Axion Power International, Inc. (Form: 8-K, Received: 02/16/2006 16:33:54)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

DATE OF EARLIEST REPORTED EVENT - FEBRUARY 14, 2006

AXION POWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	000-22573	65-0774638
(State or other jurisdiction of	(Commission	(IRS Employer
incorporation)	File Number)	Identification Number)

100 Caster Avenue

Woodbridge, Ontario, Canada L4L 5Y9

(Address of principal executive offices)

(905) 264-1991

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

EXPLANATORY NOTE

On January 20, 2006, Axion Power International, Inc. incorporated a new subsidiary named Axion Battery Products, Inc. (“ABP”), under the laws of the Commonwealth of Pennsylvania. ABP was organized to:

·	Purchase certain battery manufacturing equipment, inventory and other tangible assets; and

·	Lease the facility where the equipment is installed; and

·	Operate a commercial manufacturing plant as a wholly owned subsidiary of the Registrant.

Robert Averill, a member of the Registrant’s board of directors, provided one million dollars of acquisition and working capital financing to ABP from his personal funds.

Item 1.01 Entry into material definitive agreement.

Loan Agreement with Mr. Averill

On January 30, 2006, APB and the Registrant entered into a loan agreement with Robert Averill whereby Mr. Averill agreed to provide $1 million in acquisition and working capital financing for ABP’s proposed battery manufacturing operations in New Castle, Pennsylvania. ABP is the primary debtor under the loan agreement and the Registrant has signed the agreement as a guarantor and accommodation party. The loan agreement expressly provided that in the event ABP did not consummate the contemplated asset purchase and lease transactions, ABP would return the loan proceeds to Mr. Averill and neither ABP nor the Registrant would use the loan proceeds for any other purpose.

The loan agreements require ABP to pay interest on the outstanding balance at the annual rate of 10%. Interest payments are due on the first day of each month commencing in March 2006. The entire principal balance of the loan is due on February 1, 2007, provided that the loan may be repaid at any time without notice or penalty. The loan is secured by a purchase money security in all of ABP’s equipment, inventory, furniture and fixtures, together with all substitutions or replacements and all proceeds from the sale thereof.

The Registrant has signed the loan agreement as an accommodation party and assumed complete liability for the payment of ABP’s obligations. The Registrant has also granted Mr. Averill a first priority security interest in all of its equipment, inventory, furniture, fixtures and intellectual property, together with all substitutions or replacements and all proceeds from the sale thereof. As additional consideration for the loan, the Registrant has issued a warrant to purchase 50,000 shares of its common stock to Mr. Averill. The warrant is exercisable for a period of three years from the issue date at a price of $6 per share. On each three-month anniversary of the loan date, the Registrant will be required to issue a substantially identical warrant for an additional 50,000 shares. If the loan remains outstanding for its entire term, Mr. Averill could receive an aggregate of 200,000 warrants.

Lease of New Castle, Pennsylvania Plant.

On February 14, 2006, ABP entered into a lease agreement with Steven F. Hoye and Steven C. Warner for a 62,732 square foot industrial building located in New Castle, Pennsylvania. The facility includes 7,232 square feet of office locker, lab and lunch area, 8,000 square feet of storage buildings, and 5,000 square feet of basement area. We had no direct or indirect relationship to Messrs. Hoye and Warner prior to the execution of the lease agreement.

The agreement provides for an initial term of two years with two renewal terms of five years each. The monthly rent payable for the initial term of the agreement is $10,000. During the two extension terms, the rent will 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 addition to the monthly rental, ABP is obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance in the amount of $1 million, and maintain fire and casualty insurance for an amount equal to at least 80% of the replacement value of the leased premises.

Item 2.01 Completion of acquisition or disposition of assets.

Purchase of Battery Manufacturing Equipment

On February 14, 2006, ABO 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 (“NCB”) in a foreclosure sale conducted pursuant to the provisions of Article 9 of the Pennsylvania Uniform Commercial Code. The assets are purchased by ABP and include all equipment, molds, inventories, parts, supplies, trademarks, copyrights, patents, other intellectual property rights, permits, licenses and general intangible assets that were subject to the bank’s security interest.

The purchase price was $800,000. A total of $710,000 was paid to the seller at closing and the $90,000 balance has been placed in a non-interest bearing escrow pending the seller’s resolution of certain unpermitted encumbrances on a portion of the purchased assets .

The purchased equipment is presently installed in the industrial building that ABP leased from Messrs. Hoye and Warner and described in Item 1.01 of this report. The purchased inventory and other tangible assets are presently stored in the facility. Accordingly ABP will not incur any expenses associated with the transportation of the equipment, inventory and other tangible assets, or the installation of the equipment.

Until the former owner of the equipment, inventory and other tangible assets ceased operations in June 2005, the plant was as an ISO 9001 certified battery-manufacturing facility. The plant had three established production lines for lead acid batteries, the newest of which was installed in 2002, and had all permits and other required authorization for the manufacture of 750,000 lead-acid batteries per year. The facility historically made specialty batteries for racecars and antique automobiles

ABP is currently refurbishing the equipment and preparing the plant for production. When the battery manufacturing plant is staffed and ready for operations, ABP plans to begin production of specialty lead-acid batteries for racecars and vintage automobiles and use the excess capacity to make small batches of commercial prototype e ³ Supercell batteries for demonstration projects. ABP plans to begin production of lead-acid batteries within 30 days and realize its first revenue from product sales in the first quarter of 2006. ABP expects to begin production of commercial prototype e ³ Supercell batteries for demonstration projects in the second quarter of 2006. We believe the battery manufacturing facility will give our company the ability to make commercial prototype e ³ Supercell batteries in sufficient quantities to accommodate the needs of our planned demonstration projects. We believe the specialty lead-acid batteries and commercial prototype e ³ Supercell batteries we intend to produce will generate sufficient revenue to pay their direct manufacturing costs and make a modest contribution to overhead.

ABP’s lease of the New Castle facility and its acquisition of the equipment, inventories and trade names from the bank do not constitute the acquisition of a business. The New Castle Battery Manufacturing Company ceased operations in June 2005 when NCB foreclosed on its assets. While we believe that the lease of the plant and the acquisition of the assets will allow ABP to begin manufacturing activities more rapidly that would otherwise be the case, we will incur the substantial bulk of the risks and expenses normally associated with the start-up of a new business, including hiring new employees, developing a new market distribution system, retaining a new sales force, developing a new customer base and obtaining new permits and operating rights. We expect to incur start up costs and expenses of approximately $200,000 in connection with the commencement of manufacturing operations.

Item 9.01 Financial statements and exhibits.

Exhibit 10.16		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
Exhibit 10.17		Security agreement dated January 31, 2006 between Axion Battery Products, Inc. as debtor and Robert Averill as secured party
Exhibit 10.18		Security agreement dated January 31, 2006 between Axion Power International, Inc. as debtor and Robert Averill as secured party

Exhibit 10.19		Promissory Note dated February 14, 2006 between Axion Battery Products, Inc. as maker and Robert Averill as payee
Exhibit 10.20		Form of Warrant Agreement between Axion Power International, Inc. and Robert Averill
Exhibit 10.21		Commercial Lease Agreement dated February 14, 2006 between Axion Battery Products, Inc. as lessee and Steven F. Hoye and Steven C. Warner as lessors .
Exhibit 10.22		Asset Purchase Agreement dated February 14, 2006 between Axion Battery Products, Inc. as buyer and National City Bank of Pennsylvania as seller.
Exhibit 10.23		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.
Exhibit 99.1		Press release dated February 15, 2006

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Axion Power International, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Axion Power International, Inc.

February 16, 2006

By: /s/

Thomas Granville, Chief Executive Officer

LOAN AGREEMENT

In this Loan Agreement (this “Agreement”), executed as of this 31 ^st day of January, 2006, by and between Axion Battery Products, Inc., a Pennsylvania corporation and wholly owned subsidiary of Axion Power International, Inc. (“Borrower”), Axion Power International, Inc., a Delaware corporation (“Accommodation Party”) and Robert Averill, an individual (“Lender”), Borrower, Accommodation Party and Lender agree as follows:

1. Loan .

Borrower, Accommodation Party, and Lender agree to the following terms:

(a) Lender will make a loan (the “Loan”) to Borrower in the principal amount of One Million Dollars ($1,000,000.00) for the purpose of purchasing certain equipment, inventory and other personal property (the “Property”) and Borrower’s operating expenses, payable in monthly installments of interest accruing at the rate of 10 percent per annum, with the principal due on the first banking day of February 2007. In the event Borrower does not consummate the purchase of the Property, Borrower shall release and return the Loan to Lender and shall not use the Loan for any other purpose;

(b) Accommodation Party agrees to issue warrants to purchase 50,000 shares of common stock of Accommodation Party at the rate of $6.00 per share, exercisable for 36 months from date of issuance, upon the execution of this Agreement and at the end of each three month period thereafter until the Loan is paid in full, on the same terms and conditions. Accommodation Party will take whatever steps are necessary to register the shares for immediate sale;

2. Security for Debt .

As security for the obligations of this Agreement, Lender has agreed to accept:

(a) A first priority security interest in the Property owned by Borrower consisting of all equipment, inventory, furniture and fixtures, together with all substitutions, replacements, or accessions thereto and all proceeds and accessions of the above-described collateral (“Borrower’s collateral”); and

(b) A first priority security interest in tangible and intangible

personal property owned by Accommodation Party, including equipment, inventory, furniture, fixtures and intellectual property, together with all substitutions, replacements, developments or accessions thereto and all proceeds, and accessions of the above-described collateral (“Accommodation Party’s collateral”); and

(c) A first priority security interest in tangible and intangible personal property of any subsidiary of Accommodation Party other than the Borrower

3. Borrower’s Loan Documents .

Concurrently with this Agreement, Borrower shall deliver to Lender the following documents collectively referred to as the “Borrower’s Loan Documents”:

(a) Promissory Note in the principal amount of $1,000,000.00, payable in monthly installments of interest accruing at the rate of 10 percent per annum, by wire transfer on the first banking day of each month beginning in February 2006 and for eleven consecutive months thereafter, with the principal due on the first banking day of February 2007 (“Borrower’s Promissory Note”);

(b) Security Agreement, granting Lender a first priority security interest in the Borrower’s collateral;

(c) UCC-1 Financing Statement for the Commonwealth of Pennsylvania, to be filed or recorded by Lender in accordance with state law for the purpose of perfecting Lender’s security interest in the Borrower’s collateral.

4.	Accommodation Party’s Loan Documents and Issuance of Warrants.

Concurrently with this Agreement, Accommodation Party shall deliver to Lender the following documents collectively referred to as “Accommodation Party’s Loan Documents”:

(a) Security Agreement, granting Lender a first priority security agreement on Accommodation Party’s collateral;

(b) UCC-1 Financing Statement for the State of New York, to be filed or recorded by Lender in accordance with state law for the purpose of perfecting Lender’s security interest in Accommodation Party’s collateral;

(c) Documents necessary for Lender to file or record in the Province of Ontario, Canada to perfect his security interest against Accommodation Party’s collateral located in Ontario, Canada;

(d) Common Stock Purchase Warrant in favor of Lender, for the issuance of 50,000 shares of common stock of Accommodation Party to be exercised at the rate of $6.00 per share for a period of 36 months from the date of execution of this Agreement; and

(e) Such additional Common Stock Purchase Warrants in favor of Lender, each of the issuance of 50,000 shares of common stock of Accommodation Party to be exercised at the rate of $6.00 per share for a period of 36 months from the date of issuance, as are necessary to satisfy Accommodation Party’s obligation under ¶ 1(b) of this Agreement.

5.	Covenants of Borrower

As a material inducement to Lender’s entering into this Agreement, Borrower represents and warrants to Lender as of the date of execution of this Agreement and continuing thereafter that:

(a) Borrower is authorized to execute, deliver and perform its obligations under this Agreement and the Borrower’s Loan Documents, and such obligations shall be valid and binding obligations of Borrower;

(b) Borrower’s execution, delivery, and performance under this Agreement and the Borrower’s Loan Documents, to the best of Borrower’s knowledge, does not: (i) require any consent or approval not otherwise obtained under any partnership agreement, operating agreement, articles of incorporation, bylaws or other document; (ii) violate any statute, law, regulation or ordinance or any order or ruling of any court or governmental entity; (iii) conflict with, or constitute a breach or default or permit the acceleration of obligations under any agreement, contract, lease, or other document by which Borrower is bound or regulated; or (iv) violate any material statute, law, regulation or ordinance, or any order of any court or governmental entity.

