Axion Power International 424B3 Prospectus supplement

Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-193700

PROSPECTUS

30,000,000 Shares of Common Stock

This prospectus relates to the offer and sale of up 30,000,000 shares of common stock of Axion Power International, Inc., a Delaware corporation, issued to certain selling stockholders, which are signatories on the below listed securities purchase agreement dated May 7, 2013, between the selling stockholders and the Company, upon the conversion of Senior Convertible Notes due February 8, 2015 (“Senior Convertible Notes”) and exercise of warrants issued thereunder, and that may be offered and sold from time to time by the selling stockholders.

This prospectus covers any additional shares of common stock that may become issuable upon any anti-dilution adjustment pursuant to the terms of the Senior Convertible Notes due February 8, 2015 and accompanying warrants and also by reason of stock splits, stock dividends, and other events described therein. The Senior Convertible Notes due on February 8, 2015 were acquired by the selling stockholders in a private placement with us that closed on May 8, 2013.

Under the registration rights agreement entered into by the Company and the selling shareholders in connection with the issuance of the Senior Convertible Notes due February 8, 2015, and the warrants issued in conjunction therewith (“Senior Warrants”), the Company is required to register for resale 125% of the number of shares of the Company’s common stock issuable pursuant to the Senior Convertible Notes and 100% of the number of shares of the Company’s common stock issuable pursuant to the Senior Warrants, both as of the trading day immediately preceding the applicable date of determination (which was May 8, 2013). The Company originally registered 61,327,781 shares of its common stock pursuant to a Registration Statement on Form S-1 (file no. 333-188802) which was filed with the SEC on May 23, 2013, and became effective on June 4, 2013, to cover 125% of the number of shares of the Company’s common stock issuable pursuant to the Senior Convertible Notes and 100% of the number of shares of the Company’s common stock issuable pursuant to the Senior Warrants; however, due to the decrease of the market price for the Company’s common stock since May 2013, it was necessary to register an additional 65,330,714 shares to continue to meet its obligations as set forth which were registered pursuant to a Registration Statement on Form S-1 (file no. 333-191774), which was filed with the SEC on October 17, 2013 and declared effective on November 1, 2013. However, again due to the decrease in market price of the Company’s Common Stock and the decrease from 85% to 80% of the VWAP of the common stock to calculate the Company’s conversion price for its Senior Convertible Notes in December 2013, it is necessary to register an additional 30,000,000 shares for potential issuance to continue to meet its obligations as set forth. This amount represents a good faith estimate of the additional maximum number of shares issuable pursuant to the Senior Convertible Notes.

Unless otherwise noted, the terms “the Company,” “our Company,” “Axion,” “we,” “us” and “our” refer to Axion Power International, Inc. and its subsidiaries.

The selling stockholders may offer their shares from time to time directly or through one or more underwriters, broker-dealers or agents, in the over-the-counter market at market prices prevailing at the time of sale, in one or more privately negotiated transactions at prices acceptable to the selling stockholders, or otherwise, so long as our common stock is trading on the OTCQB, and if it is not trading on the OTCQB, OTCBB or a listed exchange, sales may only take place at fixed prices.

We are registering these shares of our common stock for resale by the selling stockholders named in this prospectus, or their transferees, pledgees, donees or assigns or other successors-in-interest that receive any of the shares as a gift, distribution, or other non-sale related transfer. We will not receive any proceeds from the sale of shares by the selling stockholders. These shares are being registered to permit the selling stockholders to sell shares from time to time, in amounts, at prices and on terms determined at the time of offering. The selling stockholders may sell this common stock through ordinary brokerage transactions, directly to market makers of our shares or through any other means described in the section entitled “PLAN OF DISTRIBUTION” beginning of page 44. In connection with any sales of the common stock offered hereunder, the selling stockholders, any underwriters, agents, brokers or dealers participating in such sales may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).

We will pay the expenses related to the registration of the shares covered by this prospectus. The selling stockholders will pay any commissions and selling expenses they may incur.

Our common stock trades on the OTCQB under the symbol “AXPW”. The closing sale price on the OTCQB on January 31, 2014, was $0.0999 per share.

Our principal executive offices are located at 3601 Clover Lane, New Castle PA 16105. Our telephone number at that address is (724) 654-9300.

Investing in the common stock offered by this prospectus is speculative and involves a high degree of risk. See “Risk Factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is February 28, 2014

TABLE OF CONTENTS

PROSPECTUS SUMMARY	2
RISK FACTORS	6
USE OF PROCEEDS	11
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
AXION POWER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 AND QUARTER ENDED SEPTEMBER 30, 2013	42
BUSINESS	51
LEGAL PROCEEDINGS	62
MANAGEMENT	63
EXECUTIVE COMPENSATION	66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	72
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS	72
DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES	73
THE SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION	81
DESCRIPTION OF SECURITIES	85
LEGAL MATTERS	87
EXPERTS	87
WHERE YOU CAN FIND MORE INFORMATION	88

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission using the Securities and Exchange Commission’s registration rules for a delayed or continuous offering and sale of securities. Under the registration rules, using this prospectus and, if required, one or more prospectus supplements, the selling stockholders named herein may distribute the shares of common stock covered by this prospectus. This prospectus also covers any shares of common stock that may become issuable as a result of stock splits, stock dividends or similar transactions.

A prospectus supplement may add, update or change information contained in this prospectus. We recommend that you read carefully this entire prospectus, especially the section entitled “Risk Factors” beginning on page 8, and any supplements before making a decision to invest in our common stock.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from the information contained in this prospectus. The common stock is not being offered in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or when any sale of our securities occurs.

Cautionary Note Regarding Forward-Looking Information

This prospectus, in particular the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing herein, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the electrical storage device industry, all of which are subject to various risks and uncertainties.

When used in this prospectus as well as in reports, statements, and information we have filed with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this prospectus that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

PROSPECTUS SUMMARY

This summary highlights important information about this offering and our business. It does not include all information you should consider before investing in our common stock. Please review this prospectus in its entirety, including the risk factors and our financial statements and the related notes, before you decide to invest.

Our Company

Axion Power Corporation, our wholly owned subsidiary, was formed in September of 2003 to acquire and develop certain innovative battery technology. Since inception through the 2012 fiscal year, Axion Power Corporation was engaged in research and development (“R&D”) of new technology for the production of our PbC batteries. On December 31, 2003, Axion Power Corporation engaged in a reverse acquisition with Tamboril Cigar Company (“Tamboril”), a public shell company whereby Axion Power Corporation became a wholly owned subsidiary of Tamboril. Tamboril was originally incorporated in Delaware in January 1997 and operated a wholesale cigar business until December 1998, after which date it was an inactive public shell until the reverse acquisition and subsequent name change to Axion Power International, Inc.

In February 2006, we acquired use of our Clover Lane facility. We have utilized this space to manufacture our specialty lead-acid battery products and to produce and test prototypes which incorporate our new technology. Our Clover Lane plant provides us the opportunity to manufacture batteries for sale under the Axion brand name; to manufacture for third parties under a specific contract arrangement; or to manufacture prototypes for our own use and testing, or for testing by our customers. Our facility has been fully tested and was found to be in compliance with emission standards established by new federal guidelines in accordance with the Clean Air Act–Title III.

Our Business

Until 2012, we were a development stage company. Since inception we have been engaged in research and development of new technology to manufacture carbon electrode assemblies for our lead-acid-carbon energy storage devices that we refer to as our PbC devices. Our PbC energy storage device is a hybrid battery supercapacitor that combines the simplicity of lead-acid batteries with the faster recharge rate, longer cycle life and greater charge acceptance of supercapacitors. The result is a relatively low cost device that has versatility of design that will allow differing iterations to deliver maximum power; maximum energy; or a range of balances between the two. We believe that a successful transition from a development stage company to a PbC commercial manufacturing company was achieved in 2012 and it will provide us the growth opportunities to commercialize our PbC technology and thereby improve our financial condition, cash flow and market profile.

Our PbC technology is protected by thirteen issued U.S. patents and other proprietary features and structures and we typically have a number of additional patent applications in process at any point in time. The resulting devices are technically sophisticated and yet simple in design. The carbon negative electrode assemblies are fabricated from readily available raw materials using, for the most part, standard industrial processes and techniques. The PbC negative electrodes that are then assembled into PbC batteries can employ the same cases, covers, positive electrodes, separators and electrolyte that are used in conventional lead-acid batteries. Our PbC batteries can be assembled with the same equipment and methodology used throughout the world for manufacturing conventional lead-acid batteries. PbC batteries use significantly less lead than standard lead-acid batteries with a comparable footprint, and the lead, plastics and acid employed, just like lead-acid batteries, can be routinely and profitably recycled at existing recycling facilities around the world. As is the case with the lead-acid battery, we expect that in the United States our PbC battery will be fully recycled 99.1% of the time (United States Environmental Protection Agency, Solid Waste and Energy Response [5306P]).

Recent Developments

May 2013 Private Placement of Senior Convertible Notes and Warrants. On May 7, 2013, the Company entered into definitive agreements relating to a private placement (the “Private Placement”) of $9.0 million in principal amount of Senior Convertible Notes due February 8, 2015 (the “Senior Convertible Notes”) and Warrants to the purchasers of the Senior Convertible Notes giving them the right to purchase up to an aggregate of 17,281,107 shares of our common stock at an exercise price of $0.302 per share (the “Senior Warrants”) (subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus). The Senior Convertible Notes are convertible at any time at the option of the holder into shares of the Company’s common stock at $0.264 per share (subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus.). The closing of the Private Placement occurred on May 8, 2013. The Senior Convertible Notes and the Senior Warrants were issued pursuant to a Securities Purchase Agreement, dated May 7, 2013, among the Company and the purchasers of the Senior Convertible Notes (the “Senior Securities Purchase Agreement”). In addition, in connection with the Private Placement, the Company entered into a Registration Rights Agreement under which it agreed to file a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) covering the resale of the shares of the Company’s common stock issuable pursuant to the Senior Convertible Notes and Senior Warrants. The purchasers of the Senior Convertible Notes and the Senior Warrants in the Private Placement are the selling stockholders described in this prospectus. See “DESCRPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus.

May 2013 Private Placement of Subordinated Convertible Notes and Warrants. On May 7, 2013, the Company entered into definitive agreements relating to a private placement (the “Junior Private Placement”) of $1.0 million in principal amount of Subordinated Convertible Notes due May 9, 2015 (the “Subordinated Convertible Notes”) and Warrants to the purchasers of the Subordinated Convertible Notes giving them the right to purchase up to an aggregate of 1,920,123 shares of our common stock at an exercise price of $0.302 per share (the “Junior Warrants”) (subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 38 of this prospectus). The Subordinated Convertible Notes are convertible at any time at the option of the holder into shares of the Company’s common stock at $0.264 per share (subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus.). The closing of the Junior Private Placement occurred on May 8, 2013. The Subordinated Convertible Notes and the Junior Warrants were issued pursuant to a Securities Purchase Agreement, dated May 7, 2013, among the Company and the purchasers of the Subordinated Convertible Notes (the “Subordinated Securities Purchase Agreement”).

Resignation of our Chief Financial Officer and Annual Meeting

Effective as of August 2, 2013, our Chief Financial Officer, Charles Trego, resigned. On September 26, 2013, we held our 2013 Annual Meeting, at which our shareholders approved an increase in our authorized shares of Common Stock from 200,000,000 to 350,000,000, and approved reelection of Tom Granville, our Chief Executive Officer, as a Director, and elected Charles Trego as a director. Subsequent to his election, the Board of Directors of the Company appointed Mr. Trego to its Audit Committee and its Compensation Committee.

Appointment of new Chief Financial Officer

On October 9, 2013, we appointed Stephen Graham as our new Chief Financial Officer, effective as of October 21, 2013.

Amendment of Terms of the Senior Convertible Notes

On January 2, 2014, the Company entered into amendments to the Senior Convertible Notes by which (i) the minimum VWAP price of $.10 necessary to effect a conversion of an Installment into Company common stock was reduced to $0.09, (ii) the Company Conversion Price commencing with the pre-installment for the period ending February 3, 2014 was reduced from 85% to 80% of the VWAP formula specified in Section 8 of the Senior Convertible Notes, and (iii) commencing the same period, the pre-installment amount was reduced from $250,000 per lender to $125,000 per lender (unless the Company opts to request an increase to $250,000).

The Offering

Common stock offered by the selling stockholders:		Up to 30,000,000 shares of our common stock, par value $0.0001 per share, are being offered by the selling stockholders. These shares are issuable upon the conversion of our Senior Convertible Notes due on February 8, 2015 (the “Senior Convertible Notes”) at an initial conversion price of $0.264 per share and Warrants (the “Senior Warrants”) at an exercise price of $0.302 (both subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus), which Senior Convertible Notes and Senior Warrants were issued by us to various selling stockholders in a private placement on May 8, 2013.

Offering prices:		The shares offered by this prospectus may be offered and sold at prevailing market prices or such other prices as the selling stockholders may determine.

Common stock outstanding:		196,584,591shares as of January 28, 2014.

Dividend policy:		Dividends on our common stock may be declared and paid when and as determined by our board of directors. We have not paid and do not expect to pay dividends on our common stock.

OTCQB:		AXPW

Use of proceeds:		We are not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the sale of the shares by the selling stockholders. All of the proceeds from the sale of common stock offered by this prospectus will go to the selling stockholders at the time they sell their shares.

Risk Factors

See “Risk Factors” beginning on page 8 for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Our Address

Our principal executive offices are located at 3601 Clover Lane, New Castle, Pennsylvania 16105, and our telephone number is (724) 654-9300.

We are registering the shares being offered under this prospectus pursuant to the registration rights agreement that we entered into with the selling stockholders described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus. We entered into the registration rights agreement in connection with a private placement (which closed on May 8, 2013) in which we offered and sold to the selling stockholders $9.0 million in principal amount of the Senior Convertible Notes (with a conversion price of $0.264 per share, subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus) together with common stock purchase warrants (“Senior Warrants”) to purchase up to 17,281,107 shares of our common stock at an exercise price of $0.302 per share (subject to adjustment as described below under “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES” beginning on p. 36 of this prospectus.)

The number of shares of common stock that will be outstanding immediately after this offering is based on the shares of our common stock outstanding as of January 28, 2014 and assumes full conversion of the Senior Convertible Notes identified above. There is no guarantee that the Senior Convertible Notes will be converted into common stock. The number of shares of common stock that will be outstanding immediately after this offering does not include:

17,281,107 shares of common stock issuable upon exercise of the Senior Warrants outstanding as of May 8, 2013, at a conversion price of $0.302 per share;

1,920,123 shares of common stock issuable upon exercise of the Junior Warrants outstanding as of May 8, 2013, at a conversion price of $0.302 per share;

3,787,879 shares of common stock issuable upon conversion of the Junior Convertible Notes outstanding as of May 8, 2013, at an exercise price of $0.264 per share;

45,661 shares of common stock issuable upon the exercise of warrants (other than the Senior Warrants and the Junior Warrants) outstanding as of September 30, 2013, at a weighted average exercise price of $2.00 per share;

3,468,725 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2013, at a weighted average exercise price of $1.69 per share; and

1,392,538 shares of common stock reserved for future grant or issuance as of December 31, 2013 under all of our 2004 Outside Directors Stock Option Plan, our 2004 Incentive Stock Plan and our 2010 Employees and Officers Stock Option Plan.

RISK FACTORS

Investing in our common stock is very speculative and involves a high degree of risk and uncertainty. You should carefully consider all of the information in this prospectus before making an investment decision. The following are among the risks we face related to our business, assets and operations. They are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also arise. Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of our common stock. You should not purchase our shares unless you can afford to lose your entire investment.

Risk Relating to our business

We are subject to stringent environmental regulation.

We use or generate certain hazardous substances in our research and manufacturing facilities. We do not carry environmental impairment insurance. We believe that all permits and licenses required for our current business activities are in place. Although we do not know of any material environmental, safety or health problems in our property or processes, there can be no assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operation, or financial condition.

Our products contain hazardous materials including lead.

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

As we sell our products, we may become the subject of product liability claims.

Due to the hazardous nature of many of the key materials used in the manufacturing of our batteries, the producers of such products may be exposed to a greater number of product liability claims, including possible environmental claims. We currently have product liability insurance up to $1,000,000 per occurrence and $5,000,000 in the aggregate to protect us against the risk that in the future a product liability claim or product recall could materially and adversely affect our business operations. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our product. We cannot assure you that as we continue distribution of our products that we will be able to obtain or maintain adequate coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Even if we maintain adequate insurance, any successful claim could materially and adversely affect our reputation and prospects, and divert management’s time and attention. If we are sued for any injury allegedly caused by our future products our liability could exceed our total assets and our ability to pay such liability.

We depend on key personnel, and our business may be severely disrupted if we lose the services of our key executives, employees, and consultants.

Our business is dependent upon the knowledge and experience of our key scientists, engineers, manufacturing staff and executive officers. Given the competitive nature of our industry, there is the risk that one or more of our key scientists or engineers will resign their positions, which could have a disruptive impact on our operations. If any of our key scientists, engineers or executive officers do not continue in their present positions, we may not be able to easily replace them and our business may be severely disrupted. If any of these individuals joins a competitor or forms a competing company, we could lose important know-how and experience and incur substantial expense to recruit and train suitable replacements. Our Compensation Committee remains committed to keeping our key team members in place as we move forward into greater commercialization of our PbC product. Currently, all of our key employees have employment contracts that include non-compete provisions.

We have limited manufacturing experience with respect to our PbC technology, which may translate into cost overruns in manufacturing our products.

We do not have extensive manufacturing experience with respect to production of our commercial PbC negative electrode prototypes in quantities required to achieve our operational goals, and there is no assurance that we will be able to retain a qualified manufacturing staff or effectively manage the manufacturing of our proposed products when we are ready to do so.

We began the commercial production of our energy storage devices in 2012. We may in the future experience cost overruns in manufacturing our PbC products, and we may not have sufficient capital in the future to successfully complete such tasks. In addition, we may not be able to manufacture our products because of industry conditions, general economic conditions, and/or competition from potential manufacturers and distributors. These inabilities could cause us to abandon our current business plan and may cause our operations to eventually fail.

We need to continue to improve the performance of our commercial PbC products before we commit to achieve large scale production.

We need to continue to improve various aspects of our PbC technology as we move forward with larger scale production of our commercial prototypes. There is no assurance that we will be able to resolve technical issues. Future developments may reveal additional technical issues that are not currently recognized as obstacles. If we cannot continue to improve the performance of our products in a timely manner, we may be forced to redesign or delay large scale production or possibly abandon our product development efforts altogether.

We do not have any long-term vendor contracts.

We currently purchase the raw materials for our carbon electrodes and a variety of other components from third parties. We then fabricate our carbon electrodes and build our products in-house. We do not have any long-term contracts with suppliers of raw materials and components, and our current suppliers may be unable to satisfy our future requirements on a timely basis. Moreover, the price of purchased raw materials and components could fluctuate significantly due to circumstances beyond our control. If our current suppliers are unable to satisfy our long-term requirements on a timely basis, we may be required to seek alternative sources for necessary materials and components or redesign our proposed products to accommodate available substitutes.

We will be a small player in an intensely competitive market and may be unable to compete.

The lead-acid battery industry is large, intensely competitive and resistant to technological change. Even if our product development efforts are successful, we will have to compete or enter into further strategic relationships with well-established companies that are much larger and have greater financial capital and other resources than we do. We may be unable to convince end users that products based on our PbC technology are superior to available alternatives. Moreover, if competitors introduce similar products, they may have a greater ability to withstand price competition and finance their marketing programs. There is no assurance that we will be able to compete effectively.

To the extent we enter into strategic relationships, we will be dependent upon our partners.

Some of our products are not intended for direct sale to end users and our business may require us to enter into strategic relationships with manufacturers of other power industry equipment that use batteries and other energy storage devices as important components of their finished products. The agreements governing any future strategic relationships may not provide us with control over the activities of any strategic relationship we negotiate and our future partners, if any, could retain the right to terminate the strategic relationship at their option. Our future partners will have significant discretion in determining the efforts and level of resources that they dedicate to our products and may be unwilling or unable to fulfill their obligations to us. In addition, our future partners may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that we intend to produce.

Risks relating to our intellectual property

We may rely on licenses for our PbC technology, which may affect our continued operations with respect thereto.

As we develop our PbC technology, we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results of our operations.

New technology may lead to our competitors developing superior products which would reduce demand for our products.

Research into the electrochemical applications for carbon nanotechnology and other storage technologies is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development of new battery technologies based on carbon nanotubes, nanostructured carbon materials and other non-carbon materials. These new technologies may, if successfully developed, offer significant performance or price advantages when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications will offer meaningful protection if a competitor develops a novel product based on a new technology.

If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability to remain in business.

Our ability to successfully commercialize our products will depend on our ability to protect those products and our technology with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex legal and factual issues.

We cannot assure you that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products.

From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.

If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, the costs of such litigation could be material to our results of operations, financial condition and liquidity and, if we are unsuccessful, the results of such litigation could materially adversely impact our entire business.

We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. We plan to aggressively defend our proprietary technology and any issued patents if funding is available to do so. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be time-consuming and expensive and, as with litigation generally, the outcome is inherently uncertain.

Although we have entered into invention assignment agreements with our employees and with certain advisors, if those employees or advisors develop inventions or processes independently which may relate to products or technology under development by us, disputes may also arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements.

We also rely on confidentiality agreements with our strategic partners, customers, suppliers, employees and consultants to protect our trade secrets and proprietary know-how. We may be required to commence litigation to enforce such agreements, and it is certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements.

Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.

Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party’s intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular technology.

Other parties may challenge certain of our foreign patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in other jurisdictions.

Risks relating to our recent financing

Our recently acquired indebtedness reduces our financial flexibility and could impede our ability to operate.

We consummated a private placement on May 8, 2013 in which we issued an aggregate $9 million principal amount of Senior Convertible Notes and $1 million principal amount of Junior Convertible Notes. The Senior Convertible Notes are payable in nine equal monthly installments with the first pre payment made in June, 2013. The Junior Convertible Notes are payable once 2/3 of the principal amount of the Senior Convertible Notes are repaid. Although the notes are payable through the issuance of shares of our common stock to the noteholders, our ability to issue stock, instead of paying cash, to satisfy our payment obligations under the notes, is limited and subject to various conditions (including trading volume and stock price conditions for our Senior Convertible Notes) that we may not be able to meet. If we cannot meet these conditions, we could be required to repay some or all of the amounts due under the notes in cash, and we may not have the funds available to make one or more of such payments when due. Even if we do have funds so available, the use of cash to make such payments could adversely affect our ability to fund operations due to the diversion of necessary cash flow to fund operations to utilization for note payments. Furthermore, the notes impose certain restrictive covenants on us which may impede our ability to operate our business or raise further funds in the capital markets. For example, there are restrictions on incurring additional indebtedness, with exceptions, while the notes are outstanding.

We are making, and intend to continue making, payments on our Senior Convertible Notes and Subordinated Convertible Notes in shares of our common stock, which could be highly dilutive to our shareholders.

As of the date of this prospectus, we do not believe that we will have the financial ability, nor would it be in the best interests of our shareholders, to make all payments on the notes in cash when due. Thus, we intend, as of the date hereof, to make such payments in shares of our common stock, to the greatest extent possible. Such payments shall be very dilutive to our shareholders.

Risks relating to our common stock

We have issued a large number of warrants and options, which if exercised would substantially increase the number of common shares outstanding.

On January 14, 2014, we had 196,584,591shares of common stock outstanding, and (a) we have warrants outstanding that, if fully exercised, would generate proceeds of $6,366,162 and cause us to issue up to an additional 20,826,436 shares of common stock, and (b) we have options outstanding to purchase common stock that, if fully exercised, would generate proceeds of $6,419,318 and result in the issuance of an additional 5,192,140 shares of common stock.

As disclosed in “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES”, we have also entered into a dilutive private placement transaction with respect to the May 8, 2013 issuance of $9.0 million principal amount of Senior Convertible Notes and $1.0 million principal amount of Subordinated Convertible Notes.

As a key component of our growth strategy we have provided and intend to continue offering compensation packages to our management and employees that emphasize equity-based compensation and would thus cause further dilution.

Historically, we have not paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never paid cash dividends on our common stock. We intend to retain our future earnings, if any, to fund operational and capital expenditure needs of our business, and we do not anticipate paying any cash dividends in the forseeable future. Furthermore, certain of the terms of the Senior Convertible Notes and Subordinated Convertible Notes preclude us from paying dividends, and future financing instruments may do the same. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our common stockholders in the forseeable future.

Our stock price may not stabilize at current levels.

Our common stock is quoted on the OTCQB. Since trading in our common stock began in January 2004, trading has been sporadic, trading volumes have been low and the market price has been volatile. The closing price reported as of January 31, 2014, the latest practicable date, was $ 0.0999 per share. Current quotations are not necessarily a reliable indicator of value and there is no assurance that the market price of our stock will stabilize at or near current levels.

Future sales of our common stock could depress our stock price.

Sales of a large number of shares of our common stock, or the availability of a large number for sale, could materially adversely affect the per share market price of our common tock and could impair our ability to raise funds in addition offering of our debt or equity securities. In the event that we propose to register shares of common stock under the Securities Act of 1933 for our own account, certain shareholders are entitled to receive notice of that registration to include their shares in the registration, subject to limitations described in the agreements granting these rights.

USE OF PROCEEDS

We are not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the sale of the shares by the selling stockholders. All of the proceeds from the sale of common stock offered by this prospectus will go to the selling stockholders at the time they offer and sell such shares. We will bear all costs associated with registering the shares of common stock offered by this prospectus.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market information

Our common stock trades on the Over the Counter Bulletin Board under the symbol “AXPW”. Trading in our common stock has historically been sporadic, trading volumes have been low, and the market price has been volatile.

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

Period	High		Low
First Quarter 2011	$	1.27	$	0.55
Second Quarter 2011	$	1.20	$	0.60
Third Quarter 2011	$	0.73	$	0.42
Fourth Quarter 2011	$	0.55	$	0.25
First Quarter 2012	$	0.64	$	0.28
Second Quarter 2012	$	0.47	$	0.30
Third Quarter 2012	$	0.36	$	0.25
Fourth Quarter 2012	$	0.34	$	0.20
First Quarter 2013	$	0.38	$	0.27
Second Quarter 2013	$	0.29	$	0.14
Third Quarter 2013	$	0.20	$	0.12
Fourth Quarter 2013	$	0.14	$	0.10

On January 31, 2014, the closing price for our common stock as reported on the OTCQB was $0.0999 per share.

