, $103,101 of dividends has been accrued,
      including $97,896 in non-cash and $5,205 in cash dividends. No cash dividends
      have been paid with respect to the series A preferred shares. Non-cash dividends
      have increased the value of the series A preferred shares by $0.13 to a stated
      value of $10.13 as of December 31, 2006.




The
      series A preferred had an initial stated value of $10.00 per share. Non-cash
      dividends are automatically added to the stated value and the stated value,
      as
      adjusted, will be used for all future dividend and conversion calculations.
      The
      following table summarizes the earnings through 2007 and the expected future
      stated value of the series A preferred at the end of each quarter through
      December 31, 2008.




**Quarter**
              **Ended**
            
            **Adjusted Stated**
              **Value**
            
            **Quarter**
              **Ended**
            
            **Adjusted Stated**
              **Value****31-Mar-07**
            
            **$**
            **10.63**
            
            
            31-Mar-08
            
            $
            13.46**30-Jun-07**
            
            **$**
            **11.16**
            
            
            30-Jun-08
            
            $
            14.13**30-Sep-07**
            
            **$**
            **11.72**
            
            
            30-Sep-08
            
            $
            14.84**31-Dec-07**
            
            **$**
            **12.30**
            
            
            31-Dec-08
            
            $
            15.58




The
      series A preferred is redeemable by the Company under certain conditions unless
      the holders elect to exercise their conversion rights prior to the redemption
      date. Twenty percent of the series A preferred will become redeemable when
      the
      market price of the Company’s common stock exceeds $5.00 per share for at least
      30 trading days within any period of 45 consecutive trading days. Thereafter,
      an
      additional twenty percent of the series A preferred will become redeemable
      for
      each $2.50 increase in the stabilized market price of the Company’s common
      stock. In connection with any proposed redemption of series A preferred, the
      Company will give each holder not less than 30 days notice of its intention
      to
      redeem a portion of the shares.




48


*Common
      Stock & Private Placements.* The common stock transactions during the year ended December 31, 2006 are as
      follow:




·
            Two
                unaffiliated individual accredited investors purchased a total of
                80,000
                units for a purchase price of $2.50 per unit or $200,000.   Each unit
                consists of one share of common stock and one common stock purchase
                warrant with an exercise price of $4.00 per share. The warrants are
                exercisable up until the first anniversary of the effective date
                of the
                common stock registration statement and were valued at $26,354 on
                the date
                of issuance





·
            The
                Company’s chief executive officer exercised his $2.00 warrants to purchase
                56,700 shares for $113,400





·
            The
                Company’s Chief Technical Officer received 6,000 unrestricted shares,
                valued at $24,000, pursuant to his 2005 employment contract and an
                additional 250,000 restricted shares, valued at $937,500, pursuant
                to his
                2006 employment contract. The 250,000 shares will become fully vested
                on
                December 28, 2009. The expense related to these shares will be recognized
                over this three-year requisite service period and the shares will
                be
                considered issued and outstanding upon vesting.




***Subscriptions
      Receivable:*** The
      balance sheet as of December 31, 2005 reflected $721,000 in subscriptions
      receivable. During the year ended December 31, 2006, the Company received
      subscription payments of $588,900, settled $107,100 against open invoices for
      legal services, and cancelled the unsettled balance of the subscription
      receivable for preferred stock amounting to $25,000,




***Warrants:*** ** 741,613
      warrants were issued to related parties in conjunction with the financing of
      debt issued during 2006. See the “Related Party” footnote within ‘Debt Financing
“above. In
      April,
      2006, the Company’s chief executive officer exercised his $2.00 warrants to
      purchase 56,700 shares for $113,400. ** In
      October 2006, 200,000 3-year warrants were issued in payment for consulting
      services. These $3.00 warrants valued at $74,437 are scheduled to expire in
      October 2009. In December 2006, a former director of the Company received 9,000
      $6.00 warrants valued at $12,411, and are scheduled to expire December 29,
      2010.
      Additionally, 80,000 warrants were issued to accredited investors in connection
      with a private placement of units comprised of one share of the Company’s common
      stock and one stock purchase warrant, as discussed above.




On June
      9,
      2006 the Board of Directors extended the life of 1,562,900 warrants issued
      to
      the original shareholders of C&T along with 91,700 capital warrants issued
      to Sally Fonner in recognition of the Company’s difficulty in establishing a
      public trading market for its common stock. These $2 warrants scheduled to
      expire in 2006 and early 2007 were modified to a December 31, 2007 expiration.
      The warrants, valued at $521,642 prior to the extension, were revalued at the
      date of modification using the Black-Scholes-Merton option-pricing model. The
      incremental expense in 2006 resulting from the revaluations was recorded into
      R&D ($342,131) and SG&A ($50,680).




***Equity
      Transactions –Year ended December 31, 2007***




***Senior
      Preferred:*** At
      December 31, 2007, 137,500 shares of 8% Cumulative Convertible Senior Preferred
      stock were issued and outstanding. As of December 31, 2007 $425,852 in dividends
      has been accrued to cover the Company’s obligations with regard to the 8%
      Cumulative Convertible Senior Preferred stock. No cash dividends have been
      paid
      with respect to these shares. Non-cash dividends have increased the value of
      the
      Senior Preferred shares by $2.72 to a stated value of $12.72 per share.




***Series
      A Preferred*** :
      782,997
      shares of Series A Preferred were issued during 2006. In January 2007, the
      Company sold 40,000 additional shares of Series A Preferred to accredited
      investors for gross cash proceeds of $400,000. On the date of issuance, the
      effective conversion price of the Series A Preferred was at a price lower than
      the market price of the common stock resulting in a non-cash beneficial
      conversion feature of $400,000 recognized as additional non-cash dividends
      on a
      straight line basis through the first date these shares are convertible, being
      April 23, 2007. This straight line calculation did not differ materially from
      the effective yield method. With the 2007 subscription, the aggregate non-cash
      beneficial conversion feature attributable to the Series A Preferred shares
      is
      valued at $7,109,970. $613,336 was recognized as additional non-cash dividends
      in the fourth quarter of 2006, with the remaining balance of $6,496,634
      recognized as additional non-cash dividends during the year ending December
      31,
      2007. Beginning on April 23, 2007, the shares of Series A Preferred became
      convertible at the option of the holders of record at an initial conversion
      of
      $1.25 per share. The conversion price is subject to adjustment if Axion issues
      any shares less than the then existing conversion price.




49


The
      holders of the shares of Series A Preferred receive dividends at the annual
      rate
      of 20% of the Stated Value of the Series A Preferred so long as the Company
      is
      behind with respect to its reporting obligations under the Securities Exchange
      Act of 1934 on any dividend payment date. Once the company is current with
      respect to these reporting obligations, the dividend rate will be reduced to
      an
      annual rate of 10% of the Stated Value. As of December 31, 2007, $1,893,855
      in
      dividends has been accrued. No cash dividends have been paid with respect to
      the
      Series A Preferred shares. Non-cash dividends have increased the value of Series
      A Preferred shares by $3.46 to a stated value of $13.46 per share. As of
      December 31, 2007, 822,997 shares of Series A Convertible Preferred stock were
      issued and outstanding.




**Common
      Stock Issuances:** The
      following table represents per share issuances of common stock from inception
      through December 31, 2007, pursuant to FASB No. 7, “ *Development
      Stage Enterprises* ”:




**2003**Description:
            
            Date
            
            Shares
            
            Per share
              valuation
            
            Business
                reason:Shares
                issued to founders
            
            
            9/18/2003
            
            
            1,360,000
            
            $
            0.00
            
            
            original
                capitalization-no contributed capitalAPC
                Founder
            
            
            9/18/2003
            
            
            170,000
            
            $
            0.29
            
            
            services
                rendered with respect to formationSeed
                debt financing
            
            
            12/31/2003
            
            
            500,000
            
            $
            1.00
            
            
            conversion
                of debt and accrued interest to common stockSeries
                I convertible debt
            
            
            12/31/2003
            
            
            533,334
            
            $
            1.50
            
            
            conversion
                of debt and accrued interest to common stockSeries
                II convertible debt
            
            
            12/31/2003
            
            
            75,000
            
            $
            2.00
            
            
            conversion
                of debt and accrued interest to common stockMega-C
                Trust
            
            
            12/31/2003
            
            
            6,147,484
            
            $
            0.00
            
            
            In
                lieu of shares issuable to foundersTamboril
                shareholders
            
            
            12/31/2003
            
            
            1,875,000
            
            $
            0.00
            
            
            recapitalization
                measured at fair market value of Tamboril assets2003
                Totals
            
            
            
            
            
            10,660,818
            
            $
            0.14


50




**2004**Description:
            
            
            Date
            
            
            Shares
            
            
            Per
                share
              valuation
            
            
            Business
                reason:Shares
                issued to founders
            
            
            1/9/2004
            
            
            445,000
            
            $
            0.00
            
            
            In
                lieu of shares issuable to foundersMega-C
                Trust
            
            
            1/9/2004
            
            
            180,000
            
            $
            0.00
            
            
            adjustment
                is shares issuable to foundersOfficer
            
            
            1/9/2004
            
            
            45,000
            
            $
            1.60
            
            
            services
                rendered by former officerSeries
                I convertible debt-Igor Filipenko
            
            
            1/9/2004
            
            
            50,000
            
            $
            1.00
            
            
            conversion
                of debt and accrued interest to common stockSeries
                II convertible debt-Turitella
            
            
            1/9/2004
            
            
            133,333
            
            $
            1.50
            
            
            conversion
                of debt and accrued interest to common stockSeries
                III convertible debt-Turitella
            
            
            1/9/2004
            
            
            100,000
            
            $
            2.00
            
            
            conversion
                of debt and accrued interest to common stockSeries
                II common stock offering
            
            
            2/1/2004
            
            
            175,000
            
            $
            2.00
            
            
            common
                stock & warrants issued for cashSeries
                III common stock offering
            
            
            3/31/2004
            
            
            288,100
            
            $
            3.00
            
            
            common
                stock & warrants issued for cashExercise
                of Series I warrants
            
            
            various
            
            
            316,700
            
            $
            1.50
            
            
            warrants
                exercised pursuant to original termsExercise
                of Series II warrants
            
            
            various
            
            
            125,000
            
            $
            2.28
            
            
            warrants
                exercised pursuant to original termsExercise
                of Series II warrants
            
            
            various
            
            
            33,500
            
            $
            3.23
            
            
            warrants
                exercised pursuant to original termsNovember
                emergency funding
            
            
            11/1/2004
            
            
            314,000
            
            $
            1.50
            
            
            common
                stock & warrants issued for cashDecember
                emergency funding
            
            
            12/1/2004
            
            
            46,700
            
            $
            1.50
            
            
            common
                stock & warrants issued for cashFractional
                shareholders
            
            
            12/31/2004
            
            
            48,782
            
            $
            0.00
            
            
            shares
                issued due to reverse split rounding formula2004
                Totals
            
            
            
            
            
            2,301,115
            
            $
            1.37


51




**2005**Description:
            
            
            Date
            
            
            Shares
            
            
            Per share
              valuation
            
            
            Business
                reason:Mega-C
                Trust
            
            
            2/28/2005
            
            
            500,000
            
            $
            3.05
            
            
            Trust
                augmentationBanca
                di Unionale
            
            
            3/18/2005
            
            
            30,000
            
            $
            2.00
            
            
            conversion
                of Preferred and accrued dividendsBanca
                di Unionale
            
            
            4/20/2005
            
            
            20,000
            
            $
            2.00
            
            
            conversion
                of Preferred and accrued dividendsC&T
                employees
            
            
            4/1/2005
            
            
            219,000
            
            $
            2.50
            
            
            employee
                incentive share grants7
                individuals
            
            
            6/10/2005
            
            
            29,565
            
            $
            3.57
            
            
            Exercise
                of Director options3
                individuals
            
            
            7/11/2005
            
            
            190,000
            
            $
            1.58
            
            
            conversion
                of Preferred and accrued dividendsBanca
                di Unionale
            
            
            7/11/2005
            
            
            10,000
            
            $
            1.60
            
            
            exercise
                of preferred warrants3
                individuals
            
            
            8/28/2005
            
            
            150,000
            
            $
            1.67
            
            
            conversion
                of Preferred and accrued dividendsJames
                Smith
            
            
            9/7/2005
            
            
            30,000
            
            $
            1.67
            
            
            conversion
                of Preferred and accrued dividends2
                individuals
            
            
            9/28/2005
            
            
            1,050,000
            
            $
            1.69
            
            
            conversion
                of Preferred and accrued dividends2
                individuals
            
            
            various
            
            
            226,900
            
            $
            1.79
            
            
            exercise
                of Series I warrants3
                individuals
            
            
            various
            
            
            91,200
            
            $
            2.40
            
            
            exercise
                of Series III warrants2
                individuals
            
            
            various
            
            
            25,000
            
            $
            1.60
            
            
            exercise
                of Preferred warrantsOfficer
            
            
            10/20/2005
            
            
            446,000
            
            $
            1.00
            
            
            exercise
                of warrants and optionsOfficer
            
            
            10/20/2005
            
            
            25,000
            
            $
            2.00
            
            
            exercise
                of warrants6
                individuals
            
            
            12/1/2005
            
            
            600,000
            
            $
            2.00
            
            
            common
                stock and warrants2005
                Totals
            
            
            
            
            
            3,642,665
            
            $
            1.94


52




**2006**2
                individuals
            
            
            4/21/06
            
            
            80,000
            
            
            2.50
            
            
            Common
                stock and warrants issued for cashOfficer
            
            
            4/21/06
            
            
            56,700
            
            
            2.00
            
            
            Exercise
                of non-plan incentive option granted to CEOOfficer
            
            
            4/21/06
            
            
            6,000
            
            
            4.00
            
            
            Unrestricted
                share grant to CTOMega-C
                Trust
            
            
            11/28/06
            
            
            (500,000
            )
            
            2.25
            
            
            Return
                of shares per settlement agreement2006
                Totals
            
            
            
            
            
            (357,300
            )
            $
            2.20







**2007**Officer
            
            
            12/01/07
            
            
            1,000
            
            
            2.30
            
            
            Unrestricted
                share grant to VP Mfg Engineering2007
                Totals
            
            
            
            
            
            1,000
            
            $
            2.30







***Warrants:*** ** 397,750
      warrants are to be issued to related parties in conjunction with the financing
      of debt. See the “Related Party” footnote above. The following table provides
      summary information on warrants outstanding as of December 31, 2007, including
      the 301,700 warrants that were issued in escrow to facilitate the pending stock
      sale described above. The table provides summary information on the various
      warrants issued by the Company in private placement transactions; the warrants
      exercised to date; the warrants that are presently exercisable **** and
      the
      current exercise prices of such warrants.




*2007*
            
            *2006*Shares
            
            Weighted Average
              Exercise
                price
            
            Shares
            
            Weighted Average
              Exercise
                priceWarrants
                outstanding January 1
            
            
            3,761,213
            
            $
            3.21
            
            
            3,242,400
            
            $
            2.66Granted
                during year
            
            
            484,278
            
            
            5.35
            
            
            1,030,613
            
            
            5.26Exercised
            
            
            -
            
            
            0.00
            
            
            (56,700
            )
            
            2.00Lapsed
            
            
            (2,500
            )
            
            2.00
            
            
            (455,100
            )
            
            1.33Outstanding
                at December 31
            
            
            4,242,991
            
            $
            3.46
            
            
            3,761,213
            
            $
            3.21Weighted
                average years remaining
            
            
            1.70
            
            
            
            
            
            1.57


53


On
      March
      9, 2007 the Board of Directors unanimously agreed to extend the life 476,000
      $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior
      Preferred private placement offering. These warrants, originally scheduled
      to
      expire on March 17, 2007 were modified to March 17, 2008, so that the holders
      of
      these warrants would have a reasonable opportunity to realize the benefit of
      their original bargain.  The warrants, valued at $381,832 prior to the
      extension, were revalued at the date of modification using the
      Black-Scholes-Merton option-pricing model. The incremental expense resulting
      from the revaluations was recorded as preferred dividends during the first
      quarter of 2007 in the amount of $164,179.




**Registration
      Rights**




***General*** :
      The
      Company filed a resale registration statement for the shares of common stock
      held by the Mega-C Trust. See the discussion in the note titled “Mega-C Power
      (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation.”