(c) Borrower shall comply in all material respects with all applicable laws, statutes and governmental regulations and all applicable orders, rules, rulings, certificates, licenses, regulations and decrees (collectively, “Laws”) and shall pay all taxes, assessments, governmental charges, claims for labor, supplies, rent and any other obligations which, if unpaid, might become a lien, charge or encumbrance against the Property, except Laws contested in good faith and liabilities being contested in good faith.

(d) Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence; provided, however, that Borrower shall not be required to preserve any such existence if (i) the Board of Directors of the Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower; and (ii) the loss thereof is not disadvantageous in any material respect to the Lender.

6.	Covenants of Accommodation Party

As a material inducement to Lender’s entering into this Agreement, Accommodation Party represents and warrants to Lender as of the date of execution of this Agreement and continuing thereafter that:

(a) Accommodation Party is authorized to execute, deliver and perform its obligations under this Agreement and the Accommodation Party’s Loan Documents, and such obligations shall be valid and binding obligations of Accommodation Party.

(b) Accommodation Party’s execution, delivery, and performance under this Agreement and the Accommodation Party’s Loan Documents, to the best of Accommodation Party’s knowledge, does not: (i) require any consent or approval not otherwise obtained under any partnership agreement, operating agreement, articles of incorporation, bylaws or other document; (ii) violate any statute, law, regulation or ordinance or any order or ruling of any court or governmental entity; (iii) conflict with, or constitute a breach or default or permit the acceleration of obligations under any agreement, contract, lease, or other document by which Accommodation Party is bound or regulated; or (iv) violate any material statute, law, regulation or ordinance, or any order of any court or governmental entity.

(c) Accommodation Party shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence; provided, however, that Accommodation Party shall not be required to preserve any such existence if (i) the Board of Directors of Accommodation Party shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Accommodation Party; and (ii) the loss thereof is not disadvantageous in any material respect to the Lender.

(d) Neither Accommodation Party nor any of its subsidiaries shall enter into a transaction between Accommodation Party and any of its subsidiaries and a director or officer of Accommodation Party, or any shareholder of Accommodation Party who holds five percent or more of the issued and outstanding shares of the Accommodation Party’s common stock unless the Board of Directors in good faith determines that the terms of such transaction are fair to the Accommodation Party or such subsidiary.

(e) Accommodation Party shall indemnify and hold Lender harmless for any damages, costs and legal fees incurred in any legal, equitable or other proceeding brought by a third party against Lender in connection with entering into this Agreement, the Borrower’s Loan Documents or the Accommodation Party’s Loan Documents.

7.	Events of Default.

The term “Event of Default” means any one of the following events:

(a) Borrower’s failure to pay when due any sums payable under the Promissory Note on or prior to the day it becomes due that remains uncured after 30 days receipt of written notice;

(b) Borrower’s material breach of any other covenant contained in the Promissory Note that remains uncured after 30 days receipt of written notice;

(c) Borrower’s material breach of any covenant made in this Agreement that remains uncured after 30 days receipt of written notice;

(d) Borrower’s material breach of any covenant made in its Security Agreement that remains uncured after 30 days receipt of written notice;

(e) Accommodation Party’s material breach of any covenant contained in this Agreement that remains uncured for 30 days;

(f) Accommodation Party’s material breach of any covenant contained in its Security Agreement that remains uncured for 30 days.

8. Remedies

In the Event of a Default, Lender shall provide written notice to Borrower and Accommodation Party. If Borrower or Accommodation Party fails to cure any Event of Default within the time period set forth in paragraph 7, Lender may immediately exercise its rights and remedies under state law pursuant to Borrower’s Loan Documents and pursuant to Accommodation Party’s Loan Documents, including the right to execute his security interest in any of the property that secures the Loan.

9. Miscellaneous

(a) All notices under this Agreement, the Borrower’s Loan Documents and the Accommodation Party’s Loan Documents shall be in writing and shall be delivered to the appropriate party at the address set forth below (subject to change from time to time by written notice to all other parties to this Agreement). All communications shall be deemed served upon delivery of, or if mailed, upon the first to occur of receipt or the expiration of three (3) days after the deposit in the United States Postal Service mail, first class, postage prepaid and addressed at the address specified. Notices must given by email and any other method of delivery, such as facsimile, regular mail, overnight or personal delivery, to the parties at the addresses listed below:

To Lender: Robert Averill

377 Cupsaw Drive

Ringwood, New Jersey 07456

Facsimile: 973-962-6138

Email: averillbob@yahoo.com

To Borrower: William E. Kelleher, Jr.

Cohen & Grigsby, P.C.

11 Stanwix Street, 15th Floor

Pittsburgh, Pennsylvania 15222-1319

Telephone: 412-297-4703

Direct Facsimile: 412-209-1997

Email: Wkelleher@cohenlaw.com and tomg@gelevator.com

To Accommodation Party: Axion Power International, Inc.

Thomas G. Granville

100 Caster Avenue

Vaughan, Ontario, Canada L4L 5Y9

Facsimile: 905-264-2385

Email: tomg@gelevator.com

Any change in the address of any party shall be given by the party having such change to the other parties in the manner provided above. Thereafter, all notices shall be given in accordance with the notice of change of address. Notices given before actual receipt of the notice of change of address shall not be invalidated by change of address.

(b) Time is of the essence of this Agreement.

(c) The waiver by either party of the time for performing any act shall not constitute a waiver of the time for performing any other act or of an identical act required to be performed at a later time. The exercise of any remedy provided for in this Agreement shall not constitute a waiver of any other remedy provided by law.

(d) The unenforceability, invalidity, or illegality of any provision of this Agreement shall not render any other provision unenforceable, invalid, or illegal.

(e) This Agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania in force from time to time.

(f) As used in this Agreement, the masculine, feminine, or neuter gender, and the singular or plural number, shall each be considered to include the others whenever the context so indicates.

(g) This Agreement shall inure to the benefit of, and be binding upon, the heirs, assigns, transferees, personal representatives, and successors in interest of the parties hereto.

(h) The captions in this Agreement shall have no effect on its interpretation.

(i) In the event of any dispute regarding this Agreement, Borrower agrees to pay Lender’s attorneys’ fees and costs actually incurred.

(j) This Agreement may be signed in counterpart and all signatures shall constitute the entire Agreement. Signature by facsimile shall be deemed original.

Dated this 31 ^st day of January, 2006.

BORROWER

AXION POWER PRODUCTS, INC., a Pennsylvania corporation

By_________________________________

, President

LENDER

ROBERT AVERILL

By__________________________________

ACCOMMODATION PARTY

AXION POWER INTERNATIONAL, INC., a Delaware corporation

By_________________________________

, Pre

SECURITY AGREEMENT

This Security Agreement is executed by Axion Battery Products, Inc., a Pennsylvania corporation and wholly owned subsidiary of Axion Power International, Inc., as Debtor, and Robert Averill, an individual, as Secured Party.

CREATION OF SECURITY INTEREST

Debtor hereby grants to Secured Party a first priority security interest in the collateral described in this Security Agreement pursuant to the Pennsylvania Uniform Commercial Code as in effect in Pennsylvania, 13 PA CONS. STAT. ANN. § 1101, et seq. (the "UCC")

OBLIGATIONS SECURED

The security interest is granted to Secured Party to secure the following obligations:

A. Payment of the indebtedness evidenced by a Promissory Note of this same date executed by Debtor, payable to the order of Secured Party, in the principal amount of One Million Dollars ($1,000,000.00), bearing interest the fixed rate of ten percent (10%) per annum, together with any renewals, extensions, modifications, or amendments of the Promissory Note (the "Note").

B. The expenses and costs incurred or paid by Secured Party in the maintenance and preservation of the collateral and the enforcement of the rights of Secured Party and the duties of Debtor as stated in this Security Agreement, including, without limitation, attorneys' fees, court costs, foreclosure expenses, and witness fees.

III

DESCRIPTION OF COLLATERAL

The collateral of this Security Agreement consists of the following:

1. All equipment, inventory, furniture and fixtures of the Debtor, together with all substitutions or replacements thereto.

2. All proceeds and accessions of the above-described collateral.

PURCHASE MONEY

Debtor acknowledges that a portion of the proceeds of the obligations secured hereby have been used to enable Debtor to acquire rights in, or the use of, the collateral presently owned by Debtor.

CLASSIFICATION OF COLLATERAL

Debtor acknowledges that at the time the security interest attaches, the collateral consists of equipment, inventory and other personal property.

PERFECTION OF SECURITY INTEREST

To perfect the security interest granted to Secured Party by the terms of this Security Agreement, Debtor agrees to the following:

A. Debtor authorizes Secured Party to file financing statements in all states, counties, and other jurisdictions as Secured Party may elect, without Debtor’s signature as permitted by law.

B. Debtor shall execute and deliver to Secured Party, in form and substance satisfactory to Secured Party, such financing statements and such further assurances as Secured Party may, from time to time, consider reasonably necessary to create, perfect and preserve Secured Party's security interest herein granted, and Secured Party may cause such statements and assurances to be recorded and filed at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest.

Upon performance of all obligations of Debtor to Secured Party that are secured by this Security Agreement, Secured Party agrees to surrender possession of the original security instruments to Debtor and to execute such documents as may be necessary to completely release Secured Party's security interest created hereby.

DEBTOR'S COVENANTS AND WARRANTIES

C. Debtor is a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, that it is in good standing under the laws of the Commonwealth of Pennsylvania, and that the granting of the security interest and the performance of all other obligations provided in this Agreement are within the Debtor's powers, have been duly authorized, and are not in contravention of any law or the Debtor's Articles of Organization, or any agreement or undertaking of which Debtor is a party or by which it is bound.

D. Debtor agrees that during the term of this Agreement, and as long as any obligation that is subject to this Agreement remains outstanding, Debtor will not grant a security interest in the collateral or any part thereof to any person except as otherwise authorized in accordance with the provisions of article VII below.

E. During the term of this Security Agreement, Debtor shall keep the collateral free and clear from any and all liens, encumbrances, and other security interests, and will pay, prior to delinquency, all taxes, charges, encumbrances, liens, and assessments against the collateral, and, should the Debtor fail to do so, Secured Party may, but shall not be required, to pay or discharge the same. Debtor shall give Secured Party 10 days notice in the event of default of any of these obligations. Debtor shall reimburse Secured Party for any such payments.

F. Debtor shall maintain the collateral in good order and repair, reasonable and ordinary wear and tear excepted.

G. Debtor shall maintain insurance on the collateral that consists of equipment in an amount not less than the replacement value of the equipment. The insurance policy or policies shall name Secured Party as a loss payee. Debtor shall provide Secured Party with a copy of the declaration page reflecting Secured Party as Loss Payee.

H. Debtor warrants that the collateral subject to this Agreement is presently located at 3601 Wilmington Road, New Castle, Pennsylvania 16105, and the Debtor shall inform Secured Party in writing at least ten (10) days prior to any change of location of the collateral.

I. Debtor shall execute any and all Financing Statements relating to the perfection, amendment, release, or termination of the security interest created hereby. The Debtor hereby authorizes and appoints Secured Party, in the case of need, to sign on behalf of Debtor with full power of substitution as the Debtor's attorney-in-fact.

VII

USE OF COLLATERAL

So long as the Debtor is not in default under the terms of this Security Agreement, Debtor may use, consume, and dispose of the collateral in the ordinary course of Debtor's business. This right includes, but is not limited to, the use and consumption of collateral in the manufacture, preparation, and delivery of goods, and the sale or encumbrance of the collateral in the ordinary course of Debtor's business.

VIII

DEFAULT PROVISIONS

A. Definition Of Default. The occurrence of any of the following shall constitute a default by the Debtor under this Security Agreement:

1. The failure by Debtor to pay or perform any obligations secured by the terms of this Security Agreement, including the failure to pay or perform under the Promissory Note executed in conjunction with this Security Agreement.

2. The failure of Debtor to perform any of Debtor's obligations under the terms of this Security Agreement or the Loan Agreement executed concurrently herewith.

3. A material breach of any covenant or representation made to Secured Party herein.

4. The filing of a petition by or against the Debtor under any state or federal law relating to the relief of debtors, any assignment by Debtor for the benefit of creditors, or the insolvency or cessation of business by Debtor.

5. The sale, transfer, alienation, encumbrance, or other disposition of the collateral, or of any part thereof or of any interest therein, whether voluntarily or involuntarily, without the prior written consent of Secured Party, except for sales or encumbrances of the equipment collateral as permitted in accordance with the provisions of article VII above.