Securities outstanding and holders of record

On January 28, 2014, there were 392 holders of record for our common stock and 196,584,591shares of our common stock outstanding.

Dividends

We have never paid dividends.

Information respecting equity compensation plans

Summary Equity Compensation Plan Information: The following table provides summary information on our equity compensation plans as of December 31, 2013:

Equity Compensation Plan category:	Number of shares Issuable on exercise of Outstanding options		Weighted average exercise price of outstanding options		Number of shares available for future issuance under equity compensation plans
Compensation plans approved by stockholders
2004 Incentive Stock Plan		1,222,847	$	1.03		747,588
						-
Compensation not approved by stockholders
Options held by officers, employees, and consultants		2,803,543	$	1.50		-
2010 Employees and Officers Stock Option Plan		1,165,750		2.22		644,950
Total equity awards		5,192,140	$	1.67

The Company has two stockholder approved equity compensation plans, and on September 28, 2010, the board of directors amended the 2004 Director’s Option Plan without stockholder approval. For certain positions, the Company enters into employment and other contracts that provide for equity compensation arrangements other than those contemplated by the stockholder approved plans.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This prospectus, in particular Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity working capital and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the electrical storage device industry, all of which are subject to various risks and uncertainties.

When used in this prospectus and other reports, statements, and information we have filed with the Securities and Exchange Commission (the “Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this prospectus that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

The following discussions should be read in conjunction with the consolidated financial statements and the related notes that are set forth in our financial statements elsewhere in this prospectus.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2012

Overview

Axion Power International, Inc. (the “Company”, Axion, “we”, “our”, or “us”) is a company whose primary purpose is to develop, design, manufacture and sell advanced energy storage devices and components that are based on our patented PbC Technology™. In addition we manufacture standard and specialty lead-acid batteries. Our new PbC® batteries and components, which are manufactured primarily through the use of activated carbon as an alternative to lead in the battery’s negative electrode, have application virtually all energy system storage functions. It is the Company’s long term goal to become a primary supply source of PbC negative electrodes to established battery manufacturers.

From 2003 through 2012, we have received $69.2 million in cash generated from financing activities of which $67.1 million was used to fund research and development activities, capital expenditures, infrastructure, operations, financing related fees, and working capital.

Key Performance Indicators, Material Trends and Uncertainties

We utilize appropriate non-financial measures to evaluate the performance of our R&D and engineering activities and projects with prospective customers. Our demonstration projects entail extended periods of time to assess our energy devices over multiple charge and discharge cycles. Further, the results of our demonstration projects do not lend themselves to simple measurement and presentation.

The three most significant financial metric for our business as we moved into our initial commercialization phase in 2012 are:

Revenue growth of our PbC technologies.

Extracting an acceptable and competitive level of operating profit from our revenue (as measured by EBITDA).

Ensuring we can access the growth capital required to fund our short and long-term business requirements.

We believe we will need to continue to characterize and perfect our products through working with prospective customers in a limited number of projects before moving into full commercial production. While the results of this work are moving toward that goal, we cannot provide assurances that the products will be successful in their present design or that further R&D will not be needed. The successful completion of present and future characterization and demonstration projects is critical to the development and acceptance of our technology.

We must continue to improve methodologies for manufacturing carbon electrode assemblies for our energy storage devices in commercial quantities. While we have assembled an engineering team that we believe can accomplish this goal, and are adding to it as we go forward, there is no assurance that we will be able to successfully commercialize our produce in large quantities.

Financing Activities

There were no financing activities during 2011. On February 3, 2012, the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million and net proceeds were approximately $8.6 million after the expenses of the offering and placement fees.

Award Activities: Grants and Contracts

The $298,605 solar energy program grant from the Pennsylvania Department of Community and Economic Development was completed during 2011. Final payment of $41,171 was received in May of 2012.

In May of 2012, we were awarded a $150,000 Phase I grant from the U.S. Department of Energy to fund a commercialization plan for the use of its PbC batteries in a “low-cost, high-efficiency” dual battery architecture for micro-hybrid vehicles. We completed a substantial amount of work on this program in 2012 and successfully completed review of that work and of our overall program. We plan on applying for Phase II early in the 2^nd quarter of 2013. We were advised that approximately ten percent of the Phase I grant applicants were accepted and received awards. It has been confirmed to us that Phase II grants, of approximately $1,000,000 each, will be made to approximately fifty percent of the applying applicants that have successfully completed Phase I. Phase II grants normally will not exceed 24 months and those successfully completing Phase II grants will be eligible to apply for Phase III grants which it is our understanding will have award sizes several times the size of the Phase II grants. In December of 2012, Axion invoiced and received payment for $74,878 from this grant.

Results of Operations

Our strategy for some time has been to utilize traditional production to train our work force, test our systems and incorporate quality improvements that we believe will ultimately benefit future PbC production. We continued that strategy in 2012.

Software improvements and mechanical tweaking continued to improve throughput on our automated robotic electrode production line in 2012. We are currently satisfied with the production from this line and we will utilize what we have learned in future electrode production lines. The line currently runs end to end and provides us more than enough capacity for our short term needs.

We continued work on our automated “continuous roll carbon sheeting” line in 2012 and made enormous improvements to the process both in terms of thru-put and quality control. We completed this line in the first quarter of 2013 and began producing carbon sheeting for our PbC batteries. This is a giant leap forward for us and the last step in automating our negative carbon electrode manufacturing. Completion of this line brings us quality control, meaningful production quantities (this line currently outpaces the full electrode production line while utilizing one shift) and significant labor cost reduction. A crew of two running this line can produce more carbon sheet product than could our previous crew of ten operating a manual process. In addition, utilizing this line has resulted in no loss of carbon sheet “energy capacity”. In fact it has resulted in a modest gain due in part to the more uniform disbursement of activated carbon in the sheet. The waste created by the process has also been reduced. The obvious result of commissioning this line is an improved product at a reduced cost.

Work continues with the hybrid vehicle manufacturers we have been working with for the past several years. Third party testing continues under protocol developed with our longest standing OEM partner. We have also been in discussions with a new top 5 vehicle manufacturer regarding partnering with them on advanced stage testing of a two battery system. As we have previously reported, the interest of several OEM’s has been fueled by our White Paper that highlights the importance of “charge acceptance” in battery products designed for the micro hybrid and stop start markets.

Our onsite PowerCube™ (“Cube”) project continues to respond to signals from the grid in conjunction with our partnership arrangement with Viridity and PJM. There is a high interest level in our Cube technology for several applications. In addition to dispatchable power, we will be proving out the Cube’s ability to provide power quality, back- up power, power smoothing, and load leveling. Our .5MW Cube is a building block size unit that can easily be scaled up or down.

We continue to evaluate the market for smaller Cubes for residential and community storage and larger Cubes for utilities, oil rigs and other larger applications such as solar and wind.

Other highlights for 2012 included:

In January, we were awarded a purchase order from Siltek, Inc. confirming their participation in a Zero Energy Building in the Washington D.C. Naval Yard. We completed and commissioned this project in August of 2012. Axion has provided an array of its PbC batteries, system electronics and battery management system that together will serve as an example of Axion’s “mini-cube” and, together with our onsite PowerCube, it has brought us numerous new requests for proposals, on and off shore, encompassing cube sizes from 50 kwh up to 4MWH.

In March 2011, we announced that we had received a series of orders for the production and immediate delivery of flooded lead-acid batteries. The batteries are purchaser branded, and do not carry an Axion Power identification label. Orders through the end of 2012 were 100% on time. We have been advised by the purchaser that their purchase of these products is expected to continue in 2013.

On April 26^th, Norfolk Southern (“NS”) issued us an order for the first $400,000 of a $475,000 total purchase order for PbC batteries for use in their initial all electric, battery powered “yard slug” locomotive. In October we received a purchase order for the remaining $75,000. In December we shipped the remainder of the batteries to NS to complete this purchase order. On a parallel path, development of an “over the road” hybrid locomotive continues. As part of our agreement with NS, Penn State University is performing duplicate string testing on our PbC batteries that so far have confirmed our claims of string “self equalization”. Simply stated, this means that one of the unique characteristics of our PbC batteries is its inherent ability to equalize battery (even cell) voltage during charging at any rate. This is particularly important when the PbC is used in large string configurations (such as the locomotive, or the PowerCube) where the string is only as strong as its weakest (lowest voltage) battery (i.e. thestring output is reduced by the lowest performing battery). The success of this testing will continue to allow us to expand the locomotive application to include other locomotive end users and locomotive integrators.

In May, we were awarded a $150,000 Phase I grant from the U.S. Department of Energy to fund a commercialization plan for the use of our PbC batteries in a “low-cost, high-efficiency” dual battery architecture for micro-hybrid vehicles. We have begun work on this nine month Phase I grant, the completion of which will enable us to apply for a Phase II grant. We were advised that approximately ten percent of the Phase I grant applicants were accepted and received awards. It has been confirmed to us that Phase II grants, of approximately $1,000,000 each, will be made to approximately fifty percent of the applying applicants who must first successfully complete their Phase I grant. Phase II grants will not exceed 24 months and those successfully completing Phase II grants will be eligible to apply for Phase III grants, which it is our understanding will have award sizes several times the size of the Phase II grants. As of December 31, 2012, we completed work and received payment for $74,878 (approximately 50% of the grant).

At our annual meeting in June, we announced that we had engaged with a marketing strategic partner, Rosewater Energy, LLC (“Rosewater”) to bring our residential energy “HUB” to market. We feel, once again, that the unique characteristics of our PbC battery (charge acceptance, fast recharge and battery string equalization) make our product ideally suited for this market. In August, we executed an exclusive Global Distribution Agreement (“Agreement”) with Rosewater. Rosewater has proven expertise in the distribution and marketing of electronic systems to the consumer retail markets in the United States and access to a network of installers for such electronic systems which we feel will be beneficial to the distribution of our “HUB”. This Agreement is for a three year term subject to the attainment of agreed upon annual sales objectives. Subsequent to the implementation of this agreement, Axion and Rosewater introduced the residential energy “HUB” at the CEDIA show in Indianapolis (September 2012). The reception of this product was very positive and the “HUB” won two awards at the show including one for ‘best new product’. We look forward to the full marketing of this product in 2013.

August also saw us revisit an initiative that we spent some time on two years earlier. At the urging of our potential customer, and with the full backing of our VP of sales (Vani Dantam), who has an extensive history of providing products to the trucking industry, we began discussions and testing aimed at using our PbC batteries for “boost up-hill performance” and overall voltage control for 18- wheel over the road heavy duty trucks. That process evolved into the October signing of an MOU with ePower that provides for the exclusive use of PbC batteries in all ePower conversions going forward. In December we outfitted a truck with 56 of our batteries and subsequent testing indicates a substantial increase in miles per gallon is possible when combining ePower’s proprietary engine system with Axion’s PbC batteries. The requirements for fast recharge, high rate of charge acceptance and string stability make the PbC the battery of choice in this application.

Also in August, relying further on Vani Dantam’s trucking experience and reputation, we began exploratory talks with an OEM leader in the heavy duty trucking industry. We resurrected an initiative aimed at providing a product that would be a well - suited solution to the issues that arose in the trucking industry because of “anti-idling” legislation. These discussions have further evolved into a stop/start two battery system initiative which has continued into 2013.

Overview

The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our Company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements, the accompanying consolidated financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

Our primary activity is the development, design, manufacture and marketing of advanced energy storage devices and components that are primarily based on our patented PbC Technology™. Net sales are derived from the sale of lead acid batteries for specialty collector and racing cars; sales of AGM batteries and flooded lead acid batteries; sales of PbC batteries and PbC energy storage components and devices and from sales of product and services related to advanced battery applications for our PbC® technology.

Product costs include raw materials, components, labor, and allocated manufacturing overhead to produce batteries and to provide components for PbC energy storage devices sold to customers. Current product costs represented in our current financial statements may not be indicative of the future costs to produce batteries and provide components for PbC energy storage devices. Product costs also include provisions for inventory valuation and obsolescence reserves.

Research & development includes expenses to design, develop, and test advanced batteries and carbon electrode assemblies for our energy storage products with prospective customers based on our patented lead carbon technology. Also included in R&D are the materials consumed in production of pilot products, manufacturing costs not assigned to product sales and costs attributable to service sales.

Selling, general and administrative expenses include business development, sales and marketing expenses and the general and administrative expenses associated with being a public company.

Summarized selected Statement of Operations data for the year's ended December 31, 2012 and 2011.

	2012			2011
Product sales	$	9,779,711		$	7,631,529
Service sales		-			459,645
Total sales		9,779,711			8,091,174
Product costs		9,044,441			6,799,302
Research & development expenses		4,883,033			5,060,036
Selling, general & administrative expenses		4,404,041			4,463,269
Loss before income tax	$	(8,553,281	)	$	(8,311,890	)

Reconciliation of net loss to EBITDA

	2012			2011
GAAP loss before income taxes	$	(8,553,281	)	$	(8,311,890	)
Plus: Interest		17,594			10,193
Depreciation		1,320,594			1,014,661
Share based compensation		445,966			453,770
Derivative revaluations (income)		(14,626	)		(238,618	)
Impairment of assets		-			308,882
EBITDA (1)	$	(6,783,583	)	$	(6,763,002	)

(1)

EBITDA, a non-GAAP financial measure, is defined as earnings before interest expense and interest income, taxes, depreciation, amortization, share based compensation, derivative revaluations, and impairment of assets. EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business.

Summary of Consolidated Operating Results for the Year Ended December 31, 2012 compared with the Year Ended December 31, 2011

Product Sales

Product salesfor the year ended December 31, 2012 were $9.8 million compared to $7.6 million for the same period in 2011. We have one customer that accounted for 80.7% of product sales in 2012 and one customer that accounted for 84% of product sales in 2011. The increase in net product sales in 2012 compared to 2011 is due to a series of orders for the production and immediate delivery of specialty flooded lead acid batteries with the purchaser financing the cost of inventory and providing the raw materials required for production.

Service Sales

There were no service sales for the year ended December 31, 2012 compared to $0.5 million for the same period in 2011. We have two customers that accounted for the service sales during 2011.

Total Sales

Total salesfor the year ended December 31, 2012 were $9.8 million compared to $8.1 million for the same period in 2011.

Product Cost

Product costs for the year ended December 31, 2012 were $9.0 million compared to $6.8 million for the same period in 2011. The increase in product costs resulted primarily from an increase in product sales.

Research & Development Expenses

Research and development expenses for the year ended December 31, 2012 were $4.9 million compared to $5.1 million for the same period in 2011.

Selling, General & Administrative Expenses

Selling, general & administrative expenses for the year ended December 31, 2012 were $4.4 million compared to $4.5 million for the same period in 2011.

Liquidity and Capital Resources

Our primary source of liquidity has historically been cash generated from issuances of our equity securities. From inception through December 31, 2012, we have generated revenue from operations that was not significant enough to produce an operating profit.

We believe that the currently available funds at December 31, 2012, which includes the net proceeds of $8.6 million from our February 2012 registered direct common stock offering and internally generated funds from products sales will provide sufficient financial resources for our operations, working capital and will fund our anticipated continued growth of sales in traditional batteries and PbC products and maintain our anticipated capital expenditures through April 30, 2013.

Subsequent sources of outside funding will be required to fund the Company’s working capital, capital expenditures and corporate operations beyond April 30, 2013. No assurances can be given that the Company will be successful in arranging the further funding needed to continue the execution of its business plan including the development and commercialization of new products, or if successful, on what terms. Failure to obtain such funding will require management to substantially curtail, if not cease operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

Management, with the advice and consent our Board of Directors, has taken actions to attempt to raise additional funds from sources that are in alignment with our business objectives and strategies, in order to continue operations beyond April 30, 2013.

Cash, Cash Equivalents, and Working Capital

At year end December 31, 2012 and 2011, we had $2.0 million of cash and cash equivalents. At December 31, 2012 working capital was $4.8 million compared to a working capital of $4.3 million at December 31, 2011. Cash equivalents consist of short-term liquid investments with original maturities of no more than six months and are readily convertible into cash.

Cash Flows from Operating Activities

In 2012, $7.7 million was used by operating activities. Of the net cash used in 2012, $6.8 million was used to fund the operations of the business while $.9 million was used to fund changes in operating assets and liabilities.

In 2011, $8.2 million was used to fund operating activities. Of the net cash used of $8.2 million in 2011, $6.7 million was used to fund the operations of the business while $1.5 million was used to fund changes in operating assets and liabilities

Cash Flows from Investing Activities

Net cash used by investing activities for year ended December 31, 2012 was $0.9 million compared to net cash used by investing activities of $3.0 million for the same period in 2011. Investing activities were for purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2012 was $8.5 million compared to net cash used by financing activities of $0.1 million for the same period in 2011.

Significant Financing Arrangements

On February 3, 2012, we completed a registered direct common stock offering at a per share price of $0.35 per share. This straight equity transaction, at a 10% discount to market based on trailing average, provided total gross proceeds of $9.4 million and net cash proceeds of $8.6 million to us after allowing for placement fees and expenses of the offering.

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

Critical Accounting Policies, Judgments and Estimates

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

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

Derivative Financial Instruments: The Company’s objective in using derivative financial instruments is to obtain the lowest cash cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 "Derivatives and Hedging – Contracts in Entity’s own Equity". The estimated fair value of derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as income or expense in the consolidated statement of operations.

Inventory:Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for changes in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and composition to determine appropriate reserve levels.

Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. Evidence of an agreement and fixed or determinable sales price is predominantly based on a customer purchase order or other form of written sales order or written agreement. Sales on account are approved only for credit-worthy customers; otherwise payment is generally received prior to shipment. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue is recognized when the product is delivered to the customer’s delivery site or the conditions for collection have been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. We offer a 90 day free replacement warranty on some specialty collector car and motorsports products. Collector car products also carry a four year prorated warranty that begins at the end of the 90 days. To date, our warranty exposure on these products has been minimal. Flooded battery sales do not have standard warranty provisions and instead are sold at a discount in lieu of warranty. There are no other post shipment obligations that may impact the timing of revenue recognition for the year ending December 31, 2012.

Grants:We recognize government grants when there is a reasonable assurance that we will comply with the conditions attached to the grant arrangement and the grant will be received. For reimbursements of expenses, the government grants are recognized as reduction of the related expense. For reimbursements of capital expenditures, the grants are recognized as a reduction of the basis of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as reduced depreciation expense.

Stock-Based Compensation: Stock-based compensation related to employee and non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50 “Equity-Based Payments to Non-Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Research and Development:R&D costs are recorded in accordance with FASB ASC topic 730,“Accounting for Research and Development Costs,”which requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. The policy of expensing the costs of R&D activities relate to (1) in-house work conducted by us, (2) costs incurred in connection with contracts that outsource R&D to third party developers and (3) costs incurred in connection with the acquisition of intellectual property that is properly classified as in-process R&D. R&D includes the conceptual formulation, design and testing of product alternatives, construction of prototypes, and operation of pilot plants.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Management Discussion and Analysis of Financial Condition and Results of Operations for the Period Ended September 30, 2013

Key Performance Indicators, Material Trends and Uncertainties

Our primary activity is the development, design, manufacture and marketing of advanced energy storage devices and components that are primarily based on our patented PbC battery technology.

We utilize appropriate non-financial measures to evaluate the performance of our development and engineering activities and projects with prospective customers. Our demonstration projects entail extended periods of time to assess our energy devices over multiple charge and discharge cycles. Further, the results of our demonstration projects do not lend themselves to simple measurement and presentation.

The most significant financial metrics for our business as we continue our initial commercialization phase in 2013 are:

	·	Revenue growth of products based upon our PbC technologies.
	·	Generating an acceptable and competitive level of operating profit from our revenue (as measured by EBITDA).
	·	Ensurance that we can access the growth capital required to fund our short and long-term business requirements.

We believe we will need to continue to characterize properties of our technologies and perfect our products through working with prospective customers in a limited number of projects as we move into full commercial production. While the results of this work are moving toward that goal, we cannot provide assurances that the products will be successful in their present design or that further R&D will not be needed. The successful completion of present and future characterization and demonstration projects is critical to the development and acceptance of our technology.

While we improved our methodologies for manufacturing carbon electrode assemblies for our energy storage devices in commercial quantities, there is no assurance that we will be able to successfully commercialize our produce in large quantities.

Grants and Contracts:

In May 2012, we were awarded a $150,000 Phase I grant from the U.S. Department of Energy to fund a commercialization plan for the use of its PbC batteries in a “low-cost, high-efficiency” dual battery architecture for micro-hybrid vehicles. We successfully completed the program, and as of April 20, 2013, we received all funds available under the grant.

Results of Operations

As we reported in our second quarter we shipped batteries to Norfolk Southern ("NS") for their first ‘all electric’ yard switcher locomotive at the end of 2012. Our work in this area is, and has been, complete for some time. NS continues to sort through sub-contractor issues as they complete the final steps in fully commissioning the ‘switcher’. Our participation with NS and Penn State, in a third party validation program, remains in place. The testing has provided, and continues to provide, valuable information for future builds of both the ‘all electric switcher’ and the ‘hybrid over the road’ locomotive. Subsequent to the end of the third quarter, Axion and NS discussed both of these applications in a joint presentation at the “7^th Annual ASME Rail Transportation Division Technical Conference” held on October 15^thto the 17^th. The slide presentation from that well attended conference is posted on our website and we feel the technical information in that presentation, underscores the value of the PbC battery in both the ‘electric’ and ‘hybrid’ locomotive technologies. We look forward to continuing our strategic relationship with NS.

Also as reported previously, our work in the hybrid locomotive area has drawn numerous inquiries and requests for information from other rail carriers. We have executed Nondisclosure Agreements and we have begun project specific discussions with potential end users of our product.

In our second quarter 10-Q filing, we stated that our onsite PowerCube™ continues to function daily in the PJM network, provides revenues and serves “as a real time field demonstration energy storage device that potential customers can examine. The last point is an important one as we move to a greater level of PowerCube commercialization going forward. We have proven the concept with our moderately sized onsite unit, and now we are responding to Request for Proposals and Request for Quotes that incorporate significantly larger amounts of storage. We are actively pursuing domestic and foreign applications for our PowerCube products.”

The pursuit of one of those applications has resulted in a $320,000 domestic use purchase order for a PowerCube that will provide energy storage for a solar array to a customer in North America. This purchase order includes 600 PbC® batteries, racking, battery management system and a data communications system. We have also received a 40% deposit. This initial order is further proof of concept that the Cube model ROI has traction in more than one renewable application.

In addition to developing strategic partners and a North American market for our Cubes, we have also been working with renewable developers and government agencies in areas of the world where electrical power is several times more expensive than it is in North America. We believe that the ROI for our Cube model in these areas is even more attractive than it is in North America.

In addition, our consortium of wind, solar, electronics integration and general contracting companies continues to pursue various off shore opportunities for various Cube size applications that include: vehicle charging stations; small residential and community storage; small commercial applications; and utility applications.

Other off shore activities that we have focused on include street light and traffic light initiatives for both ‘grid tied’ and ‘off grid’ applications. A significant portion of these ‘light’ installations are in remote, or difficult to access, locations. Long battery life and minimal maintenance over the life of the battery are both important criteria in this market. Our unique PbC battery chacteristics address these specification requirements, and our sales force has undertaken an initiative to service these off shore markets.

Our marketing research has indicated for some time that the domestic Tel-com market is a very large market for batteries. Many of these batteries sit ‘on float’ and are primarily used for backup power. This is not a particularly good market for our PbC batteries and so we did not focus on it in the past. However, through our new relationship with MultiLink - a large provider to the Tel-com market - we found that there is a ‘niche market’ within the overall market. This niche market has been created because of the numerous segments of the country, where Tel-com is subject to grid irregularities, grid overloads and grid power deficiencies – all of which create various forms of brownouts that sometimes last only a fraction of a second, but nonetheless require ‘bridge power’ battery intervention when the disruption occurs. In areas where this situation routinely occur, the market is no longer properly served by a “float application” battery, but rather the market is best served by a ‘high cycle life’ battery product. In these situations, when normal Tel-com batteries - or even high end Tel-com batteries - are utilized, the end user, or service provider, is subject to significantly higher battery replacement costs – as well as high maintenance costs. This is a PbC battery sweet spot – both from a cycle life and a low maintenance cost perspective. In the third quarter, we moved to “profile use” testing with MultiLink that included both modifying the charge characteristics and opening up the voltage range. Both modifications were designed to take better advantage of our PbC battery’s unique properties. The product has responded well in accelerated testing and have agreed that we have a potentially viable product solution for the just described ‘niche Tel-com market’. With an eye toward this market, last month we jointly exhibited our PbC product, with MultiLink, at the SCTE – Cable - Tec Expo held at the Atlanta Convention Center (believed to be The Tel-com industry's largest exhibition). MultiLink had a large display area and there was great interest in our PbC product in general, but especially in the PbC’s proposed usage with MultiLink’s new EB1 series CATV power modules.

As mentioned in our second quarter, we have been working with an additional partner with respect to the manufacture of a product for the hybrid passenger vehicle market. That work has continued in the third quarter. We have made modifications along the way and will continue to do so with the concurrence of our OEM strategic partner.