**Senior
      Preferred:** The
      Company registered the resale of the shares of common stock issuable upon
      conversion of the senior preferred and was required to maintain an effective
      registration statement until September 18, 2006, the 18-month anniversary of
      the
      closing date of the preferred stock offering. In the event that the current
      registration statement was subsequently terminated, withdrawn or suspended
      for a
      period of more than 10 days, then the conversion price of the senior preferred
      was to be decreased by an initial delay adjustment of three percent (3%), plus
      an additional delay adjustment of two percent (2%) for every thirty day period
      (or portion thereof) that the underlying common stock is not subject to and
      included in an effective registration statement. The holders of senior
      preferred, or common stock issued upon conversion thereof, also have certain
      piggy-back registration rights with respect to future offerings. The
      registration statement included Axion’s Financial Statements for the period
      ended June 30, 2005 and the financial statements became out of date. Axion
      did
      not terminate, withdraw or suspend the registration statement. The Company
      believes that the financial statements going out of date is not enough to
      reactivate the registration delay provisions of the Senior Preferred
      Stock.




***Series
      A Preferred*** *:* The
      Company is required to file a registration statement within 180 days after
      the
      initial closing of the offering and use its best efforts to maintain its
      effectiveness for two years subsequent to the date it is declared effective.
      If,
      at any time after the issuance of the series A preferred, the Company files
      a
      registration statement for a proposed public offering of common stock, then
      holders of the series A preferred will be able to participate in that offering
      as selling shareholders.




**Warrants:** The
      Company has registered the resale of the shares of common stock issuable upon
      exercise of all warrants that were issued and outstanding in June 2005 and
      is
      required to maintain an effective registration statement until the expiration
      dates of the warrants. It is also obligated to file a resale registration
      statement for the warrants issued after June 2005. The recently issued warrants
      generally provide that they will be exercisable for terms of two to three years
      after the effective date of the required registration statements. However there
      are no cash penalties or exercise price adjustments associated with registration
      delays.




During
      2006 & 2007, as a response to substantial unanticipated registration delays,
      the Company extended the expiration dates of certain warrants that were issued
      in 2003, 2004 and 2005. Under the extensions, which presently expire in December
      2007 and March 2008, the Company has retained the right to redeem the warrants
      at a price of $.01 per warrant if the underlying stock has been included in
      an
      effective registration statement under the Securities Act and has traded at
      an
      average bid price of $4 per share or more for at least 30 days before the call
      for redemption. The accounting treatment for the modifications is discussed
      above.




54


**Note
      9 - Equity Compensation**




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




Prior
      to
      the adoption of FASB 123R, the Company accounted for employee stock options
      using the intrinsic value method in accordance with APB 25. Accordingly, no
      compensation expense was recognized for stock options issued to employees as
      long as the exercise price was greater than or equal to the market value of
      the
      common stock at the date of grant. In accordance with FASB 123, the Company
      disclosed the summary of pro forma effects to reported net loss as if the
      Company had elected to recognize compensation costs based on the fair value
      of
      the awards at the grant date.




The
      Company’s accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF 96-18,
      “ *Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ”
and
      EITF 00-18 “Accounting Recognition for Certain Transactions Involving Equity
      Instruments Granted to Other Than Employees.” The measurement date for fair
      value of the equity instruments is determined by the earlier of (i) the date
      at
      which commitment for performance by the vendor or consultant is reached or
      (ii)
      the date at which the consultant or vendor’s performance is complete. In the
      case of equity instruments issued to consultants, the fair value of the equity
      instrument is recognized over the term of the consulting agreement.




The
      compensation cost that has been charged against income for options granted
      under
      the plans was approximately $162,163
      for the year ended December 31, 2007. The impact of these expenses to basic
      and
      diluted loss per share was approximately $0.01 per share during the
      year. The
      adoption of FASB 123R did not have an impact on cash flows from operating or
      financing activities. For stock options issued as non-qualified stock options,
      a
      tax deduction is not allowed until the options are exercised. The amount of
      this
      deduction will be the difference between the fair value of the Company’s common
      stock and the exercise price at the date of exercise. Accordingly, there is
      a
      deferred tax asset recorded for the tax effect of the financial statement
      expense recorded. The tax effect of the income tax deduction in excess of the
      financial statement expense will be recorded as an increase to additional
      paid-in capital. Due to the uncertainty of the Company’s ability to generate
      sufficient taxable income in the future to u tilize
      the tax benefits of the options granted, the Company has recorded a valuation
      allowance to reduce gross deferred tax assets to zero. As a result, for the
      year
      ended December 31, 2007, there is no income tax expense impact from recording
      the fair value of options granted. There is no tax deduction allowed by the
      Company for incentive stock options.




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




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




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




55


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




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




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




The
      following awards have been granted under the Plan since its
      inception:




In
      February 2004, Igor Filipenko, a Director of the Company, was granted options
      to
      purchase 6,300 shares of common stock at a price of $3.20 per share. In June
      2004, Mr. Filipenko was granted options to purchase 10,800 shares of common
      stock at a price of $5.60 per share. The options are fully vested and may be
      exercised at any time during the five-year period commencing one year after
      the
      date of grant. The market value of the Company stock at the date of grant was
      less than the exercise price; therefore there was no intrinsic value in
      accordance with APB 25. Options for 7,200 shares were cancelled in April 2005
      after Mr. Filipenko was issued additional options in March 2005 as part of
      the
      offering to the former employees of C&T discussed below.




In
      February 2004, John Petersen, a Director of the Company (and general corporate
      counsel), and Kirk Tierney, each were granted options to purchase 6,300 shares
      of common stock at a price of $3.20 per share. In June 2004, Messrs. Petersen
      and Tierney were each granted options to purchase 3,600 shares of common stock
      at a price of $5.60 per share. The options are fully vested and may be exercised
      at any time during the five-year period commencing one year after the date
      of
      grant. The market value of the Company stock at the date of grants was less
      than
      the exercise price; therefore there was no intrinsic value in accordance with
      APB 25.




In
      February 2004, an advisor to the board was granted an option to purchase 6,300
      shares of common stock at a price of $3.20 per share as compensation for
      services. In June 2004, Mr. the advisor was granted options to purchase 3,600
      shares of common stock at a price of $5.60 per share. The options are fully
      vested and may be exercised at any time during the five-year period commencing
      one year after the date of grant. The options were valued at $17,067 using
      the
      Black-Scholes-Merton option pricing model and were included as expense in 2004.




In
      November 2004, the Company’s President and Chief Operating Officer, Charles
      Mazacatto, was granted options to purchase 6,250 shares of common stock at
      an
      exercise price of $3.20. This option vested in 2004 and is exercisable until
      November 2010. The market value of the Company stock at the date of grant was
      less than the exercise price; therefore there was no intrinsic value in
      accordance with APB 25.




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




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




56


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




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




In
      December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
      Nelson, was granted 36,000 shares of restricted common stock pursuant to his
      2007 employment agreement which were valued at $82,800 on the date of grant.
      The
      shares vest at a rate of 1,000 shares per month, with provision for immediate
      vesting based on significant changes in the relative ownership of the company.
      The Company will recognize this as compensation over the 2 year employment
      contract, with $3,450 of compensation expense recorded for the year ended
      December 31, 2007.




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




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




The
      following awards have been granted under the Plan since its
      inception:




During
      the year ended December 31, 2004, the Company issued 54,000 5-year options
      to
      four of its directors vesting in one year from the date of issuance. The market
      value of the Company stock at the date of grant was less than the exercise
      price
      which resulted in no intrinsic value in accordance with APB 25. During the
      year
      ended December 31, 2005, these directors waived an aggregate of $105,542 in
      accrued compensation as full payment of the exercise price of 29,565 options.
      An
      additional 14,400 options were forfeited in 2005.




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




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




57


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




In
      January 2004, members of the law firm of Fefer, Petersen & Cie, general
      corporate counsel (of which one member was a director of the Company at the
      time) were granted two-year contractual options to purchase 189,300 shares
      of
      common stock at a price of $2.00 per share as partial compensation for services
      rendered, valued at $68,296. As represented in the note captioned “Stockholder’s
      Equity”, these members also received 116,700 warrants as consideration of
      pre-merger Tamboril debt (the amount cited in “Stockholder’s Equity” is actually
      233,400 because another party received the same number of warrants for a total
      of 233,400 warrants). In August 2004, $1.00 of the exercise price of the total
      306,000 options and warrants owned by these members was considered paid in
      advance in consideration of unbilled legal services provided by the firm. The
      Company recorded $306,000 related to this reduction. All of the warrants and
      options were exercised in the fourth quarter of 2005, however; $306,000 of
      the
      amount is included in stock subscription receivable as of December 31, 2005
      and
      was received in 2006.




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




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




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




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




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




58


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




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




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




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




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




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




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




In
      January 2007, Walker Wainwright, a director of the Company, was granted an
      option to purchase 40,000 shares of common stock at an exercise price of $5.00
      as compensation for services related to due diligence, negotiation and sale
      of
      the 2006 Series A Preferred Stock offering. These three-year options were
      immediately vested on the date of grant, and are valued at $52,230 utilizing
      the Black-Scholes-Merton
      option pricing model and are recorded as offering costs in 2007.




In
      August
      2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
      granted a contractual option to purchase 80,000 shares of common stock at an
      exercise price of $4.50. 20,000 vested immediately upon contract inception
      and
      the remainder vest at a rate of 10,000 per month over the life of his six-month
      employment contract. These two-year options are valued at $37,356 utilizing
      the Black-Scholes-Merton
      option pricing model with $24,904 recorded as compensation in 2007.




59




In
      December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
      Nelson, was granted a contractual option to purchase 108,000 shares of common
      stock at an exercise price of $5.00. The options vest at a rate of 3,000 per
      month over a three year period, but are being amortized over the term of his
      two
      year employment contract. These five-year options are valued at $108,504
      utilizing the Black-Scholes-Merton
      option pricing model with $4,521 recorded as compensation in 2007.




The
      Company uses the
      Black-Scholes-Merton Option Pricing Model to estimate the fair value of awards
      on the measurement date using the weighted average assumptions noted in the
      following table:




**Year**
            
            **Interest Rate**
            
            **Dividend Yield**
            
            **Expected Volatility**
            
            **Expected Life**2004
            
            
            3.8%
            
            
            0.0%
            
            
            59.1%
            
            
            60
                months2005
            
            
            4.0%
            
            
            0.0%
            
            
            52.0%
            
            
            100
                months2006
            
            
            4.7%
            
            
            0.0%
            
            
            53.6%
            
            
            45
                months2007
            
            
            3.9%
            
            
            0.0%
            
            
            54.4%
            
            
            62
                months




Expected
      volatilities are calculated based on the historical volatility of the Company’s
      stock since its listing on the public markets. Management has determined that
      it
      cannot reasonably estimate a forfeiture rate given the insufficient amount
      of
      time and activity of share option exercise and employee termination patterns.
      The expected life of options represents the period of time that options granted
      are expected to be outstanding was determined using the contractual term. The
      risk-free interest rate for periods within the expected life of the option
      is
      based on the interest rate for a similar time period of a U.S. Treasury note
      in
      effort on the date of the grant.




The
      following table provides consolidated summary information on the Company’s
      equity compensation plans for the years ended December 31 2004, 2005, 2006
      and
      2007.




*2004*Weighted Average**All Plan & Non-Plan Compensatory Options**
            
            Number of
              Options
            
            Exercise
            
            Fair Value
            
            Remaining
              Life (years)
            
            Aggregate
              Intrinsic
              ValueOptions outstanding
                at December 31,2003
            
            
            -
            
            $
            0.00
            
            $
            $0.00Granted
            
            
            736,350
            
            $
            3.53
            
            $
            $2.87Exercised
            
            
            -
            
            $
            0.00
            
            $
            $0.00Forfeited
                or lapsed
            
            
            -
            
            $
            0.00
            
            $
            $0.00Options
                outstanding at December 31,2004
            
            
            736,350
            
            $
            3.53
            
            $
            $2.87
            
            
            6.34




*2005*Weighted Average**All Plan & Non-Plan Compensatory Options**
            
            Number of
              Options
            
            Exercise
            
            Fair Value
            
            Remaining
              Life (years)
            
            Aggregate
              Intrinsic
              ValueOptions
                outstanding at December 31,2004
            
            
            736,350
            
            $
            3.53
            
            $
            $2.87Granted
            
            
            1,254,500
            
            $
            2.48
            
            $
            $1.34Exercised
            
            
            (358,865
            )
            $
            1.65
            
            $
            $2.32Forfeited
                or lapsed
            
            
            (182,100
            )
            $
            3.04
            
            $
            $1.44Options
                outstanding at December 31,2005
            
            
            1,449,885
            
            $
            3.12
            
            $
            $1.86
            
            
            7.73




*2006*Weighted Average**All Plan & Non-Plan Compensatory Options**
            
            
            Number of
              Options
            
            
            Exercise
            
            
            Fair Value
            
            
            Remaining
              Life (years)
            
            
            Aggregate
              Intrinsic
              ValueOptions
                outstanding at December 31,2005
            
            
            1,449,885
            
            $
            3.12
            
            $
            1.86Granted
            
            
            1,191,000
            
            $
            5.42
            
            $
            0.82Exercised
            
            
            -
            
            $
            0.00
            
            $
            0.00Forfeited
                or lapsed
            
            
            (894,000
            )
            $
            3.24
            
            $
            1.94Options
                outstanding at December 31,2006
            
            
            1,746,885
            
            $
            4.62
            
            $
            1.05
            
            
            3.70
            
            $
            634,903Options
                exercisable at December 31,2006
            
            
            1,192,385
            
            $
            5.11
            
            $
            0.97
            
            
            2.90
            
            $
            254,903


60





*2007*Weighted
                Average**All
                Plan & Non-Plan Compensatory Options**
            
            Number
                of
              Options
            
            Exercise
            
            Fair
                Value
            
            Remaining
              Life
                (years)
            
            Aggregate
              Intrinsic
              ValueOptions
                outstanding at December 31,2006
            
            
            1,746,885
            
            $
            4.65
            
            $
            1.03Granted
            
            
            228,000
            
            $
            4.82
            
            $
            0.87Exercised
            
            
            -
            
            $
            0.00
            
            $
            0.00Forfeited
                or lapsed
            
            
            (124,000
            )
            $
            2.50
            
            $
            1.14Options
                outstanding at December 31,2007
            
            
            1,850,885
            
            $
            4.81
            
            $
            1.00
            
            
            1.5
            
            $
            18,000Options
                exercisable at December 31,2007
            
            
            1,442,385
            
            $
            4.88
            
            $
            0.93
            
            
            2.0
            
            $
            6,000





The
      following table summarizes the status of the Company’s non-vested options under
      the stock option plans:





**All
                non-vested stock options as of December 31,
                2007**
            
            **Shares**
            
            **Fair
                Value**Options
                subject to future vesting atDecember
                31,2006
            
            
            554,500
            
            $
            1.34Options
                granted
            
            
            228,000
            
            $
            0.87Options
                forfeited or lapsed
            
            
            (124,000
            )
            $
            1.14Options
                vested
            
            
            (250,000
            )
            $
            1.17Options
                subject to future vesting at December 31,2007
            
            
            408,500
            
            $
            1.25





As
      of
      December 31, 2007, there was $350,754 of unrecognized compensation related
      to
      non-vested options granted under the plans. The Company expects to recognize
      the
      cost over a weighted average period of 1.3 years. The total fair value of
      options vested during the year ended December 31, 2007 was $236,054
      ($ 830,181 during
      the year ended December 31, 2006).




**Note
      10—Earnings/Loss Per Share**




Basic
      earnings per share is computed by dividing income available to common
      shareholders (the numerator) by the weighted-average number of common shares
      outstanding (the denominator) for the period. Diluted earnings per share is
      computed by assuming that any dilutive convertible securities outstanding were
      converted, with related preferred stock dividend requirements and outstanding
      common shares adjusted accordingly. It also assumes that outstanding common
      shares were increased by shares issuable upon exercise of those stock options
      for which market price exceeds the exercise price, less shares which could
      have
      been purchased by us with the related proceeds. In periods of losses, diluted
      loss per share is computed on the same basis as basic loss per share as the
      inclusion of any other potential shares outstanding would be
      anti-dilutive.