B. Notice And Right To Cure .

1. Notice . Secured Party must, before pursuing any remedy for an alleged default by Debtor, give written notice of default to Debtor. Each notice of default must specify the alleged event of default.

2. Debtor's Right To Cure Defaults . Debtor is to have thirty (30) days in which to cure a default after the receipt of the notice of default by Secured Party. However, if a non-monetary default cannot reasonably be cured within thirty (30) days, then Debtor is not to be considered in default if Debtor commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default thereafter. In the event of a monetary default that is substantially cured within the thirty (30) day notice period, Secured Party will provide reasonable time to complete the cure.

SECURED PARTY'S RIGHTS AND REMEDIES

Upon default by Debtor that remains uncured within the time limits set forth in section VIII by Debtor, Secured Party may exercise the rights of enforcement contained in the UCC at the date of the default, including, but not limited to, the following:

A Acceleration . Secured Party may, at Secured Party's option, declare immediately due and payable the obligations of Debtor to Secured Party which are secured hereby, and the same shall, upon notice to or demand on Debtor, become immediately due and payable.

B Right To Possession Of Collateral . The Secured Party shall have the right to take possession of the collateral and the Debtor agrees to cooperate fully with Secured Party in the exercise of Secured Party's right to take possession of the collateral. This right includes, but is not limited to, Debtor's obligation to assemble and deliver the collateral or some portion of the collateral or some part or component of the collateral upon request of the Secured Party, to a place designated by Secured Party where it shall be made available to the Secured Party. Failure to cooperate shall constitute a breach of this Agreement and the Debtor shall be liable for any and all expenses incident to such failure or cooperation.

C. Right To Dispose Of Collateral . The Secured Party shall have the right to dispose of the collateral by public or private proceeding and by way of one or more contracts. Such sale or other disposition of the collateral may be made as a unit or in parcels and at such time and on such terms as Secured Party may determine, provided only that the disposition effected is commercially reasonable.

Disposition of the collateral may be from the premises of the Debtor and Debtor agrees to cooperate fully in facilitating such a disposition, which may include, on request, the obligation to assemble the collateral in some designated location of the Debtor where the collateral shall be made available to prospective buyers. Disposition of the collateral may be from any other commercially reasonable location, including the principal place of business of Secured Party.

D. Notice Of Sale . Debtor and Secured Party agree that notice of disposition of the collateral shall be commercially reasonable if such notice is received by the Debtor by facsimile or hand delivery, as well as regular and certified mail, return receipt requested, at least ten (10) days prior to the date of the public sale or private sale or other disposition may be effected.

E. Proceeds Of Sale . The proceeds of any sale or disposition of the collateral shall be applied in the manner provided by law and shall include any and all expenses provided in this Agreement. Debtor agrees that Secured Party shall be entitled to recover reasonable attorneys' fees and costs incurred by the Secured Party in exercising its rights and remedies under this Agreement. Upon payment of Secured Party’s principle, interests and expenses as allowed by this agreement and by law, Secured Party will return possession of all collateral to Debtor and agrees to execute such documents as may be necessary to completely release Secured Party's security interest created hereby.

F. Deficiency . In the event the proceeds of collection, sale or disposition of the collateral are not sufficient to discharge Debtor's obligation secured hereby, Debtor shall be liable for the deficiency.

MISCELLANEOUS

A. Notices . Except as otherwise expressly provided in this Security Agreement or by law, all notices must be in writing and shall be considered given addressed upon delivery of, or if mailed, upon the first to occur of actual receipt or the expiration of three (3) days after the deposit in United States Postal Service mail, first class, postage prepaid and addressed at the address specified. Notices must given by email and any other method of delivery, such as facsimile, regular mail, overnight or personal delivery, to the parties at the addresses listed below:

To the Secured Party: Robert Averill

377 Cupsaw Drive

Ringwood, New Jersey 07456

Facsimile:973-962-6138

Email: averillbob@yahoo.com

To the Debtor: William E. Kelleher, Jr.

Cohen & Grigsby, P.C.

11 Stanwix Street, 15th Floor

Pittsburgh, Pennsylvania 15222-1319

Telephone: 412-297-4703

Direct Facsimile: 412-209-1997

Email: : Wkelleher@cohenlaw.com and tomg@gelevator.com

B. Time Of The Essence . Time is of the essence of this Security Agreement.

C. Waiver . The waiver by either party of the time for performing any act shall not constitute a waiver of the time for performing any other act or of an identical act required to be performed at a later time. The exercise of any remedy provided for in this Security Agreement shall not constitute a waiver of any other remedy provided by law.

D. Severability . The unenforceability, invalidity, or illegality of any provision of this Security Agreement shall not render any other provision unenforceable, invalid, or illegal.

E. Choice Of Law . This Security Agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania in force from time to time.

F. Gender And Number . As used in this Security Agreement, the masculine, feminine, or neuter gender, and the singular or plural number, shall each be considered to include the others whenever the context so indicates.

G. Binding Effect . This Security Agreement shall inure to the benefit of, and be binding upon, the heirs, assigns, transferees, personal representatives, and successors in interest of the parties hereto.

H. Captions . The captions in this Security Agreement shall have no effect on its interpretation.

I. Counterparts and Fax Signatures. This Agreement may be signed in counterpart and all signatures shall constitute the entire Agreement. Signature by facsimile shall be deemed original.

Dated this 31 ^st day of January, 2006.

DEBTOR

AXION BATTERY PRODUCTS, INC., a Pennsylvania corporation

By_________________________________

, President

SECURED PARTY

ROBERT AVERILL

By__________________________________

SECURITY AGREEMENT

This Security Agreement is executed by Axion Power International, Inc., a Delaware corporation, as Debtor, and Robert Averill, an individual, as Secured Party.

CREATION OF SECURITY INTEREST

Debtor hereby grants to Secured Party a first priority security interest in the collateral described in this Security Agreement pursuant to the Delaware Uniform Commercial Code - Secured Transactions.

OBLIGATIONS SECURED

The security interest is granted to Secured Party to secure the following obligations:

A. Payment of the indebtedness evidenced by a Promissory Note of this same date executed by Axion Battery Products, Inc., a Pennsylvania corporation and wholly owned subsidiary of Debtor, payable to the order of Secured Party, in the principal amount of One Million Dollars ($1,000,000.00), bearing interest the fixed rate of ten percent (10 %) per annum, together with any renewals, extensions, modifications, or amendments of the Promissory Note (the "Note").

III

DESCRIPTION OF COLLATERAL

The collateral of this Security Agreement consists of the following:

1. All of Debtor’s equipment, inventory, furniture, fixtures and intellectual property.

2. All substitutions, replacements, developments or accessions of the above-described collateral.

CLASSIFICATION OF COLLATERAL

Debtor acknowledges that at the time the security interest attaches, the collateral consists of tangible and intangible personal property, including intellectual property.

PERFECTION OF SECURITY INTEREST

To perfect the security interest granted to Secured Party by the terms of this Security Agreement, Debtor agrees to the following:

A. Debtor authorizes Secured Party to file financing statements in all states, counties, and other jurisdictions as Secured Party may elect, without Debtor’s signature as permitted by law.

DEBTOR'S COVENANTS AND WARRANTIES

C. Debtor is a corporation duly organized and existing under the laws of the State of Delaware, is in good standing under the laws of the State of Delaware, and the granting of the security interest and the performance of all other obligations provided in this Agreement are within the Debtor's powers, have been duly authorized, and are not in contravention of any law or the Debtor's Articles of Organization, or any agreement or undertaking of which Debtor is a party or by which it is bound.

E. During the term of this Security Agreement, Debtor shall keep the collateral free and clear from any and all liens, encumbrances, and other security interests, and will pay, prior to delinquency, all taxes, charges, encumbrances, liens, and assessments against the collateral, and, should the Debtor fail to do so, Secured Party may, but shall not be required, to pay or discharge the same. Debtor shall give Secured Party ten (10) days notice in the event of default of any of these obligations. Debtor shall reimburse Secured Party for any such payments.

F. Debtor shall maintain the collateral in good order and repair, reasonable and ordinary wear and tear excepted.

H. Debtor represents that the tangible collateral subject to this Agreement is presently located at 130 Pine View Drive, East Amherst, New York 14221 and, to the extent it has any ownership interest therein, at 100 Caster Avenue, Vaughan, Ontario, Canada L4L5Y9, and the Debtor shall inform Secured Party in writing at least ten (10) days prior to any change of location of the collateral.

VII

USE OF COLLATERAL

VIII

DEFAULT PROVISIONS

A. Definition Of Default. The occurrence of any of the following shall constitute a default by the Debtor under this Security Agreement:

1. The failure by Debtor to pay or perform any obligations secured by the terms of this Security Agreement, including the failure by Axion Battery Products, Inc. to pay or perform under the Promissory Note executed by it in conjunction with this Security Agreement.

2. The failure of Debtor to perform any of Debtor's obligations under the terms of this Security Agreement or the Loan Agreement executed concurrently herewith.

3. A material breach of any covenant or representation made to Secured Party herein.

B. Notice And Right To Cure .

2. Debtor's Right To Cure Defaults . Debtor shall have thirty (30) days in which to cure a default after the delivery of the notice of default by Secured Party. However, if a non-monetary default cannot reasonably be cured within thirty (30) days, then Debtor is not to be considered in default if Debtor commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default thereafter. In the event of a monetary default that is substantially cured within the thirty (30) day notice period, Secured Party will provide reasonable time to complete the cure.

SECURED PARTY'S RIGHTS AND REMEDIES

Upon the occurrence of default that remains uncured within the time limit set forth in section VIII by Debtor, Secured Party may exercise the rights of enforcement contained in the Uniform Commercial Code in force in Delaware at the date of the default, including, but not limited to, the following:

D. Notice Of Sale . Debtor and Secured Party agree that notice of disposition of the collateral shall be commercially reasonable if such notice is received by the Debtor by facsimile or hand delivery, as well as sent by regular and certified mail, return receipt requested, at least ten (10) days prior to the date of the public sale or the date after which a private sale or other disposition may be effected.

MISCELLANEOUS

A. Notices . Except as otherwise expressly provided in this Security Agreement or by law, all notices must be in writing and shall be considered given upon delivery of, or if mailed, upon the first to occur of actual receipt or the expiration of three (3) days after the deposit in United States Postal Service mail, first class, postage prepaid and addressed at the address specified. Notices must given by email and any other method of delivery, such as facsimile, regular mail, overnight or personal delivery, to the parties at the addresses listed below:

To Secured Party: Robert Averill

377 Cupsaw Drive

Ringwood, New Jersey 07456

Facsimile: 973-962-6138

Email: averillbob@yahoo.com

To Debtor: Axion Power International, Inc.

Thomas G. Granville

100 Caster Avenue

Vaughan, Ontario, Canada L4L 5Y9

Facsimile: 905-264-2385

Email: tomg@gelevator.com

B. Time Of The Essence . Time is of the essence of this Security Agreement.

D. Severability . The unenforceability, invalidity, or illegality of any provision of this Security Agreement shall not render any other provision unenforceable, invalid, or illegal.

E. Choice Of Law . This Security Agreement shall be governed by and interpreted under the laws of the State of Delaware in force from time to time.

H. Captions . The captions in this Security Agreement shall have no effect on its interpretation.

I. Counterparts and Fax Signatures. This Agreement may be signed in counterpart and all signatures shall constitute the entire Agreement. Signature by facsimile shall be deemed original.

Dated this 31 ^st day of January, 2006.

DEBTOR

AXION POWER INTERNATIONAL, INC., a Delaware corporation

By_________________________________

, President

SECURED PARTY

ROBERT AVERILL

By__________________________________

PROMISSORY NOTE

$1,000,000.00

January , 2006

For value received, Axion Battery Products, Inc., a Pennsylvania corporation ("Maker"), promises to pay to the order of Robert Averill, an individual ("Payee"), as designated herein or at such other place as the legal holder shall designate in writing, the principal sum of One Million Dollars ($1,000,000.00), together with interest at the rate of ten percent (10 %) per annum on the principal balance from the date hereof.

Principal and interest are payable as follows:

1. Twelve (12) equal monthly installments of interest on the principal balance of $1,000,000.00 in the amount of Eight Thousand Three Hundred Thirty Three and 34/100ths Dollars ($8,333.34), commencing on the first banking day of February 2006 by wire transfer to an account designated by Payee and continuing on the first banking day of each and every subsequent eleven calendar months. The first monthly payment will include prorated interest for the month of January 2006 that has accrued from the date of this Promissory Note.