But our real focus in the vehicle market remains the truck applications and specifically the Class 8 market. This is the truck market segment in the United States that uses the most diesel fuel (~28 billion gallons annually), produces the most environmentally unfriendly emissions (~311 megatons of CO2 annually) and offers the greatest opportunity to introduce new technology (United States Environmental Protection Agency). Our work in this market has been primarily with ePower Engines and their proprietaryseries hybrid system. It is important to note that the series hybrid system is ‘engine-dominant’ (the engine and generator power the drive motor directly) rather than the historical ‘battery dominant’ systems (the batteries in the ePower system are used to balance the power required for operation – typically used for acceleration boost and hill climbing). That being said, the battery performs an important function in the series hybrid system – so important that according to ePower “the technology doesn’t work without a unique and safe battery chemistry”. ePower worked with different battery types but eventually came back to Axion because, (according to Jay Bowman CTO of ePower in 7/8/13 PR Newswire release) "Axion Power PbC batteries are ideally suited to our hybridization because of their ability not only to discharge quickly, but also to recharge quickly utilizing regenerative braking and the truck's own power generation system. Our testing has been going very well, and we fell the PbC battery's ability to endure thousands of cycles without the loss of charge acceptance, and its ability to continually self equalize the state of charge in string applications, are tremendous advantages that clearly distinguish these batteries from their competition. These advantages, and others that the PbC battery brings to the equation, allow our ePower conversion System to achieve a very attractive ROI.” The demonstrated diesel fuel savings of upwards of 35% when the AC Vector Drive is used in combination with our PbC batteries, contributes significantly to that attractive ROI. Currently we are providing new batteries and working with ePower as they move to retrofit a new Class 8 ‘Day Cab’ (non sleeper, less gross vehicle and load weight) that they will market along with the Class 8 Sleepers that have been on the road. The Day Cab is scheduled to be on the road before the end of 2013. It is estimated that the US Class 8 truck market totals ~2.4 million vehicles at any point in time and that these vehicles go through rebuilds every 4 to 6 years depending on vehicle use (United States Environmental Protection Agency). We exhibited our batteries and the ePower truck at the Indiana Green Fleet Conference in August. Conference participants chose the ePower ‘Ride and Drive’ option in greater numbers than all the other truck options combined (this according to Green Conference officals).

The potential US market for the diesel fuel saving hybrid truck is staggering and thus the potential for PbC battery sales is equally notable since each converted truck will house 56 of our PbC batteries.

Overview

The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our Company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements, the accompanying unaudited consolidated condensed financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

	·	Net sales are derived from the sale of lead acid batteries for specialty collector and racing cars; sales of AGM batteries and flooded lead acid batteries; sales of PbC batteries and PbC energy storage components and devices and from sales of product and services related to advanced battery applications for our PbC® technology.

	·	Cost of sales include raw materials, components, labor, and allocated manufacturing overhead to produce lead acid and PbC batteries and to provide components for PbC energy storage devices sold to customers. Cost of sales also include, where required, provisions for inventory valuation and obsolescence reserves.

	·	Operating expenses include costs to design, develop, and test advanced batteries and carbon electrode assemblies for our energy storage devices, materials consumed in production of pilot products, manufacturing costs not assigned to product sales, selling, business development and marketing expenses and general and administrative expenses.

	·	Non-operating items include expenses, gains and losses related primarily to the issuance on May 8, 2013 of private placement senior convertible notes and warrants as disclosed in Footnote 6 to the Consolidated Condensed Financial Statements.

Consolidated Condensed Statements of Operations

Summarized selected financial data for the three months ended September 30, 2013 and 2012:

	2013		2012		% Change
Net sales	$	2,185,699	$	2,178,077	0	%
Cost of sales		1,931,321		2,014,731	4	%
Gross profit		254,378		163,346	56	%

Operating expenses		2,362,188		2,313,827	(2)	%
Other (income) expense		3,836		(2,787)		*
Operating loss		(2,111,646)		(2,147,694)	2	%
Derivative revaluations		-		(17,176)	(100)	%
Interest expense		4,064		5,484	26	%
Change in value senior warrants, gain		(535,926)		-	100	%
Change in value, conversion feature senior note, gain		(112,750)		-	100	%
Debt discount on amortization expense		1,333,470		-	(100)	%
Extinguishment loss on senior notes conversion		1,087,822		-	(100)	%
Interest on convertible notes		793,521		-	(100)	%
Net income(loss)	$	(4,681,847)	$	(2,136,002)	(119)	%

Reconciliation of net loss to EBITDA

	2013		2012		% Change
GAAP net (loss)	$	(4,681,847)	$	(2,136,002)	(119)	%
Plus: Interest expense		4,064		5,484	26	%
Depreciation expense		381,185		347,446	10	%
Stock based compensation		35,275		113,792	69	%
Derivative revaluations		-		(17,176)	(100)	%
Change in value senior warrants, gain		(535,926)		-	100	%
Change in value, conversion feature senior notes, gain		(112,750)		-	100	%
Debt discount on amortization expense		1,333,470		-	(100)	%
Extinguishment loss on senior notes conversion		1,087,822		-	(100)	%
Interest on convertible debt		793,521		-	(100)	%
EBITDA (1)	$	(1,696,512)	$	(1,686,456)	0	%

* Indicates non-meaningful calculation

Summarized selected financial data for the nine months ended September 30, 2013 and 2012:

	2013		2012		% Change
Net sales	$	7,111,812	$	6,690,502	6	%
Cost of sales		6,212,531		6,014,886	(3)	%
Gross profit		899,281		675,616	33	%

Operating expenses		6,997,784		7,055,156	1	%
Other income		(321,159)		(1,421)		*
Operating loss		(5,777,344)		(6,378,119)	9	%
Derivative revaluations		(1,217)		(12,465)	(90)	%
Interest expense		15,551		13,313	(17)	%
Change in value senior warrants, gain		(2,091,226)		-	100	%
Change in value, conversion feature senior notes, gain		(1,504,597)		-	100	%
Debt discount on amortization expense		2,051,198		-	(100)	%
Extinguishment loss on senior notes conversion		1,283,322		-	(100)	%
Interest on convertible notes		1,132,700		-	(100)	%
Net (loss)	$	(6,663,075)	$	(6,378,967)	(4)	%

Reconciliation of net loss to EBITDA

	2013		2012		% Change
GAAP net (loss)	$	(6,663,075)	$	(6,378,967)	(4)	%
Plus: Interest expense		15,551		13,313	(17)	%
Depreciation expense		1,128,200		1,035,336	(9)	%
Stock based compensation expense		168,244		311,637	46	%
Derivative revaluations		(1,217)		(12,465)	(90)	%
Change in value senior warrants, gain		(2,091,226)		-	100	%
Change in value, conversion feature senior notes, gain		(1,504,597)		-	100	%
Debt discount on amortization expense		2,051,198		-	(100)	%
Extinguishment loss on senior notes conversion		1,283,322		-	(100)	%
Interest on convertible debt		1,132,700		-	(100)	%
EBITDA (1)	$	(4,480,900)	$	(5,031,146)	11	%

* Indicates non-meaningful calculation

(1)

EBITDA, a non-GAAP financial measure, is defined as earnings before interest expense and interest income, income taxes, depreciation, amortization, stock based compensation, derivative revaluations, change in value of senior warrants, change in value of conversion feature of senior warrants, extinguishment loss on senior notes conversion and impairment of assets. EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business.

Summary of Condensed Consolidated Operations for the three and nine months ended September 30, 2013 compared with the same periods in 2012

Net Sales

Net sales for the three months ended September 30, 2013 were $2.2 million compared to $2.2 million for the same period in 2012. Net sales for the nine months ended September 30, 2013 were $7.1 million compared to $6.7 million or the same period in 2012. We have one customer that accounted for approximately 83% and 87% of net sales, respectively, for the three and nine months ended September 30, 2013 as compared to 86% and 83% of net sales for the three and nine months ended September 30, 2012, respectively. The increase in year to date net sales is due primarily to a series of orders for unbranded flooded lead–acid batteries with the purchaser carrying the cost of inventory and providing the raw materials for production.

Cost of Sales

Costs of sales for the three months ended September 30, 2013 were $1.9 million compared to $2.0 million for the same period in 2012. Costs of sales for the nine months ended September 30, 2013 were $6.2 million compared to $6.0 million for the same period in 2012. The year to date increase in cost of sales was commensurate with the increase in year to date net sales.

Gross Profit

Gross profit for the three months ended September 30, 2013 was $0.3 million compared to $0.2 million for the same period in 2012. Gross profit margin was 11.6% in the three months ended September 30, 2013 compared to 7.5% for the same period in 2012. Gross profit for the nine month ended September 30, 2013 was $0.9 million compared to $0.7 million for the same period in 2012. Gross profit margin for the nine months ended September 30, 2013 was 12.6% compared to 10.0% for the same period in 2012.

Operating Expenses

Operating expenses for the three months ended September 30, 2013 were $2.4 million compared to $2.3 million for the same period in 2012. Operating expenses for the nine months ended September 30, 2013 were $7.1 million. Operating expenses for the nine months ended September 30, 2012 were $7.0 million.

Liquidity and Capital Resources

Our primary source of liquidity has historically been cash generated from issuances of our equity securities. From inception through September 30, 2013, we have generated revenue from operations that was not significant enough to produce an operating profit.

On May 8, 2013, we consummated the sale of our Senior Convertible Notes (“Convertible Notes”) and Warrants issued by the Company (“Warrants”) with gross proceeds of $9 million to us. At Closing, we received cash proceeds of $3 million and had deposited an additional $6 million into a series of control accounts in our name. We are permitted to withdraw funds from our control accounts (i) in connection with certain conversions of the Convertible Notes or (ii) otherwise, as follows: $500,000 on each 30 day anniversary of the Effective Date commencing on the 60^th day after the Effective Date until there are no more funds in the control accounts. The Convertible Notes bear interest at 8% per annum and are convertible into shares of our Common Stock at an initial per share conversion price of $0.264 subject to certain adjustments. The Warrants entitle the holders of the Warrants to purchase, in aggregate, 17,281,107 million shares of our common stock. The five year Warrants will be exercisable at an exercise price equal to $0.302, subject to certain adjustments.

We received approximately $2.76 million in net proceeds at the May 8, 2013 closing, after deducting our placement agent’s fee of $240,000. Our other offering expenses, other than our placement agent’s fee, are approximately $100,000, and were paid out of the proceeds at Closing. At each $500,000 funds release, we will receive approximately $460,000 thousand in net proceeds, after deducting our placement agent’s fee of $40,000. As of September 30, 2013, we have received one $500,000 funds release and an additional $75,000 due to accelerated note conversions by two investors.

Subsequent to September 30, 2013, an additional $1,137,500 has been received through November 8, 2013.

Simultaneously with the Closing of the $9 million financing transaction, the Company sold $1 million principal amount of Subordinated Convertible Notes to investors consisting of management and directors of the Company and one accredited individual investor. The sale of the Subordinated Convertible Notes will not carry any additional fees and expenses, so the entire $1 million investment is netted to the Company. The Subordinated Convertible Notes are subordinated in right of repayment to the Convertible Notes to the Company and mature 91 days subsequent to the Maturity Date of the Convertible Notes. The Subordinated Convertible Notes bear interest at the rate of 8% per annum which shall accrue. Once 2/3 of the Convertible Notes have been repaid, then the Subordinated Convertible Notes may be converted and/or prepaid in cash so long as there is no Event of Default with respect to the Convertible Notes and all Equity Conditions of the Convertible Notes are met. The conversion price for the Subordinated Convertible Notes is $0.264 per share. The holders of the Subordinated Convertible Notes will be issued five year warrants to purchase 1,920,123 shares of Company common stock. Each warrant has an exercise price of $0.302 per share.

We believe that the currently available funds at September 30, 2013, and including the net proceeds from our May 8, 2013 issue of $9 million in senior convertible notes and $1 million in subordinated convertible notes and internally generated funds from net sales will provide sufficient financial resources to fund our current operations, working capital, and capital expenditures into the beginning of the fourth quarter of 2014.

Subsequent sources of outside funding will be required to fund the Company’s working capital, capital expenditures and current operations beyond the third quarter of 2014. No assurances can be given that the Company will be successful in complying with certain of the terms and conditions Senior Convertible Notes or Subordinated Convertible Notes or in arranging further funding, if needed, needed to continue the execution of its business plan including the development and commercialization of new products, or if successful, on what terms. Failure to obtain such funding will require management to substantially curtail, if not cease operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

Cash, Cash Equivalents and Working Capital

Cash and cash equivalents at September 30, 2013 was $1.1 million compared to $2.0 million at December 31, 2012. Cash equivalents consist of short-term liquid investments with original maturities of no more than six months that are readily convertible into cash. Restricted cash at September 30, 2013 was $5.4 million compared to zero at December 31, 2012. (See Note 6 to the Condensed Consolidated Financial Statements)

Working capital at September 30, 2013 was $5.6 million compared to $4.8 million at December 31, 2012.

Cash Flows from Operating Activities

Net cash used in operations for the first nine months of 2013 was $4.8 million compared to $5.6 million for the same period in 2012. This represents a decrease in net cash used in operations of $0.8 million or 14%.

Cash Flows from Investing Activities

Net cash used by investing activities for of the first nine months of 2013 was $0.1 million compared to $0.7 million for the same period in 2012. This represents a decrease in cash used by investing activities of $0.6 million or 81% primarily due to lower capital expenditures.

Cash Flows from Financing Activities

Net cash provided by financing activities for the first nine months of 2013 was $4.0 million compared to net cash provided of $8.6 million in 2012.

Critical Accounting Policies, Judgments and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in “Critical Accounting Policies, Judgments and Estimates” and Note 2 (Accounting Policies) to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012. During the nine months ended September 30, 2013, there have been no modifications to our critical accounting policies as defined on Form 10-K for the year ended December 31, 2012.

Off Balance Sheet Arrangements

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

FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011, RESPECTIVELY

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Axion Power International, Inc.

We have audited the accompanying consolidated balance sheets of Axion Power International, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2012. Axion Power International, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Axion Power International, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

/s/ EFP Rotenberg, LLP

EFP Rotenberg, LLP

Rochester, New York

March 22, 2013

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	December 31, 2012			December 31, 2011

ASSETS
Current Assets
Cash and cash equivalents	$	2,004,391		$	1,987,637
Accounts receivable		771,410			309,354
Other receivables		21,860			162,249
Prepaid expenses		173,115			145,442
Inventory, net		2,838,791			2,717,173
Total current assets		5,809,567			5,321,855

Property & equipment, net		7,963,041			8,417,163
Other receivables		41,000			53,000
TOTAL ASSETS	$	13,813,608		$	13,792,018

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	581,503		$	520,358
Other liabilities		305,510			429,432
Notes payable		113,921			104,777
Total current liabilities		1,000,934			1,054,567

Deferred revenue		1,262,295			1,573,962
Derivative liabilities		1,217			15,843
Notes payable		331,247			439,480
Total liabilities		2,595,693			3,083,852

Stockholders' Equity
Convertible preferred stock-12,500,000 shares authorized Series-A preferred – 2,000,000 shares designated 0 shares issued and outstanding		-			-
Common stock-200,000,000 shares authorized $0.0001 par value 113,260,006 issued & outstanding (85,531,114 in 2011)		11,326			8,552
Additional paid in capital		96,013,439			86,953,180
Retained Earnings(Deficit)		(84,555,174	)		(76,001,894	)
Cumulative foreign currency translation adjustment		(251,676	)		(251,672	)
Total stockholders' equity		11,217,915			10,708,166
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	13,813,608		$	13,792,018

The accompanying notes are an integral part of these consolidated financial statements

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS

	Year Ended December 31,
	2012			2011
Product	$	9,779,711		$	7,631,529
Service		-			459,645
Net sales		9,779,711			8,091,174

Costs and expenses
Product costs		9,044,441			6,799,302
Research & development		4,883,033			5,060,036
Selling, general & administrative		4,404,040			4,463,269
Interest expense		17,594			18,863
Impairment of assets		-			308,882
Derivative revaluations (income)		(14,626	)		(238,618	)
Interest & other income		(1,490	)		(8,670	)
Loss before income taxes		(8,553,281	)		(8,311,890	)

Income taxes		-			-
Net Loss		(8,553,281	)		(8,311,890	)

Foreign Translation Adjustment		(4	)		(47	)
Comprehensive Income/(Loss)	$	(8,553,285	)	$	(8,311,937	)

Basic and diluted net loss per share	$	(0.08	)	$	(0.10	)

Weighted average common shares outstanding		110,689,664			85,488,150

The accompanying notes are an integral part of these consolidated financial statements

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2012			2011
Net Loss	$	(8,553,281	)	$	(8,311,890	)

Adjustments to reconcile deficit accumulated for noncash items
Depreciation		1,320,594			1,014,661
Impairment of assets		-			308,882
Derivative revaluations (income)		(14,626	)		(238,618	)
Share based compensation expense		445,966			453,770

Changes in operating assets & liabilities
Accounts receivable		(462,053	)		(87,432	)
Other receivables		140,389			(17,276	)
Prepaid expenses		(27,673	)		(63,382	)
Inventory, net		(121,618	)		(1,288,613	)
Accounts payable		61,145			(409,663	)
Other liabilities		(141,742	)		203,628
Deferred revenue and other		(311,667	)		188,777
Net cash used by operating activities		(7,664,566	)		(8,247,156	)

Cash Flows from Investing Activities
Other receivables		12,000			12,000
Purchases of property & equipment		(866,472	)		(3,002,130	)
Net cash used by investing activities		(854,472	)		(2,990,130	)

Cash Flows from Financing Activities
Repayment of notes payable		(99,089	)		(105,039	)
Net proceeds from sale of common stock		8,634,881			-
Net cash provided (used) by financing activities		8,535,792			(105,039	)

Net change in cash and cash equivalents		16,754			(11,342,325	)
Effect of exchange rate on cash		-			(47	)
Cash and cash equivalents - beginning		1,987,637			13,330,009
Cash and cash equivalents - ending	$	2,004,391		$	1,987,637

The accompanying notes are an integral part of these consolidated financial statements

Axion Power International, Inc.

Consolidated Statement of Stockholders' Equity

For Periods Ended December 31, 2011 and 2012

	Common
	Shares		Common Stock Amount		Additional Paid- In Capital		Retained Earnings(Deficit)			Other Comprehensive Income			Total Stockholder’s Equity (Deficit)
Balance at December 31, 2010		85,453,302	$	8,545	$	86,499,416	$	(67,690,003	)	$	(251,625	)	$	18,566,332

Stock based compensation		77,812		7		453,764								453,771

Net loss								(8,311,890	)					(8,311,890	)

Other comprehensive income (loss):

Foreign currency translation adjustment											(47	)		(47	)

Comprehensive loss														(8,311,890	)
Balance at December 31, 2011		85,531,114	$	8,552	$	86,953,180	$	(76,001,893	)	$	(251,672	)	$	10,708,166

Proceeds from Common Stock Offering-Net of Costs		27,651,870		2,766		8,632,115								8,634,881

Stock based compensation		77,022		8		428,145								428,153

Net loss								(8,553,281	)					(8,553,281	)

Other comprehensive income (loss):

Foreign currency translation adjustment											(4	)		(4	)

Comprehensive loss														(8,553,285	)
Balance at December 31, 2012		113,260,006	$	11,326	$	96,013,439	$	(84,555,174	)	$	(251,676	)	$	11,217,915

The accompanying notes are an integral part of the financial statements

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

Axion Power International, Inc. (the “Company”, Axion, “we”, “our”, or “us”) is a company whose primary purpose is to develop, design, manufacture and sell advanced energy storage devices and components that are based on our patented PbC Technology. In addition we manufacture standard and specialty lead-acid batteries. Our new PbC® batteries and components, which are manufactured primarily through the use of activated carbon as an alternative to lead in the battery’s negative electrode, have application to virtually all energy system storage functions. It is the Company’s long term goal to become a primary supply source of PbC negative electrodes to established battery manufacturers.

Note 2 — Accounting Policies

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

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

Segment Reporting: Management has determined that the Company is organized, managed and internally reported as one business segment.

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

Comprehensive Income: The Company follows FASB ASC 220, “Comprehensive Income.” Comprehensive income is the change in equity of a business enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. In addition to the Company’s net loss, the change in equity components under comprehensive income include any foreign currency translation adjustment.

Fair Value of Financial Instruments: FASB ASC 825, “Financial Instruments," requires disclosure of fair value information about certain financial instruments, including, but not limited to, cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses, accounts payable, accrued expenses, notes payable to related parties and convertible debt-related securities. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2012 and 2011. The carrying value of the balance sheet financial instruments included in the Company’s consolidated financial statements approximated their fair values.

Cash and Cash Equivalents: For financial statement presentation purposes, the Company considers those short-term, highly liquid investments to be cash or cash equivalents. Our investment policy is that we only invest cash in U.S. Government Treasuries with original maturities of six months or less. As of December 31, 2012, the Company had a thirty day Certificate of Deposit valued at $1.0 million.

Accounts Receivable and Concentration of Credit Risk: The Company records its accounts receivable net of any allowance for doubtful accounts. The Company manages its credit risk exposure and establishes an allowance for doubtful accounts for accounts that are deemed at risk for collection. When management determines that an account is uncollectible, it is written off against the related allowance. No allowance was considered necessary as of December 31, 2012 and 2011.

Inventory: Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, historical sales activity, inventory costs and inventory composition to determine appropriate reserve levels. Cost is determined using the first-in first-out (FIFO) method. Many components and raw materials we purchase have minimum order quantities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A summary of inventory at December 31, 2012 and 2011 is as follows:

	2012			2011
Raw materials	$	945,763		$	1,534,957
Work in process		471,935			1,070,901
Finished goods		1,677,605			359,540
Inventory reserves		(256,512	)		(248,225	)
	$	2,838,791		$	2,717,173

Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight line method over the estimated useful lives of the assets, ranging from 3 to 22 years. Expenditures for renewals and betterments are capitalized. Expenditures for minor items are charged to repairs and maintenance expense. Gain or loss upon sale or retirement is reflected in operating results in the period the event takes place.

A summary of property and equipment at December 31, 2012 and 2011 is as follows:

	Estimated useful life	2012			2011
Construction in progress		$	476,257		$	1,651,204
Leasehold improvements	Lesser of lease term or 10 years		382,680			371,948
Machinery & equipment	3-22 years		11,186,840			9,156,153
Less accumulated depreciation			(4,082,736	)		(2,762,142	)
Net		$	7,963,041		$	8,417,163

Depreciation expense was $1,320,594 and $1,014,661 for the years ended December 31, 2012 and December 31, 2011 respectively.

Certain of our machinery and equipment amounting to $1,582,111 are secured by the Pennsylvania Department of Community and Economic Development in relation to the Machinery and Equipment Loan Fund financing. The initial loan proceeds in the amount of $776,244 were received by us on September 14, 2009. The proceeds of the loan were used to defray part of the cost of equipment purchased for use at our Green Ridge Road and Clover Lane facilities. The loan bears interest at the rate of 3% interest per annum and is payable in equal monthly installments of principal and interest over a period of seven years, maturing on October 1, 2016.

Impairment or Disposal of Long-Lived Assets: The Company adopted the provisions of FASB ASC 360-10-15-3, “Impairment or Disposal of Long-lived Assets.” This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these expected cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The primary measure of fair value is based on undiscounted future cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. There was no impairment loss recorded for year ended December 31, 2012 as compared to an impairment loss of $308,882 in 2011.

Derivative Financial Instruments: The Company’s objectives in using derivative financial instruments are to obtain the lowest cash cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 "Derivatives and Hedging – Contracts in Entity’s own Equity ". The estimated fair value of the derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations. As a result of the Company’s adoption of ASC topic 815-40, effective January 1, 2009 some of the Company’s warrants are now accounted for as derivatives.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

A summary of the assumptions used for the derivative revaluations at December 31, 2012 and 2011 were as follows:

	2012			2011
Exercise price	$	0.57		$	0.57
Risk-free interest rate		0.33	%		0.25	%
Dividend yield	$	-		$	-
Expected volatility		59.31	%		56.78	%
Expected term (in years)		0.27			1.27

Revenue Recognition:The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. Evidence of an agreement and fixed or determinable sales price is predominantly based on a customer purchase order or other form of written sales order or written agreement. Sales on account are approved only for credit-worthy customers; otherwise partial or full payment.is received prior to shipment. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue is recognized when the product is delivered to the customer’s designated delivery site or the conditions for collection have been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. We offer a 90 day free replacement warranty on some specialty collector car and motorsports products. Collector car products also carry a four year prorated warranty that begins at the end of the 90 days. To date, our warranty exposure on these battery products has been minimal. Flooded battery sales do not have standard warranty provisions and instead are sold at a discount in lieu of warranty. There were no other post shipment obligations that may impact the timing of revenue recognition for the year ending December 31, 2012.

Grants:The Company recognizes government grants when there is reasonable assurance that the Company will comply with the conditions attached to the grant arrangement and the grant will be received. Government grants are recognized in the consolidated statements of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government grant is intended to compensate. Specifically, when government grants are related to reimbursements for cost of revenues or operating expenses, the government grants are recognized as a reduction of the related expense in the consolidated statements of operations. For government grants related to reimbursements of capital expenditures, the government grants are recognized as a reduction of the basis of the asset and recognized in the consolidated statements of operations over the estimated useful life of the depreciable asset as a reduced depreciation expense. The Company records government grants receivable in the consolidated balance sheets in other receivables. Deferred revenue is amortized into income over the estimated useful life of the related equipment. As of December 31, 2012, the liability for deferred revenue was $1,262,295 and there are no grant receivables at December 31, 2012 compared to $140,389 at December 31, 2011. During the year 2012, $338,562 of income was recorded for the amortization of deferred revenue compared to $238,918 during 2011.

Stock based Compensation: Stock-based compensation related to employees and non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Research and Development:R&D costs are recorded in accordance with FASB ASC topic 730,“Accounting for Research and Development Costs,” which requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. R&D includes the conceptual formulation, design and testing of product alternatives, construction of prototypes, and operation of pilot plants.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Income Taxes: Deferred income taxes are recorded in accordance with FASB ASC 740, “Income Taxes”, and deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. FASB ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of net deferred tax assets is dependent upon generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carry forwards. The Company has determined it is more likely than not that the deferred tax asset resulting from these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If the assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which the determination is made. The tax rate may also vary based on actual results and the mix of income or loss in domestic and foreign tax jurisdictions in which operations take place. The provision for taxes represents corporate-level franchise taxes which may be based on assets, equity, capital stock or a variation thereof.

Recently Issued Accounting Pronouncements:

In May 2011, the FASB issued Update No. 2011-04 related to fair value measurements and disclosures in the financial statements, which update ASC Topic 820 “Fair Value Measurement”. This guidance conforms the wording to describe many of the requirements in U.S. GAAP to International Financial Reporting Standards to ensure the related standards are consistently applied. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard did not materially expand the Company’s consolidated financial statement footnote disclosures.