61


Had
      the
      Company recorded income applicable to common shareholders for the periods ended
      December 31, 2003, 2004 2005 2006 and 2007, weighted-average number of common
      shares outstanding would have increased by 785,897, 1,386,612 2,970,730
      2,135,938 and 7,324,374, respectively, for the fiscal years, reflecting the
      addition of dilutive securities in the calculation of diluted earnings per
      share. The increase in weighted average common shares for the cumulative period
      (September 18, 2003 to December 31, 2007) is 4,215,284 shares.




**Note
      11 — Income Taxes**




Following
      is a summary of the components giving rise to the income tax provision for
      the
      periods ended December 31, 2007 and 2006.




Currently
                payable:
            
            **2007**
            
            **2006**Federal
            
            $
            -
            
            $
            -State
            
            
            83,469
            
            
            -Foreign
            
            
            -
            
            
            -Total
                currently payable
            
            
            83,469
            
            
            -Deferred:Federal
            
            
            1,817,000
            
            
            1,386,000State
            
            
            537,000
            
            
            456,000Foreign
            
            
            446,000
            
            
            787,000Total
                deferred
            
            
            2,800,000
            
            
            2,629,000Less
                increase in allowance
            
            
            (2,800,000
            )
            
            (2,629,000Net
                deferred
            
            
            -
            
            
            -Total
                income tax provision
            
            $
            83,469
            
            $
            -




Individual
      components giving rise to the deferred tax asset are as follows:




**2007**
            
            **2006**Future
                tax benefit arising from net operating loss carry forwards
            
            $
            5,977,000
            
            $
            3,242,000Future
                tax benefit arising from available tax credits
            
            
            1,026,000
            
            
            864,000Future
                tax benefit arising from options/warrants issued for
                Services
            
            
            602,000
            
            
            536,000Other
            
            
            98,000
            
            
            149,000Total
            
            
            7,703,000
            
            
            4,791,000Less
                valuation allowance
            
            
            (7,703,000
            )
            
            (4,791,000
            )Net
                deferred
            
            $
            -
            
            $
            -


62


The
      components of pretax net loss are as follows:




**2007**
            
            **2006**United
                States
            
            $
            (5,776,191
            )
            $
            (4,867,383
            )Foreign
            
            
            (6,467
            )
            
            (2,160,580
            )$
            (5,782,658
            )
            $
            (7,027,963
            )




The
      Company has net operating loss carryforwards of approximately $10,053,000 and
      $4,930,000 available to reduce future income taxes in United States and
      Canadian, respectively. The United States carryforwards expire at various dates
      between 2024 and 2027. The Canadian carryforwards expire at various dates
      between 2010 and 2026. The Company also has generated Canadian tax credits
      related to research and development activities. A portion of this credit,
      amounting to approximately $102,000 is refundable and has been presented as
      such
      in the accompanying balance sheet. The remaining credit, amounting to
      $1,026,000, is available to offset future taxable income in Canada and expires
      at various dates between 2014 and 2027. The Company has adopted FASB 109 which
      provides for the recognition of a deferred tax asset based upon the value
      certain items will have on future income taxes and management's estimate of
      the
      probability of the realization of these tax benefits. The Company has determined
      it more likely than not that these timing differences will not materialize
      and
      have provided a valuation allowance against the entire net deferred tax asset.
      The utilization of NOL and tax credit carryforwards from Tamboril prior to
      the
      reorganization may be subject to a substantial annual limitation due to the
      ownership change limitations provided by the Internal Revenue Code of 1986,
      as
      amended and similar state provisions. Accordingly, these amounts have not been
      included in the gross deferred tax asset number above. In addition, due to
      equity transactions that have occurred subsequent to the reorganization with
      Tamboril, the utilization of NOL carryforwards may be subject to further change
      in control limitations that generally restricts the utilization of the NOL
      per
      year.




The
      reconciliation of the United States statutory federal income rate and the
      effective income tax rate in the accompanying consolidated statements of
      operations is as follows:




**2007**
            
            **2006**Statutory
                U.S. federal income tax rate
            
            
            (34.0
            )%
            
            (34.0
            )%State
                taxes
            
            
            (6.4
            )%
            
            (6.4
            )%Mega-C
                Trust Shares augmentation/return
            
            
            0.0
            %
            
            (5.4
            )%Equity
                based compensation
            
            
            1.0
            %
            
            2.0
            %Nondeductible
                research and development
            
            
            0.0
            %
            
            3.2
            %Warrant
                modifications
            
            
            0.0
            %
            
            5.1
            %Other
                permanent non-deductible differences
            
            
            1.7
            %
            
            (1.9
            )%Change
                in valuation allowance
            
            
            37.7
            %
            
            37.4
            %Effective
                income tax rate
            
            
            0.0
            %
            
            0.0
            %


63




**Note
      12 — Related Party Transactions**




***Trust
      for the Benefit of the Shareholders of Mega-C Power
      Corp:*** The
      Trustee for The Trust for the Benefit of the Shareholders of Mega-C Power Corp.
      served as an officer of one of our consolidated companies in 2004. See
      discussion of the transactions with the trust in the note captioned
“ Mega-C Power
      Corp (Mega-C), Mega-C  Trust
      (the Trust), The Taylor Litigation”




***Transactions
      with C&T:*** **** A
      current
      board member of the Company is the former majority shareholder of C&T prior
      to the acquisition by the Company. See the note captioned “Transactions with
      Related (C&T)” for disclosure of transactions with C&T prior to and in
      connection with the acquisition.




***Related
      party notes payable:*** During
      the years ending December 31, 2007 and December 31, 2006, the Company borrowed
      certain amounts from related parties; certain of these borrowings were
      extinguished through the issuance of the Company’s Series A Preferred Stock in
      2006 and through the issuance of the Secured Bridge Financing during the fourth
      quarter of 2007. Refer to Notes captioned “Related Party Debt Financing” and
“Stockholders’ Equity” for discussion on these matters.




***Series
      A Preferred stock sales -*** The
      Company raised capital in a preferred stock offering during the year ended
      December 31, 2006, discussed further in the note captioned “Stockholder’s
      Equity,” of which $3,829,970 related to transactions with board members and
      their family members.




***Legal
      fees:*** John
      Petersen was a director of the Company until January 15, 2007, and a partner
      in
      the law firm of Fefer, Petersen & Cie, which serves as the Company’s legal
      counsel. During the year ended December 31, 2006, fees incurred for services
      amounted to $287,463, including $49,352 related to the value of options vesting.
      This amount is offset by a credit of $64,943 for the change in value of equity
      instruments accrued in the fourth quarter of 2005 with a measurement date in
      the
      first quarter of 2006.




***Warrants:*** In
      January 2007, Walker Wainwright, a director of the Company, was granted an
      option to purchase 40,000 shares of common stock at an exercise price of $5.00
      as compensation for services related to due diligence, negotiation and sale
      of
      the 2006 Series A Preferred Stock offering. These three-year options were
      immediately vested on the date of grant, and are valued at $52,230 utilizing
      the Black-Scholes-Merton
      option pricing model and are recorded as offering costs in 2007.




**Note** **13-
      Significant Non-Cash Transactions**




The
      following table provides summary information on our significant non-cash
      investing and financing transactions during the twelve-month periods ended
      December 31, 2007 and 2006.


64




2007
            
            2006Notes
                payable to related parties converted to preferred stock
            
            $
            -
            
            $
            3,184,292Preferred
                Dividends attributable to warrant modifications
            
            $
            164,179
            
            $
            -Dividend
                accrued to preferred stock – Senior
            
            $
            130,566
            
            $
            103,101Dividend
                accrued to preferred stock – Series A
            
            $
            1,790,755
            
            $
            119,092Beneficial
                conversion feature on preferred stock
            
            $
            6,496,634
            
            $
            613,336Amount
                due for warrants exercised satisfied by extinguishment of
                liability
            
            $
            -
            
            $
            113,400Satisfaction
                of accrued legal liability with equity instruments
            
            $
            -
            
            $
            144,097Subscription
                receivable satisfied extinguishment of liability
            
            $
            -
            
            $
            107,100Equipment
                purchases included in accounts payable
            
            $
            -
            
            $
            66,813Reversal
                of stock subscription receivable
            
            $
            -
            
            $
            25,000Conversion
                of Interest and fees into debt instrument
            
            $
            74,573
            
            $
            -Satisfaction
                of 2005 Liability to issue stock
            
            $
            -
            
            $
            24,000Warrants
                issued for commission on sale of preferred
            
            $
            53,230
            
            $
            150,702Fair
                value of warrants issued with related party note
            
            $
            276,882
            
            $
            271,567




There
      were only minor cash payments for interest and no payments of income taxes
      during the years ended 2007 and 2006.




**Note
      14 — Mega-C**  **Power
      Corp (Mega-C** ), **Mega-C**  **Trust
      (the Trust), The Taylor Litigation**




***Mega-C
      Power Corp Business and Trust rationale:*** Mega-C
      Power Corporation was a Nevada corporation that previously held limited and
      non-exclusive license rights to the technology that APC licensed from C&T
      and that the Company purchased from C&T [as discussed in the note captioned
“Transactions with a related party (C&T]. Mega-C had ceased substantive
      operations as a result of the investigation of the promoters and management
      by
      the Ontario Securities Commission (OSC) in the spring of 2003 and was placed
      into an involuntary bankruptcy in April, 2004, as further described below.




***Trust
      Creation:*** The
      Trust was created on December 31, 2003, in connection with a reverse acquisition
      between APC and the Company, through its public shell then known as Tamboril
      Cigar Company, in response to the potential perceived equities of the Mega-C
      shareholders and risks of the situation. APC’s founders believed that the
      investors in Mega-C might be able to assert a variety of equitable claims to
      the
      energy storage technology the Company acquired from C&T. The Trust document
      required that when the Trust made its distribution, the beneficiary released
      any
      claims against all parties. Therefore, while Axion had no control over the
      Trust, its mandates were believed to be an effective way to eliminate
      conflicting claims to the technology. The Company’s founders were also
      shareholders in Mega-C for the most part.




***Trust
      corpus:*** The
      original corpus of the Trust was 7,327,500 shares of the common stock that
      APC’s
      shareholders had rights to in connection with the reverse acquisition on
      December 31, 2003. In connection with the execution of the Amended and Restated
      Trust Agreement in February 2005, which formally recognized the jurisdiction
      of
      the bankruptcy court on all matters, Axion issued 500,000 additional shares
      to
      the Trust. There was no contingency surrounding the issuance of these shares
      at
      that time. This issuance was intended to be Axion’s contribution to the Trust to
      obtain clear title to the technology and resolve all related matters and was
      charged to operating expense during the year ended December 31, 2005. The stock
      issuance transaction was valued at $1,525,000, which was the value of the shares
      on the date of issuance.


65


As
      a
      result of the bankruptcy court’s confirmation of a Chapter 11 Plan and the
      substantial consummation of the confirmed plan in November 2006 the settlement
      disclosed below became effective and 1,500,000 shares were returned to the
      Company for cancellation in 2006, of which 1,000,000 represented a retroactive
      adjustment to the shares issued in the reverse acquisition in December 31,
      2003
      and 500,000 shares represented a return of the 2005 augmentation. The return
      in
      2006 was the result of a negotiated settlement and there were no contingencies
      surrounding the Trust shares in 2005 or 2006. The 500,000 shares recovered
      were
      recorded as a reversal of the expense at fair value on the date of return in
      2006 amounting to $1,125,000 and were promptly cancelled as were the 1,000,000
      shares.




***Trust
      Operations:*** The
      Trust did not conduct any substantive operations because, as described below,
      Mega-C was placed into involuntary bankruptcy shortly after the Trust’s
      inception. As a result of the confirmation of Mega-C’s plan of reorganization by
      an order entered on November 8, 2008 and the substantial consummation of the
      confirmed plan on November 21, 2006, as described below, the Trust is now
      governed by a court appointed Trustee along with a court appointed Board from
      the Trust’s beneficiaries.




***The
      Trust for the Benefit of the Shareholders of Mega-C Power
      Corp*** . ***Analysis of Consolidation:*** Under
      FASB Interpretation No. 46 (revised December 2003) *Consolidation
      of Variable Interest Entities an interpretation of ARB No. 51* ,
      (FIN
      46R), reporting companies are required to consolidate a related variable
      interest entity (“VIE”) when the reporting company is the “primary beneficiary”
of that entity and holds a variable interest in the VIE. The determination
      of
      whether a reporting company is the primary beneficiary of a VIE ultimately
      stems
      from whether the reporting entity will absorb a majority of the VIE’s
      anticipated losses or receive a majority of the VIE’s anticipated
      gains.




***Variable
      Interest Entity:*** The
      Trust
      may be a variable interest entity because it has required outside infusions
      of
      cash over its existence.




***Variable
      Interest:*** The
      Company analyzed its transactions with and relationship to the Trust and
      concluded that it may have had a very small variable interest in the Trust
      based
      on its obligation to perform the acts necessary to have the SEC declare a
      registration statement effective. Further, Axion appeared to have had a limited
      variable interest based on its obligation, pursuant to the requirements in
      the
      Trust instrument that Axion pay Trust expenses until the required registration
      statement was declared effective. However, in reality, Axion never paid any
      significant Trust expenses for three reasons: (1) while the Trust included
      a
      provision for payment of expenses, no significant expenses were ever paid,
      (2)
      the Trust suspended operations on April 4, 2004 when Mega-C Power Corp. entered
      bankruptcy; and (3) the explicit obligation the Company had to pay certain
      expenses of the Trust ended on January 7, 2005 when the required registration
      statement was declared effective. The Company’s relationship to and transactions
      with the Trust, based on actual transactions, constituted a very small variable
      interest, if any, compared to other entities who provided much larger amounts
      of
      support to the Trust, for which the Company had no responsibility. Further
      no
      shares were expected to be returned to Axion at the time these assessments
      were
      made. The relative size of the variable interest is relevant to the
      determination of the primary beneficiary, as discussed below.




***Primary
      Beneficiary:*** Axion
      did
      not and will not absorb a majority of the Trust’s anticipated losses or derive
      the benefit of a majority of the Trust’s gains, if any, at any time. The primary
      beneficiary, at the time of assessment, based on an assessment of what entity
      (entities) absorbs a majority of the entity’s expected losses, receives a
      majority of its expected residual returns, or both, as a result of holding
      variable interests, was the creditors and shareholders of Mega-C Power Corp,
      as
      a group. These were the entities, as groups, who would be affected by increases
      and decreases in the Trust’s primary asset, the Axion stock. These two groups
      will also suffer a diminution in assets available for distribution to them
      because of the expenses the Trust incurs. The increases and decreases in the
      value of the Axion stock in the Trust will have no effect on Axion. Axion may
      have had a very limited obligation in the first quarter of 2004 but few, if
      any,
      expenses were incurred by the Trust in that quarter. In the second quarter,
      Mega-C Power Corp. entered bankruptcy and the Trust became dormant and,
      effectively, under the jurisdiction of the Bankruptcy Court. Upon registration
      of the Trust shares in January 2005 Axion’s obligation to the Trust ended except
      as described below relative to possible registration of shares.




Based
      on
      the above, Axion was not the primary beneficiary and accordingly, Axion is
      not
      required to consolidate the Trust. Axion’s relationship with the Trust ended
      when the Bankruptcy Court in Reno confirmed the bankruptcy plan in 2006 except
      as described below relative to possible registration of shares. (See “Settlement
      Agreement” below)


66


***Trust
      Registration Rights*** **:** The
      Company registered 7,327,500 shares of common stock held by the Mega-C Trust
      by
      a registration statement the SEC declared effective January 7, 2005. 
Pursuant to the confirmed Chapter 11 Plan (See footnote captioned “Subsequent
      Events”), as referenced above, the Company may be required to register 5,700,000
      of those shares (the "Plan Funding Shares") which fund the Chapter 11
      Plan.  The Company filed a post-effective amendment relating to the resale
      or other disposition of 1,627,500 shares, of which, 1 million represent a
      portion of the Plan Funding Shares and 627,500 represent shares to pay expenses
      of the Trust. In paragraph 1(d) of the Settlement Agreement, the Company further
      agreed to file such additional registration statements or post-effective
      amendments as may be necessary or desirable to facilitate or accommodate the
      sale or distribution of 4,700,000 of those shares. The Settlement Agreement
      was
      incorporated and approved in its entirety in paragraph 6.1 of the Second Amended
      Plan, which further provided in paragraph 6.12 that the Second Amended
      Shareholder Trustee and the Liquidation Trustee have the right and power to
      request that the Company file such amendments to the registration statement
      for
      the Plan Funding Shares.