2. The entire unpaid balance of principal and accrued interest shall be due and payable on or before the first banking day of February 2007.

3. Interest and all or any portion of the unpaid principal balance may be prepaid at any time without penalty, provided, however, that any payment must be in an amount not less than $200,000. All payments shall first be applied to accrued interest with the balance of each payment to be applied against the unpaid principal balance.

This Promissory Note is secured by a Security Agreement of this same date executed by Maker, as Debtor, and Payee, as Secured Party.

If a default occurs under the terms of this Promissory Note, the Maker agrees to pay all costs, including reasonable attorneys' fees, incurred in the collection of any unpaid amounts. The Maker waives presentment for payment, demand, notice, protest, notice of protest, diligence, and non-payment of this Promissory Note, and all defenses on the ground of any extension of time for payment that may be given by the holder to them.

AXION BATTERY PRODUCTS, INC., a Pennsylvania corporation

By_________________________________

President

AXION POWER INTERNATIONAL, INC.

COMMON STOCK PURCHASE WARRANT

ISSUED TO: Robert G. Averill (the “Warrantholder”)

This warrant is exercisable to purchase 50,000 shares

of the $.0001 par value common stock of

Axion Power International, Inc., a Delaware corporation

(subject to adjustment as provided herein)

This warrant is void after the first banking day of February 2009

This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after the date hereof, until 5:00 P.M. Eastern Standard Time on the first banking day of February2009, up to 50,000 shares of the Common Stock of the Company, adjusted as provided for herein.

The exercise price of this Warrant shall be $6.00 per share until it expires on the first banking day of February 2009. The number and character of the shares of common stock issuable upon exercise of this warrant are subject to adjustment as provided below, and the term “Common Stock” shall mean, unless the context otherwise requires, the stock and other securities and property receivable upon the exercise of this Warrant. This Warrant Certificate is issued subject to the following terms and conditions:

1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings:

(a) “Acts,” means the Securities Acts of 1933, as amended, and the Securities Acts (Ontario).

(b) “Commission,” means the Securities and Exchange Commission.

(d) “Company,” means Axion Power International, Inc., a Delaware corporation.

(e) “Company’s Expenses,” means any and all expenses payable by the Company in connection with an offering described in Section 7 hereof, except Warrantholders’ Expenses.

(f) “Exercise Price,” means the price at which a Warrantholder may purchase one share of Common Stock upon exercise of Warrants as determined from time to time pursuant to the provisions hereof.

(g) “Rules and Regulations,” means the rules and regulations of the Commission adopted under the Acts.

(h) “Warrant Certificate,” means a certificate evidencing Warrants.

(i) “Warrantholder,” means a record holder of Warrants or Securities.

(j) “Warrantholders’ Expenses,” means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 7 hereof multiplied by a fraction the numerator of which is the aggregate sale price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sale price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholders, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company.

(k) “Warrants,” means the warrants evidenced by this certificate, any similar certificate issued upon the assignment of this certificate, or any certificate issued upon the partial exercise of Warrants.

2. Exercise of Warrants. All or any part of the Warrants evidenced hereby may be exercised by surrendering this Warrant Certificate, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 100 Caster Avenue, Vaughan, Ontario, Canada L4L 5Y9, or at such other office or agency as the Company may designate. Upon notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Common Stock to be issued to the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable for the Warrants being exercised.

If fewer than all the Warrants evidenced by this Warrant Certificate are exercised, the Company will, in connection with each partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated as of the date hereof), in form and tenor similar to this Warrant Certificate, evidencing the Warrants not exercised. The issue date of all Common Stock obtained upon the exercise of Warrants will be the date the Company receives full payment of the Exercise Price.

3. Adjustments in Certain Events. The number of shares and the exercise price of the Common Stock for which this Warrant may be exercised are subject to adjustment from time to time upon the happening of certain events as follows:

(a) If the outstanding Common Stock is subdivided into a greater number of shares, the number of shares of Common Stock issuable upon exercise of the Warrants will be proportionately increased and exercise price of the Warrants will be proportionately reduced. Conversely, if the outstanding Common Stock is combined into a smaller number of shares, the number of shares of Common Stock issuable upon exercise of the Warrants will be proportionately reduced and the exercise price of the Warrants will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a).

(b) If the Common Stock is converted into or exchanged for other property or securities in connection with a merger, consolidation, reclassification, reorganization or partial liquidation of the Company, then, as a condition transaction, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrants the kind and amount of other property or securities that he would have been entitled to receive if he had held the number of shares of Common Stock issuable upon the exercise of the Warrants immediately prior to transaction. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any other property or securities thereafter deliverable upon the exercise of the Warrants. The Company will not permit any of the above-referenced changes to occur unless the issuer of the other property or securities agrees to be bound by and comply with the provisions of this Warrant.

(c) When any adjustment is required to be made in the number of shares of Common Stock purchasable upon exercise of the Warrants, the Company will promptly determine the new number of shares purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of shares and (ii) mail a copy of such statement to the Warrantholder within thirty (30) days after the date when the event giving rise to the adjustment occurred.

(d) No fractional shares of Common Stock will be issued in connection with any exercise of Warrants, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices in the over-the-counter market or the closing price on a national securities exchange, whichever is the principal market, on the day immediately prior to exercise.

4. Reservation of Shares. The Company agrees that a number of shares of Common Stock sufficient to provide for the exercise of the Warrants upon the basis set forth above will at all times during the term of the Warrants be reserved for exercise.

5. Validity of Common Stock. All Common Stock delivered upon the exercise of the Warrants will be duly and validly issued, fully paid and nonassessable and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrants.

6. Registration of Common Stock Issuable on Exercise of Warrant Certificate.

(a) On or before , the Company will file registration statements for the Common Stock issuable upon exercise of the Warrants pursuant to the Acts so as to allow the unrestricted re-sale of the Common Stock to the public from time to time commencing on the Effective Date of such Registration Statement and ending at 5:00 p.m. Eastern Time on the Expiration Date (the “Registration Period”). The Company will also file such applications and other documents necessary to permit the sale of the Common Stock to the public during the Registration Period in such other states and provinces as the Company and the Warrantholders agree to. In order to comply with the provisions of this Section 6(a), the Company may, but is not required to, file more than one registration statement.

(b) The Company will pay all of the Company’s Expenses and Warrantholder will pay its share of the Warrantholder’s Expenses relating to the registration, offer, and sale of the Common Stock.

(c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statements during the period of their use. In addition, if the Warrantholder participating in the registration are advised by counsel that the registration statements, in their opinion, are deficient in any material respect, the Company will use its best efforts to cause the registration statements to be amended to eliminate the concerns raised.

(d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Acts, and such other documents as they may reasonably request in order to facilitate the disposition of Common Stock owned by them.

7. Indemnification in connection with Registration.

(a) In connection with the registration of the Common Stock issuable upon exercise of the Warrants, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Acts, and any participating underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or participating underwriter may be subject under the Acts or otherwise; and it will reimburse each Warrantholder, each controlling person, and each participating underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or participating underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld.

(b) Each selling Warrantholder, as a condition of the Company’s registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Acts against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Acts or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld.

(c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b).

(d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation.

8. Restrictions on Transfer. This Warrant Certificate and the Warrants evidenced hereby may not be sold, transferred, subdivided or assigned without the express written consent of the Company, which will not be unreasonably withheld.

9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of Warrants, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders.

10. Notice . All notices under this Certificate shall be in writing and shall be delivered to the appropriate party at the address set forth below (subject to change from time to time by written notice to all other parties to this Agreement). All communications shall be deemed served upon delivery of, or if mailed, upon the first to occur of receipt or the expiration of three (3) days after the deposit in the United States Postal Service mail, first class, postage prepaid and addressed at the address specified. Notices must given by email and any other method of delivery, such as facsimile, regular mail, overnight or personal delivery, to the parties at the addresses listed below:

If to the Company :

Axion Power International, Inc.

100 Caster Avenue

Vaughan, Ontario, Canada L4L 5Y9

Facsimile: 905-264-2385

Email: tomg@gelevator.com

If to the Warrantholder:

Robert G. Averill

377 Cupshaw Drive

Ringwood, New Jersey 07456

Facsimile: 973-962-6138

Email: averillbob@yahoo.com

11. Applicable Law. This Certificate will be governed by and construed in accordance with the laws of the state of Delaware.

Dated this 31 ^st day of January, 2006. Axion Power International, Inc.

By:

Thomas Granville, Chief Executive Officer

LEASE AGREEMENT

THIS AGREEMENT is made as of this 14 ^th day of February, 2006, BY AND

BETWEEN

STEVEN F. HOYE and STEVEN C. WARNER, hereinafter collectively referred to as “Lessor,”

AND

AXION BATTERY PRODUCTS, INC. , a Pennsylvania corporation hereinafter referred to as “Lessee.”

WITNESSETH:

WHEREAS, Lessor is the owner of certain property located in the Township of Neshannock, Lawrence County, Pennsylvania, as more fully described on Exhibit A hereto (the "Property"); and

WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor, a portion of the Property; and

WHEREAS, Lessor currently leases approximately 11,000 square feet of the Property to Commercial Battery Company Of Pennsylvania ("CBC") for use as warehouse, office, and retail sales space pursuant to a lease (the "CBC Lease") that expires September 30 ^th of 2006;

THEREFORE, in consideration of the covenants and premises hereby mutually undertaken to be kept and performed by the parties hereto, the parties agree as follows with the intent to be legally bound:

1. Lessor hereby leases to Lessee, and Lessee hereby rents and takes from Lessor that portion of the Property consisting of approximately 62,732 square feet in the aggregate (including 42,500 square feet of manufacturing space, 7,232 square feet of office locker, lab and lunch area, 8,000 square feet of storage buildings, and 5,000 square feet of basement area), which portion of the Property is further described in Exhibit “A-1”, attached hereto and made part thereof (the "demised premises"). Lessor represents and warrants to Lessee that the CBC Lease will expire on September 30, 2006, subject to existing renewal or extension options exercisable by CBC. Lessor covenants that it will not renew, extend, amend or enter into a new lease with CBC without the prior written consent of Lessee; provided, however, the parties acknowledge that CBC may exercise its existing option to renew or extend the term of the CBC Lease. If Lessor and CBC do not enter into a new lease for the premises occupied by CBC, or if CBC does not exercise its option to renew or extend the term of the CBC Lease beyond September 30, 2006, Lessee shall have the option to lease such space, at Lessee's option, on the same terms and conditions as currently set forth in the CBC Lease, or on the terms and conditions set forth in this lease, for the remainder of the term (including any renewals) of this lease. In addition, from and after October 1, 2006, Lessee shall have the option to lease from Lessor the office space currently leased by CBC. In the event Lessee exercises such option by written notice to Lessor, Lessor shall be responsible for removing CBC from such space and making any renovations or other modifications necessary to accommodate CBC and Lessee, and upon delivery of possession and use to Lessee, such office space shall then be added to and considered as a part of the "demised premises" under this Lease, except the rent shall be proportionately increased to reflect the additional square feet.

2 . This lease shall be for a term of 2 years commencing on the date hereof and ending on the second anniversary hereof. Lessee will have the right and option to renew this lease for two (2) successive five (5) year terms upon the same terms and conditions by giving Lessor written notice of its intention to renew this lease at least ninety (90) days prior to the end of the original term or prior to the end of any renewal term.

3. Lessee hereby covenants and agrees to pay Lessor as rent in monthly installments without demand or counterclaim the sum of Ten Thousand and no/100 Dollars ($10,000.00) per month in advance on the first day of each and every month during the initial term (prorated at the rate of $333.33 per day for any partial month). The monthly rental to be paid for each and any renewal term shall be a commercially reasonable rental to be mutually agreed upon by Lessor and Lessee. In the event Lessor and Lessee are unable to agree on a rental rate, then a written opinion of an M.A.I. appraiser selected by the Lessor and Lessee as to a commercially reasonable rental rate shall be controlling. In the event the selection of an appraiser cannot be agreed upon, the Lessor shall select one M.A.I appraiser, the Lessee shall select one such appraiser, and the two appraisers so selected shall select a third. The controlling rental rate shall be the average of the three appraisals. The expense of the appraisals shall be equally divided between the Lessor and Lessee.