In June 2011, the FASB issued Update No. 2011-05 related to the presentation of comprehensive income in the financial statements, which updates ASC Topic 220 “Comprehensive Income”. The Update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Under the new guidance, the Company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

In December 2011, the FASB issued ASU No. 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05,which defers the effective date pertaining to reclassification adjustments out of other accumulated comprehensive income in ASU 2011-05, until the FASB is able to reconsider those requirements. All other requirements of ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011, which coincide with the effective dates of the requirements in ASU 2011-05 amended by this Update.

Note 3 - Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. At December 31, 2012 the Company’s working capital was $4.8 million. The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond April 30, 2013, as those operations currently exist. Subsequent funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond April 30, 2013. No assurances can be given that the Company will be successful in arranging the further funds needed to continue the execution of its business plan, which includes the development and commercialization of new products, or even if further funding is available, upon what terms. Failure to obtain such funds on terms acceptable to the Company’s management will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue as a going concern.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Note 4 — Stockholders' Equity

Authorized Capitalization: The Company’s authorized capitalization includes 200,000,000 shares of common stock and 12,500,000 shares of preferred stock. The number of authorized common shares was increased by 75,000,000 pursuant to the Shareholder meeting vote on July 20, 2011.

Common Stock: At December 31, 2012, 113,260,006 shares of common stock were issued and outstanding. The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of common stock are entitled to receive dividends when and if declared by the board out of funds legally available. In the event of liquidation, dissolution or winding up, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. The common stockholders have no conversion, preemptive or other subscription rights and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are fully paid and non-assessable.

Preferred Stock: The Company’s certificate of incorporation authorizes the issuance of 12,500,000 shares of blank check preferred stock. The Company’s board of directors has the power to establish the designation, rights and preferences of any preferred stock. Accordingly, the board of directors has the power, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. At December 31, 2012 and 2011, no shares of Series-A Convertible Preferred stock were issued and outstanding.

Warrants: The following table provides summary information on warrants outstanding as of December 31, 2012 and 2011, with summary information on the various warrants issued by the Company in private placement transactions, warrants exercised to date, warrants that are presently exercisable and the current exercise prices of such warrants.

				2012					2011
	Shares			Weighted Average Exercise price		Shares			Weighted Average Exercise price

Warrants outstanding January 1		11,896,070		$	0.83		12,973,820		$	1.18

Granted during year		-			-

Exercised

Lapsed		(173,755	)		2.35		(1,077,750	)		4.74

Outstanding at December 31		11,712,315		$	0.83		11,896,070		$	0.85

Weighted average years remaining		.3					1.3

As of December 31, 2012 and 2011, 1,085,714 warrants were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption “derivative revaluations” on the Consolidated Statements of Operations and Comprehensive Loss.

Note 5 – Equity Compensation

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

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

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

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

There are no incentive stock options outstanding at December 31, 2012.

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

On October 17, 2012, the Board of Directors amended the Axion Power International, Inc. independent director’s stock option plan to increase the number of shares of common stock available thereunder from 500,000 shares to 1,000,000 shares.

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

During 2012, the Company issued 171,429 five year options to one of its directors, vesting one third per year over the next three years. These options are exercisable at a price of $0.35 per share, expiring five years from vest date and are valued at $35,136 utilizing the Black-Scholes-Merton option pricing model, with $6,832 recorded as compensation in 2012. There were no issuances in 2011.

Stock Options Held by Officers, Employees, and Consultants Not Approved by Stockholders:

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

Year	Interest rate %		Dividend Yield %		Expected Volatility %		Expected Life
2012		0.42		0.0		61.12	96 months
2011		1.40		0.0		59.4	76 months

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

The following table provides consolidated summary information on the Company’s stock option activity for the years ended

December 31, 2012 and 2011.

				2012
				Weighted Average
All Plan & Non-Plan Compensatory Options	Number of Options			Exercise		Fair Value		Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2011		3,909,300		$	1.85	$	0.64		4.2
Granted		536,429			1.13		0.15
Exercised		-			-		-
Forfeited or lapsed		(369,584	)		2.45		0.82
Options outstanding at December 31, 2012		4,076,145		$	1.70	$	0.56		3.8	$	-
Options exercisable at December 31, 2012		2,965,998		$	1.90	$	0.65		3.0	$	-

				2011
				Weighted Average
All Plan & Non-Plan Compensatory Options	Number of Options			Exercise		Fair Value		Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2010		3,578,520		$	1.97	$	0.70
Granted		579,552			1.22		0.30
Exercised		-			-		-
Forfeited or lapsed		(248,772	)		2.17		0.68
Options outstanding at December 31, 2011		3,909,300		$	1.85	$	0.65		4.2	$	-
Options exercisable at December 31, 2011		2,515,660		$	2.12	$	0.77		3.2	$	-

The following table summarizes the status of the Company’s non-vested options:

All non-vested stock options as of December 31, 2012	Shares			Fair Value
Options subject to future vesting at December 31, 2011		1,393,638		$	0.43
Options granted		536,429			0.15
Options forfeited or lapsed		(101,582	)		0.25
Options vested		(718,338	)		0.42
Options subject to future vesting at December 31, 2012		1,110,147		$	0.40

As of December 31, 2012, there was $544,847 of unrecognized compensation related to non-vested options compared to $474,872 at December 31, 2011. The Company expects to recognize the cost over a weighted average period of 1.4 years. The total fair value of options vested was $1,945,085 and $888,318 for 2012 and 2011, respectively.

The compensation expense that has been recognized for options granted was $410,326 and $427,040 for the years ended December 31, 2012 and 2011 respectively. In addition the Company recognized non-cash compensation expense of $35,640 in 2012 and $26,730 in 2011 for stock granted to directors in lieu of cash. There was no dilutive impact per share during 2012 or 2011. For stock options issued as non-qualified stock options, a tax deduction is not allowed until the options are exercised. The amount of this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, the Company has recorded a valuation allowance to reduce gross deferred tax assets to zero. As a result, for the year ended December 31, 2012, there is no income tax expense impact from recording the fair value of options granted. There is no tax deduction allowed by the Company for incentive stock options.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company has two stockholder approved equity compensation plans. The following sections summarize the Company’s equity compensation arrangements.

Note 6 Earnings/Loss Per Share

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

Had the Company recorded income applicable to common shareholders for the periods ended December 31, 2012 and 2011 weighted-average number of common shares outstanding would have increased by 161,219, and 1,519,892 respectively, for the fiscal years, reflecting no change to dilutive securities in the calculation of diluted earnings per share.

Note 7 — Income Taxes Expense (Benefit)

A summary of the components giving rise to the income tax expense (benefit) for the periods ended December 31, 2012 and 2011 is as follows:

	2012			2011
Current income tax expense:
Federal	$	-		$	-
State		-			-
Foreign		-			-
	$	-		$	-

Deferred income tax provision (benefit):
Federal	$	(2,905,000	)	$	(2,857,000	)
State		(564,000	)		(555,000	)
Foreign		(51,000	)		48,000
Total deferred tax		(3,520,000	)		(3,364,000	)
Less increase in allowance		3,520,000			3,364,000
Net deferred tax	$	-		$	-

Total income tax expense (recovery)	$	-		$	-

Individual components giving rise to the deferred tax asset are as follows:	2012			2011
Future tax benefit arising from net operating loss carry forwards		21,100,000		$	17,748,000
Future tax benefit arising from available tax credits		1,373,000			1,373,000
Future tax benefit arising from options/warrants issued for Services		1,210,000			1,029,000
Other		222,000			225,000
Total future tax benefit		23,905,000			20,375,000
Less valuation allowance		(23,905,000	)		(20,375,000	)
Net deferred tax	$	-		$	-

The components of pretax net loss are as follows:	2012			2011
United States	$	(8,553,281	)	$	(8,309,197	)
Foreign		-			(2,693	)
	$	(8,553,281	)	$	(8,311,890	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company has net operating loss carry forwards of $48,100,000 and $2,800,000 available to reduce future income taxes in United States and Canada, respectively. The United States carry forwards expire at various dates between 2024 and 2032.0. The Canadian loss carry forwards expire at various dates between 2012 and 2030. The Company also has generated Canadian tax credits related to research and development activities. The credit, amounting to $734,000 U.S. Dollars, is available to offset future taxable income in Canada and expires at various dates between 2024 and 2026. The Company has adopted FASB ASC 740, which provides for the recognition of a deferred tax asset based upon the value certain items will have on future income taxes and management's estimate of the probability of the realization of these tax benefits. The Company has determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. The utilization of NOL and tax credit carry forwards from Tamboril prior to the reorganization may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. Accordingly, these amounts have not been included in the gross deferred tax asset number above. In addition, due to equity transactions that have occurred subsequent to the reorganization with Tamboril, the utilization of NOL carry forwards may be subject to further change in control limitations that generally restricts the utilization of the NOL per year.

The reconciliation of the United States statutory federal income rate and the effective income tax rate in the accompanying Consolidated Statements of Operations for the periods ended December 31, 2012 and 2011 is as follows:

	2012			2011
Statutory U.S. federal income tax rate		(34.0	)%		(34.0	)%
Prior period adjustments		0.0	%		0.00	%
State taxes, net		(6.6	)%		(6.7	)%
Foreign currency fluctuation		(0.6	)%		0.6	%
U.S. tax credits		0.0	%		0.0	%
Revaluation of Derivatives		(0.1	)%		(0.5	)%
(Other		0.1	%		0.1	%
Change in valuation allowance		41.1	%		40.5	%
Effective income tax rate		0.0	%		0.0	%

The Company adopted the provisions of FASB ASC 740-10 “Income Taxes” on January 1, 2008. As the result of the assessment, the Company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2008 and as of December 31, 2012, the Company has no unrecognized tax benefits. By statute, tax years ending December 31, 2008 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Note 8 — Related Party Transactions

Transactions with C&T: A former board member of the Company, Dr. Igor Filipenko, was the former majority shareholder of C&T prior to the acquisition by the Company. The Board of Directors on August 21, 2009 approved the issuance of warrants to purchase not more than 1,600,000 shares of common stock at an exercise price of $2.00 per share and a term of two years to the C&T Group. On January 11, 2010, Dr. Igor Filipenko gave notice of his resignation as a director of the Company, effective immediately. On December 31, 2012 these warrants have not yet been issued pending "mutual understanding" between the parties.

Note 9 — Supplemental Cash Flow Information

Cash payments for interest during the years ended December 31, 2012 and December 31, 2011 were $17,595 and $18,042, respectively. There were no payments of income taxes during the years ended December 31, 2012 and 2011

Note 10 — Commitments and Contingencies and Significant Contracts

Facilities: On March 28, 2010, we renewed our lease for existing space at our manufacturing plant, located at 3601 Clover Lane, in New Castle, Pennsylvania. The salient terms of the Lease are as follows:

The term commenced on April 3, 2010 with an initial term of three years.

The renewal lease may be extended for two successive five-year renewal options with future rent to be negotiated at a commercially reasonable rate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The battery manufacturing facility includes 70,438 square feet of floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area.

The rental amount for the initial term is $17,200 per month, which is fixed through 2013. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises.

On May 26, 2011 we executed an addendum to the existing lease agreement which resulted in the lease of an additional 2,160 square feet of additional space for $500.00 per month. There were no other changes to the existing lease.

With the execution of the addendum we now lease 72,598 square feet for a monthly rent of $17,200.

On November 4, 2010, the Company entered into a Commercial Lease (“Lease”) with Becan Development, LLC (“Lessor”) to lease a 45,000 square foot building, located at 209 Green Ridge Road in New Castle PA, (the “Property”). The salient terms of the Lease are as follows:

The Lease term commenced on January 1, 2011 and the term expires on December 31, 2015.

The Lease may be extended for two 5-year terms, by giving notice not less than 30 nor more than 120 days before the expiration of the initial term or first renewal term (as applicable). The renewal leases shall be on terms substantially similar to the terms of the initial Lease except for any adjustment to rent, if warranted, as mutually agreed upon by Lessor and the Company.

The rental amount for the initial term is $19,297 per month and is on a “triple net” basis.

If the Company is able to obtain sufficient funding from either the federal or state government or agencies, and it enters into a binding agreement to purchase the Property, the Lease shall be immediately terminated and Lessor shall credit the most recent 6 months of actual rental payments made to Lessor against the purchase price of the Property

The Company also has a right of first refusal to purchase the property within 30 days of receipt of notice of a third party offer from Lessor upon substantially the same terms as those offered by the third party.

The Lease contains market terms on standard provisions such as defaults and maintenance.

Employment Agreements: The Company has entered into executive employment agreements with Thomas Granville, Charles R. Trego, Phillip S. Baker, and Vani K. Dantam. These agreements generally require each executive to devote substantially all of his business time to the Company’s affairs, establish standards of conduct, prohibit competition with our company during their term, affirm our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of the executives is allowed to participate in our standard employee benefit programs, including medical/hospitalization insurance and group life insurance, as in effect from time to time. Each of the covered executives will generally receive an automobile allowance, reimbursement for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties, and a severance package that guarantees continued remuneration equal to the executives base salary for a total of 23 months so long as the Company elects to enforce the provisions of the Non-Competition Agreement, should the executive be unable to find employment or accepts employment at a reduced rate of pay due solely to the Non-Competition Agreement. The provisions of the individual agreements are set forth in the following table:

Name		Position	Date	Term		Salary	Options		Price	Vesting	Stock
Thomas Granville	(1)	CEO	6/29/10	3-year	$	380,000	360,000	$	1.50	Monthly	0
Charles R. Trego	(2)	CFO	4/01/10	3-year	$	225,000	265,000	$	1.50	Monthly	0
Philip S. Baker	(3)	COO	4/01/10	3-year	$	199,800	230,000	$	1.50	Monthly	0
Vani K. Dantam	(4)	Sr. VP	1/23/12	3-year	$	225,000	150,000	$	1.50	Monthly	0

1.	Thomas Granville. On June 29, 2010, the Company entered into an Executive Employment Agreement with Thomas Granville as Chief Executive Officer. Pursuant to this agreement, Mr. Granville receives an annual salary of $380,000, and an annual car allowance of $9,000 for the period commencing June 29, 2010, and terminating June 30, 2013. Mr. Granville’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Mr. Granville’s and the Company’s performance. In addition, Mr. Granville received a signing bonus of $270,000 and was paid on July 9, 2010. The Company also granted Mr. Granville an option to purchase 360,000 shares of our common stock at a price of $1.50 per share at a vesting rate Of 10,000 shares per month through the term of the agreement. Mr. Granville is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs.

2.	Charles R. Trego.On April 1, 2010, the Company entered into an Executive Employment Agreement withCharles R. Trego as Chief Financial Officer.Under the terms of his employment agreement, which has a term of three years, Mr. Trego receives an annual salary of $225,000, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $9,000, bonuses as determined by the compensation committee, and a 5-year option to purchase 265,000 shares of our common stock at a price of $1.50 per share. 27,000 options shall vest upon execution of this contract and, beginning in June 2010, 7,000 options will vest monthly through the remaining 34 months of this contract.

3.	Philip S. Baker.On April 1, 2010, the Company entered into an Executive Employment Agreement with Philip S. Baker as Chief Operating Officer. Under the terms of his employment agreement, which has a term of three years, Mr. Baker receives an annual salary of $199,800, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $6,000, and a 5-year option to purchase 230,000 shares of our common stock at a price of $1.50 per share. 26,000 options shall vest upon execution of this contract and, beginning in June, 2010, 6,000 options will vest monthly through the remaining 34 months of this contract.

	4. Vani K. Dantam.On January 1, 2012, The Company entered into an Executive Employment Agreement with Vani Dantam as Senior Vice President Business Development, Sales & Marketing. Pursuant to this agreement which has a term of three years, Mr. Dantam receives an annual salary of $225,000, which is subject to review on an annual basis, a $20,000 sign-on bonus which was paid in January 2102, bonuses as determined by the compensation committee, and a 5- year option to purchase 150,000 shares of our common stock at a price of $1.50 per share, 15,020 options vest upon execution of this contract and, beginning March 2012, 3,970 options will vest monthly.

We have no retirement plans or other similar arrangements for any directors, executive officers or employees, other than a noncontributory 401(k) plan.

Purchase Orders

On May 11, 2010, the Company was awarded federal contract number N00014-10-C-0094. Under the terms of the agreement, Axion shall furnish personnel and facilities to conduct the research effort for the development of new lightweight, high-powered batteries for use in vehicles operated by the U.S. Marine Corps. This cost-plus-fixed-fee completion contract requires scientific or technical reports to be delivered, inspected and accepted prior to reimbursement. Costs incurred during the performance period, will be reimbursed quarterly. The final report was delivered in July, 2011. The contract, provided $1,004,747 to us in funding for this project, and is subject to a financial audit upon contract completion which we anticipate will occur in 2013.

Selling price was determined by periodic spending using the hourly labor, overhead, and G&A rates submitted with the proposal. The rates are subject to adjustment at the end of contract, and secured by the unpaid fixed fee. Revenue based on the proportionate performance of the work performed was recognized from inception to completion when collection of the reimbursement was reasonably assured. Recognition of the fixed fee was postponed to contract completion. Fixed fee billings were recorded under deferred revenue. The contract contributed no service revenue in 2012 as compared to $387,645 in service revenue during 2011.

Note 11 – Subsequent events

On March 10, 2013, we renewed our lease for our manufacturing plant at 3601 Clover Lane in New Castle, Pennsylvania. The lease which commences on April 3, 2013 is for a term of five years with one five year renewal option. All other terms and conditions of the lease are the same as the existing lease agreement.

FINANCIAL STATEMENTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2012 AND 2012, RESPECTIVELY

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited)

	September 30, 2013			December 31, 2012

ASSETS

Cash and cash equivalents	$	1,061,823		$	2,004,391
Restricted cash		5,420,901			-
Accounts receivable		330,048			771,410
Other current assets		585,647			194,975
Inventory, net		3,254,630			2,838,791
Total current assets		10,653,049			5,809,567

Property & equipment, net		6,986,411			7,963,041
Other receivables		32,000			41,000

Total Assets	$	17,671,460		$	13,813,608

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable	$	606,860		$	581,503
Other liabilities		297,291			305,510
Note payable		104,777			113,921
Accrued interest convertible notes		163,023			-
Derivative conversion feature senior convertible notes		7,403			-
Subordinated convertible notes, net of discount		368,709			-
Senior convertible notes, net of discount		3,526,198			-
Total current liabilities		5,074,261			1,000,934

Deferred revenue		1,007,345			1,262,295
Note payable		247,917			331,247
Subordinated convertible notes		411,288			-
Derivative liability senior warrants		846,774			-
Derivative liabilities		-			1,217
Total liabilities		7,587,585			2,595,693

Stockholders’ Equity
Convertible preferred stock – 12,500,000 shares designated, no shares issued and outstanding		-			-
Common stock-350,000,000 shares authorized $0.0001 par value per share 142,807,864 shares issued & outstanding (113,233,762 in 2012)		14,281			11,326
Additional paid in capital		101,539,455			96,013,439
Retained earnings (deficit)		(91,218,249	)		(84,555,174	)
Cumulative foreign currency translation adjustment		(251,612	)		(251,676	)
Total stockholders’ equity		10,083,875			11,217,915

Total Liabilities & Stockholders’ Equity	$	17,671,460		$	13,813,608

The accompanying notes are an integral part of these consolidated condensed financial statements.

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012

Net sales	$	2,185,699		$	2,178,077		$	7,111,812		$	6,690,502

Cost of sales		1,931,321			2,014,731			6,212,531			6,014,886

Gross profit		254,378			163,346			899,281			675,616

Operating expenses		2,362,188			2,313,827			6,997,784			7,055,156
Other (income) expense		3,836			(2,787	)		(321,159	)		(1,421	)
Operating loss		(2,111,646	)		(2,147,694	)		(5,777,344	)		(6,378,119	)

Change in value of senior warrants, gain		(535,926	)		-			(2,091,226	)		-
Change in value conversion feature senior notes, gain		(112,750	)		-			(1,504,597	)		-
Debt discount amortization expense		1,333,470			-			2,051,198			-
Interest expense, note payable		4,064			5,484			15,551			13,313
Extinguishment loss on senior notes conversion		1,087,822			-			1,283,322			-
Derivative revaluations (gain) loss		-			(17,176	)		(1,217	)		(12,465	)
Interest on convertible notes		586,573			-			795,797			-
Financing costs on convertible notes		206,948			-			336,903			-

Net (loss)		(4,681,847	)		(2,136,002	)		(6,663,075	)		(6,378,967	)
Foreign Currency Translation adjustment		-			(1	)		(64	)		(4	)

Comprehensive (loss)	$	(4,681,847	)	$	(2,136,003	)	$	(6,663,139	)	$	(6,378,971	)

Basic and diluted net loss per share	$	(0.04	)	$	(0.02	)	$	(0.06	)	$	(0.06	)

Weighted average common shares outstanding		132,929,067			113,249,335			114,928,123			109,826,629

The accompanying notes are an integral part of these consolidated condensed financial statements.

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2013			2012
Operating Activities

Net loss	$	(6,663,075	)	$	(6,378,967	)

Adjustments to reconcile deficit accumulated for noncash items
Depreciation expense		1,128,200			1,035,336
Derivative revaluations (gain) loss		(1,217	)		(12,465	)
Change in value of senior warrants, gain		(2,091,226	)		-
Change in value conversion feature senior notes, gain		(1,504,597	)		-
Debt discount amortization expense		2,051,198			-
Interest accrued, senior convertible notes paid in common stock		727,217			-
Debt discount amortization expense on subordinated note		42,579			-
Extinguishment loss on senior notes conversion		1,283,322			-
Amortization deferred finance costs		336,903			-
Stock based compensation expense		168,244			311,637

Changes in operating assets & liabilities
Accounts receivable		441,362			3,169
Other receivables		-			140,389
Other current assets		(89,298	)		(85,575	)
Inventory, net		(415,839	)		(512,002	)
Accounts payable		17,100			219,559
Other current liabilities		(8,748	)		(116,489	)
Accrued interest		32,001			-
Deferred revenue		(254,950	)		(226,682	)
Cash (used) by operating activities		(4,800,824	)		(5,622,090	)

Investing Activities
Other receivables		9,000			5,000
Capital expenditures		(151,570	)		(742,834	)
Cash (used) by investing activities		(142,570	)		(737,834	)

Financing Activities
Repayment of note payable		(92,474	)		(80,870	)
Proceeds from senior and subordinated convertible notes		10,000,000			-
Net Proceeds from sale of common stock		-			8,625,979
Payment of debt issuance costs		(485,735	)		-
Amount deposited into restricted cash account		(5,420,901	)		-
Cash provided by financing activities		4,000,890			8,545,109

Net increase in cash and cash equivalents		(942,504	)		2,185,185
Effect of exchange rate on cash		(64	)		(4	)
Cash and cash equivalents – beginning		2,004,391			1,987,637
Cash and cash equivalents – ending	$	1,061,823		$	4,172,818

Supplemental Schedule of Non Cash Investing and Financing Activities:
Common stock issued for principal payments on senior notes	$	3,075,000
Warrants issued for placement agent fees	$	143,777

The accompanying notes are an integral part of these consolidated condensed financial statements.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

1. Basis of Presentation and Recent Accounting Pronouncements

The accompanying unaudited consolidated condensed financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These consolidated condensed financial statements should be read in conjunction with the audited financial statements and footnotes thereto in the Axion Power International, Inc. (“the Company”) Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of results of operations for the Company’s 2013 calendar year.

Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the current presentation.

Recently Adopted Accounting Pronouncements

In the three months ended March 31, 2013, the Company conformed its presentation of results of operations, in accordance with new guidance on the presentation of comprehensive income (loss). The guidance requires total comprehensive income (loss) for interim periods to be presented in a single continuous statement or in two separate, but consecutive, statements. The new guidance does not change where the components of comprehensive income (loss) are recognized.

During the current quarter, no new accounting standards were adopted that would have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.

2. Inventories

Inventories consist of the following:

	September 30, 2013		December 31, 2012
Raw materials and components	$	1,134,835	$	945,382
Work in process		1,913,229		1,828,687
Finished goods		427,592		321,234
Inventory reserves		(221,026)		(256,512)
	$	3,254,630	$	2,838,791

Inventory reserves include a provision for inventory valuation and obsolescence.

3. Warrants

Warrants consist of the following:

	Shares	Weighted average exercise price		Weighted average remaining contract term (years)
Warrants outstanding at December 31, 2012	11,712,315	$	0.83	1.1
Granted	20,110,320		0.30	5.0
Exercised	-		-	-
Forfeited or lapsed	(11,666,654)		0.86	-
Warrants outstanding at September 30, 2013	20,155,981	$	0.31	4.6

As of September 30, 2013, there are 17,281,107 warrants classified as derivative liabilities relating to senior convertible notes of the Company issued on May 8, 2013, which were exercisable November 8, 2013. Of the 20,155,981 warrants outstanding, 45,661 are exercisable. For each reporting period, the warrants classified as derivatives are revalued with the change in value reported as a change in value of senior warrants on the consolidated condensed statements of operations. (See Footnote 6)

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

4. Stock Based Compensation

The Company adopted ASC 718 “Compensation – Stock Compensation” whereby employee-compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company’s accounting policy for equity instruments issued to non-employees in exchange for goods and services follows the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees”. The measurement date for fair value of the equity instruments is determined by the earlier of (i) the date at which commitment for performance by the non-employees is reached, or (ii) the date at which the non-employees performance is complete.

The compensation expense was $168,244 of which $48,270 was for stock and $119,974 for stock options as independent directors’ compensation in lieu of cash, for the nine months ended September 30, 2013 and had no impact on the diluted loss per share.

Outstanding compensatory options consist of the following:

		Weighted Average
	Number of Options	Exercise		Fair Value		Remaining Life (years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2012	4,076,145	$	1.70	$	0.56	3.8	$	-
Granted	498,501		0.12		0.08	5.0		-
Exercised	-		-		-	-		-
Forfeited or lapsed	(214,301)	$	2.91		0.79	-		-
Options outstanding at September 30, 2013	4,360,345	$	1.48	$	0.55	3.4	$	-
Options exercisable at September 30, 2013	3,468,725	$	1.69	$	0.58	2.8	$	-

There were 498,501 options granted and no options exercised during the nine months ended September 30, 2013.