***Taylor
      Litigation:*** On
      February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor,
      Elgin Investments, Inc. and Mega-C Technologies, Inc. (collectively the “Taylor
      Group”) filed a lawsuit in the Ontario Superior Court of Justice Commercial List
      (Case No. 04-CL-5317) that named Tamboril, APC, Rene Pardo, Marvin Winick,
      Kirk
      Tierney, Joseph Piccirilli, Ronald Bibace, Robert Averill, James Smith, James
      Eagan, Thomas Granville, Joseph Souccar, Glenn W. Patterson, Canadian
      Consultants Bureau Inc., Robert Appel, Harold Rosen, Igor Filipenko, Valeri
      Shtemberg, Yuri Volfkovich, Pavel Shmatko, Michael Kishinevsky, Mega-C Power
      Corporation (Nevada), Mega-C Power Corporation (Ontario), C&T, Turitella
      Corporation, Gary Bouchard, Fogler Rubinoff LLP, Netprofitetc Inc., 503124
      Ontario Ltd., HAP Investments LLC, Infinity Group LLC, James Keim, Benjamin
      Rubin and John Doe Corporation as defendants. Although the complaint alleges
      a
      number of complex and intersecting causes of action, it appears that with
      respect to the Company and certain of its directors, officers and stockholders,
      the lawsuit alleged a conspiracy to damage the value of the Taylor Group’s
      investment in Mega-C and deprive the Taylor Group of its alleged interests
      in
      the technology based on an alleged “oral” agreement, as well as damages of
      $250,000,000.




Based
      on
      orders entered in the Bankruptcy Court on February 11, 2008, management believes
      that this litigation against the Company is resolved, as set forth more fully
      in
      the section entitled “Settlement Agreement and Confirmed Chapter 11
      Plan.”




***Mega-C
      Bankruptcy Court Litigation*** **:** As
      described above, shortly after the formation of the Trust, Lewis “Chip” Taylor,
      Chip Taylor in Trust, Elgin Investments, Jared Taylor and Mega-C Technologies
      filed suit against Axion and APC’s founders (the “Taylor Litigation”). The
      Company, APC and Thomas Granville filed an involuntary Chapter 11 petition
      against Mega-C in the U.S. Bankruptcy Court for the District of Nevada (Case
      No.
      BK-N-04-50962-gwz).




In
      February 2005, the Bankruptcy Court stayed the Taylor Litigation pending
      resolution of Mega-C’s Chapter 11 bankruptcy case. In March 2005, the Bankruptcy
      Court appointed William M. Noall to serve as Chapter 11 Trustee for the Mega-C
      case. On June 7, 2005, the Chapter 11 Trustee commenced an adversary proceeding
      against Sally Fonner, the trustee of the Trust (Adversary Proceeding No.
      05-05042-gwz), demanding, among other things, the turnover of at least 7,327,500
      shares of the Company’s stock held by the Trust as property of the bankruptcy
      estate.




On
      July
      27, 2005, the Company commenced an adversary proceeding against the Chapter
      11
      Trustee and Ms. Fonner (Adversary Proceeding No. 05-05082-gwz) for the purpose
      of obtaining a judicial determination that as of the petition
      date:




·
            Mega-C's
                license to commercialize the technology was
                terminated;·
            Mega-C
                does not have any interest in the technology;·
            Mega-C
                did not transfer any property to the Company with the intent to damage
                or
                defraud any entity;·
            Mega-C
                did not transfer any property to the Company for less than reasonably
                equivalent value; and


67




·
            If
                the court ultimately decides that Mega-C has a valid legal interest
                in the
                technology, then the Company is entitled to terminate the Trust.
                Further,
                Axion amended its complaint in September 2005 to assert its legal
                right to
                have the Trustee of the Mega-C Trust hold the assets of the Trust
                for the
                benefit of the Company in the event the bankruptcy court were to
                grant the
                Chapter 11 Trustee's request for turnover of the Trust assets and
                to set
                aside the Trust. Among other things these theories made it necessary
                to name Sally A. Fonner as a defendant in the lawsuit.




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




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




·
            The
                Company has compromised and withdrawn  its notes receivable from
                Mega-C to an allowed unsecured claim of $100;·
            Mega-C
                has assigned all of its right, title and interest, if any, in the
                technology and any and all tangible and intangible personal property
                in
                the Company's possession to the Company;·
            The
                Trust has been restated and retained 4,700,000 shares that will be
                sold to
                pay creditor claims that remain unsatisfied from the Liquidation
                Trust
                described below, with the balance to be proportionately distributed
                to the
                holders of allowed equity interests in Mega-C in connection with
                the
                implementation of Mega-C's Chapter 11 plan. It is also the owner of
                685,002 share certificates which serve as collateral for loans paid
                to the
                newly created Liquidation Trust in the amount of
                $2,055,000;·
            A
                newly created Liquidation Trust received the proceeds of loans in
                the
                amount of $2,055,000, secured by 685,002 shares and has legal title
                to
                314,998 shares that will be sold to pay creditor claims and Liquidation
                Trust expenses.·
            The
                former trustee of the Trust has received 627,500 shares as compensation
                by
                the Trust through the effective date of Mega-C's plan; and·
            The
                Trust surrendered 1,500,000 shares to the Company which were promptly
                cancelled as discussed under “Trust corpus” above.




The
      litigation settlement and releases provided by the plan, which are as broad
      as
      the law allows, are now binding on Mega-C, the Chapter 11 trustee, the Taylor
      Group and all other parties described in the plan of reorganization. The plan
      requires the Liquidation Trustee or the Second Amended Shareholders Trustee
      to
      seek dismissals of the Taylor litigation to the extent the litigation asserts
      derivative or other causes of action that belong to the Chapter 11 estate of
      Mega-C.


68


While
      certain aspects of the litigation discussed above are on appeal to the Ninth
      Circuit Court of Appeals and to the United States District Court for the
      District of Nevada, management believes the possibility of any adverse decision
      to the Company to be remote.




In
      orders
      entered on February 11, 2008, the Bankruptcy Court held that the alleged “oral”
agreement creating rights or interests in the Technology in favor of the Taylor
      Group never existed and, even if it had, the Taylor Group transferred any such
      rights to the Debtor which were then transferred to the Company by the confirmed
      Chapter 11 Plan. The Bankruptcy Court held that the Taylor Group has no interest
      in or rights to the Technology. The Bankruptcy Court held that the only rights
      the Taylor Group has are as putative creditors or shareholders of Mega-C and
      that any attempts to claim an interest in or contest the Company’s title to the
      Technology are contrary to the permanent injunction of the Chapter 11
      Plan.




***Future
      Litigation Costs:*** No
      amounts have been accrued in the accompanying balance sheet related to future
      litigation costs. Protracted litigation or higher than anticipated costs could
      significantly reduce available working capital and have a material adverse
      impact on the company’s financial condition.




***Notes
      Receivable-Mega-C:*** The
      Company advanced funds to Mega-C over the years from 2003 to 2005. The Company
      considered these notes impaired, by recording an allowance for doubtful
      accounts, in an amount equal to the aggregate of the advances, net of certain
      repayments, against the Mega-C advances as the advances were made.




Because
      of the uncollectibility of the Mega-C receivable, as confirmed by the above
      described transactions and events, the Company recorded a recovery of notes
      receivable previously written off in November of 2006 in the amount of $100
      as
      well as other assets received from Mega-C Power Corp. The other assets received,
      primarily miscellaneous fixed assets, have been determined to be negligible
      in
      value and no attempt has been made to secure an appraisal or record any amounts
      for these assets. Most importantly, the confirmation of the plan of
      reorganization conveyed all of Mega C’s right, title and interest, if any, in
      the technology to the Company, thereby resolving a significant challenge to
      the
      Company’s ownership of the technology.




**Note
      15 — Commitments and Contingencies**




***Facilities*** During
      2006 the Company closed the facilities in Woodbridge, Ontario and moved to
      New
      Castle, Pennsylvania. See the note captioned “Purchase of Assets of Failed
      Battery Manufacturing Company (Equipment Purchase).” The agreement provided for
      an initial term of two years with two renewal terms of five years each. The
      monthly rent payable for the initial term of the agreement was $10,000. During
      the two extension terms, the rent was to be based on market rates as determined
      by negotiation between the parties, or if the parties are unable to reach a
      mutually agreed rental rate, by an independent appraisal process. In April
      of
      2008, the company signed a new lease that also added to our existing space
      at
      our manufacturing plant in New Castle, Pennsylvania. The new lease calls for
      a
      monthly payment of $16,142 with an initial term of two (2) years beginning
      April
      2008. In addition to the monthly rental, APB is obligated to pay all required
      maintenance costs, taxes and special assessments, maintain public liability
      insurance in the amount of $1 million, and maintain fire and casualty insurance
      for an amount equal to 1000% of the replacement value of the leased premises.
      Rent expense for the plant in New Castle amounted to approximately $135,800
      and
      $103,000 for the years ended December 31, 2007 and 2006, respectively. Future
      commitments under the initial term of the lease amount to $20,000 in
      2008.




***Employment
      Agreements:*** The
      Company’s Chief Executive Officer, President, Chief Financial Officer, Chief of
      Research and Development and Vice President of Manufacturing Engineering have
      each executed written employment agreements with the terms set forth in the
      following table.




**Name**
            
            **Position**
            
            **Date**
            
            **Term**
            
            **Salary**
            
            **Options**
            
            **Price**
            
            **Vesting**Thomas Granville
                (1)
            
            
            CEO
            
            
            4/4/05
            
            
            24 Months
            
            $
            261,000
            
            
            180,000
            
            $
            2.50
            
            
            MonthlyDr.
                Edward Buiel (2)
            
            
            CTO
            
            
            9/1/05
            
            
            36 Months
            
            $
            168,000
            
            
            100,000
            
            $
            3.75
            
            
            MonthlyAndrew
                Carr Conway, Jr. (3)
            
            
            CFO
            
            
            8/31/07
            
            
            6 months
            
            $
            180,000
            
            
            80,000
            
            $
            4.50
            
            
            MonthlyDr.
                Robert Nelson (4)
            
            
            VP
                Mfg. Eng.
            
            
            12/1/07
            
            
            24 Months
            
            $
            132,000
            
            
            108,000
            
            $
            5.00
            
            
            Monthly


69


(1)
      Thomas Granville’s employment agreement was automatically extended for
      another 24 months through April 2009 based on the terms of the agreement. The
      terms in the agreement did not change.




(2)
      In
      December 2006, Mr. Buiel was promoted to the post of Vice President and Chief
      Technology Officer. Pursuant to his promotion, a new employment agreement was
      approved retroactive to October 2006 in which Mr. Buiel receives an annual
      salary of $168,000 and bonuses as determined by the compensation committee.
      In
      addition, Mr. Buiel receives an option to purchase 100,000 shares of our common
      stock at a price of $3.75 per share that vest over two years commencing December
      2008 and 250,000 shares of restricted common stock that fully vest in December
      2009.




(3)
      On
      August 31, 2007, the Company entered into a 6 month service contract with Andrew
      Carr Conway, Jr. to fill the position of Chief Financial Officer. The contract
      automatically renewed for an additional six month term when the initial six
      months expired with the same terms and conditions. The agreement calls for
      a
      $15,000 per month consulting fee, and the issuance of 80,000 $4.50 options
      with
      an exercise period of 2 years. 30,000 options vested with the execution of
      the
      contract, and the balance vest periodically over the remainder of the contract.
      Mr. Conway is also entitled to whatever additional fees and bonuses he and
      the
      Company may agree upon.




(4)
      Dr.
      Nelson’s employment agreement also provides for a stock grant at a vesting rate
      of 1,000 shares per month with immediate vesting in the event of a change in
      control or the acquisition of 20% or more of the Company’s voting securities.




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




Management
      concluded there is no requirement, pursuant to the requirements of FASB 5,
      “ *Accounting
      for Contingencies* ,”
to
      accrue any loss contingency based on the above described matters involving
      the
      301,700 shares. As a result, there has been no accounting recognition of these
      events in the financial statements.




**Note
      16 — Subsequent Events**




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


70


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




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




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




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




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




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




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




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




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




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




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




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




71


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




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




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




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




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




***C&T
      and Series A Warrants*** . In
      January of 2004 the Company issued warrants (the “C&T Warrants”) to the
      shareholders of C&T (the “C&T Warrant Holders”) in exchange for the
      acquisition of certain intellectual property rights associated with the
      lead/carbon hybrid supercapacitor formerly referred to as the E3 Cell. In
      February of 2005 we issued shares of our Series A Convertible Preferred Stock
      (the “Series A Preferred Stock”) to a group of investors (the “Series A
      Holders”), and in recognition of certain concessions, we issued warrants to the
      Series A Holders (the “Series A Warrants”). Both the C&T Warrants and the
      Series A Warrants expired during the period of time in which the Company was
      not
      current in its Exchange Act Reporting Obligations. In recognition of this,
      our
      board has authorized management to commence discussions and potential
      negotiations with the C&T Warrant Holders and the Series A Holders in an
      effort to recognize that the economic benefits that these parties and the
      Company expected at the time these warrants were issued was frustrated by the
      length of the time the Company was out of compliance with its Exchange Act
      reporting obligations and to provide some form of tangible value to the C&T
      Warrant Holders and the Series A Holders.




72


**Item
      8.**  **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**




None




**Item
      8A(T).**  **Controls
      and Procedures**




*Evaluation
      of Disclosure Controls and Procedures*




As
      of the
      end of the period covered by this Annual Report on Form 10-KSB, management
      performed, with the participation of our Chief Executive Officer and Chief
      Accounting Officer, an evaluation of the effectiveness of our disclosure
      controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
      Exchange Act. Our disclosure controls and procedures are designed to ensure
      that
      information required to be disclosed in the report we file or submit under
      the
      Exchange Act is recorded, processed, summarized, and reported within the time
      periods specified in the SEC’s forms, and that such information is accumulated
      and communicated to our management including our Chief Executive Officer and
      our
      Chief Accounting Officer, to allow timely decisions regarding required
      disclosures. Based on the evaluation and the identification of the material
      weaknesses in our internal control over financial reporting described below,
      our
      Chief Executive Officer and our Chief Accounting Officer concluded that, as
      of
      December 31, 2007, our disclosure controls and procedures were not
      effective.




*Management’s
      Report on Internal Control Over Financial Reporting*




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
      Act. Internal control over financial reporting is a process designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements in accordance with GAAP. Because of its
      inherent limitations, internal control over financial reporting may not prevent
      or detect misstatements. Also, projection of any evaluation of effectiveness
      to
      future periods is subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.




Management
      has conducted, with the participation of our Chief Executive Officer and our
      Chief Financial Officer, an assessment, including testing of the effectiveness,
      of our internal control over financial reporting as of December 31, 2007.
      Management’s assessment of internal control over financial reporting was
      conducted using the criteria in *Internal
      Control over Financial Reporting - Guidance for Smaller Public
      Companies* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (“COSO”).




A
      material weakness is a deficiency, or a combination of deficiencies, in internal
      control over financial reporting, such that there is a reasonable possibility
      that a material misstatement of our annual or interim financial statements
      will
      not be prevented or detected on a timely basis. In connection with our
      management’s assessment of our internal control over financial reporting as
      required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified
      the
      following material weaknesses in our internal control over financial reporting
      as of December 31, 2007:




Hiring/Training
      of Accounting Personnel knowledgeable in Generally Accepted Accounting
      Principles (GAAP).




We
      failed
      to hire, or subsequently train, accounting personnel that had the appropriate
      knowledge of GAAP. As a result, financial statements submitted to the SEC had
      to
      be restated for the years 2003-2005. Financial statements for fiscal year 2006
      were filed on March 31, 2008 and fiscal year 2007 during the extension period
      following that date.




Lack
      of
      an effective Employee Handbook or Training on Company Policies. We did not
      distribute an Employee Handbook to all employees and employees have not received
      any training on company policies such as the Code of Conduct, Sexual Harassment,
      Diversity, Usage of Company Computers, and Insider Trading. Employees are not
      aware of how they are expected to conduct themselves.




We
      do not
      have a Whistleblower program in place. Employees need a process for making
      issues affecting them in the workplace known to the appropriate person(s)
      without fear of retribution. Without an effective process for employees to
      anonymously report wrongdoing, such as falsification of accounting records,
      those employees will not risk a phone call to disclose their suspicions of
      wrongdoing.