4. Lessee shall cause to be paid all taxes, general or special, all public rates, dues and special assessments of any kind which shall become due and payable or which are assessed against or levied upon the demised premises during the term of this lease calculated on the percentage of the total building square footage leased by Lessee (prorated on the basis of a 360 day year for any partial calendar year of this lease). Such payments shall be due within 15 days after Lessee's receipt of Lessor's invoice therefor.

5. Lessor shall arrange to have all public utility services customarily used in the operation of a commercial or industrial enterprise (including but not limited to water, sanitary sewer, gas, electricity, telephone, cable television or communications services such as DSL or broadband) connected and available to the demised premises for Lessee's use at the commencement of the term. If the parties agree in the future, Lessor shall arrange to establish separately metered service for all such utility services not separately metered on the date of this lease, and Lessor, unless otherwise agreed, shall pay for all connection, tap-in and facility charges to establish such connection and separate metering. Pending the establishment of separate meters, Lessee shall pay or cause to be paid all charges for gas, water, sewage, disposal, steam, electricity, light, heat or power, telephone or other communication service used or supplied in connection with the demised premises such cost to be offset by the historical utility costs for the building since the commencement of the lease term under the CBC Lease.

6. As part of the consideration for this lease, Lessee covenants and agrees to maintain at its sole cost and expense at all times during the term of this lease, public liability insurance under which Lessor shall be named as additional insured, properly protecting and indemnifying Lessor, in an amount not less than One Million Dollars ($1,000,000.00) for injury to any one person (including death), and not less than One Million Dollars ($1,000,000.00) for personal injuries in any one (1) accident, and not less than Two Hundred and Fifty Thousand Dollars ($250,000.00) for property damage.

During the term hereof, Lessee shall, at Lessee’s own cost and expense, provide and keep in force insurance, under which Lessor shall be named as an additional insured, against loss or damage or injury or destruction to any building or buildings and appurtenances there, now and hereafter erected on the demised premises, resulting from fire or from any hazard included in the normal broad extended coverage endorsement, with such company or companies as may be reasonably acceptable to Lessor in the amount at least equal to eighty percent (80%) of the replacement value of said building or buildings and appurtenances thereto.

Lessee shall furnish Lessor with a certificate or certificates of insurance covering all insurance so maintained by Lessee, stipulating that such insurance shall not be cancelled without ten (10) days advance notice to Lessor.

7. Lessee shall use and occupy the demised premises as a business office, warehouse and battery manufacturing facility and for any other lawful purpose or business. Lessee represents and warrants to Lessor that it will occupy the demised premises, and conduct its operations on the demised premises, in compliance with all applicable federal, state and local laws and regulations, including all environmental laws and regulations.

8. (a) Lessor represents and warrants to Lessee that it has good and marketable fee simple title to the demised premises, free and clear of all liens, restrictions, and encumbrances other than those which do not have a material adverse effect on Lessee's intended use of the demised premises. Lessor has received no written notice of violation of any law which remains uncorrected on the date hereof and, to Lessor's knowledge, the demised premises is in compliance with all applicable laws and regulations. Lessor shall provide Lessee with a current and valid certificate of occupancy for the demised premises simultaneously with the execution of this lease.

(b) Except as otherwise provided in this lease, it is understood and agreed that Lessee accepts the demised premises in the physical condition which the same now are and that Lessor shall be under no obligation whatever to make any repairs or replacements to the said premises during the term of this lease.

(c) Lessee, at its sole expense, shall keep and maintain the structural and exterior portions of the demised premises (including without limitation the walls, ceilings, doors, foundations and roofs) in substantially the same condition as they are in on the date of this lease, ordinary wear and tear excepted. Lessee, at its sole expense, shall also keep and maintain all mechanical systems serving the demised premises (including the plumbing, electrical, sewer and HVAC systems but excluding any assets owned by Lessee) in good operating order and repair. Lessee, at its sole expense, shall also make the initial repairs set forth on Exhibit "B" attached hereto as Lessor and Lessee may agree to, and make any necessary replacements and capital improvements which may be required to comply with the foregoing covenants or which may be required by any law; provided, however, in the event such replacements or capital improvements exceed, individually or in the aggregate, $75,000, Lessee shall have the option to make such replacements or capital improvements or terminate this lease on 60 days notice to Lessor. Except as otherwise set forth above, all such repairs and replacements shall be made within 30 days after the date Lessee provides Lessor with written notice of the need therefor, or immediately in the event such condition constitutes a hazard, emergency or violation of any law.

(d) Except as otherwise provided in subsection (c) above, Lessee, at its sole expense, shall make any and all other necessary repairs to the demised premises in order to preserve, protect, and maintain the demised premises in substantially the same condition as they are in on the date hereof, ordinary wear and tear excepted. If Lessee fails to make such repairs or fails to maintain properly the demised premises, same may be made or done by Lessor at the expense of the Lessee and the costs thereof shall be collectible as additional rent or otherwise and shall be paid by Lessee within five (5) days after rendition of a bill or statement thereof.

9. No installations, alterations, improvements, additions or changes of a structural nature shall be made in or to the demised premises by Lessee without the prior consent of Lessor. All installations, alterations, additions, or improvements of a permanent nature made by Lessee in the demised premises (except such trade and office fixtures and equipment of Lessee as may be removed without material damage to the premises) shall, immediately upon being made or installed, become the property of Lessor and shall remain upon and be surrendered with the demised premises as a part thereof upon the expiration or earlier termination of this lease, without disturbance or injury.

10. Lessee shall not assign this lease or underlet the demised premises, or any part thereof, without the prior written consent of Lessor, which consent shall not be unreasonably withheld.

11. Should the demised premises be destroyed or rendered unfit for use and occupancy by fire or other casualty, Lessee shall, at its option, either replace or repair the same, or terminate this agreement.

12. If, during the term of this lease, all of the demised premises should be taken for any public or quasi-public use under any law, ordinance, or regulation or by the right of eminent domain, or should be sold to the condemning authority under threat of condemnation, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective as of the date of the taking of said premises by the condemning authority.

If less than all of the leased premises shall be taken for any public or quasi-public use under any law, ordinance or regulation, or by right of eminent domain, or should be sold to the condemning authority under threat of condemnation, this lease shall not terminate but Lessor shall forthwith at its sole expense, restore and reconstruct the building and other improvements, situated on the leased premises, provided such restoration and reconstruction shall make the same reasonably tenantable and suitable for the uses for which the premises are leased and rent shall be equitably abated during such period; provided, however, that if such restoration or reconstruction cannot reasonably be or is not completed within 120 days following such taking, Lessee shall have the right in its sole option to terminate this lease. If not so terminated, the rent payable hereunder during the unexpired portion of this lease shall be adjusted equitably.

In any event, any condemnation award, or purchase price in lieu thereof, for the taking of all or any portion of the premises shall be the property of Lessor whether such award or purchase price shall be made as a compensation for diminution in value of the leasehold or for the taking of the fee, and Lessee hereby assigns to Lessor all its right, title, and interest in and to any such award or purchase price. Nothing contained herein, however, shall be deemed to preclude Lessee from obtaining, or to give Lessor any interest in, any award to Lessee for moving expenses or for loss or damage to lessee’s fixtures, equipment or other property or for damages for cessation or interruption of Lessee’s business.

13. Lessee shall keep the demised premises in a neat and clean appearance and shall not allow an accumulation of trash, waste or other refuse thereon.

14. If Lessor should fail to perform any of its obligations under this lease within the time specified (or within thirty (30) days after written notice from Lessee if no time is specified), Lessee may, at its option, terminate this lease or perform any such obligation ( and in such event, Lessor's consent will not be required under Paragraph 9) and receive a credit against future rental payments due under this lease, in addition to all other remedies provided by law or in equity for Lessor's default .

15. The occurrence of any of the following shall constitute material default and breach of this lease by Lessee:

(a) A failure by Lessee to pay the rent reserved herein, or to make any other payment required to be made by Lessee hereunder, where such failure continues for ten (10) days after written notice thereof from Lessor to Lessee;

(b) A failure by Lessee to observe and perform any other provisions or covenants of this lease to be observed or performed by Lessee, where such failure continues for thirty (30) days after written notice thereof from Lessor to Lessee provided; however, that if the nature of the default is such that the same cannot reasonably be cured within such thirty-day period, Lessee shall not be deemed to be in default if Lessee shall within such period commence such cure and thereafter diligently prosecutes the same to completion;

(c) The making by Lessee of any assignment for the benefit of creditors; the adjudication that Lessee is bankrupt or insolvent; the filing by or against Lessee of a petition to have Lessee adjudged bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee the same is dismissed within sixty (60) days after the filing thereof); the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located in the demised premises or of Lessee’s interest in this lease (unless possession is restored to Lessee within thirty (30) days after such appointment); or the attachment, execution or levy against or other judicial seizure of, substantially all of Lessee’s assets located in the demised premises or of Lessee’s interest in this lease (unless the same is discharged within thirty (30) days after issuance thereof).

16. In the event of any material default or breach of this lease by Lessee as set forth in paragraph 15 hereof, the rent reserved herein for the entire unexpired portion of the term of this lease shall at the Lessor’s option thereupon immediately become due and payable. To the extent permitted by law, Lessee shall be obligated for such accelerated rent regardless of which, if any, of the remedies provided in paragraph 17 hereof or provided by law Lessor elects to pursue.

17. In the event of any material default or breach of this lease by Lessee as set forth in paragraph 15 hereof; Lessor, at its option, may terminate this lease upon and by giving written notice of termination to Lessee, or Lessor, without terminating this lease, may at any time after such material default or breach, without notice or demand additional to that provided in paragraph 15 hereof, and without limiting Lessor in the exercise of any other right or remedy which Lessor may have by reason of such default or breach (other than the aforesaid right of termination), exercise any one or more of the remedies hereinafter provided in this paragraph or as otherwise provided by law, all of such remedies (whether provided herein or by law) being cumulative and non exclusive:

(a) Lessor may enter the demised premises (to the extent permitted by law and without thereby incurring any liability to Lessee and without such entry being constituted an eviction of Lessee or termination of this lease) and take possession of the demised premises and, at any time and from time to time relet the demised premises or any part thereof for the account of Lessee, for such terms, upon such conditions and at such rental as Lessor may deem proper. In the event of such reletting, (i) Lessor shall receive and collect the rent therefrom and shall first apply such rent against such expenses as Lessor may have incurred in recovering possession of the demised premises, placing the same in good order and condition, altering or repairing the same for reletting and such other expenses, commissions and charges, including attorney’s fees, which Lessor may have paid or incurred in connection with such repossession and reletting, and then shall apply such rent against the accelerated rent. No re-entry by Lessor shall be deemed to be an acceptance of a surrender by Lessee of this lease or of the demised premises.

18. The failure or delay on the part of Lessor or Lessee to enforce or exercise at any time any of the provisions, rights, or remedies in this lease shall in no way be construed to be a waiver thereof, nor in any way to effect the validity of this lease or any part hereof, or the right of Lessor or Lessee, as the case may be, to thereafter enforce each and every such provision, right to remedy. No waiver of any breach of this lease shall be held to be a waiver of any other or subsequent breach. The receipt by Lessor of rent at a time when the rent is in default under this lease shall not be construed as a waiver of such default. The receipt by Lessor of a lesser amount than the rent due shall not be construed to be other than a payment on account of the rent then due, nor shall any statement on Lessee’s check or any letter accompanying Lessee’s check be deemed an accord and satisfaction, and Lessor may accept such payment without prejudice to Lessor’s right to recover the balance of the rent due or to pursue any other remedies provided in this lease. No act or thing done by Lessor or Lessor’s agents or employees during the term of this lease shall be deemed an acceptance or a surrender of the demised premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Lessor.

19. Lessor reserves the right to assign this lease at any time, including the assignment of rent as security, and Lessee hereby agrees to make payments of rent to any party to whom such an assignment is made upon written request of Lessor.

20. Lessor shall have the permission at any reasonable time or times upon reasonable prior notice (except in the event of an emergency) to enter upon the demised premises for the purpose of making inspections and to make repairs, in the event Lessor should determine to make such repairs, or for the purpose of protection of such premises.

21. At the expiration of the original term of this lease or any extension of such term by Lessee, Lessee shall surrender the demised premises to Lessor in the same condition as when Lessee took possession of such premises, ordinary wear and tear excepted.

22. If Lessee holds over without written consent of Lessor after expiration or termination of the original term of the lease or any extension of such term by Lessee, Lessee’s holdover shall be at the will of Lessor.

All notices provided to be given under this agreement shall be given by messenger, reliable express delivery service, telecopier or certified mail or registered U.S. mail, addressed to the proper party at the following address:

LESSOR: LESSEE:

Steven F. Hoye and Axion Battery Products, Inc.