All non-vested compensatory stock options consist of the following:	All Options
	Shares	Fair Value
Options subject to future vesting at December 31, 2012	1,110,147	$	0.24
Options granted	498,501		0.56
Options forfeited or lapsed	(214,301)		0.11
Options vested	(502,727)		0.32
Options subject to future vesting at September 30, 2013	891,620	$	0.41

As of September 30, 2013, there was $123,828 of unrecognized compensation related to non-vested options granted under the plans. The Company expects to recognize this expense over a weighted average period of 2.8 years. The total fair value of options, which vested during the nine months ended September 30, 2013, was $172,580.

5. Earnings (Loss) Per Share

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

If the Company had generated earnings during the nine months ended September 30, 2013 and 2012, the Company would have added 5,332,532 and 517,617 respectively, of common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

6. Senior Convertible Notes and Warrants, and Subordinated Notes and Warrants

On May 8, 2013, the Company consummated the sale of $9 million in aggregate principal amount of senior convertible notes (the “Senior Notes”) due on February 8, 2015 and warrants (the “Senior Warrants”) to various institutional investors (“Investors”). At closing, the Company received $2.76 million in net proceeds, after deducting placement agent fees of $240,000. Total offering expenses were $494,500 and were recorded as deferred financing fees. The $6,000,000 balance of the gross proceeds from the sale of Senior Notes was deposited into a series of control accounts in the Company’s name. Withdrawals from the control accounts are permitted (i) in connection with certain conversions of the Senior Notes or (ii) otherwise, as follows: $500,000 on each 30 day anniversary of the closing date (May 8, 2013) commencing on the 60^th day after the closing date until there are no more funds in the control accounts. The Senior Notes and Senior Warrants and the Subordinated Notes and Subordinated Warrants described below were issued in transactions exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. As of September 30, 2013, we have received one $500,000 funds release and an additional $75,000 due to accelerated note conversions by two investors.

The following is intended to provide a summary of the terms of the agreements and securities described above. This summary is qualified in its entirety by reference to the full text of the agreements, each of which is attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 8, 2013. Readers should review those agreements for a complete understanding of the terms and conditions associated with these transactions.

Securities Purchase Agreement

The Senior Convertible Notes and Senior Warrants were issued pursuant to the terms of a Securities Purchase Agreement (“Purchase Agreement”) entered into among us and the Investors. The Purchase Agreement provided for the sale of the Senior Convertible Notes and Senior Warrants for gross proceeds of $9 million to us.

Ranking - The Senior Notes are senior unsecured obligations of the Company, subject only to certain secured obligations of the Company for up to a maximum of $1 million of government issued indebtedness for purchase of plant and machinery and other purchase money financing for property, plant and equipment.

Maturity Date - Unless earlier converted or redeemed, the Senior Notes mature 21 months from the closing date subject to the right of the investors to extend the date (i) if an event of a default under the Senior Notes has occurred and (ii) for a period of 20 business days after the consummation of a fundamental transaction if certain events occur.

Interest - The Senior Notes bear interest at the rate of 8% per year, compounded monthly on the first calendar day of each calendar month. The interest rate will increase to 18% per year upon the occurrence and continuance of an event of default (as described below).

Conversion - The Senior Notes are convertible at any time at the option of the holders, into shares of the Company’s common stock at an initial conversion price of $0.264 per share (subsequent conversions are based on the company’s volume weighted average price per share). The conversion price is subject to adjustment for stock splits, combinations or similar events. In addition, the conversion price is also subject to a “full ratchet” anti-dilution adjustment if the company issues or is deemed to have issued securities at a price lower than the then applicable conversion price. In the event certain equity conditions are not met, the company may be prevented from issuing shares to satisfy the installments due on the note.

The Senior Notes may not be converted with respect to any note holder if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the Company’s outstanding shares of common stock. At each holder’s option, the limit on percentage ownership may be raised or lowered to any other percentage not in excess of 9.99%, except that any raise will only be effective upon 61-days’ prior notice to the Company.

Events of Default

The Senior Notes contain standard and customary events of default including but not limited to: (i) failure to register our Common Stock within certain time periods; (ii) failure to make payments when due under the Senior Notes; and (iii) bankruptcy or insolvency of the Company.

If an event of default occurs, the Senior Note holders may require the Company to redeem all or any portion of the Senior Notes (including all accrued and unpaid interest thereon), in cash, at a price equal to the greater of (i) up to 125% of the amount being redeemed, depending on the nature of the default, and (ii) the intrinsic value of the shares of Common Stock then issuable upon conversion of the Convertible Note.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

Fundamental Transactions

The Senior Notes prohibit the Company from entering into specified transactions involving a change of control, unless the successor entity assumes in writing all obligations under the Senior Notes under a written agreement.

In the event of transactions involving a change of control, the Senior Notes will be redeemable whole or in part (including all accrued and unpaid thereon) at a price equal to the greater 125% of the amount of the face value of the Senior Note being redeemed and the intrinsic value of the shares of Common Stock then issuable upon conversion of the Senior Note being redeemed.

Warrants

The Warrants entitle the holders to purchase, in the aggregate, 17,281,107 shares of common stock. The Warrants were exercisable November 8, 2013 and will expire 5 years from the Closing Date. The Warrants were exercisable at an exercise price equal to $0.302, subject to certain adjustments.

The Warrants may be exercised for cash, provided that, if there is no effective registration statement available registering the exercise of the Warrants, the Warrants may be exercised on a cashless basis.

The exercise price of the Warrants is subject to adjustment for stock splits, combinations or similar events. In addition, the exercise price is also subject to a “full ratchet” anti-dilution adjustment if we issue or are deemed to have issued securities at a price lower than the then applicable exercise price.

The Warrants may not be exercised with respect to any warrant holder if, after giving effect to the exercise, the warrant holder together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of common stock. At each Warrant holder’s option, the limit on percentage ownership may be raised or lowered to any other percentage not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to the Company.

The Senior Warrants prohibit the Company from entering into specified transactions involving a change of control, unless the successor entity assumes all obligations under the Senior Warrants under a written agreement before the transaction is completed. When there is a transaction involving a permitted change of control, a Senior Warrant holder will have the right to require us to repurchase their Senior Warrant for a purchase price in cash equal to the Black-Scholes value of the then unexercised portion of the Senior Warrant.

Accounting for the Conversion Option and Warrants

The Company first considered whether the notes met the criteria under ASC 480-10-25-14 to be recorded as a liability and determined that, due to the note’s differing potential settlement features, it did not meet the criteria. The Company next considered whether the conversion option met the definition of a derivative, requiring it to be bifurcated and recorded as a liability. Pursuant to ASC 815-40, due to full-ratchet down-round price protection on the conversion price of the Senior Notes and the exercise price of the Warrants, the Company determined that the conversion features of the Senior Notes and the exercise price of the Senior Warrants, the Company determined that the conversion features of the Senior Notes and the exercise features of the Senior Warrants are not indexed to the Company’s owned stock and must be recognized separately as a derivative liability in the consolidated balance sheet, measured at fair value and marked to market each reporting period until the Senior Notes have been fully paid or converted and the Senior Warrants fully exercised.

The conversion feature of the Senior Notes was valued using the Monte Carlo simulation model under the following assumptions; (i) expected life of 0.9 years, (ii) volatility of 60%, (iii) risk-free interest rate of 0.10%, and (iv) dividend rate of 0. The Senior Warrants were also valued using the Monte Carlo simulation model, under the following assumptions: (i) expected life of 5 years, (ii) volatility of 0.80%, (iii) risk-free interest rate of 0.75%, and (iv) dividend rate of zero. The initial fair values of the conversion feature and the warrants were estimated to be $2.9 million and $1.5 million, respectively, totaling $4.4 million. This amount was recorded as debt discount on May 8, 2013 and is being amortized over the term of the note using the interest method. In addition, debt issuance costs totaling $494,500 are being amortized over the term of the note using the effective interest method.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

As of September 30, 2013, the conversion feature was valued at $7,403 and the Senior Warrants were valued at $847,000. The change in fair value of $3.6 million was recorded as a non-cash (gain) in change in value of these derivatives for the quarter ended September 30, 2013. The Senior Warrants and the conversion feature of the Senior Notes are classified as a liability in the consolidated condensed balance sheet as follows:

	Warrants		Conversion Feature		Total

Original valuation – May 8, 2013	$	2,938,000	$	1,512,000	$	4,450,000
Adjustment to fair value		(2,091,226)		(1,504,597)		(3,595,823)
Ending Balance – September 30, 2013	$	846,774	$	7,403	$	854,177

Pursuant to the terms of the Senior Notes, the Company opted to pay the installment payments due prior to September 30, 2013 with shares of the Company’s common stock. As of September 30, the Company issued 28.8 million shares of common stock at a weighted average conversion price of $0.1224 for the first $3.1million in principal and $470,000 of interest. In addition 625,000 shares were issued for accelerated conversions netted a release of $75 thousand. A loss on extinguishment was recognized in the amount of $1,283,322, for the difference between the installment amount and the fair value of the shares at the issuance date. As of September 30, 2013, the principal balance of the Senior Notes (net of discount) was as follows:

	Convertible Note		Debt Discount		Net Total

Original valuation – May 8, 2013	$	9,000,000	$	(4,450,000)	$	4,550,000
Installment Payments in Shares		(3,075,000)		-		(3,075,000)
Amortization of debt discount		-		2,051,198		2,051,198
Ending Balance – September 30, 2013	$	5,925,000	$	(2,398,802)	$	3,526,198

Placement Agent Warrants

Upon the closing of the issuance of the Senior Notes and Senior Warrants, the Company issued 909,090 warrants to its placement agent and is obligated to issue additional warrants when and if the Company receives further proceeds from the sale of the Senior Notes and Senior Warrants which are currently being held in the control accounts described above. The initial placement agent warrants have been recognized as additional financing fees and are being amortized over the life of the Senior Notes. These warrants were determined not to be derivative instruments, and as such they have been recorded as equity. The fair value of the initial issuance of 909,090 placement agent warrants was estimated to be $144,000 using the Black-Scholes model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 80%, (iii) risk free interest rate of 0.75% and (iv) dividend yield of zero.

Subordinated Convertible Notes and Subordinated Warrants

Simultaneously with the closing of the $9 million principal amount Senior Note transaction, the Company sold $1 million principal amount of its Subordinated Convertible Notes (the “Subordinated Notes”) to investors consisting of management and directors of the Company and one individual investor. The sale of the Subordinated Notes did not carry any additional fees and expenses, so the Company received the entire $1 million in proceeds from the Subordinated Notes at closing. The Subordinated Notes are subordinated in right of repayment to the Senior Notes and mature 91 days subsequent to the maturity date of the Senior Notes. The Subordinated Notes bear interest at the rate of 8% per year. Once 2/3 of the Senior Notes have been repaid, then the Subordinated Notes may be converted and/or prepaid in cash so long as there is no Event of Default with respect to the Senior Notes and all Equity Conditions (as defined in the securities purchase agreement for the Senior Notes) are met. The conversion price for the Subordinated Notes is $0.264 per share. The holders of the Subordinated Convertible Notes were issued five year warrants to purchase 1,920,123 shares of Company common stock (“Subordinated Warrants”). Each Subordinated Warrant has an exercise price of $0.302 per share.

As the conversion feature of the Subordinated Notes and the related warrants were determined not to be derivative instruments, in accordance with the guidance in ASC Topic 470-20 Debt with Conversion and Other Options (“ASC 470”), the Company first calculated the fair value of the warrants issued and then calculated the relative value of the note and determined that there was a beneficial conversion feature in the amount of $246,000. However, as conversion of the Subordinated Notes is conditioned upon 2/3 of the Senior Notes being repaid, the beneficial conversion feature was determined to be contingent and therefore will not be booked unless and until the contingency is resolved.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2013

(unaudited)

The fair value of the warrants, issued in connection with the Subordinated Notes is $304,000 in the aggregate and was calculated using the Black-Scholes option pricing model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 80%, (iii) risk free interest rate of 0.75% and (iv) dividend yield of zero.

The relative value of the warrants to the note was $263,000, which was the amount recorded as original debt discount.

The balance at September 30, 2013 related to the Subordinated Notes was comprised of:

Convertible notes payable, related and unrelated parties at May 8, 2013	$	1,000,000
Unamortized debt discount		(220,003)
Ending balance at September 30, 2013	$	779,997

Fair Value Disclosure

The Company has two Level 3 financial instruments, Senior Warrants and the conversion feature associated with the Senior Notes, which are both recorded at fair value on a periodic basis. The Senior Warrants and the conversion feature are evaluated under the hierarchy of FASB ASC Subtopic 480-10, FASB ASC Paragraph 815-25-1 and FASB ASC Subparagraph 815-10-15-74 addressing embedded derivatives. The fair value of the warrants and the conversion feature are estimated using the Monte Carlo simulation model. As of September 30, 2013, the following table represents the Company’s fair value hierarchy for items that are required to be measured at fair value on a recurring basis:

	Fair
	Value		Level 1	Level 2	Level 3
Embedded note conversion feature	$	7,403			$	7,403
Warrant liability	$	846,774			$	846,774

7. Increase in Authorized Shares of Common Stock

On September 26, 2013, our shareholders approved an increase in our authorized common stock from 200,000,000 shares to 350,000,000 shares, and we amended our articles of incorporation accordingly on the same day.

8. Subsequent Events

On October 9, 2013, the Company appointed Stephen Graham as its new Chief Financial Officer, effective as of October 21, 2013.

BUSINESS

Axion Power International, Inc. (the “Company”, Axion, “we”, “our”, or “us”) is a company whose primary purpose is to develop, design, manufacture and sell advanced energy storage devices and components that are based on our patented PbC Technology. In addition we manufacture standard and specialty lead-acid batteries. Our new PbC® batteries and components, which are manufactured primarily through the use of activated carbon as an alternative to lead in the battery’s negative electrode, have application to virtually all energy system storage functions. It is the Company’s long term goal to become a primary supply source of PbC negative electrodes to established battery manufacturers.

The Battery Industry

There are two principal types of lead-acid batteries: flooded batteries and valve regulated lead-acid. The choice of battery depends mainly on the specific application that the battery serves. Typical standby or stationary applications use valve regulated lead-acid batteries due to their inherent advantages, including spill proof design, low maintenance, and compact form, low self-discharge and high performance. On the other hand, applications like industrial equipment are better served by the flooded lead-acid battery types due to their superior performance in continuous deep discharge applications and at high operating temperatures, among other features. Technology within the lead-acid battery industry has remained relatively stable for the last 30 years, and an industry-wide lack of innovation has generally restrained growth into new applications and emerging markets.

¹The Company is eligible to incorporate by reference under General Instruction VII of Form S-1. Specifically, the Company notes that it has met the requirements of paragraphs A. – D. of General Instruction VII, and that it has not been, during the past three years, a registrant for an offering of “penny stock” as defined in Rule 3a51-1 as under Rule 3a51-1.g.1., it has had net tangible assets (Stockholders Equity) of at least $2 million in all three of its last fiscal years as set forth in its balance sheets for the years ended December 31, 2012, 2011 and 2010 (as reported in the Forms 10-K of the Company for the years ended December 31, 2012 and 2011, respectively), of $11.2 million, $10.7 million and $18.6 million, respectively.

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

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

Our Corporate History

Axion Power Corporation, our wholly owned subsidiary, was formed in September of 2003 to acquire and develop certain innovative battery technology. Since inception Axion Power Corporation has been engaged in research and development (“R&D”) of new technology for the production of our PbC batteries. On December 31, 2003, Axion Power Corporation engaged in a reverse acquisition with Tamboril Cigar Company (“Tamboril”), a public shell company whereby Axion Power Corporation became a wholly owned subsidiary of Tamboril. Tamboril was originally incorporated in Delaware in January 1997 and operated a wholesale cigar business until December 1998, after which date it was an inactive public shell until the reverse acquisition and subsequent name change to Axion Power International, Inc.

In February 2006, we acquired use of our Clover Lane facility. We have utilized this space to manufacture our specialty lead-acid battery products and to produce and test prototypes which incorporate our new technology. Our Clover Lane plant provides us the opportunity to manufacture batteries for sale under the Axion brand name; to manufacture for third parties under a specific contract arrangements; or to manufacture prototypes for our own use and testing, or for testing by our customers. Our facility has been fully tested and was found to be in compliance with emission standards established by new federal guidelines in accordance with the Clean Air Act–Title III.

Since inception, our operations have been financed through the sale of equity and debt instruments to investors, as well as loans and proceeds from government grants, and with minimal revenue generated from our operations. We believe that a successful transition from an R&D to development stage company to a PbC commercial manufacturing company was achieved in 2012 and it will provide us the growth opportunities to commercialize our PbC technology and thereby improve our financial condition, cash flow and market profile.

Developments Since 2008

Since 2008, we have devoted a significant portion of our time and financial resources to upgrading, and where necessary, replacing existing battery manufacturing equipment as part of our long range business plan. Our business plan anticipated utilizing upgraded equipment to manufacture our proprietary PbC lead carbon products. During 2009, we continued to make improvements to our production processes through purchases of equipment and the early stage of quality control systems. We also installed and continued to engineer our first prototype automated PbC negative electrode manufacturing line.

On December 22, 2009, we sold 45,757,572 shares of our common stock at a price of $0.57 per share for total gross proceeds of $26,081,816 and net cash proceeds of $24,928,323 after “breakup” fees and cash offering costs.

During 2010, we continued to improve and utilize our new prototype line which, together with certain manual processes, allowed us to manufacture our PbC negative electrodes for sale and for use in ongoing prototype testing. We then incorporated our knowledge and experience into the design of a second generation automated robotic line. There were two main challenges we needed to address in order to ready our product for commercial production quantities – (i) implementation of improved quality control; and (ii) increase in quantity production to targeted levels. We began discussions with a major “design and equipment manufacture” firm early in 2010 which, in the summer of 2010, led to a design and build contract for a robotic carbon electrode manufacturing line. The complete new line was delivered to us in 2011 and was put in place at our Green Ridge Road facility in New Castle, PA. We anticipate that the carbon electrode component of our PbC batteries for our various planned PowerCube^TM projects, for our hybrid locomotive Norfolk Southern project, for our automotive strategic partners and for testing on various other customer oriented projects will be manufactured with robotic precision on this second generation line. We also continue to identify further improvements to the new line which will be incorporated into the next generation.

Our upgrade and replacement of battery manufacturing equipment, begun in 2010, was completed in 2011 and included the installation of a new automatic paste mixer and a fixed orifice pasting line that will improve the quality and dimensional tolerances of battery plates. In addition, the assembly operation added an automatic stacker that will provide the precise wrap and alignment of absorbed glass matt separator that is needed for the production of our premium PbC products. 2011 also saw us complete the modernization of our second lead-acid production line; the rebuild of five casting machines; the addition of new welding equipment; and a 35% expansion of our formation area.

As a result of our having invested in the reconfiguration of our manufacturing space and in the training of our workforce, we have been able to seize an evolving opportunity to increase revenue and cash flow generated from specialty lead-acid batteries. On March 8, 2011, we announced that we had received a series of purchase orders for the production and immediate delivery of specialty flooded lead-acid batteries. The batteries will be branded by the purchaser. These shipments generated $7.9 million and $6.4 million, respectively in 2012 and 2011 product sales. The flooded lead-acid batteries were built by us, with the purchaser carrying the cost of inventory and providing the raw materials required. The battery order was, and remains, well-suited for production on our renovated, and under-utilized, manufacturing facilities at Clover Lane. This initiative is not a deviation from our long-term strategy which is focused on PbC battery and component production. Rather, it provided us with an opportunity to enhance that strategy by further training our factory personnel, while at the same time allowing us to make production and quality improvements. A further benefit was the generation of cash flow to reduce our cash burn rate as we moved forward toward the ready state for commercialization of our PbC products in 2012.

In 2011, our automotive work incorporated new OEM partners to the ongoing mix. An increasing body of empirical evidence is presented with respect to the lack of merit, and/or practicality, of existing stop-start battery solutions, the potential of our PbC product gains more and more traction. The clock is running for the US and European automotive manufacturers as they seek to comply with upcoming governmental regulations and consumer expectations for increased miles per gallon. European OEM’s in particular have made commitments to fleet wide adoption of hybridization for their future manufactured vehicles. This commitment was strongly influenced by European Union (EU) legislation that requires reductions in CO2 emissions for all new passenger vehicle production in Europe beginning in 2012. In most cases 2012 requirements that 65% of the fleet (average) is required to reduce CO2 emissions to 130 grams per kilometer, have been met by the OEM’s because their smaller engine cars brought the fleet average down to the required level. It will be far more difficult going forward as the required average percentage for the fleet ratchets up to 75% in 2013, 80% in 2014 and a full 100% (average) in 2015. Failure to comply with the regulation will result in a fine based on the number of grams of CO2 that were emitted above the 130 gram limit. The assessment begins with 5 euros for the first gram; 15 euros for the second; 25 euros for the third; 95 euros for the fourth; and 95 euros for every subsequent gram of CO2 over the 130 gram limit. This fine will be assessed against the entire new manufactured fleet of an OEM. In real terms it means that if an OEM manufactured one million vehicles for European consumption in 2015 (and there are several that do) and that if that manufacturer was 5 grams of CO2 over the limit (at the 135 grams of CO2 per kilometer level), then that manufacturer would be fined 235 million euros for the year 2015, and for every subsequent year of non-compliance (European Parliament regulation EC443/2009).

We and others believe that the fastest, and least expensive, method of reducing CO2 emissions from an internal combustion engine vehicle is to equip the vehicle with stop-start technology. Simply put, in stop-start, every time the vehicle comes to rest the engine shuts off. When the operator takes their foot off the brake and re-engages, the engine comes back on. CO2 emission reductions, and the “hand in hand” fuel savings, are directly proportional to the time the engine is at rest. But, while the engine is off, there is still an ancillary load in the car that must be powered (headlights, heater/air conditioning, radio, power brakes, windshield wipers, door locks, dash board lights, power windows, etc.). The car battery will have to power this load, and it will have to do so without charge from the alternator, or integrated starter generator, because the engine is at rest. Several battery technologies can be utilized - expensive lithium ion, nickel metal hydride, supercapacitors in various forms and combinations, but these solutions all add four figures to the cost when the necessary ancillary equipment, required by these chemistries, is included in the equation. Prospective solutions in the form of conventional lead-acid batteries would cost a few hundred dollars but lead-acid batteries, in flooded, VRLA or AGM constructs, do not allow the vehicle to come close to fully functioning in accordance with stop/start design requirements. This is true because the lead-acid battery develops poor charge acceptance early in its life cycle resulting in extended charge time requirements between stop-start events. The result is a charging event that takes minutes, during which time, the vehicle engine cannot shut off and therefore does not reduce CO2 emissions, nor does it increase mpg, in conformance with government regulations. The solution offered by our PbC technology combines low cost, with a fast rate of charge acceptance and achieves the specified stop-start performance that is needed to comply with CO2 emissions regulations, while at the same time improving miles per gallon performance. We feel we have the best potential product for the emerging micro-hybrid (stop-start) market and therefore we have devoted considerable time and money in working with our strategic partners and prospective customers in this area. In 2012, two new major players in the automotive and truck manufacturing industry, joined our programs. Since the end of 2012, two additional OEM’s have moved into programs with us.

A major focus in 2011 was our continued effort in the hybrid locomotive application. Similar to the hybrid vehicle market, battery charge acceptance and ability to take advantage of opportunity charging are key elements in providing a product for the hybrid locomotive market. If one adds to the equation the hybrid locomotive’s need for a product that also has a “high cycle life” component, you can easily see why we feel our PbC battery, with high charge acceptance, fast re-charge ability and high cycle life, has a significant advantage in this market. Most of our work over the last three years has been with Norfolk Southern, with whom we forged a partnership after the early battery technologies they chose to work with proved to be inadequate for the unique needs of that hybrid technology. After initial testing confirmed that our PbC product demonstrated great potential for the hybrid locomotive market, we entered into a 12 month service and supply agreement with Norfolk Southern, under which we initially provided engineering expertise and small quantities of batteries for their in house testing. This arrangement evolved into the sale of a much greater quantity of batteries for their use in large string testing. That string testing proved out well in 2012 and in the 4^th quarter, we shipped all the batteries required for Norfolk Southern to rebuild their NS-999 all electric “yard slug” locomotive. When road worthiness is confirmed, the yard slug will go into yard service moving shipments and railroad cars into new train, and other yard configurations. Our work continues in the development and commissioning of an “over the road” hybrid locomotive that has been on a parallel path with the yard slug application.

With the financial assistance provided by the Pennsylvania Energy Development Authority and Commonwealth Financing Authority grants we were awarded, we commissioned our first PowerCube™ product onsite at our Clover Lane facility in November of 2011. The PowerCube was fully integrated by us and, in addition to the batteries, contains a racking system, electronics and power equipment, battery management system, climate control and fire suppression systems. As part of this undertaking, we entered into a partnership with Viridity Energy and PJM (the largest Regional Transmission Organization in the US). Basically through this arrangement, the PowerCube was network connected to the PJM system and allowed us to respond through Viridity to curtailment and demand response signals from PJM. Our strategic partnerships with Viridity and PJM were originally formed partially in response to anticipated new rulings from the Federal Energy Regulatory Commission (FERC). The new rulings took place in October of 2011 and basically allowed power sources, of 500kW down to 100kW, to be connected to the grid. They also ruled that “pay for performance” provisions would be phased in during calendar year 2012, and they were in October of 2012. “Pay for performance” translates into “the faster one responds the higher rate the utility will pay on a per kilowatt basis based on three performance metrics”. Our metrics have averaged close to 95%, and as a result our reimbursement rate is approximately 1.9 times greater than it was at the beginning of the program. In addition, in 2012 we increased our participation rate from a couple of hours per day, to 50 plus hours per week. More is possible but we are currently limited by the times that the signal channel is available. The available times have been increasing subsequent to the end of 2012. Our cube not only allows us to fully test our system, but it also allows network testing. Of course a main focus of the onsite PowerCube is still its function as a test bed for several of our applications that incorporate large strings of batteries. We have added to those applications in 2012 and in the first quarter of 2013.

Since the PowerCube can be scaled, we began a parallel path development of smaller PowerCube units (mini-cubes) in 2011. These mini-cube applications include residential storage (at levels down to 10kW) and small commercial storage. The units can be connected to wind and solar power sources in addition to filtering power directly from the grid. The end product will provide backup power, power quality, power smoothing, and potential peak shaving. In 2012 we entered into a distribution agreement with Rosewater Energy, a group that will take this product to market in North America.