73


·
            We
                do not have documented Job Descriptions for each position in the
                Company.
                Performance appraisals have not been performed consistently on an
                annual
                basis and, as a result, our employees may not have a clear understanding
                of their responsibilities or performance compared to these
                responsibilities.


We
      have
      not maintained sufficient segregation of duties as evidenced by:




·
            Our
                Sales Manager approves credit worthiness of new customers and also
                has the
                ability and responsibility for entering sales orders into our accounting
                system. Credit limit approval for new customers and sales order entry
                should not be performed by sales personnel.


·
            Some
                of our employees have the ability to purchase and receive goods.
                The
                receipt of goods should be kept separate from the purchasing
                functions.


·
            Our
                accounting staff employees with payable responsibilities also have
                access
                to vendor maintenance controls. Access to vendor accounts should
                be kept
                separate from the accounts payable
                functions.




We have
      concluded that there were not effective
      financial reporting controls in the following areas that could lead to
      inaccurate financial reporting:




·
            All
                financial personnel have the ability to change account structures
                without
                approval.


·
            General
                Ledger journal entries are not always approved prior to
                entry.


·
            Documented
                processes do not exist for several key processes such as a closing
                checklist, budget-to-actual analyses, balance sheet variation analysis,
                pro forma financial statements, and the usage of key
                spreadsheets.




We
      have
      identified weaknesses in our inventory controls:




·
            Documented
                processes do not exist for several key inventory control processes
                including inventory adjustments, reserves for excess, defective and
                obsolete inventory, product shipments and the tracking and recording
                of
                in-transit inventory.


·
            Inventory
                valuation processes are lacking or do not exist including costs to
                be
                expensed versus inventoried, standard cost changes, actual versus
                standard
                cost analysis and the accurate accumulation of total production
                costs.





We
      do not
      have a closed loop monitoring process in place to ensure issues, improvement
      and
      other directed actions have been completed in a timely manner.




·
            We
                do not do criminal background checks on the Board of Directors and
                employees.




o
            Per
                the KPMG, Fraud Risk Management White Paper, “U.S. sentencing guidelines
                (amended, November 2004) for organizational defendants establish
                minimum
                compliance and ethics program requirements for organizations seeking
                to
                mitigate penalties for corporate misconduct. Specifically, the amended
                guidelines call on organizations to: (1) promote a culture that encourages
                ethical conduct and a commitment to compliance with the law and (2)
                establish standards and procedures to prevent and detect criminal
                misconduct. (3) Use reasonable efforts and exercise due diligence
                to
                exclude individuals from positions of substantial authority who have
                engaged in illegal activities or other conduct inconsistent with
                an
                effective compliance and ethics
                program.”






·
            We
                have key financial, sales order processing, shipping and receiving
                processes that are used to operate our business on a daily basis
                that are
                not formally documented.




·
            We
                do not have formal guidelines for authorization levels for entering
                into
                agreements (i.e. purchase orders, non-disclosure agreements, sales
                and
                other contracts) or distributing cash (signing checks, creating
                authorizing wire transfers).


74


Because
      of the material weaknesses noted above, management has concluded that we did
      not
      maintain effective internal control over financial reporting as of December
      31,
      2007, based on *Internal
      Control over Financial Reporting - Guidance for Smaller Public
      Companies* issued
      by (“COSO”).




**Remediation
      of Material Weaknesses in Internal Control Over Financial
      Reporting**




We
      are in
      the process of implementing remediation efforts with respect to the material
      weaknesses noted above as follows:


·
            We are currently interviewing for an SEC filing
              experienced Controller and other accounting personnel with sufficient
              knowledge of GAAP. Training plans will be implemented to ensure accounting
              personnel stay abreast of updates to
              GAAP.  ·
            We have recently hired a Director of Human Resources
              and
              will re-distribute the Employee Handbook, conduct employee training
              sessions and have all employees acknowledge key policies and sign the
              Code
              of Conduct.  ·
            We are in the process of developing, documenting,
              and
              communicating a formal whistleblower program to employees. We expect
              to
              post the policy on the web site in the governance section and in the
              common areas in the office. We plan on providing a 1-800 number for
              reporting complaints and will hire a specific 3rd party whistleblower
              company to monitor the hotline and provide monthly reports of activity
              to
              our board of directors.  ·
            We
                will document job descriptions for all positions and conduct performance
                appraisals for each employee
                annually.




·
            We
                are developing a plan to reorganize our accounting functions so one
                person
                is responsible for verifying a new customers’ credit worthiness.
                Additionally, we will reassign sales order entry to a person outside
                sales
                and remove the access to the sales module in our accounting software
                to
                all sales personnel.


·
            We
                are separating the purchasing and receipt of goods functions and
                restrict
                system access accordingly.


·
            We
                are changing our accounting system access so that employees with
                accounts
                payable responsibilities cannot add, delete or change vendor
                accounts.


·
            We
                are improving our financial reporting controls by doing the
                following:


o
            Establishing
                a procedure for changing account structures and restrict system access
                accordingly


o
            Implement
                a process to review all journal entries prior to entry into the General
                Ledger


o
            Document
                all key financial reporting
                processes


o
            Establish
                an effective document control and retention procedure




·
            We
                will document all key inventory control processes and will develop
                and
                document inventory valuation
                processes.


75


·
            We
                are establishing a closed loop monitoring process. This process will
                include documentation of outstanding actions, the responsible
                individual(s), expected completion dates and the status of the progress
                of
                these actions. The document will be reviewed and updated on an ongoing
                basis.




·
            We
                are evaluating the use of criminal background checks for all new
                members
                of the Board of Directors, prior to their appointment. We are also
                evaluating the use of criminal background checks for all potential
                new
                hires.




·
            We
                will implement a process to document key business processes and procedures
                and make them accessible to all appropriate
                personnel.




·
            We
                are determining and will document authorization levels stating who
                is
                allowed to approve key transactions and at what level of
                spending.




We
      believe the foregoing efforts will enable us to improve our internal control
      over financial reporting. Management is committed to continuing efforts aimed
      at
      improving the design adequacy and operational effectiveness of its system of
      internal controls. The remediation efforts noted above will be subject to our
      internal control assessment, testing and evaluation process.




This
      annual report does not include an attestation report of the company's registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by the company's registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the company to provide only management's report
      in this annual report.




**PART
      III**




**Item 9.**
            **Directors,
                Executive Officers****,
                Promoters, Control Persons and Corporate Governance; Compliance with
                Section 16(a) of the Exchange
                Act.**




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




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




**Name**
            
            **Age**
            
            **Position**
            
            **Term
                expires**Thomas
                Granville
            
            63
            
            Chief
                Executive Officer, Director
            
            2008Dr.
                Howard K. Schmidt
            
            49
            
            Director
            
            2008Michael
                Kishinevsky
            
            42
            
            Director
            
            2008Glenn
                Patterson
            
            54
            
            Director
            
            2009Stanley
                A. Hirschman
            
            61
            
            Director
            
            2009Dr.
                Igor Filipenko (1)
            
            43
            
            Director
            
            2008Robert
                G. Averill (1)
            
            68
            
            Director
            
            2008D.
                Walker Wainwright
            
            57
            
            Director
            
            2008




(1)
            Term
                extended as described above.




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


76




**Name**
            
            **Age**
            
            **Position**
            
            **Contract expires**Andrew
                Carr Conway Jr.(1)
            
            64
            
            Chief
                Financial Officer
            
            August
                2008Dr.
                Edward Buiel
            
            35
            
            Vice
                President and Chief Technology Officer
            
            December
                2010Dr.
                Robert F. Nelson
            
            67
            
            Vice
                President, Manufacturing and Engineering
            
            ****November 30, 2009




(1)
            Mr.
                Conway’s employment automatically renewed for an additional six months at
                the same terms and conditions absent negotiations to change the terms
                and
                conditions. There have been no such negotiations.




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




**Directors** ****




***Dr.
      Igor Filipenko, M.D.*** was
      appointed to our board in February 2004 and reelected at our 2004 annual meeting
      for a term that will expire on the date of our **2008** annual
      meeting. Dr. Filipenko was a founder of C and T Co. Incorporated, the original
      developer of the e3 Supercell technology (which we now refer to as PbC
      technology). In addition to his duties as president of C&T, Dr. Filipenko a
      principal shareholder in a number of other enterprises, including Oledo
      Associated S.A., VIK Oil and Vostok Energiya, a group of Ukrainian companies
      that are engaged in petroleum refining and the import, export and trading of
      petroleum products, and Laser Plus, an ophthalmologic clinic located in Donetsk,
      Ukraine. Dr. Filipenko is a 1986 graduate of Donetsk Medical University,
      Ukraine.




***Robert
      G. Averill*** is
      an
      independent director who was appointed to our board in February 2004 and
      reelected at our 2004 annual meeting for a term that will expire on the date
      of
      our **2008** annual
      meeting. Mr. Averill is retired and principally involved in personal
      investments. He served as a director of Implex Corp., a New Jersey based
      developer and manufacturer of orthopedic implants that he co-founded in 1991
      and
      then sold to Zimmer Holdings, Inc. From 1978 to 1991 Mr. Averill held a variety
      of executive positions with Osteonics Corp., a developer and manufacturer of
      orthopedic implants that he co-founded in 1978 and then sold to Stryker
      Corporation. From 1971 to 1977, Mr. Averill served as a director and held a
      variety of executive positions with Meditech Inc., a developer and manufacturer
      of orthopedic implants that he co-founded in 1971 and sold to 3M Corporation
      in
      1975. Mr. Averill holds 28 patents on a variety of orthopedic devices and
      materials and he is the co-author of several publications in the field of
      orthopedics. Mr. Averill holds two degrees from the Newark College of
      Engineering (BS-mechanical engineering, 1962 and MS-engineering management,
      1966).




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




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


77


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




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




***Stanley
      A. Hirschman*** **** was
      elected to the board and an independent director at our 2006 annual meeting
      serving for a three-year term that will end on the date of our 2009 annual
      meeting. He is President of CPointe Associates, Inc., a Plano, Texas executive
      management and retail operations consulting firm. He is an
      investment due diligence specialist and works regularly with public companies
      dealing with the difficulties of the balance between increased regulatory
      requirements and reasonable corporate governance. He has served on boards of
      several public companies and is currently a director of South Texas Oil Co.
      and
      former chairman of Mustang Software, Inc. Mr. Hirschman’s client list has
      included GameStop, Nortel, Dalrada Financial Corp, The Longview Funds,
      Earthlink, Aiirmesh Communications, Bravo Foods International and Retail
      Highway. Prior to establishing CPointe Associates, Mr. Hirschman was Vice
      President Operations, Software Etc., Inc., a 396 retail store software chain,
      from 1989 until 1996. Mr. Hirschman also held senior executive management
      positions with T.J. Maxx, Gap Stores and Banana Republic. Mr. Hirschman is
      a
      member of the National Association of Corporate Directors, the KMPG Audit
      Committee Institute and is a graduate of the Harvard Business School Audit
      Committees in the New Era of Governance.  He is active in community affairs
      and serves on the Advisory Board of the Salvation Army Adult Rehabilitation
      Centers.