Steven C. Warner Attn: Thomas G. Granville, CEO

Box 202 3601 Wilmington Road

New Wilmington, PA 16142 New Castle, PA 16105

Fax: Fax:

With a copy to: With a copy to:

William E. Kelleher, Jr., Esq.

Cohen & Grigsby, P.C.

11 Stanwix Street, 15 ^th Floor

Pittsburgh, PA 15222

Fax: 412-209-1997

Notices shall be deemed to have been given on the date of receipt by the addressee (or, if the date of receipt is not a business day, on the first business day after the date of receipt), as evidenced by (i) a receipt executed by the addressee (or a responsible person in his or her office) or a notice to the effect that such addressee refused to accept such communication, if sent by messenger, U.S. mail or express delivery service, or (ii) a receipt generated by the sender's telecopier showing that such communication was sent to the appropriate number on a specified date, if sent by telecopier.

24. At Lessee’s request, Lessor agrees to execute a Memorandum of Lease in such form as may be recorded in the Office of the Recorder of Deeds of Lawrence County, Pennsylvania.

25. If and so long as Lessee pays the rent and observes and performs all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall and may peaceably and quietly have, hold and enjoy the Premises for the term and any renewal or extension thereof, subject nevertheless to all of the provisions of this lease. Lessor covenants that no other lessees of Lessor occupying any portion of Lessor's property shall unreasonably interfere with the business or operations of Lessee; provided, however, Lessee acknowledges that CBC is currently in possession and use of the premises leased under the CBC Lease.

WITNESS the following signatures and seals:

WITNESS:	LESSOR: Steven F. Hoye Steven C. Warner
ATTEST:	LESSEE: AXION BATTERY PRODUCTS, INC. By: Thomas G. Granville CEO and President

1048999_1

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made and entered into this 10th day of February, 2006 (the “Effective Date”), by and between National City Bank of Pennsylvania, a national banking association (“Seller”), and Axion Battery Products, Inc., a Pennsylvania corporation (“Buyer”).

RECITALS:

WHEREAS, pursuant to a Commercial Note dated June 4, 1997 (as may have been amended, modified or supplemented from time to time, the “Note”), Seller has made certain loans (the “Loans”) to New Castle Battery Manufacturing Company, a Pennsylvania corporation (the “Company”);

WHEREAS, the Loans were secured by a security interest in all of the Company’s Inventory, Chattel Paper, Accounts, Equipment and General Intangibles and other Collateral in accordance with, and as such terms are defined in, that certain Commercial Security Agreement between the Company and Seller, dated as of November 24, 2002 (the “Security Agreement”, and together with the Note and Loan Agreement, collectively, the “Loan Documents”);

WHEREAS, Seller has advised Buyer that the Company is in default under the Loan Documents, that Seller has taken, or will take, possession of the Collateral and that Seller is entitled to sell the Assets (as defined below) at a private sale pursuant to Section 9-610 of the Uniform Commercial Code as in effect in Pennsylvania, 13 PA CONS. STAT. ANN. § 1101, et seq. (the “UCC”); and

WHEREAS, the Seller wishes to sell, and the Buyer wishes to purchase, the Assets all on the terms and conditions set forth below.

NOW THEREFORE, in consideration of the mutual promises, representations and warranties contained in this Agreement, and intending to be legally bound, the parties hereto do hereby agree as follows:

ARTICLE I - PURCHASE AND SALE

1.1 Purchase and Sale . On the terms and subject to the conditions contained in this Agreement, on the Closing Date (as defined below), Buyer shall purchase from Seller, and Seller shall sell to Buyer, all of the Company’s rights, title and interest in and to all of the assets subject to Seller’s security interest (excluding Accounts, but including, by way of example only and not limitation, the property listed on Exhibit “A” hereto) (the “Assets”) free and clear of any lien, security interest, charge, pledge or encumbrance, except only for the encumbrances listed on Exhibit "B" attached hereto ("Permitted Encumbrances").

1.2 No Liabilities . Pursuant to UCC § 9617(a) and this Agreement, the transfer of the Assets to Buyer, at the Closing, will transfer all of the Company’s rights in the Assets, discharge the security interest of Seller in the Assets and discharge any other security interest or lien in the Assets that was subordinate to Seller’s security interest. By acquiring the Assets, Buyer assumes no liability of any nature or kind whatsoever, other than the obligation to pay the Purchase Price in accordance with Section 1.3 below.

1.3 Purchase Price .

(a) The purchase price for the Assets (the “Purchase Price”) shall be Eight Hundred Thousand Dollars ($800,000). Except as otherwise provided in the Escrow Agreement, the Purchase Price shall be paid by bank check or wire transfer as hereinafter provided.

(b) Seller acknowledges that Buyer has previously paid to Seller a deposit of $105,000, which deposit Seller shall apply to the Purchase Price at the Closing, and which deposit will be refundable only as provided in Section 8.1(b) hereof.

(c) Contemporaneous with the signing of this Agreement, the parties, together with the Escrow Agent named therein, shall enter into an Escrow Agreement, on terms and conditions mutually satisfactory to the parties, providing for the escrow and subsequent payment to Seller (or refund to Buyer) of $90,000 of the Purchase Price.

ARTICLE II - CLOSING

2.1 Time, Date and Place . The closing of the purchase and sale of the Assets and the other transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Klett Rooney Lieber & Schorling, 40 ^th Floor, One Oxford Centre, Pittsburgh, PA 15219, or such other place as the parties may agree. The Closing shall be held on a mutually convenient date and time as soon as practicable after all conditions to closing have been satisfied in accordance with Article VII, but no later than February 14, 2006 (such date is referred to throughout this Agreement as the “Closing Date”) unless this Agreement is earlier terminated in accordance with Article VIII.

2.2 Closing Costs And Due Diligence . All expenses incurred by Seller or Buyer with respect to the consummation of the transaction contemplated by this Agreement are to be borne and paid exclusively by the party incurring same.

ARTICLE III - DELIVERIES AT THE CLOSING

3.1 Deliveries by Seller . In addition to any other documents to be delivered under other provisions of this Agreement, at the Closing Seller shall deliver to Buyer the following:

(a) a bill of sale executed by Seller for all of the Assets in a form to be mutually agreed to by the parties;

(b) a duly executed counterpart of the Escrow Agreement;

(c) an amendment or amendments (form UCC-3), in suitable form for filing in all applicable filing offices, to all financing statements filed by Seller against the Company confirming the discharge of Seller’s security interest in the Assets, together with confirmation that all such amendments have been filed, or will be filed contemporaneous with the Closing;

(d) such other deeds, bills of sale, assignments, certificates of title, transfer statements, documents and other instruments of transfer and conveyance as may reasonably be requested by Buyer, each in a form to be to mutually agreed upon by the parties and executed by Seller; and

(e) a certificate executed by Seller as to the accuracy of its representations and warranties as of the date of this Agreement and as of the Closing and as to its compliance with and performance of its covenants and obligations to be performed or complied with at or before the Closing in accordance with Section 7.2.

3.2 Deliveries by Buyer . In addition to any other documents to be delivered under other provisions of this Agreement, at the Closing Buyer shall deliver to Seller the following:

(a) Six Hundred Five Thousand dollars ($605,000) by bank check or wire transfer to an account specified by Seller in writing to Buyer at least one (1) business day prior to the Closing Date;

(b) a duly executed counterpart of the Escrow Agreement, together with evidence that Buyer has delivered the balance of the Purchase Price ($90,000) to Escrow Agent to be held and disbursed in accordance with the Escrow Agreement;

(c) a certificate executed by Buyer as to the accuracy of its representations and warranties as of the date of this Agreement and as of the Closing and as to its compliance with and performance of its covenants and obligations to be performed or complied with at or before the Closing in accordance with Section 7.1; and

(d) a certificate of the Secretary of Buyer certifying, as complete and accurate as of the Closing, attached copies of all requisite resolutions or actions of Buyer’s board of directors approving the execution and delivery of this Agreement and the consummation of the transaction contemplated hereby and certifying to the incumbency and signatures of the officers of Buyer executing this Agreement and any other documents relating to the transactions being consummated at the Closing.

ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SELLER

4.1 Seller represents and warrants to Buyer as of the date hereof:

(a) Seller is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, with full corporate power and authority to carry on its business as currently conducted.

(b) (i) This Agreement and the Escrow Agreement constitute the legal, valid and binding obligations of Seller, enforceable against it in accordance with their terms. Seller has the absolute and unrestricted right, power and authority to execute and deliver, and carry out the transactions contemplated by, this Agreement and the Escrow Agreement.

(ii) Neither the execution and delivery of this Agreement or the Escrow Agreement, nor the consummation or performance of any of the transactions contemplated by this Agreement or the Escrow Agreement, will directly or indirectly (with or without the passage of time): breach any provision of the charter or bylaws of Seller; breach or give any governmental body or other person the right to challenge the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under any law or order to which Seller or any of the Assets may be subject; contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any governmental body the right to revoke, withdraw, suspend, cancel, terminate or modify, any governmental authorization that is held by Seller or that otherwise relates to the Assets; breach any provision of, or give any person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any contract by which Seller is bound; or result in the imposition or creation of any encumbrance upon or with respect to any of the Assets.

(iii) Except for the notices referenced in Section 7.2 below, Seller is not required to give any notice or obtain any consent from any person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated by this Agreement.

(c) Seller has a duly perfected, first priority, valid and enforceable security interest in the Assets. The sale by Seller under this Agreement has been, and will be as of the Closing, conducted in compliance with and satisfaction of any applicable requirements of the Loan Documents and the UCC, and will transfer to Buyer good and transferable title to the Assets free and clear of any lien or encumbrance of any kind, except only for the Permitted Encumbrances. The Company is in default under the Loan Documents and the amount owed by the Company to Seller under the Loan Documents, as of the date of this Agreement, is not less than the Purchase Price.

(d) There is no litigation, claim or administrative action, nor any order, decree or judgment, in progress or pending, or, to the knowledge of Seller, threatened, against or relating to Seller, to Seller’s knowledge, no facts or circumstances exist which would reasonably be expected to give rise to litigation, claims or administrative actions which would prevent, restrain or affect Seller’s ability to perform the transaction contemplated by this Agreement.

ARTICLE V - REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER

5.1 Buyer represents and warrants to Seller as of the date hereof:

(a) Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Pennsylvania with full corporate power and authority to conduct its business as it is now conducted.

(b) This Agreement and the Escrow Agreement constitute the legal, valid and binding obligations of Buyer, enforceable against it in accordance with their terms. Buyer has the absolute and unrestricted right, power and authority to execute and deliver this Agreement and the Escrow Agreement and to perform its obligations under this Agreement and such action has been duly authorized by all necessary corporate action.

(c) Neither the execution and delivery of this Agreement or the Escrow Agreement by Buyer, nor the consummation or performance of any of the transactions contemplated by this Agreement or the Escrow Agreement directly or indirectly (with or without the passage of time): will give any person the right to prevent, delay or otherwise interfere with any of the transactions contemplated hereby pursuant to: any provision of Buyer’s charter or bylaws; any resolution adopted by the board of directors of Buyer; any provision of any law, statute, rule, regulation or executive order to which Buyer or any of its assets or properties is subject; any contract to which Buyer is a party or by which Buyer may be bound; or any judgment, order, writ or decree of any court or administrative body applicable to Buyer or any of its assets or properties.

(d) There is no litigation, claim or administrative action, nor any order, decree or judgment, in progress or pending, or, to the knowledge of Buyer, threatened, against or relating to Buyer and, to Buyer’s knowledge, no facts or circumstances exist which would reasonably be expected to give rise to litigation, claims or administrative actions which would prevent, restrain or affect Buyer’s ability to perform the transaction contemplated by this Agreement.

(e) Buyer is not and will not be required to give any notice or obtain any consent from any person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated by this Agreement.

ARTICLE VI - DUE DILIGENCE AND NO WARRANTIES

6.1 Access and Investigation . Prior to the Closing and upon reasonable notice to it, Seller shall afford to the officers, attorneys, accountants or other authorized representatives of Buyer reasonable access during normal business hours to the Assets, so as to afford Buyer an opportunity to make, at its sole cost and expense, such review, examination and investigation as Buyer may reasonably desire to make of the Assets. Buyer acknowledges and agrees that Seller has never operated the Company or any business using the Assets. Therefore, Seller cannot, and will not, provide Buyer with any information about the business of the Company, the value of the Assets, or their usefulness in, or adequacy for, carrying on any business.