We completed our work on a $1.0 million grant from the Office of Naval Research (ONR) in 2011. This project was aimed at developing a product for the Navy and Marine Corps silent watch program and their assault vehicle program. This program provided us with valuable information that we will utilize across the spectrum of our products. We have billed $1.0 million and collected all monies less a 1% service fee as of December 31, 2012.

A grant for the deployment of solar panels at our Greenridge facility was received from the Commonwealth Financing Authority of Pennsylvania. The project was completed and was signed off on in February of 2012 and the final $41,171 was collected in May of 2012. The solar panels provide an energy offset to power used in our Greenridge building.

Our Business and Products

More than eight years have been devoted to research and development on various aspects of our PbC technology. Our work has focused on developing our intellectual property, characterizing baseline performance, developing proprietary treatment processes for the activated carbon we use in our electrodes, developing proprietary designs and manufacturing techniques for electrode assemblies and fabricating a series of material and design evaluation prototypes that range from single cell to multi-cell batteries.

Our PbC energy storage device is a hybrid battery supercapacitor that combines the simplicity of lead-acid batteries with the faster recharge rate, longer cycle life and greater charge acceptance of supercapacitors. The result is a relatively low cost device that has versatility of design that will allow differing iterations to deliver maximum power; maximum energy; or a range of balances between the two.

We believe our advanced battery technologies are uniquely situated to answer the current challenges facing the lead acid battery industry and the battery industry, including the new chemistries (such as lithium-ion, nickel metal hydride, etc.) as a whole. While we explore the various potential applications for our PbC technology, two facilities in New Castle, Pennsylvania provide us with both an excellent R&D facility and a production plant in which to produce our advanced energy storage devices. In manufacturing our PbC battery using conventional lead-acid battery production methods, we provide proof to our future PbC negative electrode customers that our product is suitable to immediate use in their factories.

The PbC battery production was limited by our inability to make the carbon electrodes in large numbers and with full automated quality control. As part of our plan to transition from pilot production of PbC negative electrodes to commercial manufacturing, in 2010 we entered into a long term lease for an additional New Castle, Pennsylvania facility that we had been subleasing since 2008 (our Green Ridge Road facility). This 45,000 square foot facility currently houses our Gen II robotic PbC negative electrode production line. In addition, during this transition we:

refined our fabrication methods for carbon sheeting, packet assembly and other key components of our carbon electrode assemblies;

demonstrated the feasibility of manufacturing our PbC device and our other technologies, using standard techniques and equipment;

demonstrated that the proper quality control can be achieved on our robotic PbC negative electrode manufacturing line;

demonstrated and documented the performance of our products in key applications; and

Demonstrated that we can respond appropriately to anticipated and unanticipated technical and manufacturing challenges.

Our Clover Lane facility has a permitted manufacturing capacity of 3,000 batteries per day, so we currently have excess battery manufacturing capacity. This allows us to dedicate a portion of this production capacity to direct sale high margin specialty batteries that are required in relatively small numbers, as well as have the flexibility to respond to industry requests to provide contract manufacturing. We are also able to respond quickly as other opportunities to manufacture traditional products present themselves.

Meanwhile, we plan to develop our lead carbon technology for use in a variety of applications in different markets including:

Motive Power;

Utility Grid Connected Power;

Standby Power (UPS); and

Military applications.

We believe demand for cost-effective energy storage systems produced using our PbC technology will grow rapidly. We also believe that our technologies can be among the leaders in the high performance battery market, and that our competitive advantages will include:

excellent partial state –of-charge performance when compared to advanced lead acid and lithium ion products;

significantly longer life in string applications with minimal battery management when compared to advanced lead acid;

dramatically better charge acceptance when compared to advanced lead acid;

significantly faster recharge rate when compared to advanced lead acid and lithium ion and other storage chemistries;

significantly longer cycle lives in deep discharge applications when compared to advanced lead acid and similar life when compared to lithium ion;

significantly better ability to be recycled and end of life value ($.30~ value per pound compared to $.45 cost per pound cost to be disposed of compared to lithium ion;

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

the availability of raw materials and key components;

our ability to design and manufacture commercial carbon electrode assemblies;

our ability to establish and operate facilities that can fabricate PbC negative electrode assemblies and commercially manufacture our PbC device with consistent quality at a predictable cost;

our ability to establish and expand a customer base;

our ability to execute and perform on any future strategic distribution agreements with tier one and/or tier two battery manufacturers;

our ability to compete against established, emerging, and other storage technologies;

the market for batteries in general; and

our ability to retain key personnel.

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

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

Leverage relationships with thought leaders. We are engaged in discussions with industry consortia, research institutions, automotive OEM’s, rail transportation providers and other thought leaders in the fields of utility applications and hybrid electric vehicle technology. As we develop our relationships in the field of energy research, we believe the opportunities for government funding and consortia participation will expand and improve our access to potential suppliers and customers.

Leverage relationships with battery manufacturers. Our business model is based on the premise that, as we continue forward, we can most effectively address the needs of the market by selling PbC negative electrode assemblies to established lead-acid battery manufacturers who want to add advanced battery technology to their existing product lines. This business model should allow us to leverage the business abilities, manufacturing facilities and distribution networks of established manufacturers in order to reduce our time to market and increase our potential market penetration.

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

Focus on specific markets. Markets for motive power, utility grid connected power, standby power (UPS) and military applications are becoming increasingly attractive. We are actively pursuing the use of our lead carbon technology products in these emerging market sectors.

Maintain our technical advantage and reduce manufacturing costs. We intend to maintain our technical advantage by continuing to invest in R&D in order to improve the performance of our PbC devices and other technologies and to continue to lower our manufacturing costs. Our R&D focus will now be working with prospective customers on the commercial application of our PbC technology to fit their unique requirements`

The battery industry is mature, capital intensive, heavily regulated, highly competitive and averse to product performance risks associated with radical departures from established technology. We do not believe we will be able to make a credible entry into the battery market until we continue to prove the advantages of our PbC device technology in projects with end users in our targeted markets. Therefore, our business plan contemplates two discrete phases: the development phase (including prototype and demonstration) and the commercialization phase.

Commercialization Phase. During the commercialization phase, formally begun in 2012, we started to implement a platform technology business model where we will develop and manufacture the PbC carbon electrode assemblies that are unique to our PbC batteries. In addition to using these assemblies in our batteries, we eventually intend to sell our proprietary assemblies to other established battery manufacturers who are seeking to market more advanced batteries. We believe a platform technology business model will reduce our time to market, allow us to rely on the established business abilities of existing manufacturers and forge a strong brand identity for our PbC products, while, at the same time, allowing us to focus on a narrow band of value-added activities that should minimize our investment and maximize our profitability.

Until we complete initial planned commercial projects in our targeted markets, our negotiation position with respect to developing customer relationships with established battery manufacturers may be impaired. Even if our initial planned commercial projects are successful, we may be unable to negotiate manufacturing relationships on terms acceptable to us.

We plan to initially focus on high-value market segments where the total cost of ownership is the primary determining factor in product selection. We believe our commercial PbC device will be most appealing where longer life, high performance, and low maintenance are fully valued.

Our Patents and Intellectual Property

We own thirteen issued U.S. patents at the date of this report covering various aspects of our PbC technologies, and we typically have a number of patent applications in process at any point in time. There is no assurance that any of the pending patent applications will ultimately be granted. Our issued patents are:

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

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

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

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

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

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

¨ U.S. Patent No. 7,569,514 (expires May 22, 2021) - Method of Fabrication of Modified Activated Carbon

¨ U.S. Patent No. 7,881,042(expires March 2027) – Activated Carbon Electrode with PTFE B

¨ U.S. Patent No. 8,023,251(expires November 2028) – Hybrid Energy Storage Device and Method of Making Same

¨ U.S. Patent No. 7,998,616(expires February 2028) – Negative Electrode for a Hybrid Energy Storage Device

¨ U.S. Patent No. 8,202,653 (expires February 2028) – Electrode Grid Structure

¨ U.S. Patent No. 8,192,865 (expires October 2027) – Negative Electrode for a Hybrid Energy Storage Device

¨ U.S. Patent No. 8,347,468 (expires February 2031) – Method of Making a Current Collector

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

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

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

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

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

Our Competition

Our PbC technology is potentially competitive with technologies being developed by a number of new and established companies engaged in the manufacture of storage devices or components for storage devices. In addition, many universities, research institutions and other companies are developing advanced energy storage technologies including:

symmetric supercapacitors;

asymmetric supercapacitors with organic electrolytes;

nickel metal hydride batteries;

lithium-ion batteries;

other advanced lead-acid devices; and

flow batteries.

Other business entities are developing advanced energy production technologies like fuel cells, solar cells and windmills which may use our products, or, in some cases, compete with our products. Since some of our competitors are developing technologies that may ultimately have costs similar to, or lower than, our projected costs, there can be no assurance we will be able to compete effectively.

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

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

Raw Materials

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

Lead is the primary raw material in lead-acid batteries and currently accounts for 80% of our raw material and component costs in the specialty conventional lead-acid batteries we now manufacture. Lead prices have fluctuated dramatically over the last three years, similar to other industrial grade commodity metals. Although our PbC battery does not require as much lead as a conventional lead-acid battery, lead is still a major raw material component.

Environmental Protection

Lead is a toxic material that is a primary raw material in our PbC batteries. We also use, generate and discharge other toxic, volatile and hazardous chemicals and wastes in our research, development and manufacturing activities. We comply with federal, state and local laws and regulations regarding pollution control and environmental protection. Under some statutes and regulations, a government agency, or other parties, may seek to recover response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. In addition, more stringent laws and regulations may be adopted in the future, and the costs of complying with those laws and regulations could be substantial. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances, we could be subject to significant monetary damages and fines, or forced to suspend certain operations. Our facility was previously tested and found to be in compliance with emission standards as established by new federal guidelines in accordance with the Clean Air Act – Title III.

Our Research and Development

We engage in extensive R&D activities for the purpose of improving our PbC technology and our proposed products. Our goal is to continue to increase efficiency and reduce costs in order to maximize our competitive advantage. Our R&D organization works closely with our engineering and business development teams, our suppliers and our potential customers to improve our product design and lower manufacturing costs. Going forward R&D will be primarily focused working with prospective customers to determine how our PbC technology best fits their unique requirements. During 2012 and 2011, we spent $4.9 million and $5.1 million, respectively, on R&D. While our limited financial resources and brief operating history makes it difficult for us to estimate our future expenditures, we expect to incur R&D expenditures of consistent magnitude for the foreseeable future.

Our Employees

As of January 14, 2014, we employed a staff of approximately 83, including an 9 member scientific and engineering team, and 53 people who are involved principally in manufacturing. We are not subject to any collective bargaining agreements, and we believe we have a good relationship with our employees.

Description of Properties

On March 28, 2010, we renewed our lease for existing space at our manufacturing plant located at 3601 Clover Lane in New Castle, Pennsylvania. The salient terms of the renewal lease are as follows:

The term commenced on April 3, 2010 with an initial term of three years.

The renewal lease may be extended for two successive five-year renewal options with future rent to be negotiated at a commercially reasonable rate.

The rental amount for the initial term is $16,700 per month, which is fixed through 2013. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises.

With the execution of the addendum we now lease 72,598 square feet for a monthly rent of $17,200.

On March 10, 2013, we renewed our lease for our manufacturing plant at 3601 Clover Lane in New Castle, Pennsylvania. The lease renewal, which commenced on April 3, 2013, is for a term of five years with one five year renewal option. All other terms and conditions of the lease are the same as the existing lease agreement.

The Lease term commenced on January 1, 2011 and the term expires on December 31, 2015.

The rental amount for the initial term is $19,297 per month and is on a “triple net” basis.

The Lease contains market terms on standard provisions such as defaults and maintenance

LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

MANAGEMENT

Our board of directors directs the management of the business and affairs of our company as provided in our certificate of incorporation, our by-laws and the General Corporation Law of Delaware. Members of our board of directors keep informed about our business through discussions with senior management, by reviewing analyses and reports sent to them, and by participating in board and committee meetings.

Board Leadership Structure and Risk Oversight; Diversity

Our Company is led by Thomas Granville, who has served as chief executive officer and chairman of the board since 2005 (he also served as interim Principal Financial Officer effective as of August 2, 2013 until the newly announced Chief Financial Officer, Stephen Graham, joined us on October 21, 2013.) Our board of directors is divided into three classes of directors that serve for staggered three-year terms. Two of our current board members have been elected to serve for terms that expire on the date of our 2014 Annual Meeting; one has been elected to serve for term that expires on the date of our 2015 Annual Meeting; and two were elected at the 2013 Annual Meeting to serve for a term that expires on the date of our 2016 Annual Meeting. The board has four standing committees – audit, compensation, nominating and technology. The Audit Committee is comprised solely of independent directors (except for Charles Trego), and each committee has a separate chair. Our Audit Committee is responsible for overseeing risk management, and our full board receives periodic reports from management.

Our board leadership structure is used by other smaller public companies in the Unites States, and we believe that this leadership structure is effective for the Company. We believe that having a combined Chairman/CEO and chairs for each of our board committees is the correct form of leadership for our Company. We have a single leader for our Company and oversight of Company operations by experienced directors, three of whom are also committee chairs. We believe that our directors provide effective oversight of the risk management function, especially through the work of the Audit Committee and dialogue between the full board and our management.

The Company does not currently consider diversity in identifying nominees for director. Due to the small size of the Company, the priority has been in attracting qualified directors, and issues such as diversity have not yet been considered.

The following table identifies our current directors and specifies their respective ages and positions with our Company.

Name	Age	Position
Thomas Granville	69	Chief Executive Officer and Director
David DiGiacinto(1)	60	Director
Michael Kishinevsky	47	Director
Howard K. Schmidt, Ph. D.	55	Director
Charles R. Trego(2)	63	Director
D. Walker Wainwright	63	Director

(1)

Mr. DiGiacinto was appointed to the Board effective as of February 1, 2014.

(2)

Mr. Trego was our Chief Financial Officer until August 2, 2013.

Thomas Granville, has served on our board of directors since February 2004 and is both our chairman of our board of directors and chief executive officer. Mr. Granville served as the president of a New York State elevator company that specialized in the installation and maintenance of elevators, escalators, moving walkways and other building transportation products. Mr. Granville also served 15 years as treasurer and ten years as the president of the National Elevator Industry Inc., a trade association that represents elevator manufacturers and contractors, where his duties included labor negotiations for national contracts and oversight duties to a $2.3 billion national pension fund. Mr. Granville has also been a partner, or the general partner, of a number of real estate partnerships that owned multi-family housing, commercial real estate and a cable television company. Mr. Granville is a 1967 graduate of Canisus College. (BA - Business Administration). The Company has determined that Mr. Granville should serve as a director due to his position as senior executive officer of the Company, which gives him valuable insight, as well as his prior managerial experience which provides unique insight for the Board into the operations of the Company.

David T. DiGiacinto,is currently the elected Controller for the City Of Bethlehem, and has managed his own Business Consulting Company, BETHNY Enterprise, Inc. From January 2010 thru January 2013, he served as an elected Councilman for the City of Bethlehem. He also serves as a Managing Director for the COLMAN Group. He has independent affiliate consulting agreements with the COLMAN Group and Oriel Stat A Matrix. From December of 2011 thru November of 2012, he was a Vice President of ConAgra Foods Inc. which acquired National Pretzel Company in 2011. From December 2009-December 2011,, Mr DiGiacinto was an Executive Vice President/General Manager and Director for the National Pretzel Company. From April 1, 2008 until March 31, 2009, Mr. DiGiacinto was President and CEO (and Director) of Minrad International, Inc., which was merged with Piramal Critical Care in February of 2009. From 2000 to March 2008, Mr. DiGiacinto was a Senior Managing Director of Spencer Trask Specialty Group, an investment firm, focused on investing in emerging and development companies in the Life Sciences arena. From December 1982 to March 2000, he worked at Pfizer, Inc. in various positions including sales, marketing, business development and general management in the Chemical/Food Science and Consumer Health Care Groups. Currently Mr. DiGiacinto serves on the Board of Directors of Penn Sheet Metal, LV and Board of Advisors of Gusmer Enterprises, Inc. He was a director of Vyteris, Inc. from 2000 through January 2011. He holds a BS in Engineering from the U.S. Military Academy at West Point. The Company has determined that Mr. DiGiacinto should serve as a director due to his background in marketing, investment banking/private equity and as an executive and director of other public and private companies.

Michael Kishinevsky, is an independent director who has served on our board since June 2005. Mr. Kishinevsky is a Canadian lawyer who had been principally engaged in the practice of corporate and commercial law from February 1995 until August 2005. For five years Mr. Kishinevsky served as general legal counsel for C&T. Mr. Kishinevsky currently serves as a director of Sunrock Consulting Ltd., a company he co-founded in October 1995, which specializes in the import and distribution of carbon black and synthetic rubber. He is also the president and director of SunBoss Chemicals Corp., a corporation specializing in chemical additives for the custom rubber mixing industry. Mr. Kishinevsky is a 1989 graduate of the University of Calgary (B.Sc. in Cellular, Molecular and Microbial Biology and B.Sc. in Psychology) and a 1993 graduate of the University of Ottawa Law School. Mr. Kishinevsky was called to the bar in the Ontario courts in 1995 and is a member of the Law Society of Upper Canada. The Company has determined that Mr. Kishinevsky should serve as a director due to his legal background as well as his import and distribution experience which provides expertise on the Board with regard to product distribution.

Howard K. Schmidt, Ph.D.,is an independent director, who has served on our board of directors since April, 2005. Dr. Schmidt has been employed as a Petroleum Engineering Consultant at Saudi Aramco since August, 2009. Dr. Schmidt is an expert in the field of carbon nanotechnology and single-wall carbon nanotubes, and occasionally acts as an expert witness in nanotechnology patent litigation. He founded AOTA Energy, LLC in mid-2009 to pursue long-term research in renewable energy and sustainable water technologies. Prior to Aramco, Schmidt served as a Senior Research Fellow in the Department of Chemical and Biomolecular Engineering at Rice University in Houston, Texas. Between September, 2003 and March, 2008, he was the Executive Director of the Carbon Nanotechnology Laboratory (the “CNL”) at Rice University. Before joining CNL, Dr. Schmidt operated Stump Partners, a Houston-based consultancy firm and was involved in two Internet ventures. In 1989, Dr. Schmidt founded SI Diamond Technology, Inc., a company that received the prestigious R&D 100 Award from Research and Development Magazine in 1989, went public in 1993, and recently changed its name to Applied Nanotech Holdings, Inc. Dr. Schmidt holds two degrees from Rice University (BS-Electrical Engineering, 1980 and Ph.D.-Chemistry, 1986). The Company has determined that Dr. Schmidt should serve as a director due to his unique and extensive technical knowledge.

Charles R. Trego,joined the Company as Chief Financial Officer on April 1, 2010 and resigned on August 2, 2013. He was elected as a director on September 26, 2013. He most recently served as Executive Vice President and Chief Financial Officer of Minrad International, an Amex-listed pharmaceutical and medical device company in Orchard Park, NY. Minrad was acquired by India's Piramal Healthcare in early 2009, and Trego was an integral part of the acquisition strategy and managed the bridge financing through the transition. He served as a consultant providing financial management services to several companies from April 2009 to February 2010. Prior to that, from 2005 to 2008, he was Senior Vice President and Chief Financial Officer of Elmira NY-based Hardinge Inc, a Nasdaq-listed global machine tool company ($327 million in annual revenue), and from 2003 to 2005 he was Chief Financial Officer and Treasurer of Latham NY-based Latham International ($180 million in annual revenue), a privately held manufacturer and marketer of swimming pool components, His career began with a position as Senior Auditor with Ernst & Whinney in Dayton, and continued with financial officer positions with increasing responsibility with Ponderosa Inc., Bojangles of America, Rich Sea Pak, Rymer Foods and Rich Products Corporation. During his 14-year tenure as Chief Financial Officer at Rich Products, revenue increased from $650 million to more than $1.8 billion. He has over 30 years of experience as a financial officer of global middle businesses across several industries and includes private (family), public and private equity ownership structures. He has served as the chief financial officer of startup, turnaround, restructuring and growth businesses with revenue ranging from $25 million to $2 billion. Trego graduated from the University of Dayton in 1972 (BS in Accounting) and in 1978 (MBA). He achieved his CPA designation in 1973 from the State of Ohio. The Company has determined that Mr. Trego should serve as a director due to his long term finance and accounting experience.

D. Walker Wainwright, is an independent director who was appointed to our board of directors in January 2007. He is the founder and Chairman of American Intermodal Container Manufacturing Co., LLC, a manufacturing concern to be located in Fulton, NY. He is the former Chairman of Interboro Insurance Company, a provider of personal lines insurance products in New York State. He is also the founder and chief executive of Wainwright & Co. LLC, an independent financial advisory firm and investment manager. In this capacity he is the manager of a fund of hedge funds titled Dunemere Investor Partners, LP. Formerly a Managing Director in investment banking at Smith Barney, Inc. and at Kidder, Peabody & Co., Mr. Wainwright has over 37 years’ consulting, banking and investment banking experience. Having directed Kidder’s investment banking efforts in the Asia Pacific Region, he has extensive international experience and has lived in Australia and Lebanon. Mr. Wainwright began his career at Chemical Bank and, subsequently, the Schroder Group. He is a graduate of Stanford University (A.B. – 1972) and of Columbia University (M.B.A. – 1976). The Company has determined that Mr. Wainwright should serve as a director due to his long term finance and banking experience.

Executive officers.

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

Name	Age	Position

Philip S. Baker Stephen Graham	65 56	Chief Operating Officer Chief Financial Officer
Vani Kumar Dantam	54	Senior Vice President

Philip S. Baker joined the Company as Chief Operating Officer on April 1, 2010. He was with Santa Fe Springs CA-based Trojan Battery Company from 1997 to 2009. From 2006 to 2009 he was Senior Vice President and General Manager of a new battery facility for which he led all the phases of development and operations in Sandersville, GA. Baker guided the lead-acid battery plant from negotiations and permitting forward, and is considered to be an expert in quality control and documentation, productivity and the maximization of uptime, automation and the management of environmental issues. Prior to Sandersville, Baker served from 2001 to 2005 at the Trojan plant in Lithonia GA as Senior Vice President and General Manager, where he executed a turn-around in leadership, quality and output, introduced Kaizen events and Six-Sigma tools and improved productive output by 20% in critical bottleneck areas. Before Lithonia, Baker worked for Trojan in Santa Fe Springs as Director of Operations. He was with privately held Wyomissing PA-based Glen-Gery Corporation, a manufacturer of building materials where 700 employees reported upstream to him. He began his career at the Houston Brick & Tile Company. He is a graduate of Georgia Institute of Technology in 1971 (BS in Ceramic Engineering).

Vani Kumar Dantam joined the Company as Senior Vice President-Business Development, Sales and Marketing on January 23, 2012. From 2010 – 2011, Mr. Dantam served as the Vice President – Business Development & Sales for Ener 1, a manufacturer of EV and HEV batteries. During his tenure with Ener 1, Dantam developed over 35 comprehensive proposals for new global customers, building a pipeline of over $500 million in EV and HEV battery business. From 1994 – 2010, Dantam was employed with Remy International, as Director – Sales & Marketing, Global Director – Heavy Duty Sales & Marketing (2004-2009) and Global Director – Hybrid & Traction Motor Sales & Business Development (2009 – 2010). Mr. Dantam holds an MBA (Finance and International Business) from Indiana University, an MS, Mechanical Engineering from Vanderbilt University and a BE, Metallurgical Engineering from Banaras Hindu University- in India.

Stephen Grahamhas over 33 years of accounting and finance experience, including 17 years in a Chief Financial Officer capacity. From 2012 until joining Axion, Mr. Graham was an Executive and Financial Consultant, providing Interim CFO and transaction related services to the private equity industry. From 2009 to 2012 he served as Sr. Vice President-Chief Financial Officer, Treasurer and Secretary of Associated Materials, LLC, an international manufacturing and distribution company of building products. From 2008 to 2009, Mr. Graham was the Chief Financial Officer for Wastequip Inc., a national manufacturing company of waste disposal equipment. From 2001 to 2008, Mr. Graham was the Executive Vice President and Chief Financial Officer of Shiloh Industries, Inc. a national manufacturing company of automotive components. Mr. Graham also served as a member of the Board of Directors and Chairman of the Audit Committee for the Neenah Foundry Company from 2006 to 2010. Mr. Graham graduated with a Bachelor’s degree from the University of Toronto in 1979 and received his Chartered Accountant designation in 1982 from the Canadian Institute of Chartered Accountants.

Presiding Director

Our Chief Executive Officer, Thomas Granville, acts as the presiding director at meetings of our board of directors. In the event that Mr. Granville is unavailable to serve at a particular meeting, responsibility for the presiding director function will rotate among the chairmen of each of the committees of our board of directors.

Corporate Governance

Our board of directors believes that sound governance practices and policies provide an important framework to assist them in fulfilling their duty to stockholders. Our board of directors is working to adopt and implement many “best practices” in the area of corporate governance, including separate committees for the areas of audit and compensation, careful annual review of the independence of our Audit and Compensation Committee members, maintenance of a majority of independent directors, and written expectations of management and directors, among other things. In 2012, all incumbent directors attended 75% of our meetings of the board of directors.

Code of Business Conduct and Ethics

Our board of directors has adopted a Code of Business Conduct and Ethics, which has been distributed to all directors, officers, and employees and will be given to new employees at the time of hire. The Code of Business Conduct and Ethics contains a number of provisions that apply principally to our Chief Executive Officer, Chief Financial Officer and other key accounting and financial personnel. A copy of our Code of Business Conduct and Ethics can be found under the “Investor Information” section of our website atwww.axionpower.com. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions, applicable to our directors and executive officers, at the same location on our web site identified above. The inclusion of our web site address in this proxy statement does not include or incorporate by reference the information on our web site into this proxy statement.

Communications with the Board of Directors

Stockholders and other parties who are interested in communicating with members of our board of directors, either individually or as a group, may do so by writing to Thomas Granville, c/o Axion Power International, Inc., 3601 Clover Lane, New Castle, Pennsylvania, 16105. Mr. Granville will review all correspondence and forward to the appropriate members of the board of directors copies of all correspondence that, in the opinion of Mr. Granville, deals with the functions of the board of directors or its committees or that he otherwise determines requires their attention. Concerns relating to accounting, internal controls or auditing matters should be immediately brought to the attention of our audit committee and will be handled in accordance with procedures established by that committee.