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




**Executive
      officers**




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


78




***Dr.
        Edward Buiel, Ph.D.*** was
        appointed chief of research and development in September 2005. Before joining
        our company, Dr. Buiel served for 3-1/2 years as project leader for the Energy
        Storage Group of Meadwestvaco Corporation, one of the largest producers of
        activated carbon in the world. In this position Dr. Buiel’s team focused on
        developing activated carbon materials for electrochemical applications including
        Lithiumion batteries, organic ultracapacitors, and asymmetric lead-carbon
        capacitors. His responsibilities included managing a USCAR-Advanced Battery
        Consortium project to develop activated carbon materials for hybrid electric
        vehicle energy storage systems and managing a joint program with Sandia National
        Laboratories to develop lead-carbon capacitors for grid-connected energy
        storage
        systems. Previously, Dr. Buiel worked for nine months as a senior software
        engineer for Vasocor, Inc. and for 2-1/2 years as a Senior Research Engineer
        for
        the Automotive Carbon Group of Meadwestvaco Corporation. Dr. Buiel is a 1994
        graduate of Queen’s University, Kingston, Ontario, where he earned a Bachelor of
        Science in Engineering and Physics, and a 1998 graduate of Dalhousie University,
        Halifax, Nova Scotia, where he earned a Ph.D. in Physics and wrote his doctoral
        thesis on “The Development of Disordered Carbon Materials as Anode Materials for
        Li-ion Battery Applications.”
  ***Dr.
        Robert F. Nelson, Ph.D.*** joined
        Axion as Vice President of Manufacturing Engineering in December 2007. Before
        joining Axion, Dr. Nelson worked for Firefly Energy, Inc. as a Technical
        Advisor
        and Senior Vice President of Engineering for 4-1/2 years. His primary function
        at Firefly was to implement the development and testing of valve-regulated
        lead-acid (VRLA) cells and batteries. Before Firefly, Dr. Nelson was an
        independent consultant for six years, working with some 45 companies on
        materials and designs of VRLA batteries. Previous positions include three
        years
        at Bolder Technologies (1994-1997), three years at the International Lead
        Zinc
        Research Organization (where he organized and managed the Advanced Lead-Acid
        Research Organization, ALABC, from 1991 to 1994), one year at Portable Energy
        Products (a lead-acid startup company) and 13 years with Gates Energy Products,
        the innovator of VRLA technology. Over these 30 years, Dr. Nelson has five
        patents, has given invited presentations at some 35 international conferences
        and published 38 research papers in refereed journals. Before this, he spent
        11
        years in teaching and research, lastly at the University of Georgia (1972-1977).
        Dr. Nelson is a 1963 graduate of Northwestern University with a B.A. in
        Chemistry (cum laude) and a 1967 graduate of the University of Kansas with
        a
        Ph.D. in Analytical Chemistry. During his academic career he gave presentations
        at over 30 international conferences and published more than 35 refereed
        papers
        dealing with organic electrochemistry.
  **Presiding
        director**
  Our
        Chief
        Executive Officer, Thomas Granville, acts as the presiding director at meetings
        of our Board of Directors. In the event that Mr. Granville is unavailable
        to
        serve at a particular meeting, responsibility for the presiding director
        function will rotate among the chairmen of each of the committees of our
        Board
        of Directors.
  **Corporate
        governance**
  Our
        Board
        of Directors believes that sound governance practices and policies provide
        an
        important framework to assist them in fulfilling their duty to stockholders.
        Our
        Board of Directors is working to adopt and implement many “best practices” in
        the area of corporate governance, including separate committees for the areas
        of
        audit and compensation, careful annual review of the independence of our
        Audit
        and Compensation Committee members, maintenance of a majority of independent
        directors, and written expectations of management and directors, among other
        things.
  **Code
        of business conduct and ethics**
  Our
        Board
        of Directors has adopted a Code of Business Conduct and Ethics, which has
        been
        distributed to all directors, officers, and employees and will be given to
        new
        employees at the time of hire. The Code of Business Conduct and Ethics contains
        a number of provisions that apply principally to our President, Chief Financial
        Officer and other key accounting and financial personnel. A copy of our Code
        of
        Business Conduct and Ethics can be found under the “Investor Information”
section of our website at www.axionpower.com. We intend to disclose any
        amendments or waivers of our Code of Business Conduct and Ethics on our
        website.
  **Communications
        with the Board of Directors**
  Stockholders
        and other parties who are interested in communicating with members of our
        Board
        of Directors, either individually or as a group may do so by writing to Thomas
        Granville, c/o Axion Power International, Inc, 3601 Clover Lane, New Castle,
        Pennsylvania, 16105. Mr. Granville will review all correspondence and forward
        to
        the appropriate members of the Board of Directors copies of all correspondence
        that, in the opinion of Mr. Granville, deals with the functions of the Board
        of
        Directors or its committees or that he otherwise determines requires their
        attention. Concerns relating to accounting, internal controls or auditing
        matters should be immediately brought to the attention of our Audit Committee
        and will be handled in accordance with procedures established by that
        committee.
  79
  **Director
        independence**
  Our
        Board
        of Directors has determined that six of our directors would meet the
        independence requirements of the American Stock Exchange if such standards
        applied to the Company. In the judgment of the Board of Directors, Dr.
        Filipenko, and Mr. Granville do not meet such independence standards. In
        reaching its conclusions, the Board of Directors considered all relevant
        facts
        and circumstances with respect to any direct or indirect relationships between
        the Company and each of the directors, including those discussed under the
        caption “Certain Relationships and Related Transactions.” Our Board of Directors
        determined that any relationships that exist or existed in the past between
        the
        Company and each of the independent directors were immaterial on the basis
        of
        the information set forth in the above-referenced sections.
  **Board
        committees**
  Audit
        Committee –
        Our Board of Directors has created an Audit Committee that presently consists
        of
        Mr. Patterson, Mr. Hirschman and Dr. Schmidt. Mr. Patterson serves as chairman
        of the audit committee. All members have a basic understanding of finance
        and
        accounting, and are able to read and understand fundamental financial
        statements. The Board of Directors has determined that all members of the
        Audit
        Committee would meet the independence requirements of the American Stock
        Exchange if such standards applied to our company. Our Board of Directors
        has
        also determined that based on education and work history, Messrs. Patterson
        and
        Hirschman meet the definition of an “Audit Committee Financial Expert” as
        established by the Securities and Exchange Commission. The Audit Committee
        has
        the sole authority to appoint, review and discharge our independent auditors.
        The Audit Committee reviews the results and scope of the audit and other
        services provided by our independent auditors, as well as our accounting
        principles and its system of internal controls, reports the results of their
        review to the full Board of Directors and to management and recommends to
        the
        full Board of Directors that the our audited consolidated financial statements
        be included in the our Annual Report on Form 10-KSB.
  Compensation
        Committee – Our
        Board of Directors has created a
        compensation committee that presently consists of Messrs Averill, Patterson,
        Kishinevsky and Wainwright. Mr. Averill serves as chairman of the compensation
        committee. The compensation committee exercises our Board’s authority concerning
        compensation of the executive management team, non-employee directors and
        the
        administration of our stock-based incentive compensation plans. The Compensation
        Committee typically meets in separate sessions independently of board meetings.
        The Compensation Committee typically schedules telephone meetings as necessary
        to fulfill its duties.  The chairman establishes meeting agendas after
        consultation with other committee members and Mr. Thomas Granville, our CEO.
        Subject to supervision by the full Board of Directors, the compensation
        committee administers our 2004 Incentive Stock Plan. Our CEO and other members
        of management regularly discuss our compensation issues with Compensation
        Committee members. Subject to Compensation Committee review, modification
        and
        approval, Mr. Granville typically makes recommendations respecting bonuses
        and
        equity incentive awards for the other members of the executive management
        team.
        The Compensation Committee establishes all bonus and equity incentive awards
        for
        Mr. Granville in consultation with other members of the management team.
        Our
        Board of Directors has determined all members of the compensation committee
        would meet the independence requirements of the Amex if such standards are
        applied to us.
  Technology
        Committee– Our
        Board of Directors has created a Technology Committee that consists of Dr.
        Schmidt and Messrs. Averill and Granville. Dr. Schmidt serves as chairman
        of the
        technology committee. The technology committee provides board-level oversight,
        guidance and direction to our research and development staff, supervises
        the
        activities of our Technical Advisory Board, evaluates and makes recommendations
        with respect to the acquisition and licensing of complementary and competitive
        technologies and supervises the activities of our intellectual property
        lawyers.
  Nominating
        Committee– Our
        Board of Directors does not have a separate nominating committee, and has
        determined that it is appropriate for the entire Board of Directors to serve
        that function for the time being. With respect to Director nominees, our
        Board
        of Directors will consider nominees recommended by stockholders that are
        submitted in accordance with our By-Laws. The process for receiving and
        evaluating director nominations from stockholders is described
        below.
  **Board
        meetings and attendance**
  During
        the year ended December 31, 2007, the Board of Directors held 12 meetings,
        the
        Audit Committee held 20 meetings; the Compensation Committee held one meeting;
        and the Technology Committee held one meeting. During the year ended December
        31, 2007, Dr. Igor Filipenko and Mr. Kishinevsky attended less than 70% of
        all
        Board of Directors meetings that required their attendance.
  80
  We
        encourage all members of the Board of Directors to attend our annual
        stockholders meetings and 7 of our 8 board members attended the 2006 Annual
        Meeting. The Company did not hold an annual shareholders meeting in
        2007.
  **Board
        nominations**
  Stockholders
        wishing to bring a nomination for a director candidate before a stockholders
        meeting must give written notice to our Corporate Secretary, either by personal
        delivery or by Untied States mail, postage prepaid. The stockholder’s notice
        must be received by the Corporate Secretary not later than (a) with respect
        to
        an Annual Meeting of Stockholders, 90 days prior to the anniversary date
        of the
        immediately preceding annual meeting, and (b) with respect to a special meeting
        of stockholders for the election of directors, the close of business on the
        tenth day following the date on which notice of the meeting is first given
        to
        stockholders. The stockholder’s notice must set forth all information relating
        to each person whom the stockholder proposes to nominate that is required
        to be
        disclosed under applicable rules and regulations of the SEC, including the
        written consent of the person proposed to be nominated to being named in
        the
        proxy statement as a nominee and to serving as a director if elected. The
        stockholder’s notice must also set forth as to the stockholder making the
        nomination (i) the name and address of the stockholder, (ii) the number of
        shares held by the stockholder, (iii) a representation that the stockholder
        is a
        holder of record of stock of the Company, entitled to vote at the meeting
        and
        intends to appear in person or by proxy at the meeting to nominate the person
        named in the notice, and (iv) a description of all arrangements or
        understandings between the stockholder and each nominee.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  To
        our
        knowledge, based solely on a review of the Section 16(a) reports furnished
        to us
        and written representations that no other reports were required to be filed
        pursuant to Section 16(a) and the related rules of the SEC, for transactions
        occurring in fiscal year 2007, our officers, directors and holders of more
        than
        10% of our common stock filed all Section 16(a) reports on a timely basis,
        other
        than as described below. For transactions occurring in fiscal year 2007,
        one or
        more Forms 4 (Statement of Changes of Beneficial Ownership) was inadvertently
        filed late for each of the following persons, as indicated: Mr. Thomas
        Granville, a member of our Board of Directors (two filings disclosing a total
        of
        four transactions); Mr. Glenn Patterson, a member of our Board of Directors
        (three filings disclosing a total of six transactions); Mr. John Petersen,
        who
        was serving as a member of our Board of Directors for 2006 and resigned
        effective January 15, 2007 (four filings disclosing a total of 13 transactions);
        and Mr. Robert Averill, a member of our Board of Directors (twelve filings
        disclosing a total of one hundred thirty-four transactions).
  **Item
        10.**  **Executive
        Compensation.** ****
  **Summary
        Compensation Table**
  The
        following table sets forth the compensation earned by or paid to our Named
        Executive Officers with respect to the year ended December 31,
        2007.  The Named Executive Officers are as shown. We did not have
        any non-equity incentive plans, pension plans or deferred compensation plans
        during the year ended December 31, 2007.
 **Name and**
                  **Principal Position**
                
                **Year**
                
                **Salary ($)**
                  **(1)**
                
                **Bonus ($)**
                  **(2)**
                
                **Stock**
                  **Awards ($)**
                  **(3)**
                
                **Option Awards**
                  **($) (3)**
                
                **All Other**
                  **Compensation**
                  **($) (6)**
                
                **Total**
                  **Compensation**
                  **($)**Thomas Granville**(4*)*
                  *CEO
                    and Director*
                
                
                2007
                
                
                252,000
                
                
                
                
                
                
                
                
                
                
                
                25,312
                
                
                277,312Thomas Granville**(4)
                  *CEO
                    and Director*
                
                
                2006
                
                
                252,000
                
                
                356,700
                
                
                200,000
                
                
                412,687
                
                
                174,184
                
                
                1,395,571Charles
                    Mazzacato
                  *CEO
                    and Director*
                
                
                2006
                
                
                125,000
                
                
                
                
                
                
                
                
                124,364
                
                
                
                
                
                249,364Edward
                    Buiel
                  *Vice
                    President and CTO*
                
                
                2007
                
                
                168,000
                
                
                
                
                
                
                
                
                
                
                
                22,312
                
                
                190,312Edward
                    Buiel
                  *Vice
                    President and CTO*
                
                
                2006
                
                
                132,000
                
                
                
                
                
                937,500
                
                
                288,366
                
                
                28,039
                
                
                1,385,905Andrew
                    C Conway, Jr*Consultant*
                
                
                2007
                
                
                163,878
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                163,878Andrew
                    C Conway, Jr**
                  *CFO*(5)
                
                
                2007
                
                
                66**,**450
                
                
                
                
                
                
                
                
                37**,**356
                
                
                
                
                
                103**,**806Peter
                    Roston -*CFO*
                  (Aka:
                    Thornbridge Capital)
                
                
                2006
                
                
                122,570
                
                
                
                
                
                
                
                
                138,182
                
                
                
                
                
                260,752Michael
                    Courtade
                  *CFO*
                
                
                2006
                
                
                18,000
                
                
                
                
                
                
                
                
                
                
                
                604
                
                
                18,604Robert
                    Nelson**
                  *VP
                    Manufacturing Engineering*
                
                
                2007
                
                
                11**,**423
                
                
                
                
                
                82,800
                
                
                108,504
                
                
                
                
                
                202,727
 81
  1.
              Salaries
                  are presented as the contractual amount earned for the year, regardless
                  of
                  date of payment.
 
 2.
              Discretionary
                  bonuses are not made pursuant to any specific bonus plan. In December
                  2006, Mr. Granville was awarded a cash bonus of $300,000. $225,000
                  was
                  paid during the first quarter of 2007 and the remainder on May
                  19, 2007.
                  These amounts were reported in this Item in the Form 10-KSB for
                  the period
                  ended December 31, 2006 and are accordingly not included in 2007
                  above.
 
 3.
              Mr.
                  Conway received stock options valued at the amount cited. Mr. Nelson
                  received both a stock grant and an option grant which is valued
                  at the
                  amount cited.
 
 4.
              With
                  the exception of equity compensation and related gross-ups
                  compensationrelated
                  to Mr. Granville’s employment were remitted to Gallagher Elevator Co.
                  (Gallagher) under an agreement whereby Mr. Granville’s services are
                  provided to us through Gallagher.
 
 5.
              Andrew
                  Conway performed consulting services for the Company before he
                  accepted a
                  position as CFO in 2007. For the amounts reflected above as consulting
                  fees, Andrew Conway received less than half of the amounts disclosed
                  with
                  the firm he was employed by receiving the balance of the consulting
                  fees.
                  With respect to the total compensation for Andrew Conway as CFO,
                  the total
                  does not include travel and living expenses while Mr. Conway was
                  in New
                  Castle for Company business
                  reasons.
 
 6.
              Amounts
                  in the other compensation column for 2007 represent perquisites
                  paid to
                  the employees.
 
 We
        have
        entered into executive employment agreements with Thomas Granville, Edward
        Buiel, Andrew
        Carr Conway, Jr. and Robert Nelson. These agreements generally require each
        executive to devote substantially all of his business time to our affairs,
        establish standards of conduct, prohibit competition with our company during
        their term, affirm our rights respecting the ownership and disclosure of
        patents, trade secrets and other confidential information, provide for the
        acts
        and events that would give rise to termination of such agreements and provide
        express remedies for a breach of the agreement. Each of our executives will
        participate, without cost, in our standard employee benefit programs, including
        medical/hospitalization insurance and group life insurance, as in effect
        from
        time to time. Each of the covered executives will generally receive an
        automobile allowance and reimbursement for all reasonable business expenses
        incurred by him on behalf of the Company in the performance of his duties.
        The
        provisions of the individual agreements are summarized below:
  1.
              Under
                  the terms of his employment agreement effective April 2005, which
                  had a
                  term of two years, Mr. Granville receives an annual salary of $261,000,
                  bonuses as determined by the compensation committee and an option
                  to
                  purchase 180,000 shares of our common stock at a price of $2.50
                  per share
                  that vests over 24 months beginning in April 2005. In April 2007,
                  his
                  agreement was automatically extended for another 24 months through
                  April
                  2009 with no change in terms. As described above, cash remuneration
                  to Mr.
                  Granville is paid to Gallagher.
  82
  2.
              In
                  December 2006, Dr. Buiel was promoted to the post of Vice President
                  and
                  Chief Technology Officer. Pursuant to his promotion, a new employment
                  agreement was approved retroactive to October 2006 in which Mr.
                  Buiel
                  receives an annual salary of $168,000 and bonuses as determined
                  by the
                  compensation committee. In addition, Mr. Buiel received an option
                  to
                  purchase 100,000 shares of our common stock at a price of $3.75
                  per share
                  that vest over two years commencing December 2008 and 250,000 shares
                  of
                  restricted common stock that fully vest in December 2009. The compensation
                  recognized because of the 250,000 shares was reported in this Item
                  in the
                  Form 10-KSB for the year ended December 31,
                  2006.
  3.
              Under
                  the terms of his employment agreement effective August 2007, which
                  has a
                  term of six months, Mr. Conway receives an annualized salary of
                  $180,000,
                  bonuses as determined by the compensation committee and an option
                  to
                  purchase 80,000 shares of our common stock at a price of $4.50
                  per share.
                  30,000 options vested with the execution of the contract, and the
                  balance
                  vest periodically over the remainder of the contract. The contract
                  automatically renewed for an additional six month
                  term.
  4.
              Under
                  the terms of his employment agreement effective December 2007,
                  which has a
                  term of two years, Dr. Nelson receives an annual salary of $132,000
                  and
                  bonuses as determined by the compensation committee. In addition,
                  Dr.
                  Nelson receives an option to purchase 108,000 shares of our common
                  stock
                  at a price of $5.00 per share and 36,000 shares of restricted common
                  stock, each that vest over three years from the effective date
                  of his
                  employment agreement.
  We
        have
        no retirement plans or other similar arrangements for any directors, executive
        officers or employees.
  83
  **Outstanding
        Equity Awards At Fiscal Year-End Table**
 Option Awards
                      
                      Stock AwardsEquity Incentive Plan AwardsNon-Plan
                      
                      
                      
                      Equity
                        Incentive
                        Plan
                        AwardsNumber of shares underlying unexercised options
                      
                      
                      
                      Number
                      
                      Market
                        Value
                      
                      # Shares
                      
                      MarketValueName
                      
                      #
                        Exercisable
                      
                      #
                        UnExercisable
                      
                      Unearned
                      
                      Exercise
                        Price
                      
                      Expiration Date
                      
                      Shares or units of
                        stock that have not
                        vested
                      
                      Unearned shares, units, or other
                        rights that have not vested
                      
                      Footnotes(a)
                      
                      (b)
                      
                      (c)
                      
                      (d)
                      
                      (e)
                      
                      (f)
                      
                      (g)
                      
                      (h)
                      
                      (i)
                      
                      (j)Granville,
                          Tom
                      
                      
                      
                      
                      
                      0
                      
                      
                      2,200
                      
                      $
                      5.60
                      
                      
                      2/2/2009
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Director's
                          plan award - Fully vestedGranville,
                          Tom
                      
                      
                      180,000
                      
                      
                      0
                      
                      
                      
                      
                      $
                      2.50
                      
                      
                      varies through 4/30/12
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Issued
                          pursuant to April 2005 Executive Employment Agreement.
                          Options Expire 5
                          years after monthly vest dateGranville,
                          Tom
                      
                      
                      400,000
                      
                      
                      100,000
                      
                      
                      
                      
                      $
                      6.00
                      
                      
                      2/10/2009
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Non-Plan
                          Performance-based award granted by the Compensation Committee
                          Feb 2006 -
                          Vesting is contingent upon future eventsBuiel,
                          Edward
                      
                      
                      70,000
                      
                      
                      20,000
                      
                      
                      
                      
                      $
                      4.00
                      
                      
                      varies through8/31/13
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Issued
                          pursuant to Sept 2005 Executive Employment Agreement. Options
                          expire 5
                          years after monthly vest dateBuiel,
                          Edward
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      250,000
                      
                      $
                      937,500
                      
                      
                      Restricted
                          Stock Grant issued pursuant to Dec 2006 Executive Employment
                          Agreement -
                          Lump sum Vesting Date 12/29/2009Buiel,
                          Edward
                      
                      
                      15,000
                      
                      
                      20,000
                      
                      
                      
                      
                      $
                      6.00
                      
                      
                      2/10/2009
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Non-Plan
                          Performance-based award granted by the Compensation Committee
                          Feb 2006 -
                          Vesting is contingent upon future eventsBuiel,
                          Edward
                      
                      
                      0
                      
                      
                      50,000
                      
                      
                      
                      
                      $
                      3.75
                      
                      
                      12/29/2015
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Options
                          issued pursuant to Dec 2006 Executive Employment Agreement.
                          Lump sum
                          vesting date - 12/29/2009Buiel,
                          Edward
                      
                      
                      0
                      
                      
                      50,000
                      
                      
                      
                      
                      $
                      3.75
                      
                      
                      12/29/2016
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Options
                          issued pursuant to Dec 2006 Executive Employment Agreement.
                          Lump sum
                          vesting date - 12/29/2010Conway,
                          Andrew Carr Jr.
                      