6.2 Disclaimer of Warranties; “AS-IS” Conveyance .

(i) BUYER ACKNOWLEDGES TO, AND AGREES WITH, SELLER THAT BUYER IS PURCHASING THE ASSETS IN AN “AS IS - WHERE IS” CONDITION “WITH ALL FAULTS” AND SPECIFICALLY AND EXPRESSLY WITHOUT ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, EITHER EXPRESS OR IMPLIED, OF ANY KIND OR NATURE FROM SELLER EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT. Buyer acknowledges that Buyer has not relied, and is not relying, upon any information, document, sales brochure, due diligence/property information package or other literature, map or sketch, projection, pro forma statement, representation, guarantee or warranty (whether express or implied, or oral or written, material or immaterial) that may have been given by or made by or on behalf of or omitted by the Seller, its agents, representatives, consultants and/or attorneys with respect to (i) the quality, nature, adequacy or physical condition of the Assets; (ii) the development potential of the Assets for any particular purpose; (iii) the Assets’ or their operation’s compliance with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions or restrictions of any governmental or quasi governmental entity; or (iv) the Assets’ or their operation’s compliance with any applicable labor laws.

(ii) BUYER ACKNOWLEDGES TO, AND AGREES WITH, SELLER THAT, WITH RESPECT TO THE ASSETS AND EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER HAS NOT AND DOES NOT AND WILL NOT MAKE ANY WARRANTIES OR REPRESENTATION, EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW INCLUDING, BUT IN NO WAY LIMITED TO, ANY WARRANTY OF TITLE, POSSESSION, QUIET ENJOYMENT, CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR WITH RESPECT TO THE VALUE, PROFITABILITY OR MARKETABILITY OF THE ASSETS OR WITH RESPECT TO COMPLIANCE OF THE ASSETS WITH ANY ENVIRONMENTAL PROTECTION OR POLLUTION LAW, RULE OR REGULATION, ORDER OR REQUIREMENT, INCLUDING BUT NOT LIMITED TO, THOSE PERTAINING TO THE HANDLING, GENERATING, TREATING, STORING OR DISPOSING OF ANY HAZARDOUS WASTE OR SUBSTANCE.

(iii) Except with respect to any specific obligations of Seller under this Agreement or the Escrow Agreement, Buyer does hereby release, and forever discharge Seller, its employees, representatives, agents, sub-agents, successors, assigns and attorneys from any and all claims for damages and other causes of action at law or equity for injury, destruction, loss or damage of any kind or character, to the person or property of Buyer and Buyer’s employees, agents and representatives arising out of, or in any way relating to, any of the matters referred to in this Section 6.2 as not being the responsibility of Seller.

(iv) Except as otherwise set forth in the Escrow Agreement, Buyer acknowledges Seller shall not be obligated to pay, either prior to or after the Closing, any sums or perform any work with respect to any portion of the Assets for any reason whatsoever.

ARTICLE VII - CLOSING CONDITIONS

7.1 Seller’s Conditions to Closing . Seller’s obligation to sell the Assets and to take the other actions required to be taken by Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller in whole or in part):

(a) All of Buyer’s representations and warranties in this Agreement (considered collectively), and each of these representations and warranties (considered individually), shall have been accurate in all material respects as of the date of this Agreement and shall be accurate in all material respects as of the time of the Closing as if then made.

(b) All of the covenants and obligations that Buyer is required to perform or comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), shall have been performed and complied with in all material respects.

(c) Every consent which Buyer needs to obtain in order to consummate the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect. Copies of all such consents shall have been delivered to Seller prior to the Closing.

(d) Buyer shall have delivered to Seller a certificate of an officer of Buyer dated the Closing Date certifying that all conditions set forth in Section 7.2 have been satisfied or waived.

(e) There shall not be in effect any law or regulation or any injunction or other order that (i) prohibits the consummation of the transactions contemplated hereby and (ii) has been adopted or issued, or has otherwise become effective, since the date of this Agreement.

7.2 Buyer’s Conditions to Closing . Buyer’s obligation to purchase the Assets and take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):

(a) All of Seller’s representations and warranties in this Agreement (considered collectively), and each of these representations and warranties (considered individually), shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the of the Closing as if then made.

(b) All of the covenants and obligations that Seller is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), shall have been performed and complied with in all material respects.

(c) Every action which Seller needs to take in order to consummate the transactions contemplated by this Agreement shall have been taken or completed (including the lapse of any notice, grace or cure period) and shall be in full force and effect, including, but not limited to, declaring a default under its Loan Documents, taking possession of the Assets, notifying all parties entitled to notice under the UCC regarding this Agreement or any of the transactions contemplated by this Agreement, and, if necessary, obtaining from the Company or any guarantor a waiver of any right of redemption under UCC § 9623 or otherwise. Copies of all notices, demands and all other authenticated records, documents or instruments relating to the foregoing shall have been delivered by Seller to Buyer prior to Closing.

(d) Seller shall have delivered to Buyer a certificate of an officer or Seller dated the Closing Date certifying that all conditions set forth in Section 7.1 have been satisfied or waived.

ARTICLE VIII - TERMINATION

8.1 By written notice given prior to or at the Closing, this Agreement may be terminated as follows:

(a) by mutual consent of Buyer and Seller;

(b) by Buyer if a material breach of any provision of this Agreement has been committed by Seller and such breach has not been waived by Buyer. If Buyer validly terminates this Agreement pursuant to this Section 8.1(b), Seller shall return the $105,000 in deposits paid pursuant to Section 1.3 of this Agreement unless the Buyer is in material breach of this Agreement;

(c) by Seller if a material breach of any provision of this Agreement has been committed by Buyer and such breach has not been waived by Seller; OR

(d) by either party if the Closing has not occurred on or before February 10, 2006 or such later date as the parties may agree upon, unless the terminating party is in material breach of this Agreement.

8.2 Each party’s right of termination under Section 8.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 8.1, all obligations of the parties under this Agreement will terminate, except that the obligations of the parties in this Section 8.2 will survive, provided, however, that, if this Agreement is terminated because of a breach of this Agreement by the nonterminating party or because one or more conditions to the terminating party’s obligations under this Agreement is not satisfied as a result of the party’s failure to comply with its obligations under this Agreement, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

ARTICLE IX - ADDITIONAL COVENANTS

9.1 The parties shall cooperate reasonably with each other in connection with any steps required to be taken as part of their respective obligations under this Agreement, and shall execute and deliver to each other such other documents and do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement.

ARTICLE X - MISCELLANEOUS

10.1 Neither party may assign any of its rights or delegate any of its duties or obligations under this Agreement without the prior written consent of the other party. Subject to the foregoing sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

10.2 All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment; or (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, in each case to the following addresses, facsimile numbers or e-mail addresses and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, e-mail address or person as a party may designate by notice to the other parties):

If to Buyer, to :

Thomas G. Granville, CEO

Axion Battery Products, Inc.

c/o William E. Kelleher, Jr., Esq.

Cohen & Grigsby, P.C.

11 Stanwix Street, 15 ^th Floor

Pittsburgh, PA 15222

with a copy (which shall not constitute notice), to:

Cohen & Grigsby, P.C.

11 Stanwix Street, 15 ^th Floor

Pittsburgh, PA 15222

Attention: William E. Kelleher, Jr., Esq.

If to Seller, to:

National City Bank of Pennsylvania

20 Stanwix Street

Pittsburgh, PA 15222

Attention: Edward Kitchen

with a copy (which shall not constitute notice), to:

Klett Rooney Lieber & Schorling

40th Floor, One Oxford Centre

Pittsburgh, PA 15219-6498

Attention: James D. Newell, Esq.

10.3 This Agreement, together with the Escrow Agreement, supersedes all prior agreements, whether oral or written, between the parties with respect to the subject matter hereof and constitutes (along with the other documents delivered pursuant to this Agreement) a complete and exclusive statement of the terms of the agreement between the parts with respect to the subject matter hereof. This Agreement may not be amended, supplemented or otherwise modified except by a written document executed by the party to be charged with the amendment.

10.4 Any proceeding arising out of or relating to this Agreement or any transaction contemplated hereunder may be brought in the courts of the Commonwealth of Pennsylvania, County of Allegheny, or if it has or can acquire jurisdiction, in the United States District Court for the Western District of Pennsylvania, and each of the parties irrevocably submits to the exclusive jurisdiction of each such court in any such proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the proceeding shall be heard or determined only in such court and agrees not to bring any proceeding arising out of or relating to this Agreement or any of the transactions contemplated hereunder in any other court.

10.5 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

10.6 The section and subsection headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties.

10.7 If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

10.8 This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania without regard to conflicts-of-laws principles that would require the application of any other law.

10.9 Nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto (except for any permitted successors or assigns).

SIGNATURES CONTAINED ON NEXT PAGE

SIGNATURE PAGE FOR ASSET PURCHASE AGREEMENT

IN WITNESS WHEREOF, this Asset Purchase Agreement has been executed by the duly authorized officer or manager of each of the parties as of the Effective Date.

BUYER:

AXION BATTERY PRODUCTS, INC.

By:

Name:

Title:

SELLER:

NATIONAL CITY BANK OF PENNSYLVANIA

By:

Name:

Title:

1041771_3

ESCROW AGREEMENT

This Escrow Agreement (the “Agreement”) is made and entered into as of the ___ day of February, 2006, by and among Axion Battery Products, Inc. ("Axion") and National City Bank of Pennsylvania ("Bank", and together with Axion, the "Parties") and William E. Kelleher, Jr. and James D. Newell (collectively, "Agents").

Background

A. The Bank, as Seller, and Axion, as Buyer, are parties to that certain Asset Purchase Agreement ("APA") of even date herewith, pursuant to which Seller has agreed to transfer to Buyer free and clear title to the Assets (as such term is defined, and as other capitalized terms used in this Agreement that are not otherwise defined herein are defined, in the APA) for the total Purchase Price of $800,000.

B. Certain of the Assets, specifically three (3) molds (the "Molds") in the possession of Richardson Moulding, Inc. ("Richardson"), are the subject of a pre-judgment attachment or other encumbrance asserted by Richardson (the "Richardson Claim") in connection with the action brought by Richardson against New Castle Battery Manufacturing Company that is pending in the Chancery Court of Neshoba County, Mississippi at Cause No. 2005-343 (the "Action").

C. Notwithstanding the Richardson Claim, Seller will convey to Buyer title to the Molds, but the Parties have agreed to escrow a portion of the Purchase Price pending resolution of the Richardson Claim, subject to and in accordance with the terms of this Agreement.

Provisions

The Parties, for good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, agree as follows:

1. Appointment of Escrow Agent. The Parties appoint Agents to act, jointly, as escrow agent ("Escrow Agent") under this Agreement and Agents agree to serve as Escrow Agent under this Agreement.

2. Escrowed Funds. “Escrowed Funds” shall mean and refer to the sum of $90,000 to be deposited by Axion with Escrow Agent, who shall maintain such funds in a joint (two signature) depository account ("Escrow Account") at a mutually acceptable bank (other than Bank) with offices in Pittsburgh until disbursed in accordance with this Agreement. To the extent required by any income tax, withholding or other applicable law, Axion will provide its Federal Employer Identification Number to Agents and the Escrowed Funds will be maintained or reported under such number; provided, however, that the ultimate liability or responsibility for any income or other taxes payable or reportable with respect to the Escrowed Funds or any interest earned thereon shall be determined by applicable law and not by this Agreement.

3. Operation of Escrow. The Escrow Agent is specifically and irrevocably authorized and directed by the Parties to maintain the Escrowed Funds in the Escrow Account to be disbursed consistent with the terms of this Agreement.

4. Disbursement of Funds. The Escrow Agent shall disburse the Escrow Funds (including any interest earned thereon, but less any maintenance, account fees or other charges imposed by the bank): (a) to Bank, upon receipt of a written certification from Bank, together with satisfactory written evidence from Richardson or the Court having jurisdiction over the Action that either (i) Richardson has voluntarily relinquished and irrevocably released the Richardson Claim as it relates to the Molds, or (ii) the Action has been resolved, in whole or in part, whether by stipulation, withdrawal, dismissal or judicial determination, in a manner that removes and releases, finally and without subject to any appeal, the Richardson Claim as it relates to the Molds, or (iii) Richardson has relinquished and irrevocably released any and all rights, claims and interests in the Molds that accrued prior to the date of this Agreement; (b) to Bank, upon written certification from Bank or Axion that actual possession of the Molds has been delivered to Axion at its facility in New Castle, Pennsylvania or to some other location designated by Axion; (c) to Bank, upon written certification from Axion that Richardson has agreed to produce products for Axion from the Molds on terms (including without limitation price, quantity, quality, shipping, and delivery time) deemed commercially reasonable and satisfactory to Axion and that at the expiration of such agreement with Richardson, the Molds will be returned to Axion; or (d) to Axion, if Escrow Agent has not received a written certification that one of the events in subsection (a) through (c) above has occurred prior to the expiration of the Escrow Period (as defined below). Disbursement of the Escrowed Funds in accordance with this Section 4 shall constitute full satisfaction of Axion's obligation to pay the balance of the Purchase Price under the APA.