Director Independence

Our board of directors has determined that three of our current directors would meet the independence requirements of the NYSE MKT if such standards applied to the Company. In the judgment of the board of directors, Mr. Granville and Mr. Trego do not meet such independence standards. In reaching its conclusions, the board of directors considered all relevant facts and circumstances with respect to any direct or indirect relationships between the Company and each of the directors, including those discussed under the caption “Certain Relationships and Related Transactions” below. Our board of directors determined that any relationships that exist or existed in the past between the Company and each of the independent directors were immaterial on the basis of the information set forth in the above-referenced sections.

Board Committees

The board of directors currently has four standing committees: the audit committee, the compensation committee, the nominating committee and the technology committee. These committees are responsible to the full board.

Audit Committee – Our board of directors has created an audit committee that presently consists of Mr. Wainwright, Mr. Trego and Dr. Schmidt. Mr. Wainwright serves as the current chairman of our audit committee. Each of the members has a basic understanding of finance and accounting, and is able to read and understand fundamental financial statements. The board of directors has determined that each of the members of the audit committee, other than Mr. Trego, would meet the independence requirements applicable to NYSE MKT listed companies although such standards do not apply to our company. Our board of directors has also determined that based on work history Mr Trego meets the definition of an “Audit Committee Financial Expert” as defined in Item 407(d)(5)(ii) under Regulation S-K, promulgated under the Securities Exchange Act of 1934. The audit committee has the sole authority to appoint, review and discharge our independent registered public accounting firm. The audit committee reviews the results and scope of the audit and other services provided by our independent registered public accounting firm, as well as our accounting principles and our system of internal controls, reports the results of their review to the full board of directors and to management, and recommends to the full board of directors that the our audited consolidated financial statements be included in our Annual Report on Form 10-K.

The audit committee met four times during the year-ended December 31, 2013. The audit committee charter can be found on our website underAbout Axion; Corporate Governance / Committees, atwww.axionpower.com.

Compensation Committee – Our board of directors has created a compensation committee that presently consists of Messrs. Kishinevsky, Wainwright and Trego. Mr. Wainwright serves as chairman of the compensation committee. The compensation committee makes recommendations concerning compensation of the executive management team and non-employee directors and administers our stock-based incentive compensation plans. The chairman establishes meeting agendas after consultation with other committee members and Mr. Thomas Granville, our Chief Executive Officer. Subject to supervision by the full board of directors, the compensation committee administers our stock option plans. Our Chief Executive Officer and other members of management regularly discuss our compensation issues with compensation committee members. Subject to compensation committee review, modification and approval, Mr. Granville typically makes recommendations respecting bonuses and equity incentive awards for the other members of the executive management team. The compensation committee in conjunction with other non-employee directors establishes all bonus and equity incentive awards for Mr. Granville and the other executive members of the management team. Our board of directors has determined that all members of the compensation committee would meet the independence requirements applicable to NYSE MKT listed companies although such standards do not apply to us.

The compensation committee met twice during the year ended December 31, 2013. The compensation committee charter can be found on our website under “About Axion; Corporate Governance; Committees ,” atwww.axionpower.com.

Nominating Committee -Our board of directors has created a nominating committee that consists of Messrs. Trego, Wainwright and Kishinevsky. Mr. Kishinevsky serves as chairman of the nomination committee. As currently constituted, the nominating committee will seek out candidates for director positions on the board of directors and present those candidates to the entire board for approval. At the current time, due to the recent formation of the committee, a charter has not yet been enacted. With respect to director nominees, our nominating committee will consider nominees recommended by stockholders that are submitted in accordance with our By-Laws. We do not have any specific minimum qualifications that our board believes must be met by a board recommended nominee for a position on our board of directors or any specific qualities or skills that our board believes are necessary for one or more of our directors to possess. We are developing a formal process for identifying and evaluating nominees for director, including nominees recommended by security holders. The nominating committee may consider use of an executive search firm for assistance in discovering potential board candidates.

Technology Committee – Our board of directors has created a technology committee that consists of Dr. Schmidt, and Messrs. Kishinevsky and Granville. The technology committee provides board-level oversight, guidance and direction to our R&D staff, and makes recommendations with respect to the acquisition and licensing of complementary and competitive technologies and supervises the activities of our intellectual property lawyers.

The technology committee met 9 times during the year ended December 31, 2013 and met informally with members of the R&D and manufacturing teams during the course of the year.

Board nominations

Stockholders wishing to bring a nomination for a director candidate before a stockholders meeting must give written notice to our Corporate Secretary, either by personal delivery or by United States mail, postage prepaid. The stockholder’s notice must be received by the Corporate Secretary not later than (a) with respect to an Annual Meeting of Stockholders, 120 days before the date on which next year’s proxy statement will be mailed, which the Company anticipates will be on or about May 1, 2014, and (b) with respect to a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of the meeting is first given to stockholders. The stockholder’s notice must set forth all information relating to each person whom the stockholder proposes to nominate that is required to be disclosed under applicable rules and regulations of the SEC, including the written consent of the person proposed to be nominated to being named in the proxy statement as a nominee and to serving as a director if elected. The stockholder’s notice must also set forth as to the stockholder making the nomination (i) the name and address of the stockholder, (ii) the number of shares held by the stockholder, (iii) a representation that the stockholder is a holder of record of stock of the Company, entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person named in the notice, and (iv) a description of all arrangements or understandings between the stockholder and each nominee.

Stockholder Communications with the Board of Directors

Stockholders may communicate directly with the board of directors or any board member by writing to them at Axion Power International, Inc., 3601 Clover Lane, New Castle, PA 16105, C/O Secretary, Michael Kishinevsky. The outside of the envelope should prominently indicate that the correspondence is intended for the board of directors or for a specific director. The secretary will forward all such written communications to the director to whom it is addressed or, if no director is specified, to the entire board of directors.

Director Attendance at Annual Meetings of Stockholders

We encourage our directors to attend Annual Meetings, although such attendance is not required. Four directors attended the 2013 Annual Meeting.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by or paid to our Named Executive Officers with respect to the years ended December 31, 2012 and 2013. The Named Executive Officers are as shown. We did not have any non-equity incentive plans, pension plans or deferred compensation plans during the years ended December 31, 2012 and 2013.

SUMMARY COMPENSATION TABLE

						Option		All Other		Total
Name and Principal		Salary		Bonus		Awards		Compensation		Compensation
Position	Year	($)(1)		($)(2)		($)(3)		($)(4)		($)
Thomas Granville
CEO and Director	2013		380,000		38,000				13,994		422,994
Thomas Granville
CEO and Director	2012		380,000						20,175		400,715

Charles R. Trego (5)
CFO	2013		147,115		22,500				6,897		176,513
Charles R. Trego
CFO	2012		225,000						22,109		247,109

Stephen Graham (6)
CFO	2013		48,077				64,836		6,536		119,449

Philip S. Baker
COO	2013		199,800		19,180				7,882		227,662
Philip S. Baker
COO	2012		199,800						18,317		218.117

Vani K. Dantam	2013		225,000		22,500				12,538		260,038

Vani K. Dantam	2012		225,000		20,000		21,384		44,271		310,655

1.	Salaries are presented as the contractual amount paid during 2013 and 2012.

2.	Discretionary bonuses are not made pursuant to any specific bonus plan. Bonuses cited were awarded and paid in 2013.

3.	Stock and option awards were granted pursuant to the individual employment contracts. Options are valued using the Black-Scholes-Merton option pricing model.

Other compensation includes Company perquisites relating to pre and post-employment consulting contracts, severance payments, auto allowance, personal use of company cars, accrued vacation payments, moving expenses, other earned compensation, as well as healthcare premiums paid under the group health plan.

5.	Mr Trego resigned effective August 2, 2013

6.	Mr Graham joined on October 21, 2013

Employment Agreements

Messrs. Baker, Dantam and Granville and Mr. Trego (who resigned effective August 2, 2013)

Effective as of April 1, 2013, Axion Power International, Inc. (the “Company”) entered into new three year employment agreements (“Agreement” or “Agreements”) with each of Thomas Granville, Charles Trego, Phillip Baker and Vani Dantam, which expire on March 31, 2016. Each of the Agreements is identical to the prior employment agreements in effect with each of the officers, except with respect to the new terms and as set forth below.

For each officer, there is a new payment schedule, which calls for a stipend payment equal to 10% of base salary (which is the same as in the prior Agreement and which remains unchanged during the term of said Agreement), in cash within 45 days from the date of effectiveness of each Agreements, and then the same stipend payment is due on the first, second and third anniversaries of the effective date of the Agreement so long as the executive is still employed by the Company on each said anniversary date.

The following table sets forth the stipend payment schedule:

Executive	Payment within 45 days of April 1, 2013		Payment on 1 year anniversary (1)		Payment on 2 year anniversary (1)		Payment on 3 year anniversary (1)
Thomas Granville	$	38,000	$	38,000	$	38,000	$	38,000
Charles Trego (3)	$	22,500	$	22,500	$	22,500	$	22,500
Vani Dantam (2)	$	22,500	$	22,500	$	22,500	$	22,500
Philip Baker	$	19,980	$	19,980	$	19,980	$	19,980

(1)	Payable only if executive is still employed by the Company on the anniversary date.
(2)	Also has been given an automobile allowance of $500 per month.
(3)	Mr. Trego resigned as our Chief Financial Officer effective as of August 2, 2013.

A description of the previous contracts is set forth below due to the almost identical terms.

During 2010, the Company has entered into executive employment agreements with Thomas Granville, Charles R. Trego, and Phillip S. Baker. These agreements generally require each executive to devote substantially all of his business time to the Company’s affairs, establish standards of conduct, prohibit competition with our company during their term, affirm our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of the executives is allowed to participate in our standard employee benefit programs, including medical/hospitalization insurance and group life insurance, as in effect from time to time. Each of the covered executives will generally receive an automobile allowance, reimbursement for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties, and a severance package that guarantees continued remuneration equal to the executive’s base salary for a total of 23 months so long as the Company elects to enforce the provisions of the Non-Competition Agreement, should the executive be unable to find employment or accepts employment at a reduced rate of pay due solely to the Non-Competition Agreement. There are no non-qualified deferred compensation plans. The provisions of the individual agreements are set forth in the following table:

•

Thomas Granville. On June 29, 2010, the Company entered into an Executive Employment Agreement with Thomas Granville as Chief Executive Officer. Pursuant to this agreement, Mr. Granville receives an annual salary of $380,000, and an annual car allowance of $9,000 for the period commencing June 29, 2010, and terminating June 30, 2013. Mr. Granville’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Mr. Granville’s and the Company’s performance. In addition, Mr. Granville received a signing bonus of $270,000 and was paid on July 9, 2010. The Company also granted Mr. Granville an option to purchase 360,000 shares of our common stock at a price of $1.50 per share at a vesting rate of 10,000 shares per month through the term of the agreement. Mr. Granville is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs.

•

Charles R. Trego. On April 1, 2010, the Company entered into an Executive Employment Agreement with Charles R. Trego as Chief Financial Officer.Under the terms of his employment agreement, which has a term of three years (and thus terminates on March 31, 2013), Mr. Trego received an annual salary of $225,000, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $9,000, bonuses as determined by the compensation committee, and a 5-year option to purchase 265,000 shares of our common stock at a price of $1.50 per share. 27,000 options shall vest upon execution of this contract and, beginning in June 2010, 7,000 options will vest monthly through the remaining 34 months of this agreement. Mr Trego resigned as Chief Financial Officer effective August 2, 2013.

•

Philip S. Baker. On April 1, 2010, the Company entered into an Executive Employment Agreement with Philip S. Baker as Chief Operating Officer. Under the terms of his employment agreement, which has a term of three years (and thus terminates on March 31, 2013), Mr. Baker receives an annual salary of $199,800,which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $6,000, and a 5-year option to purchase 230,000 shares of our common stock at a price of $1.50 per share, of which 26,000 options shall vest upon execution of this contract and, beginning in June, 2010, 6,000 options will vest monthly through the remaining 34 months of this agreement.

In conjunction with the appointment of Mr. Dantam, the Company entered into an employment agreement with him that generally requires the executive to devote substantially all of his business time to our affairs, establish standards of conduct, prohibit competition with our company during his term, affirm our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of our executives will participate in our standard employee benefit programs, including medical/hospitalization insurance as in effect from time to time. Each of the covered executives will generally receive reimbursement for all reasonable business expenses incurred by them on behalf of the Company in the performance of their duties.

Under the terms of his employment agreement effective January 1, 2012, which has a term of three years, Mr. Dantam receives an annual salary of $225,000, which is subject to review on an annual basis, a $20,000 sign on bonus, bonuses as determined by the compensation committee, and a 5-year option to purchase 150,000 shares of our common stock at a price of $1.50 per share, 15,020 options shall vest upon execution of this contract and, beginning in March 2012, 3,970 options will vest monthly through the remaining 34 months of this contract.

Mr. Graham

On October 9, 2013, the Company appointed a new Chief Financial Officer, Stephen Graham, effective as of October 21, 2013.

In conjunction with this appointment, we entered into an employment agreement with Mr. Graham. This agreement generally requires this executive to devote substantially all of his business time to our affairs, establishes standards of conduct, prohibits competition with our company during his term in office, affirms our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provides for the acts and events that would give rise to termination of such agreements and provides express remedies for a breach of the agreement. Mr. Graham will participate in our standard employee benefit programs, including medical/hospitalization insurance as in effect from time to time. He will receive an automobile allowance and reimbursement for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties. The provisions of his individual agreement are summarized below:

The term of employment is three years.

Mr. Graham shall receive an annual salary of $250,000, which is subject to annual review, and a monthly car allowance of $750.

Mr. Graham will be granted a 5-year option to purchase 900,000 shares of our common stock at a price of $0.15 per share, 180,000 options shall vest immediately, and thereafter 20,000 options shall vest on the last day of each consecutive calendar month, commencing on October 31, 2013 and ending on September 30, 2016.

In consideration of the level of compensation paid to Mr. Graham, the Company will pay him a stipend as an additional inducement to retain his services over the term of his employment as follows: provided he is an employee in good standing in the position of Chief Financial Officer on each of October 21, 2014, October 21, 2015 and October 21, 2016, he will be paid a stipend of $25,000.00, subject to normal withholdings and deductions on the first regularly scheduled payroll following each such date, respectively.

Warrants

As of December 31, 2013, we had 20,828,436 outstanding warrants that represent potential future cash proceeds to our company of $6,366,162. The warrants are divided into four classes that are presently exercisable and expire at various times through December 8, 2018. The following table summarizes the number of warrants in each class, the anticipated proceeds from the exercise of each class, and the expiration date of each class.

Warrant Series	Number of Warrants	Exercise Price		Anticipated Proceeds	Expiration Date
2009 Bridge Warrants	45,661	2.00	$	91,322	August 12, 2014
Senior Convertible Notes	17,281,107	0.30		5,218,894	May 07, 2018
Junior Convertible Notes	1,920,123	0.30		579,877	May 07, 2018
Placement Agent	909,090	0.30		274,545	May 07, 2018
Placement Agent	325,758	0.30		97,727	October 22,2018
Placement Agent	193,182	0.30		58,341	November 14, 2018
Placement Agent	151,515	0.30		45,455	December 07,2018
Total	20,826,436		$	6,366,162

The holders of warrants are not required to exercise their rights at any time prior to the expiration date and we are unable to predict the amount and timing of any future warrant exercises. We reserve the right to temporarily reduce the exercise prices of our warrants from time to time in order to encourage the early exercise of the warrants.

Stock Options

As of December 31, 2013, we had 5,192,140 outstanding stock options that represent potential future cash proceeds to our company of $6,419,318. The outstanding options include 3,431,729 options that are currently vested and exercisable and 1,760,411 that will vest and become exercisable over the next three years. These options represent potential future cash proceeds to our company of $5,734,116 and $ 685,202 respectively.

	Shares		Price		Proceeds		Shares		Price		Proceeds
2013 Employee & Officer plan options		1,734,395	$	1.50	$	2,601,430		801,932	$	0.48	$	513,191
Directors plan options		531,584		1.03		547,061		958,479		.31		296,317
Non-plan options to consultants and employees		1,165,750		2.22		2,585,625
Total		3,431,729	$	1.67	$	5,734,116		1,760,411	$	0.46	$	685,202

The holders of options are not required to exercise their rights at any time and we are unable to predict the amount and timing of any future option exercises. We reserve the right to temporarily reduce the exercise prices of our options from time to time in order to encourage the early exercise of the options.

Outstanding Equity Awards at 2013 Fiscal Year-End

Option Awards

Stock Awards

Non-Plan

Equity Incentive Plan Awards

Number of shares underlying unexercised options

# Shares

Name

#
Exercisable

#
Unexer-
cisable

Unearned

Option
Exercise
Price

Option
Expiration
Date

Number
Unearned
Shares
or units
of
stock

Market
Value

Unearned
shares,
units, or
other
rights not
vested

Market
Value

Footnotes

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Granville, Tom

90,000

2.50

varies through 6/15/2015

Issued pursuant to June 2008 Executive Employment Agreement. Options Expire 5 years after monthly vest date

Granville, Tom

360,000

1.50

varies through 6/29/2018

Issued pursuant to June 2010 Executive Employment Agreement. Options Expire 5 years after monthly vest date

Charles Trego

265,000

1.50

varies through 3/30/2018

Issued pursuant to April 2010 Executive Employment Agreement. Options Expire 5 years after monthly vest date

Philip Baker

230,000

1.50

varies through 3/30/2018

Issued pursuant to April 2010 Executive Employment Agreement. Options Expire 5 years after monthly vest date

Stephen Graham

240,000

660,000

0.15

varies through 9/21/21

Issued pursuant to October2013 Executive Employment Agreement. Options Expire 5 years after monthly vest date

Post-Termination Compensation

We have not entered into change in control agreements with any of our named executive officers or other members of the executive management team, although our employment agreements with certain members of management do call for immediate vesting of options upon a 50% change in control. No awards of equity incentives under our 2004 Incentive Stock Plan or awards of options under our 2004 Outside Directors Stock Option Plan provide for immediate vesting upon a change in control other than a restricted stock grant of 36,000 shares issued to Robert Nelson. However, the compensation committee has the full and exclusive power to interpret the plans, including the power to accelerate the vesting of outstanding, unvested awards. A “change in control” is generally defined as (1) the acquisition by any person of 30% or more of the combined voting power of our outstanding securities or (2) the occurrence of a transaction requiring stockholder approval and involving the sale of all or substantially all of our assets or the merger of us with or into another corporation.

Director Compensation

The following table provides information regarding compensation paid to non-employee directors for services rendered during the year ended December 31, 2013

	Fees Earned or		Stock
	Paid in Cash		Awards
Name	($)(1)		($)		Total ($)
Thomas Granville (2)
Robert G. Averill		40,250				40,250
Dr. Howard K. Schmidt		44,760		46,452		91,212
Michael Kishinevsky		43,820		42,353		86,173
Chuck Trego (3)		8,113		8,063		16,176
D. Walker Wainwright		35,260		46,452		81,712

1.	Fees are presented based on the amount paid during 2013.

2.	Mr. Granville received no compensation during 2013 for his service as a Director, as he served as our chief executive officer during that time period. For a summary of the compensation received by him as chief executive officer during 2013, see Summary Compensation Table above.

Mr. Trego was elected to serve on the Board of Directors at the Annual Meeting held on September 26,2013, receiving 498,501 five-year options with an exercise price of $0.12 per share, pursuant to the 2004 Outside Directors Stock Option Plan. The options granted shall vest at the rate of 166,667 per year commencing on the date of the company's Annual Meeting, so long as the director serves as a member of the board on the date of such meeting.

The members of our board of directors are actively involved in various aspects of our business ranging from relatively narrow board oversight functions to providing hands-on guidance to our executives and scientific staff with respect to matters within their personal experience and expertise. We believe that the active involvement of all directors in our principal business and policy decisions increases our board of directors’ understanding of our needs and improves the overall quality of our management decisions. In recognition of the substantial time and personal effort that we require from our directors, we have adopted director compensation policies that provide for higher director compensation than is typically found in companies at our early stage of development.

Only non-management directors are compensated separately for service as members of our board of directors. Each of our non-management directors received the following components of compensation for the period January 1, 2012 through December 31, 2013:

•

A basic annual retainer of $25,000 for service as a director;

•

A supplemental retainer of $6,000 for service as chairman of any committee;

•

A supplemental annual retainer of $3,000 for service as a committee member;

•

A meeting fee of $1,500 per day for each board or committee meeting attended in person or $500 for each board or committee meeting attended by telephone;

•

Reimbursement for all reasonable travel, meals and lodging costs incurred on our behalf;

•

Options to reelected directors; and

•

Reimbursement for expenses up to $5,000 annually for education related to chairmanship of a committee.

The 2004 stock option plan for independent directors authorized the issuance of options to purchase $20,000 of our common stock for each year of service as a director. The plan was amended on September 28, 2010 increasing the shares reserved for issuance under the outside directors’ stock option plan to 500,000. On October 17, 2012, the Board of Directors amended the Axion Power International, Inc. independent director’s stock option plan to increase the number of shares of common stock available thereunder from 500,000 shares to 1,000,000 shares.

For 2013 and 2012, we issued 500,000, and 171,429, options respectively pursuant to our directors’ stock option plan. Of this total, no options were exercised during the year ended December 31, 2013, 531,584 options are currently vested and exercisable at a weighted average price of $1.03 per share and 958,479 options are unvested and will be exercisable at a weighted average price of $0.31 per share.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

On January 14, 2014, we had 196,584,591 shares of common stock issued and outstanding. The following table sets forth certain information with respect to the beneficial ownership of our securities as of October 4, 2013, for (i) each of our directors and executive officers and (ii) all of our directors and executive officers as a group. We do not have any persons who we know beneficially owns more than 5% of our common stock. Normally, the Company would rely on the Section 16 filings for determining if there are any 5% owners. Our reporting is limited to the information we do have when we do not have the benefit of further information.

Beneficial ownership data in the table has been calculated based on the Securities and Exchange Commission rules that require us to identify all securities that are exercisable for or convertible into shares of our common stock within 60 days of January 14, 2013 and treat the underlying stock as outstanding for the purpose of computing the percentage of ownership of the holder.

Except as indicated by the footnotes following the table, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all capital stock held by that person. The address of each named executive officer and director, unless indicated otherwise by footnote, is c/o Axion Power International, Inc. 3601 Clover Lane, New Castle PA 16105.

	Common Stock		Warrants & Options (1)		Combined Ownership		Percentage

Granville, Tom	696,596		442,751		1,139,347		*
Graham, Stephen			900,000		900,000		*
Trego, Charles		8,063		784,201		792,264		*
Wainwright, Walker		106,688		270,287		376,975		*
Baker, Philip		-		249,201		249,201		*
Schmidt, Howard		106,274		137,250		243,524		*
Kishinevsky, Michael		97,287		137,250		234,537		*
Dantam, Vani		-		169,201		169,201		*
Directors and officers as a group (8 persons)		1,014,908		3,090,141		4,105,049		2.1	%

*Less than 1%

(1)

Represents shares of common stock issuable upon exercise of warrants and options held by the stockholders that are presentably exercisable or will become exercisable within 60 days.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Transactions with Executive Management

See the “Executive Compensation” section for a discussion of the material elements of compensation awarded to, earned by or paid to our named executive officers. Other than as stated in the “Executive Compensation” section, we have not entered into any transactions with executive management.

DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES

Description of the Private Placement

$9 Million Financing Transaction

On May 7, 2013 (“Closing”), we entered into a financing transaction for the sale of Senior Convertible Notes (“Senior Convertible Notes”) of Axion Power International, Inc. and warrants issued by the Company in connection therewith (“Senior Warrants”) with gross proceeds of $9 million to us. On Closing, we received cash proceeds of $3 million and deposit an additional $6 million into a series of control accounts in our name. We are permitted to withdraw funds from our control accounts (i) in connection with certain conversions of the Senior Convertible Notes or (ii) otherwise, as follows: $500 thousand on each 30 day anniversary of the Effective Date commencing on the 60^th day after the Effective Date until there are no more funds in the control accounts (each, a “Funds Release”).

We received approximately $2.76 million in net proceeds at Closing, after deducting our placement agent’s fee of $240,000. Our other offering expenses, other than our placement agent’s fee, are approximately $100,000, which expenses will be paid out of the proceeds at Closing. At each Funds Release, we received approximately $460 thousand in net proceeds, after deducting our placement agent’s fee of $40,000.

Securities Purchase Agreement

The Senior Convertible Notes and Senior Warrants were issued pursuant to the terms of a Securities Purchase Agreement (“Purchase Agreement”) among us and the Investors. The Purchase Agreement provided for the sale of the Senior Convertible Notes and Senior Warrants for gross proceeds of $9 million to us.

Senior Convertible Notes

Ranking

The Senior Convertible Notes are senior unsecured obligations of the Company, subject only to certain secured obligations of the Company for up to a maximum of $1 million of government issued indebtedness for purchase of plant and machinery and other purchase money financing for property, plant and equipment.

Maturity Date

Unless earlier converted or redeemed, the Senior Convertible Notes mature 21 months from the Closing (“Maturity Date”), subject to the right of the investors to extend the date (i) if an event of default under the Senior Convertible Notes has occurred and is continuing or any event shall have occurred and be continuing that with the passage of time and the failure to cure would result in an event of default under the Senior Convertible Notes and (ii) for a period of 20 business days after the consummation of a fundamental transaction if certain events occur.

Interest

The Senior Convertible Notes bear interest at the rate of 8% per annum and are compounded monthly, on the first calendar day of each calendar month. The interest rate will increase to 18% per annum upon the occurrence and continuance of an event of default (as described below).

Interest on the Senior Convertible Notes is payable in arrears on each Installment Date (as defined below). If a holder elects to convert or redeem all or any portion of a Senior Convertible Note prior to the Maturity Date, all accrued and unpaid interest on the amount being converted or redeemed will also be payable. If we elect to redeem all or any portion of a Senior Convertible Note prior to the Maturity Date, all accrued and unpaid interest on the amount being redeemed will also be payable.