                      
                      60,000
                      
                      
                      20,000
                      
                      
                      
                      
                      $
                      4.50
                      
                      
                      varies through 2/28/2010
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Options
                          issued pursuant to Aug 2007 Executive Employment Agreement.
                          Vesting
                          monthly through Feb 29, 2008Nelson,
                          Robert
                      
                      
                      3,000
                      
                      
                      105,000
                      
                      
                      
                      
                      $
                      5.00
                      
                      
                      varies through  12/01/2015
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Options
                          issued pursuant to Dec 2007 Executive Employment Agreement.
                          Vesting
                          monthly through Dec 1, 2010Nelson,
                          Robert
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      35,000
                      
                      $
                      79,350
                      
                      
                      Restricted
                          Stock Grant issued pursuant to Dec 2007 Executive Employment
                          Agreement -
                          Vest monthly through Dec 2010
  84
  **Nonqualified
        deferred compensation**
  We
        had no
        non-qualified deferred compensation plans during 2007.
  **Post-Termination
        Compensation**
  We
        have
        not entered into change in control agreements with any of our Named Executive
        Officers or other members of the executive management team. Awards of equity
        incentives under our 2004 Incentive Stock Plan and awards of options under
        our
        2004 Outside Directors Stock Option Plan do not provide for immediate vesting
        upon a change in control.   However, the Compensation Committee has
        the full and exclusive power to interpret the plans, including the power
        to
        accelerate the vesting of outstanding, unvested awards.  A “change in
        control” is generally defined as (i) the acquisition by any person of 30%
        or more of the combined voting power of the Company’s outstanding securities, or
        (ii) the occurrence of a transaction requiring shareholder approval and
        involving the sale of all or substantially all of the Company’s assets or the
        merger of the Company with or into another corporation.
  **Director** **Compensation**
  The
        members of our Board of Directors are actively involved in various aspects
        of
        our business ranging from relatively narrow board oversight functions to
        providing hands-on guidance to our executives and scientific staff with respect
        to matters within their personal experience and expertise. We believe that
        the
        active involvement of all board members in our principal business and policy
        decisions increases our Board of Director’s understanding of our needs and
        improves the overall quality of our management decisions. In recognition
        of the
        substantial time and personal effort that we require from our board members,
        we
        have adopted director compensation policies that provide for higher director
        compensation than is typically found in companies at our early stage of
        development.
  Only
        independent directors are compensated separately for service as members of
        our
        Board of Directors. Each of our independent directors received the following
        compensation for the period January
        1, 2007 through December 31, 2007 :
  ·
              A
                  basic annual retainer of $25,000 for service as a board member;
  ·
              A
                  supplemental retainer of $6,000 for service as chairman of audit
                  committee
                  or technology committee, and supplemental annual retainer $4,000
                  for
                  service as chairman of any other board
                  committee
  ·
              A
                  supplemental annual retainer of $3,000 for service as a committee
                  member
  ·
              A
                  meeting fee of $1,500 per day for each board or committee meeting
                  attended
                  in person or $500 for each board or committee meeting attended
                  by
                  telephone; and
  ·
              Reimbursement
                  for all reasonable travel, meals and lodging costs incurred on
                  our
                  behalf.
  At
        our
        2004 Annual Meeting, our stockholders ratified a stock option plan for
        independent directors that authorized the issuance of options to purchase
        $20,000 of our common stock for each year of service as a director of our
        company. At our 2005 Annual Meeting, the number of shares reserved for issuance
        under the outside directors’ stock option plan was increased to
        500,000.
  For
        the
        years ended December 31, 2007, 2006, 2005 and 2004, we have issued, 0, 60,000,
        70,000 and 54,000, respectively of options pursuant to our director’s stock
        option plan. Of this total, no options were exercised during the year ended
        December 31, 2007, 90,035 **** options
        are currently vested and exercisable at a weighted average price of $2.83
        per
        share, and 50,000 options are unvested and will be exercisable at a weighted
        average price of $2.40  per
        share.
  85
  **Director
        Compensation Table**
  The
        following table provides information regarding compensation paid to non-employee
        directors for services rendered during the year
        ended December 31, 2007 .
 Name
                
                Fees
                  Earned or
                  Paid in
                  Cash ($)
                
                Stock
                  Awards
                  ($)
                
                Option
                  Awards
                  ($)
                
                Non-Equity
                  Incentive Plan
                  Compensation
                  ($)
                
                Nonqualified
                  Deferred
                  Compensation
                  Earnings
                
                AllOther
                  Compensation
                  ($)
                
                Total ($)Thomas
                    Granville
                
                
                (1)John
                  Petersen
                
                
                0Fefer,
                    Petersen & Cie, Attorneys
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2)Dr.
                    Igor Filipenko
                
                
                0Robert
                    G. Averill
                
                
                39,000Dr.
                    Howard K. Schmidt
                
                
                51,600Michael
                    Kishinevsky
                
                
                33,000Glenn
                    Patterson
                
                
                51,000Stanley
                    A. Hirschman
                
                
                43,000Walker
                    Wainwright
                
                
                31,500
                
                
                
                
                
                (3) 53,230
                
                
                
                
                
                
                
                
                
                
                
                84,730
  (1)
              See
                  Executive Compensation Table
  (2)
              John
                  Petersen, the Company’s legal counsel, served as a member of our Board of
                  Directors through January 15, 2007. Mr. Petersen did not receive
                  payment
                  for serving as a member of the
                  Board.
  (3)
              In
                  January 2007, Walker Wainwright was granted an option to purchase
                  40,000
                  shares of common stock at an exercise price of $5.00 as compensation
                  for
                  services related to due diligence, negotiation and sale of the
                  2006 Series
                  A Preferred Stock offering.
  **Item
        11.** **Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters**
  We
        had
        18,156,060 shares of common stock, 137,500 shares of Senior Preferred Stock
        and
        822,997 shares of Series A Preferred Stock outstanding on the date of this
        report. Th e
        follow ing
        table
        sets forth certain information with respect to the beneficial ownership of
        our
        securities as of March 31, 2008, for (i) each of our directors and executive
        officers; (ii) all of our directors and executive officers as a group; and
        (iii)
        each person who we know beneficially owns more than 5% of our common
        stock.
  86
  Beneficial
        ownership data in the table has been calculated based on SEC rules that require
        us to identify all securities that are exercisable for or convertible into
        shares of our common stock within 60 days of March 31, 2008 and treat the
        underlying stock as outstanding for the purpose of computing the percentage
        of
        ownership of the holder.
  Except
        as
        indicated by the footnotes following the table, and subject to applicable
        community property laws, each person identified in the table possesses sole
        voting and investment power with respect to all capital stock held by that
        person. The address of each named executive officer and director, unless
        indicated otherwise by footnote, is c/o Axion Power International, Inc. 3601
        Clover Lane, New Castle PA 16105.
  **Common**
                **Stock**
              
              **Preferred**
                **Conversion**
                **(1)**
              
              **Warrant &**
                **Options**
                **(2)**
              
              **Combined**
                **Ownership**
              
              **Percentage****Quercus
                  Trust**
                **1835
                  Newport Blvd**
                **A109
                  - PMB 467**
                **Cosa
                  Mesa, CA 92627**
              
              
              1,904,762
              
              
              -
              
              
              2,857,143
              
              
              4,761,905
              
              
              22.7
              %**Trust
                  for the Benefit of the Shareholders**
                **of
                  Mega-C Power Corp**
                **c/o
                  Cecilia L Rosenauer Ltd**
                **510
                  W Plumb Lane Suite A**
                **Reno
                  NV 89509**
              
              
              5,385,002
              
              
              -
              
              
              -
              
              
              5,385,002
              
              
              29.7
              %**Fursa
                  Master Global Event Driven Fund LP**
                **200
                  Park Avenue, 54th Floor**
                **New
                  York, New York 10166**
              
              
              -
              
              
              1,946,941
              
              
              -
              
              
              1,946,941
              
              
              9.7
              %**Directors
                  and Named Executive Officers:**
              
              
              
              
              
              
              
              
              
              
              
              -**Averill,
                  Robert (3)**
              
              
              792,901
              
              
              1,555,823
              
              
              789,464
              
              
              3,138,188
              
              
              15.3
              %**Patterson,
                  Glenn**
              
              
              915,030
              
              
              1,196,724
              
              
              577,388
              
              
              2,689,142
              
              
              13.5
              %**Petersen,
                  John (4)**
              
              
              217,500
              
              
              1,009,170
              
              
              369,900
              
              
              1,596,570
              
              
              8.2
              %**Granville,
                  Thomas**
              
              
              421,300
              
              
              194,694
              
              
              582,200
              
              
              1,198,194
              
              
              6.3
              %**Filipenko,
                  Igor**
              
              
              785,900
              
              
              316,889
              
              
              74,311
              
              
              1,177,100
              
              
              6.4
              %**Buiel,
                  Edward**
              
              
              31,000
              
              
              -
              
              
              122,500
              
              
              153,500
              
              
              0.8
              %**Conway,
                  Andrew Carr**
              
              
              -
              
              
              -
              
              
              80,000
              
              
              80,000
              
              
              0.4
              %**Wainwright,
                  Walker**
              
              
              -
              
              
              -
              
              
              40,000
              
              
              40,000
              
              
              0.2
              %**Schmidt,
                  Howard**
              
              
              -
              
              
              -
              
              
              18,000
              
              
              18,000
              
              
              0.1
              %**Hirschman,
                  Stanley**
              
              
              -
              
              
              -
              
              
              10,000
              
              
              10,000
              
              
              0.1
              %**Nelson
                  , Robert**
              
              
              6,000
              
              
              -
              
              
              18,000
              
              
              24,000
              
              
              0.1
              %**Kishinevsky,
                  Michael**
              
              
              -
              
              
              -
              
              
              10,000
              
              
              10,000
              
              
              0.1
              %Directors
                  and officers as a group(12 persons)
              
              
              3,169,631
              
              
              4,273,300
              
              
              2,691,763
              
              
              10,134,694
              
              
              40.3
              %
  87
 
 (1)
              Represents
                  shares of common stock issuable upon conversion of preferred stock
                  held by
                  the stockholder.
  (2)
              Represents
                  shares of common stock issuable upon exercise of warrants and options
                  held
                  by the stockholder that are presently exercisable or will become
                  exercisable within 60 days.
  (3)
              Includes
                  956,759 shares held by Dr. Igor Filipenko and 220,341 shares held
                  by his
                  wife, including 175,000 shares of common stock and 45,341 shares
                  issuable
                  upon the conversion of 6,100 shares of preferred
                  stock.
  (4)
              Includes
                  13,000 shares of common stock held by Mr. Petersen, 4,500 shares
                  of common
                  stock held by Mr. Petersen’s wife, and 200,000 shares of common stock
                  deposited in a segregated account at Credit Suisse as collateral
                  security
                  for a second mortgage on Mr. Petersen’s principal
                  residence..
  **Item
        12.**  **Certain
        Relationships and Related Transactions, and Director
        Independence.**
  **Transactions
        with directors**
  ***--Dr.
        Igor Filipenko—financing transactions.*** During
        2007 Dr. Filipenko advanced monies to the company in the amount of $207,000.
        From the 2007 loan agreements, Dr. Filipenko earned 31,750 3-year warrants
        at an
        exercise price of $6.00 per share, and 7,661 5-year warrants at an exercise
        price of $2.35 per share. His August loan in the amount of $115,000 by
        conversion into a $225,000 Private Placement Secured Bridge Loan, with the
        Company on December 17, 2007. This short term bridge loan earns interest
        at a
        rate of 14%, origination fees of $18,000 over a 3 month period, and the 7,661
        warrants as referenced above. The $225,000 loan had an initial maturity date
        of
        March 2008.
  ***--Robert
        Averill—financing transactions-2006.*** Mr.
        Averill was one of the original founders of APC. During the first quarter
        of
        2006, Mr. Averill loaned us $1,000,000 under the terms of a one-year promissory
        note that bore interest at the rate of 10% per annum, requires monthly payments
        of accrued interest, and was secured by a lien on all of our property. Over
        the
        course of the year 2006, Mr. Averill continued to advance monies to the company,
        increasing the loaned amount to $1,955,000, with interest rates ranging from
        10-12%. The interest rate varied because of different loans and interest
        rate
        escalators under certain circumstances. Accrued interest from these loans
        amounted to $127,260 during 2006. By the terms of these loans, he received
        345,000 common stock purchase warrants with a debt discount valued at $127,243
        in 2006. Mr. Averill was eligible to receive an additional 230,000 3-year
        warrants at an exercise price of $6 per share from these loans through the
        date
        of extinguishment in November 2007. Some of his loans were convertible into
        offering units at a price of $2.50 per unit, consisting of one share of common
        stock and one five year warrant to purchase one share of common stock at
        a price
        of $4.00 per share. Mr. Averill elected not to exercise this feature; instead,
        he converted $1,645,000 of his loans plus interest into Series A Preferred
        Stock
        during the fourth quarter of 2006, and carried over $428,675 of principle
        plus
        $8,585 of interest into 2007. During 2007, Mr. Averill earned an additional
        366,000 3-year warrants from these loans at an exercise price of $6.00 per
        share.
  ***--Robert
        Averill—financing transactions***  **2007** -During
        2007, Mr. Averill continued to advance monies to the company in the amount
        of
        $1,267,751. From the 2007 loan agreements, Mr. Averill earned 136,000 3-year
        warrants at an exercise price of $6.00 per share, and 61,290 5-year warrants
        at
        an exercise price of $2.35 per share. $115,000 of these loans were repaid
        in
        September 2007 and the balance of these loans, including the 2006 carryover,
        was
        extinguished along with $70,335 in interest by conversion into a $1,800,000
        Private Placement Secured Bridge Loan, with the Company on November 27, 2007.
        This short term bridge loan earns interest at a rate of 14%, origination
        fees of
        $8,000 (on each $100,000) over a 4 month period, and the 61,290 warrants
        as
        referenced above. The $1.8M loan had an initial maturity date of March
        2008.
  ***--Glenn
        Patterson—financing transactions.*** In
        April
        2006, Mr. Patterson loaned us $100,000 on a short-term note. Over the year
        2006,
        Mr. Patterson continued to advance monies to the company, increasing the
        loaned
        amount to $1,105,000, with interest rates ranging from 10-12%. The interest
        rate
        varied because of different loans and interest rate escalators under certain
        circumstances. Accrued interest from these loans amounted to $43,577 during
        2006. By the terms of these loans, he received 353,113 common stock purchase
        warrants with a debt discount valued at $93,334. Some of his loans were
        convertible into offering units at a price of $2.50 per unit, consisting
        of one
        share of common stock and one five year warrant to purchase one share of
        common
        stock at a price of $4.00 per share. Mr. Patterson elected not to exercise
        this
        feature; instead, he converted $1,080,000 of his loans plus interest into
        Series
        A Preferred Stock during the fourth quarter of 2006. $72,124 principle and
        $2,114 interest carried over into 2007 and was paid on January 25, 2007 prior
        to
        the maturity date of his loans. In December 2007, Mr. Patterson loaned the
        Company $92,000 pursuant to the Company’s Private Placement Secured Bridge Loan
        offering, earning interest at 14% per annum, origination fees of $8,000 over
        3 1⁄2
months, and 3,405 5-year warrants at an exercise price of $2.35 per share.
        This
        short term bridge loan had an initial maturity date of March
        2008.
  88
  ***John
        Petersen— compensatory transactions.*** John
        Petersen was a director of our company until January 15, 2007 and a partner
        in
        the law firm of Fefer, Petersen & Cie, which serves as our legal counsel.
        During 2007, we paid Fefer, Petersen & Cie $180,000 in cash.
  **Transactions
        with Executive Management**
  See  “EXECUTIVE
        COMPENSATION” above for a discussion of the material elements of compensation
        awarded to, earned by or paid to our Chief Executive Officer, Thomas Granville,
        and our Chief Technical Officer, Edward Buiel. These individuals are referred
        to
        as “Named Executive Officers.”
  **Item
        13.**  **Exhibits.**
  2.1
              
              Reorganization
                  Agreement (without exhibits) between Tamboril Cigar Company, Axion
                  Power
                  Corporation and certain stockholders of Axion Power Corporation
                  dated
                  December 31, 2003.
              