5. Duration of Escrow. Unless extended by a written agreement signed by all parties hereto, under no circumstances shall the Escrow Agent maintain the Escrowed Funds for more than 180 days from the date of execution of this Agreement ("Escrow Period").

6. Escrow Agent's Duties. The duties of Escrow Agent under this Agreement are purely ministerial in nature and shall be expressly limited to the safekeeping of the Escrowed Funds and for disbursement of the Escrowed Funds in accordance with the terms of this Agreement. The Escrow Agent undertakes to perform only the duties expressly contained in this Agreement, and no implied duties or obligations not identified in this Agreement.

7. Liability of Escrow Agent. Escrow Agent shall have no liability or obligation with respect to the Escrowed Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole responsibility shall be for the safekeeping and disbursement of the Escrowed Funds in accordance with the terms of this Agreement. Escrow Agent may rely upon any writing or instrument, including any electronic communication, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and which conforms to the provisions of this Escrow Agreement.

8. Resignation. Escrow Agent may resign at any time upon the giving of not less than thirty (30) days' written notice to the Parties. In such an event, the Escrow Agent shall deliver the Escrowed Funds and any and all documents relating thereto to the successor Escrow Agent mutually appointed by the Parties, who shall upon receipt of the Escrowed Funds become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent. The retiring Escrow Agent shall be discharged from any duties and obligations under this Escrow Agreement, but shall not be discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession. After retiring Escrow Agent's resignation or removal, the provisions of this Escrow Agreement shall inure to the retiring Escrow Agent's benefit as to any actions taken or omitted to be taken by the retiring Escrow Agent while acting as Escrow Agent under this Escrow Agreement.

9. Miscellaneous Provisions.

9.1 Binding Effect. All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the signatories to this Agreement and their respective heirs, successors, legal representatives, and permitted assigns.

9.2 Severability. If any provision of this Agreement or the application of a provision to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of the invalid or unenforceable provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected, and the remainder of this Agreement shall otherwise remain in full force and effect. Moreover, the invalid or unenforceable provision shall be reformed, if possible, so as to accomplish most closely the intent of the Parties consistent with applicable law.

9.3 Waiver. Except as otherwise expressly provided in this Agreement, no waiver of any rights or obligations under this Agreement shall be deemed to have occurred unless the purported waiver is contained in a writing signed by the party against whom the waiver is asserted. Further, the failure or delay of any party at any time to require performance by another party of any provision of this Agreement shall not affect the right of that party at a later date to require performance of the provision or to exercise any right, power, or remedy provided for under this Agreement. The waiver by any party of any breach of any provision of this Agreement shall not be construed as continuing or as a bar to or waiver of any right or remedy as to any subsequent event. No notice to or demand on any party, in any case, shall of itself entitle that party to any other or further notice or demand in similar or other circumstances.

9.4 Third Parties. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies on any person or entity not a signatory to this Agreement (other than the parties' respective heirs, successors, legal representatives, and permitted assigns), nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third person or entity to any party to this Agreement.

9.5 Governing Law. This Agreement and all transactions contemplated by this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania.

9.6 Entire Agreement. This Agreement shall constitute the entire agreement of the Parties with respect to the transactions contemplated in this Agreement. All prior understandings and agreements between the Parties with respect to such matters are merged into this Agreement, which alone fully and completely expresses their understanding.

9.7 Amendments. This Agreement may not be amended, modified, altered, or changed in any respect, except by a further agreement in writing duly executed by each of the signatories to this Agreement.

9.8 Counterparts. This Agreement may be executed in counterparts or in multiple originals, and separate signature pages may be attached to this Agreement containing the original signatures of one or more of the signatories to this Agreement. In any of the foregoing events, each counterpart or original shall be deemed an original of this Agreement but all such counterparts or originals together shall comprise one and the same agreement which shall be binding on all of the parties to this Agreement, notwithstanding that all of the parties are not signatories to the original or the same counterpart of this Agreement. For purposes of this Agreement, facsimile signatures are considered original signatures.

9.9 Assignability. This Agreement is personal to the Parties to this Agreement. This Agreement may not be assigned without the prior written consent of the Parties and Escrow Agent.

9.10 Notices. Any notice, demand, request, election, certification or other communication (any “Communication”) required or permitted to be given or made to or by any party to this Agreement or otherwise under this Agreement shall be in writing. Any Communication so required or permitted and any other Communication shall be deemed to have been delivered and received on the earlier of the day actually received (by whatever means sent) if received on a business day (or, if not received on a business day, on the first business day after the day of receipt) or, regardless of whether or not received after the dates hereinafter specified, (i) on the date of transmittal by telecopier if transmitted by telecopier prior to 5:00 p.m. on a day which is a business day; if transmitted by telecopier after 5:00 p.m. or on a day other than a business day, the Communication shall be deemed to have been delivered and received on the next business day, (ii) on the date of delivery or refusal of delivery, if by hand delivery, (iii) on the first business day after having been delivered to a nationally recognized overnight air courier service, such as Federal Express, (iv) on the second business day after having been deposited with the United States Postal Service, Express Mail, return receipt requested, in each case addressed to the respective party at the several addresses indicated below or to any other addresses that may hereafter be indicated by notice delivered in accordance with the terms of this Section to the other party:

If to Bank: With a copy to:

National City Bank of Pennsylvania Klett Rooney Lieber & Schorling

20 Stanwix Street 40 ^th Floor, One Oxford Centre

Pittsburgh, PA 15222 Pittsburgh, PA 15219-6498

Attention: Edward Kitchen Attention: James D. Newell

If to Axion: With a copy to:

Thomas G. Granville, CEO William E. Kelleher, Jr., Esq.

Axion Battery Products, Inc. Cohen & Grigsby, P.C.

c/o William E. Kelleher, Jr., Esq. 11 Stanwix Street, Fifteenth Floor

Cohen & Grigsby, P.C. Pittsburgh, PA 15222

11 Stanwix Street, 15 ^th Floor

Pittsburgh, PA 15222

If to Escrow Agent:

William E. Kelleher, Jr. Esq.

Cohen & Grigsby, P.C.

11 Stanwix Street, 15 ^th Floor

Pittsburgh, PA 15222

AND

James D. Newell

Klett Rooney Lieber & Schorling

40 ^th Floor, One Oxford Centre

Pittsburgh, PA 15219-6498

The respective attorneys for the Parties are authorized to give any Communication pursuant to this Agreement on behalf of their respective clients. Any Communication so given by an attorney shall be deemed to have been given by that attorney's client. If the addressee refuses delivery of the notice or if the notice is returned to the addressor unopened by the addressee, effective notice shall still be deemed to have been given. For purposes of this Agreement, the term “business day” shall mean any day other than a Saturday, Sunday, or legal holiday.

9.11. Advice of Counsel. Each of the Parties has reviewed this Agreement and all of its terms with legal counsel, or has had an opportunity to review this Agreement with legal counsel, and is not relying on any representations made to him by any other person concerning the effect of this Agreement. This Agreement shall be interpreted without regard to any presumption or rule requiring construction against the party causing this Agreement to be drafted.

9.12 Jurisdiction and Venue. The Parties irrevocably agree and consent that any legal action or proceeding arising out of or in any way connected with this Agreement shall be instituted or brought exclusively in the State or Federal Courts of the Commonwealth of Pennsylvania, and irrevocably submit to the jurisdiction of those Courts in any such legal action or proceeding. In addition, the Parties irrevocably and unconditionally waive any objection which they may now or hereafter have to the laying of venue of any of these actions or proceedings in any such Court and. further irrevocably and unconditionally waive the right to plead or claim that any such action or proceeding brought in any such Court has been brought in an inconvenient forum.

9.13 Use of Singular. Unless the context clearly requires otherwise, the use of the singular shall include the plural, and vice versa. Without limiting the generality of the foregoing, the term "Escrow Agent" as used in this Agreement shall mean and refer to each Escrow Agent individually and to both Escrow Agents collectively.

IN WITNESS WHEREOF, this Agreement has been duly executed on behalf of the Parties and shall be effective as of the date first set forth above.

NATIONAL CITY BANK OF PENNSYLVANIA

By:

Name:

Title:

AXION BATTERY PRODUCTS, INC.

By:

Name:

Title:

ESCROW AGENT

____________________________________

William E. Kelleher

____________________________________

James D. Newell

1047781_2

Axion Completes Acquisition of Lead Acid Battery Manufacturing Equipment and Finalizes Facility Lease

Company Begins First Phase in Commercialization Plan

February 15, 2006 - WOODBRIDGE, ONTARIO - Axion Power International, Inc. (OTCBB: AXPW) announced today that its wholly owned subsidiary, Axion Battery Products, Inc., has purchased battery fabrication equipment, parts inventories and trademarks from National City Bank of Pennsylvania in a UCC sale.

The purchased assets include three battery fabrication lines with a combined capacity of 750,000 batteries per year; an inventory of tools, battery parts, components and , supplies; and the “TurboStart” racing battery trademark.

Concurrently, Axion announced the execution of a lease on the 63,000 square foot manufacturing plant where the equipment is installed. The lease provides for a two-year initial term at a monthly rental of $10,000 and two five-year renewal options at commercially reasonable rates.

Thomas Granville, Axion’s CEO, said “The acquisition of the fabrication equipment and inventories, combined with the lease on the manufacturing plant, moves Axion into commercialization much faster than we envisioned when our insiders, friends and families decided to fund the e ³ Supercell technology through the R&D phase. In addition to reducing our planned capital outlays by as much as $5 million, today’s acquisition accelerates our commercialization schedule by 9 to 12 months while providing a very near term revenue stream that should cover the costs of operating our new facility. While today’s acquisition is only the beginning of our efforts to bring our e ³ Supercell technology to market, we could not have imagined a better start.”

Axion plans to begin production of TurboStart racing batteries and specialty batteries for vintage automobiles within 30 days and realize its first revenue in the current quarter. In the second quarter, Axion expects to begin production of commercial prototype e ³ Supercell batteries for demonstration projects. The first of several demonstration projects with alternative energy producers is scheduled for the summer of 2006.

Acquisition financing for the equipment purchase was provided by a loan arrangement with one of Axion’s directors.

Axion Power International, Inc., has developed and is preparing to introduce a new generation of rechargeable batteries that are part lead-acid battery and part super capacitor. Axion calls these batteries “e ³ Supercells.” Where conventional lead-acid batteries use lead-based electrodes for both the positive and negative poles, e ³ Supercells use lead-based electrodes for the positive pole and negative electrodes from advanced carbon super capacitors for the negative pole. e ³ Supercell batteries use 70% less lead and offer longer cycle life; higher power; faster recharge rates; and no maintenance. In addition, e ³ Supercell batteries are less likely to fail prematurely or be damaged by overcharging or other improper use. Axion believes its e ³ Supercell technology represents the first major advance in lead-acid battery technology in 30 years. Axion is implementing a platform technology business model, where it will manufacture electrode assemblies for sale to established battery manufacturers that want to offer a high-performance co-branded product.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995:

Certain statements in this Press Release are "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. These statements include, without limitation, statements concerning Axion’s future business prospects and its ability to successfully complete the commercialization of the e ³ Supercell technology. These forward-looking statements are based on current expectations and beliefs and are subject to a number of risk factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such risks and uncertainties include all of the risks inherent in commercializing a new product (including technology risks, market risks, financial risks and implementation risks, as well as other risks and uncertainties described in Axion’s periodic filings with the Securities and Exchange Commission, all of which are available at www.sec.gov. Axion disclaims any intention or obligation to revise any forward-looking statements, including, without limitation, financial estimates, whether as a result of new information, future events, or otherwise.

For further information, please visit www.axionpower.com or contact:

Katya Sergejeva, Corporate Communications

Axion Power International, Inc.

Telephone: 905-264-1991

katyas@axionpower.com