              (1)2.2
              
              First
                  Addendum to the Reorganization Agreement between Tamboril Cigar
                  Company,
                  Axion Power Corporation and certain stockholders of Axion Power
                  Corporation dated January 9, 2004.
              
              (1)3.1
              
              Amended
                  and Restated Certificate of Incorporation of Tamboril Cigar Company
                  dated
                  February 13, 2001.
              
              (2)3.3
              
              Amendment
                  to the Certificate of Incorporation of Tamboril Cigar Company dated
                  June 4, 2004.
              
              (3)3.4
              
              Amendment
                  to the Certificate of Incorporation of Axion Power International,
                  Inc.
                  dated June 4, 2004.
              
              (3)3.5
              
              Amended
                  By-laws of Axion Power International, Inc. dated June 4,
                  2004.
              
              (3)4.1
              
              Specimen
                  Certificate for shares of Company’s $0.00001 par value common
                  stock.
              
              (9)4.2
              
              Trust
                  Agreement for the Benefit of the Shareholders of Mega-C Power Corporation
                  dated December 31, 2003.
              
              (1)4.3
              
              Succession
                  Agreement Pursuant to the Provisions of the Trust Agreement for
                  the
                  Benefit of the Shareholders of Mega-C Power Corporation dated March
                  25,
                  2004.
              
              (4)4.4
              
              Form
                  of Warrant Agreement for 1,796,300 capital warrants.
              
              (9)4.5
              
              Form
                  of Warrant Agreement for 667,000 Series I investor
                  warrants.
              
              (9)4.6
              
              Form
                  of Warrant Agreement for 350,000 Series II investor
                  warrants.
              
              (9)4.7
              
              Form
                  of Warrant Agreement for 313,100 Series III investor
                  warrants.
              
              (9)4.8
              
              Form
                  of 8% Cumulative Convertible Senior Preferred Stock
                  Certificate
              
              (D)
  89
 4.9
                
                First
                    Amended and Restated Trust Agreement for the Benefit of the Shareholders
                    of Mega-C Power Corporation dated February 28, 2005.
                
                (11)4.10
                
                Certificate
                    of Powers, Designations, Preferences and Rights of the 8% Convertible
                    Senior Preferred Stock of Axion Power International, Inc. dated
                    March 17,
                    2005.
                
                (12)4.11
                
                Certificate
                    of Powers, Designations, Preferences and Rights of the Series
                    A
                    Convertible Preferred Stock, Par Value $0.0001 Per Share, of
                    Axion Power
                    International, Inc. dated October 23, 2006.
                
                (13)4.12
                
                Amended
                    Certificate of Powers, Designations, Preferences and Rights of
                    the Series
                    A Convertible Preferred Stock, Par Value $0.0001 Per Share, of
                    Axion Power
                    International, Inc. dated October 26, 2006.
                
                (13)9.1
                
                Agreement
                    respecting the voting of certain shares beneficially owned by
                    the Trust
                    for the Benefit of the Shareholders of Mega-C Power
                    Corporation.
                
                Included
                    in Exhibit 4.210.1
                
                Development
                    and License Agreement between Axion Power Corporation and
                    C and T Co. Incorporated dated November 15,
                    2003.
                
                (1)10.2
                  
                  
                  10.3
                  
                  10.4
                  
                  10.5
                
                Letter
                    Amendment to Development and License Agreement between Axion
                    Power
                    Corporation and C and T Co. Incorporated dated November 17,
                    2003.
                  
                  Tamboril
                    Cigar Co. Incentive Stock plan Dated January 8, 2004
                  
                  Tamboril
                    Cigar co. Outside Directors Stock Option Plan Dated February
                    2,
                    2004
                  
                  Stock
                    Purchase & Investment Representation Letter Dated January 9,
                    2004
                
                (1)
                  
                  
                  (A)
                  
                  (A)
                  
                  (B)10.6
                
                Letter
                    Amendment to Development and License Agreement between Axion
                    Power
                    Corporation and C and T Co. Incorporated dated January 9,
                    2004.
                
                (1)10.7
                
                Purchase
                    and sale agreement among John L. Petersen, Sally A. Fonner and
                    C and T Co. Incorporated dated January 9, 2004.
                
                (1)10.8
                
                First
                    Amendment to Development and License Agreement between Axion
                    Power
                    Corporation and C and T Co. Incorporated dated as of January 9,
                    2004.
                
                (5)10.9
                
                Definitive
                    Incentive Stock Plan of Axion Power International, Inc. dated
                    June 4,
                    2004.
                
                (3)10.10
                
                Definitive
                    Outside Directors’ Stock Option Plan of Axion Power International, Inc.
                    dated June 4, 2004.
                
                (3)10.11
                
                Executive
                    Employment Agreement of Charles Mazzacato.
                
                (9)10.12
                  
                  10.13
                
                Executive
                    Employment Agreement of Peter Roston.
                  
                  Amended
                    Retainer Agreement—Fefer-Petersen Dated March 31, 2005
                
                (9)
                  
                  (D)10.14
                  
                  10.15
                
                Retainer
                    Agreement dated January 2, 2004 between the law firm of Fefer,
                    Petersen
                    & Cie and Tamboril Cigar Company.
                  
                  Bankruptcy
                    Settlement Agreement Between Axion Power International, Inc.
                    and 
                    Mega-C Dated December, 2005
                
                (10)
                  
                  (E)10.16
                  
                  
                  10.17
                
                Second
                    Amendment to Development and License Agreement between Axion
                    Power
                    International, Inc. and C and T Co. Incorporated dated as of
                    March 18, 2005.
                  
                  Executive
                    Employment Agreement of Thomas Granville
                
                (12)
                  
                  
                  (C)
 90
 10.18
                
                Loan
                    agreement dated January 31, 2006 between Axion Battery Products,
                    Inc. as
                    borrower, Axion Power International, Inc. as accommodation party
                    and
                    Robert Averill as lender respecting a $1,000,000 purchase money
                    and
                    working capital loan.
                
                (14)10.19
                
                Security
                    agreement dated January 31, 2006 between Axion Battery Products,
                    Inc. as
                    debtor and Robert Averill as secured party.
                
                (14)10.20
                
                Security
                    agreement dated January 31, 2006 between Axion Power International,
                    Inc.
                    as debtor and Robert Averill as secured party.
                
                (14)10.21
                
                Promissory
                    Note dated February 14, 2006 between Axion Battery Products,
                    Inc. as maker
                    and Robert Averill as payee.
                
                (14)10.22
                
                Form
                    of Warrant Agreement between Axion Power International, Inc.
                    and Robert
                    Averill.
                
                (14)10.23
                
                Commercial
                    Lease Agreement dated February 14, 2006 between Axion Battery
                    Products,
                    Inc. as lessee and Steven F. Hoye and Steven C. Warner as
                    lessors.
                
                (14)10.24
                
                Asset
                    Purchase Agreement dated February 10, 2006 between Axion Battery
                    Products,
                    Inc. as buyer and National City Bank of Pennsylvania as
                    seller.
                
                (14)10.25
                
                Escrow
                    Agreement dated February 14, 2006 between Axion Battery Products,
                    Inc. and
                    National City Bank of Pennsylvania as parties in interest and
                    William E.
                    Kelleher, Jr. and James D. Newell as escrow agents.
                
                (14)10.26
                
                Executive
                    Employment Agreement of Edward Buiel dated December 29,
                    2006.
                
                (15)10.27
                
                Consulting
                    Agreement, dated as of September 27, 2007, by and between Axion Power
                    International, Inc. and Andrew Carr Conway, Jr.
                
                (1610.28
                
                Amendment
                    No. 1 to Consulting Agreement, dated as of October 31, 2007, by and
                    between Axion Power International, Inc. and Andrew Carr Conway,
                    Jr.
                
                (16)10.29
                
                Securities
                    Purchase Agreement dated as of January 14, 2008, by and between
                    Axion
                    Power International, Inc. and Quercus Trust.
                
                (17)10.30
                
                Common
                    Stock Purchase Warrant dated January 14, 2008, executed by Axion
                    Power
                    International, Inc.
                
                (17)14.1
                
                Code
                    of Business Conduct and Ethics
                
                (6)16.1
                
                Letter
                    from Want & Ender CPA, PC Re: Change in Certifying
                    Accountant.
                
                (8)16.2
                
                Letter
                    from Freed Maxick & Battaglia, CPAs, PC, dated January 31,
                    2008.
                
                (18)23.1
                
                Consent
                  of Rotenberg
                  & Co., LLP31.1
                
                Certification
                    of Chief Executive Officer Pursuant to Rule 13a-14(a).31.2
                
                Certification
                    of Chief Financial Officer Pursuant to Rule 13a-14(a).32.1
                
                Statement
                    of Chief Executive Officer Pursuant to Section   1350 of Title 18 of
                    the United States Code.32.2
                
                Statement
                    of Chief Financial Officer Pursuant to Section   1350 of Title 18 of
                    the United States Code.
  91
 
 (1)
              Incorporated
                  by reference from our Current Report on Form 8-K dated January
                  15,
                  2003.(2)
              Incorporated
                  by reference from our Current Report on Form 8-K dated February
                  5,
                  2003.(3)
              Incorporated
                  by reference from our Current Report on Form 8-K dated June 7,
                  2004.(4)
              Incorporated
                  by reference from our Current Report on Form 8-K dated April 13,
                  2004.(5)
              Incorporated
                  by reference from our Form S-3 registration statement dated May
                  20,
                  2004.(6)
              Incorporated
                  by reference from our Annual Report on Form 10-KSB dated March
                  29,
                  2004(7)
              Incorporated
                  by reference from our Current Report on Form 8-K dated April 13,
                  2003.(8)
              Incorporated
                  by reference from our Current Report on Form 8-K dated February
                  16,
                  2004.(9)
              Incorporated
                  by reference from our Form S-1 registration statement dated September
                  2,
                  2004.(10)
              Incorporated
                  by reference from our Form S-1 registration statement dated November
                  24,
                  2004.(11)
              Incorporated
                  by reference from our Current Report on Form 8-K dated February
                  28,
                  2005.(12)
              Incorporated
                  by reference from our Current Report on Form 8-K dated March 21,
                  2005.(13)
              Incorporated
                  by reference from our Current Report on Form 8-K dated November
                  8,
                  2006.(14)
              Incorporated
                  by reference from our Current Report on Form 8-K dated February
                  16,
                  2006(15)
              Incorporated
                  by reference from our Current Report on Form 8-K dated January
                  3,
                  2007.(16)
              Incorporated
                  by reference from our Current Report on Form 8-K dated November
                  6,
                  2007.(17)
              Incorporated
                  by reference from our Current Report on Form 8-K dated January
                  17,
                  2008.(18)
              Incorporated
                  by reference from our Current Report on Form 8-K dated January
                  31,
                  2008.(A)
              Incorporated
                  by reference from our Current Report on Form 8-K/A dated February
                  2,
                  2004.(B)
              Incorporated
                  by reference from our Current Report on Form 8-K dated January
                  15,
                  2004.(C)
              Incorporated
                  by reference from our Current Report on Form 8-K dated April 4,
                  2005.(D)
              Incorporated
                  by reference from our Registration Statement on Form SB-2 dated
                  April 26,
                  2005.(E)
              Incorporated
                  by reference from our Current Report on Form 8-K dated December
                  30,
                  2005.
  **Item
        14.****Principal
        Accountant Fees and Services.**
  **Selection
        of Independent Certified Public Accountants**
  The
        Audit
        Committee selected Rotenberg & Co. LLP as our independent registered public
        accounting firm for the years ended December 31, 2007 and 2006. Rotenberg
& Co. LLP had no relationship with our Company other than that arising from
        their engagement as our independent registered public accounting firm.
  **Independent
        Auditors’ Fees**
  The
        following table summarizes the aggregate fees for services performed by our
        independent registered public accounting firms for the years ended December
        31,
        2007 and 2006.
  92
 **Fee
                    Category**
                
                **Rotenberg & Co. LLP**
                  **2007 Fees**
                
                **Rotenberg & Co. LLP**
                  **2006 Fees**
                
                **Freed Maxick & Battaglia**
                  **CPAs, PC 2006 Fees**Audit
                    Fees
                
                $
                59,000
                
                $
                50,000
                
                $
                0Audit-Related
                    Fees-registration statement consents
                
                $
                0
                
                $
                0
                
                $
                281,222Tax
                    Fees
                
                $
                0
                
                $
                0
                
                $
                0All
                    Other Fees
                
                $
                0
                
                $
                0
                
                $
                0
  **Audit
        Committee Pre-Approval Policy**
  Our
        independent auditor will provide audit, review and attest services only at
        the
        direction of, and pursuant to engagement fees and terms approved by, the
        Audit
        Committee. Such engagement will be pursuant to a written proposal, submitted
        to
        the Audit Committee for review and discussion. If acceptable, the Audit
        Committee will engage the independent registered public accounting firm pursuant
        to a written retention agreement, duly approved by the Audit Committee. As
        proscribed by Section 10A(g) of the Securities Exchange Act of 1934, certain
        non-audit services may not be provided by our independent registered public
        accounting firm, including bookkeeping or other services related to the
        accounting records or financial statements of the Company; financial information
        systems design and implementation; appraisal or valuation services, fairness
        opinions, or contribution-in-kind reports; actuarial services; internal audit
        outsourcing services; management functions or human resource functions; broker
        or dealer, investment adviser, or investment banking services; legal services
        and expert services unrelated to the audit; and any other service that the
        Public Company Accounting Oversight Board determines, by regulation, is
        impermissible.
  With
        respect to permissible non-audit services, including tax services, our Chief
        Financial Officer or Chief Executive Officer will submit a request to the
        Audit
        Committee to retain our independent registered public accounting firm to
        perform
        non-audit services when management believes it is in the best interest of
        our
        company to do so. The requesting officer will submit specific reasons supporting
        this determination. In such event, the requesting officer shall submit a
        written
        proposal from the independent registered public accounting firm for the
        non-audit services, which shall be specific as to the scope of the services
        to
        be provided, and the compensation structure. The Audit Committee will review
        the
        proposed retention for compliance with three basic principles, violations
        of
        which would impair the independent registered public accounting firms’
independence: (1) an independent registered public accounting firm cannot
        function in the role of management, (2) an independent registered public
        accounting firm cannot audit his or her own work, and (3) an independent
        registered public accounting firm cannot serve in an advocacy role for our
        company. If the Audit Committee determines that the proposed retention does
        not
        and will not violate these principles, it may authorize, in writing, the
        retention of the independent registered public accounting firm for the agreed
        scope of non-audit services and compensation structure.
  93
  **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
        has duly caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
 **AXION
                    POWER INTERNATIONAL, INC.**By:
                /s/
                    Thomas GranvilleThomas
                    Granville, Chief Executive Officer and DirectorDate:
                  April 4, 2008By:
                /s/
                    Andrew Carr Conway, Jr.Andrew
                    Carr Conway, Jr., Chief Financial OfficerDate:
                  April 4, 2008
  In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
  Signature
              
              Title
              
              Date/s/
                  Stanley
                  A. HirschmanStanley
                  A. Hirschman
              
              Director
              
              April
                  4, 2008/s/Robert
                  G. Averill
              
              Director
              
              April
                  4, 2008/s/
                  Glenn
                  PattersonGlenn
                  Patterson
              
              Director
              
              April
                  4, 2008/s/
                  Michael
                  KishinevskyMichael
                  Kishinevsky
              
              Director
              
              April
                  4, 2008/s/
                  Igor
                  FilipenkoIgor
                  Filipenko
              
              Director
              
              April
                  4, 2008/s/
                  Howard
                  K. SchmidtHoward
                  K. Schmidt
              
              Director
              
              April
                  4, 2008/s/D.
                  Walker Wainwright
              
              Director
              
              April
                  4, 2008
  94