Conversion

All amounts due under the Senior Convertible Notes are convertible at any time, in whole or in part, at the option of the holders into shares of our common stock at a fixed conversion price, which is subject to adjustment as described below. The Senior Convertible Notes are initially convertible into shares of our common stock at the initial price of $0.264 per share. This conversion price is subject to adjustment for stock splits, combinations or similar events and “full ratchet” antidilution provisions.

Payment of Principal and Interest

We have agreed to make amortization payments with respect to the principal amount of each Senior Convertible Note in shares of our common stock, subject to the satisfaction of certain equity conditions, or at our option, in cash on each of the following installment dates:

the twenty-third trading day after the earlier of:

(x)

the initial effective date of a registration statement filed in connection with this offering or

(y)

October 1, 2013; the first trading day of the calendar month immediately following the initial installment date (or if such date is less than twenty trading days after the initial installment date, the second calendar month immediately following the initial installment date to the extent); and then each month through and including the Maturity Date, each in an amount equal to 1/9 of the principal amount of each Senior Convertible Note.

The holder of each Senior Convertible Note agrees that, with respect to shares of our common stock received in payment of a Senior Convertible Note as described above, to not sell shares of our common stock during any trading day in an amount, in the aggregate, exceeding 15% of the composite aggregate share trading volume of the common stock measured at the time of each sale of securities during such trading day.

Acceleration and Deferral of Amortization Amounts

During each period after an installment date and prior to the immediately subsequent installment date, a holder may elect to accelerate the amortization of a Senior Convertible Note at the applicable amortization conversion price for such prior installment date, if either:

	¨	in the aggregate, all such accelerations in such period does not exceed the sum of two (2) other installment amounts (or, if the Company has delivered shares of Common Stock in satisfaction of the entire installment amount of such installment date, one (1) other installment amount),

	¨	no more than five (5) separate accelerations have been consummated in such period, or

	¨	such holder has not accelerated any portion of any installment amount in six (6) prior periods.

The holder of a Senior Convertible Note may, at the holder’s election by giving notice to us, defer the payment of the installment amount due on any installment dates, in whole or in part, to another installment date, in which case the amount deferred will become part of such subsequent Installment Date and will continue to accrue interest.

Events of Default

The Senior Convertible Notes contain standard and customary events of default including but not limited: (i) failure to register our Common Stock within certain time periods; (ii) failure to make payments when due under the Senior Convertible Notes; and (iii) bankruptcy or insolvency of the Company.

If an event of default occurs, each holder may require us to redeem all or any portion of the Senior Convertible Notes (including all accrued and unpaid interest thereon), in cash, at a price equal to the greater of (i) up to 125% of the amount being redeemed, depending on the nature of the default, and (ii) the intrinsic value of the shares of Common Stock then issuable upon conversion of the Senior Convertible Note.

Fundamental Transactions

The Senior Convertible Notes prohibit us from entering into specified transactions involving a change of control, unless the successor entity assumes in writing all of our obligations under the Senior Convertible Notes under a written agreement.

In the event of transactions involving a change of control, the holder of a Senior Convertible Note will have the right to require us to redeem all or any portion of the Senior Convertible Note it holds (including all accrued and unpaid thereon) at a price equal to the greater 125% of the amount of the Senior Convertible Note being redeemed and the intrinsic value of the shares of Common Stock then issuable upon conversion of the Senior Convertible Note being redeemed.

Limitations on Conversion and Issuance

A Senior Convertible Note may not be converted and shares of common stock may not be issued under the Senior Convertible Notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of common stock. At each holder’s option, the Senior Convertible Note Blocker may be raised or lowered to any other percentage not in excess of 9.99%, except that any raise will only be effective upon 61-days’ prior notice to us.

Senior Warrants

The Senior Warrants entitle the holders of the Senior Warrants to purchase, in aggregate, 17,281,107 million shares of our common stock. The Senior Warrants will not be exercisable until the six month anniversary of the Closing and will expire 5 years from the date of first exercise. The Senior Warrants are initially exercisable at an exercise price equal to $0.302, subject to certain adjustments.

The Senior Warrants may be exercised for cash, provided that, if there is no effective registration statement available registering the exercise of the Senior Warrants, the Senior Warrants may be exercised on a cashless basis. This prospectus does not cover the shares of common stock issuable from time to time upon exercise of the Senior Warrants. We anticipate that we will file a registration statement covering the shares of common stock issuable upon the exercise of the Senior Warrants prior to the time the Senior Warrants become exercisable.

The exercise price of the Senior Warrants is subject to adjustment for stock splits, combinations or similar events, and, in this event, the number of shares issuable upon the exercise of the Senior Warrant will also be adjusted so that the aggregate exercise price shall be the same immediately before and immediately after the adjustment. In addition, the exercise price is also subject to a “full ratchet” anti-dilution adjustment where if we issue or are deemed to have issued securities at a price lower than the then applicable exercise price.

Limitations on Exercise

The Senior Warrants may not be exercised if, after giving effect to the exercise, the holder of the Senior Warrant together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of common stock. At each holder’s option, the warrant blocker applicable to the exercise of the Senior Warrants may be raised or lowered to any other percentage not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to us.

Fundamental Transactions

The Senior Warrants prohibit us from entering into specified transactions involving a change of control, unless the successor entity assumes all of our obligations under the Senior Warrants under a written agreement before the transaction is completed. When there is a transaction involving a permitted change of control, a holder of a Senior Warrant will have the right to require us to repurchase the holder’s Senior Warrant for a purchase price in cash equal to the Black Scholes value (as calculated under the Senior Warrants) of the then unexercised portion of the Senior Warrant.

Registration Rights Agreement

The Company entered into a Registration Rights Agreement with the Holders as of the date of Closing. Under this Agreement, the Company has agreed to register 125% of the shares issuable under the Notes and 100% of the shares issuable under the Senior Warrants, with filing to occur no later than 20 days of the Closing and with effectiveness to occur no later than 75 days of the Closing. If we are unable to meet either of these deadlines, we may be required to pay certain cash damages under the Registration Rights Agreement or, with the passage of additional time, an Event of Default under the Notes may occur.

Dollar Value of Underlying Securities and Potential Profits on Conversion

The following table sets forth the potential profit to be realized upon conversion by the selling stockholders of the Senior Convertible Notes based on the conversion price on May 8, 2013 and the closing price of our common stock on May 8, 2013 (the date the Senior Convertible Notes were issued).

Potential Profit from Conversion of the Senior Convertible Notes at the Option of the Selling Stockholders

Per share market price as of May 8, 2013	$	0.251
Per share conversion price as of May 8, 2013	$	0.264
Total shares underlying Senior Convertible Notes based on conversion price		34,090,909
Aggregate market value of underlying shares based on per share market price as of May 8, 2013	$	8,556,818
Aggregate conversion price of underlying shares	$	9,000,000
Aggregate cash purchase price for the Senior Convertible Notes	$	9,000,000
Total premium to market price of underlying shares		5.18	%

The following table sets forth the potential profit to be realized upon exercise of the Senior Warrants by the selling stockholders based on the exercise price at May 8, 2013 and the per share closing price of our common stock on May 8, 2013 (the date of issuance of the Senior Warrants). Although, the Senior Warrants are not exercisable until November 8, 2013, the figures set forth in the following table have been calculated as if the Senior Warrants were exercisable on the Closing Date of May 8, 2013 for illustrative purposes only.

Potential Profit from Exercise of the Senior Warrants

Per share market price as of May 8, 2013	$	0.251
Per share exercise price as of May 8, 2013	$	0.302
Total shares underlying Senior Warrants		17,281,107
Aggregate market value of underlying shares based on market price as of May 8, 2013	$	4,337,558
Aggregate exercise price of underlying shares	$	5,218,894
Total premium to market price of underlying shares		20.32	%

Shares Issuable to Selling Stockholders in Satisfaction of Principal and Interest

The following table sets forth the total number of shares of Company common stock which would be issued to the selling stockholders if the Company elects to convert all principal and interest under the Senior Convertible Notes into shares of its common stock in lieu of paying cash. The following table assumes that: (a) principal and interest payments are made on the nine regularly scheduled installment dates (beginning on August 14, 2013), (b) that no such regularly scheduled installment payments are accelerated or deferred, (c) that no payments of interest will be made prior to the first installment date ( August 14, 2013), (d) that the indicated conversion price remains the same from the first installment date until the Senior Convertible Notes are paid in full, and (e) that the selling stockholders do not convert the Senior Convertible Notes at their election. This table is provided for illustrative purposes only, as it is unlikely that these assumptions will be fully accurate at all relevant times.

Number of Shares Issuable in Satisfaction of the Senior Convertible Notes
Based on Various Assumed Conversion Prices

Assumed Conversion Price*	Number of Shares Potentially Issuable

Initial Conversion price ($0.264 per share)		35,237,340
$0.24 per share		38,761,074
$0.22 per share		42,284,807
$0.20 per share		46,513,288
$0.18 per share		51,681,431

*Assumes conversion price remains the same throughout the entire installment payment period, which is unlikely to occur because the conversion price applicable to each installment payment will be based on the market price of the Company’s common stock prior to each such installment date.

Payments to Selling Stockholders and Affiliates

In connection with the Senior Convertible Notes, we are or may be required to make the following payments to the selling stockholders and their affiliates:

Payee		Maximum Interest Payments (1)				Maximum Early Redemption Premiums (2)				Maximum Registration Penalties (3)				Total Maximum Payments During First 12 Months (4)
Selling Stockholders		$	302,658			$	12,863,134			$	727,200			$	1,029,858

(1) Represents the maximum amount of interest payable by the Company to the selling stockholders under the Senior Convertible Notes assuming (a) that all nine installment payments thereunder are timely made (beginning with the first installment payment being made on August 14, 2013) and that no installment payments are accelerated or deferred, (b) that no payments of interest will be made prior to the first installment date, (c) that the Senior Convertible Notes are not otherwise converted prior to the maturity date, (d) that interest is paid in cash and on the declining balance only and (e) that no event of default thereunder occurs.

(2) Represents the cash amount that would be payable by the Company if it were required to redeem the Senior Convertible Notes as a result of an event of default or change of control assuming (a) that the applicable premium to be applied upon the event of default or change of control is 125%, (b) that the event of default or change of control occurs on May 28, 2013, and (c) that the required payments continue until May 7, 2014. The default interest rate is 18% per annum upon the occurrence and continuance of an event of default.

(3) Represents the maximum monetary penalties and interest that would be payable if the Company failed to timely file, obtain a declaration of effectiveness or maintain the effectiveness with respect to the registration statement required under the above-described Registration Rights Agreement. Assumes that (a) the monetary penalties begin to accrue in May, 2013, (b) the monetary penalties continue to accrue until May 7, 2014, and (c) the monetary penalties will not be paid until May 8, 2014 (which results in the payment of interest on unpaid amounts at a rate of 1% per month from May 8, 2013 to May 7, 2014).

(4) Represents the maximum amounts payable in cash under the other columns in this table during the first 12 months after the sale of the Senior Convertible Notes assuming that there is no redemption thereof during the first year due to an event of default or change of control. Since this table assumes that the first installment payment is made on August 14, 2013, there will be no interest due and payable after the first 12 months as all nine installment payments would be made within the first year.

Net Proceeds from Private Placement of Senior Convertible Notes

The following table sets forth the gross proceeds received from the private placement of the Senior Convertible Notes and calculates the net proceeds thereof after deduction of the anticipated payments pursuant to the Senior Convertible Notes and related documents. The net proceeds do not include the payment of any contingent payments, such as liquidated damages or repayment premiums in the case of default or a change of control. The net proceeds assumes that all interest and principal will be paid in cash and that all nine installment payments are timely made (beginning with the first installment payment on August 14, 2013), notwithstanding that the Company may pay (and is expected to pay) interest and principal in shares of its common stock under specified circumstances, as described above. The interest amount reflected below assumes that all nine installment payments are made when due without any event of default, and the table assumes that none of the Senior Convertible Notes are converted prior to maturity. Based on the foregoing assumptions, the net proceeds represent approximately 82.53% of the gross proceeds.

Gross Proceeds	$	9,000,000
Approximate Aggregate Interest Payments	$	302,658
Approximate Transaction Costs (including Placement Agent Fees)	$	820,000
Net Proceeds	$	7,877,342

Comparison of Issuer Proceeds to Potential Investor Profit

As discussed above, the Company plans to use the proceeds from the sale of the Senior Convertible Notes for general corporate purposes. The following table summarizes the potential proceeds the Company will receive pursuant to the Senior Securities Purchase Agreement, the Senior Convertible Notes and the Senior Warrants. For purposes of this table, we have assumed that the selling stockholders will exercise all of the Senior Warrants on a cash basis. We have also assumed that the Senior Convertible Notes will be held by the selling stockholders through the maturity date thereof.

Total Gross Proceeds Payable to the Company in the Senior Private Placement(1)	$	14,218,894
Payments that have been made or may be required to be made by the Company until maturity(2)	$	1,029,858
Net proceeds to the Company assuming maximum payments made by the Company(3)	$	13,189,036
Total possible profit to the selling stockholders (4)	$	0.00
Percentage of payments and profit over net proceeds(5)		7.81	%
Percentage of payments and profit over net proceeds per year of the term(6)		4.46	%

(1) Includes gross proceeds payable to the Company on the sale of the Senior Convertible Notes in the amount of $9,000,000 and assumes full exercise of the Senior Warrants to yield an aggregate exercise price of $5,218,894. However, there is no assurance that any Senior Warrants will actually be exercised or if they are exercised, whether they will be exercised for cash.

(2) Total possible payments (excluding repayment of principal) payable by us to the selling stockholders or their affiliates assuming the Senior Convertible Notes remain outstanding until the maturity date and that interest is paid in cash. Assumes that no liquidated damages are incurred and that no redemption premium on the Senior Convertible Notes will be applicable.

(3) Total net proceeds to the Company calculated by subtracting the result in footnote (2) from the result in footnote (1).

(4) This number represents the total possible profit to the selling stockholders based on the aggregate discount to market price of the shares underlying the Senior Convertible Notes and Senior Warrants as indicated in the above table entitled “Potential Profit from Conversion of Senior Convertible Notes.” Because the conversion price of the Senior Convertible Notes and the exercise price of the Senior Warrants was higher than the market price on the date of issuance thereof (as reflected on such table), this number indicates a profit of “0”. However this does not mean that the selling stockholders will not realize a profit on their investment which could occur if the market price for the common stock exceeds the exercise price of the Senior Warrants.

(5) Percentage of the total possible payments to the selling stockholders as calculated in footnote (2) plus profit calculated in footnote (4) compared to the net proceeds disclosed in footnote (3).

(6) Based on a 21-month term.

Shares to be Registered Under this Registration Statement (as of January 28, 2014)

Shares issued in the Registration Statements declared effective on June 4, 2013 and November 1, 2013:		126,659,495
Warrant reserve:		17,281,107
Shares issuable for Senior Convertible Notes:		109,378,388
Shares issued for the Senior Convertible Notes:		79,002,027
Shares remaining for issuance under the Notes:		30,376,361

Principal and interest remaining: (assuming no deferrals/accelerations)	$	3,449,218
(Assuming floor VWAP price) conversion price:	$	.0720
Shares for remaining principal and interest:		47,905,813
With 125% reserve requirement:		59,882,267
Less shares remaining for issuance:		30,376,361
Shares registered hereunder:		30,000,000	(rounded from 29,505,906)

Comparison of Registered Shares to Outstanding Shares

The following table compares the number of shares held by persons other than the selling stockholders, Company affiliates, and affiliates of selling stockholders with the number of shares registered for resale and sold by such parties in prior transactions as well as in the current transactions involving the Senior Convertible Notes and Senior Warrants:

Shares Outstanding Prior to the Senior Private Placement Held by Persons Other than the Selling Stockholders, or Affiliates of the Company or Selling Stockholders			108,684,517

Shares Registered for Resale by Selling Stockholders or Affiliates of Selling Stockholders in Prior Registration Statements			126,659,495

Shares Registered for Resale by Selling Stockholders or Affiliates of the Selling Stockholders that Continue to be Held by Such Persons other than in the prior registration statement			0

Shares Sold in Registered Resale Transactions by the Selling Stockholders or Affiliates Thereof other than in the prior registration statement			0

Shares Registered for Resale on behalf of the Selling Stockholders or Affiliates Thereof in Connection with the Senior Private Placement second registration statement			30,000,000

Other Information

As of the date of this prospectus, the Company does not believe that it will have the financial ability to make all payments on the Senior Convertible Notes in cash when due. Accordingly, the Company intends, as of the date of this prospectus, to make such payments in shares of Company common stock to the greatest extent possible.

Each selling shareholder has advised the Company that it may enter into short sales in the ordinary course of its business of investing and trading securities. Each selling shareholder has advised the Company, and represented to the Company in the purchase agreement for the Senior Convertible Notes and Senior Warrants, that no short sales were entered into during the period beginning when such selling shareholder obtained knowledge that the Company was contemplating a private placement and ending upon the public announcement of any such private placement. Additionally, each selling shareholder has agreed in the Senior Securities Purchase Agreement that, so long as a selling shareholder holds any Senior Convertible Note, the selling shareholder will not maintain a “net short position” in the Company’s common stock, which generally means that the selling shareholder has agreed not to maintain a short position in the Company’s common stock without maintaining an equivalent offsetting long position.

The Company has not had any material relationships or arrangements with any of the selling stockholders, their affiliates, or any person with whom any selling shareholder has a contractual relationship regarding the Senior Private Placement (or any predecessors of those persons).

According to information provided by each selling stockholder to the Company, none of the selling stockholders has been involved in a transaction with the Company prior to the May 8, 2013 purchase by the selling stockholders of the Senior Convertible Notes and Senior Warrants.

We believe that the available funds at September 30, 2013, and including the net proceeds from our May 8, 2013 issue of $9 million in senior convertible notes and $1 million in subordinated convertible notes plus internally generated funds from products sales will provide sufficient financial resources to fund our operations, working capital, and capital expenditures into the beginning of the fourth quarter of 2014.

Subsequent sources of outside funding will be required to fund the Company’s working capital, capital expenditures and rate operations beyond the beginning of the fourth quarter of 2014. No assurances can be given that the Company will be successful in complying with certain of the terms and conditions in the issuance of the Senior Convertible Notes or in arranging further funding, if needed, to continue the execution of its business plan including the development and commercialization of new products, or if successful, on what terms. Failure to obtain such funding will require management to substantially curtail, if not cease operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

$1 Million Financing Transaction

Simultaneously with the Closing of the $9 million financing transaction, the Company sold $1 million principal amount of Subordinated Convertible Notes to investors consisting of management and directors of the Company and one individual investor. The sale of the Subordinated Convertible Notes did not carry any additional fees and expenses, so the entire $1 million investment netted to the Company. The Subordinated Convertible Notes are subordinated in right of repayment to the Convertible Notes to the Company and mature 91 days subsequent to the Maturity Date of the Convertible Notes. The Subordinated Convertible Notes bear interest at the rate of 8% per annum which shall accrue. Once 2/3 of the Senior Convertible Notes have been repaid, then the Subordinated Convertible Notes may be converted and/or prepaid in cash so long as there is no Event of Default with respect to the Convertible Notes and all Equity Conditions of the Senior Convertible Notes are met. The conversion price for the Subordinated Convertible Notes is $0.264 per share. The holders of the Subordinated Convertible Notes were issued five year warrants to purchase 1,920,123 shares of Company common stock. Each warrant has an exercise price of $0.302 per share.

THE SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION

The shares of common stock being offered by the selling stockholders are issuable to the selling stockholders pursuant to the terms of the Senior Convertible Notes and Senior Warrants. For additional information regarding the issuance thereof, see “DESCRIPTION OF SENIOR PRIVATE PLACEMENT AND SENIOR CONVERTIBLE NOTES” in this prospectus. We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time. Except for the ownership of the Senior Convertible Notes and Senior Warrants issued pursuant to the Securities Purchase Agreement, the selling stockholders have not had any material relationship with us or our affiliates within the past three years.

The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling stockholders. The second column lists the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of the Senior Convertible Notes and Senior Warrants, as of May 8, 2013, assuming conversion of all Senior Convertible Notes on that date, without regard to any limitations on conversions, amortizations, redemptions or exercises. The third column lists the shares of common stock being offered by this prospectus by the selling stockholders. The fourth column lists the number of shares of common stock anticipated to be beneficially owned by the selling stockholders following the offering, assuming the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.

This prospectus covers the resale of 125% of the number of shares of common stock issuable pursuant to the Convertible Notes as of May 8, 2013 and 100% of the number of shares of common stock issuable pursuant to the Senior Warrants as of May 8, 2013. Because the conversion price of the Senior Convertible Notes may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus.

Under the terms of the Senior Convertible Notes, a selling stockholder may not convert the Senior Convertible Notes to the extent such conversion would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding shares of common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of the Convertible Notes which have not been converted. The number of shares in the second column does not reflect this limitation (the "Maximum Percentage"). The selling stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”

Name of Selling Stockholder	Number of Shares of Common Stock Owned As a Result of the Offering			Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus (9)		Number of Shares of Common Stock Owned After Offering

Parsoon Special Situation Ltd. (1)		16,357,416	(2)		10,416,667		0

Hudson Bay Master Fund Ltd. (3)		17,259,717	(4)		10,416,667		0

Empery Asset Master Ltd. (5)		18,183,155	(6)		10,416,667		0

Capital Ventures International (7)		18,206,189	(8)		10,416,667		0

(1) Robin R. Shah has voting and/or investment power over such shares of Common Stock.

(2) Represents 1,620,472 shares owned as of January 28, 2014 and 10,416,667 shares issuable to the Selling Shareholder if the Company Conversion Price were $0.072 which was the Company conversion price on January 28, 2014. Includes 4,320,277 shares of Common Stock issuable upon exercise of the Warrants.

(3) Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Sander Gerber disclaims beneficial ownership over these securities.

(4) Represents 2,522,773 shares owned as of January 28, 2014 and 10,416,667 shares issuable to the Selling Shareholder of the Company Conversion Price were $0.072 which was the Company conversion price on January 28, 2014. Includes 4,320,277 shares of Common Stock issuable upon exercise of the Warrants.

(5) Empery Asset Management LP, the authorized agent of Empery Asset Master Ltd ("EAM"), has discretionary authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. Mr. Hoe and Mr. Lane disclaim any beneficial ownership of these shares.

(6) Represents 3,446,211 shares owned as of January 28, 2014 and 10,416,667 shares issuable to the Selling Shareholder if the Company Conversion Price were $0.072 which was the Company conversion price on January 28, 2014. Includes 4,320,277 shares of Common Stock issuable upon exercise of the Warrants.

(7) Heights Capital Management, Inc., the authorized agent of Capital Ventures International (“CVI”), has discretionary authority to vote and dispose of the shares held by CVI and may be deemed to be the beneficial owner of these shares. Martin Kobinger, in his capacity as Investment Manager of Heights Capital Management, Inc., may also be deemed to have investment discretion and voting power over the shares held by CVI. Mr. Kobinger disclaims any such beneficial ownership of the shares. CVI is affiliated with one or more registered broker-dealers. CVI purchased the shares being registered hereunder in the ordinary course of business and at the time of purchase, had no agreements or understandings, directly or indirectly, with any other person to distribute such shares.

(8) Represents 3,469,245 shares owned as of January 28, 2014 and 10,416,667 shares issuable to the Selling Shareholders of the Company Conversion Price were $0.072 which was the Company conversion price on January 28, 2014. Includes 4,320,277 shares of Common Stock issuable upon exercise of the Warrants.

(9) On May 8, 2013, we entered into a Registration Rights Agreement with the selling stockholders listed in this table. See the section of this prospectus entitled “DESCRIPTION OF PRIVATE PLACEMENT AND CONVERTIBLE NOTES.” Under the Registration Rights Agreement, we are required to file a resale registration statement for the shares underlying the Senior Convertible Notes and Senior Warrants to enable the resale of such shares by the selling stockholders on a delayed or continuous basis under Rule 415 of the Securities Act. Pursuant to the terms of the Senior Convertible Notes, we may make interest and/or installment payments with shares of our common stock, and we are including in this registration statement 1.25 times the number of shares issuable upon the conversion of the Senior Convertible Notes and 1.00 times the number of shares issuable upon the exercise of the Senior Warrants as of the date of the Registration Rights Agreement. Accordingly, the full number of shares set forth in this column may not ultimately become issuable to the selling stockholders under such Senior Convertible Notes and Senior Warrants. The Agreement also requires us to register additional shares to cover these registration requirements if the Company Conversion Price decreases thus requiring more shares to be registered, pursuant to this prospectus. This column does not include shares owned as of January 28, 2014 which were registered under the Company’s registration statements on Form S-1 (File #s 333-188802 and 333-191774) and shares underlying warrants issued to them in the May 8, 2013 offering which are registered under the Company’s registration statement on Form S-1 (File # 333-188802).

PLAN OF DISTRIBUTION

We are registering the shares of common stock issuable upon conversion of the notes and exercise of the warrants to permit the resale of these shares of common stock by the holders of the notes and warrants from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

The selling stockholders may sell all or a portion of the shares of common stock held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:

on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

in the over-the-counter market;

in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

through the writing or settlement of options, whether such options are listed on an options exchange or otherwise;

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

an exchange distribution in accordance with the rules of the applicable exchange;

privately negotiated transactions;

short sales made after the date the Registration Statement is declared effective by the SEC;

broker-dealers may agree with a selling security holder to sell a specified number of such shares at a stipulated price per share;

a combination of any such methods of sale; and

any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares of common stock under Rule 144 promulgated under the Securities Act of 1933, as amended, if available, rather than under this prospectus. In addition, the selling stockholders may transfer the shares of common stock by other means not described in this prospectus. If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

The selling stockholders may pledge or grant a security interest in some or all of the notes, warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

To the extent required by the Securities Act and the rules and regulations thereunder, the selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $6,000 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act in accordance with the registration rights agreements or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreements or we may be entitled to contribution.

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

DESCRIPTION OF SECURITIES

General

Our amended and restated certificate of incorporation authorizes the issuance of 350,000,000 shares of common stock and 12,500,000 shares of preferred stock. As of January 28, 2014, we have 196,584,591 common shares issued and outstanding. Outstanding warrants and vested options entitle the holders to purchase 28,026,080 additional shares of common stock.

Within the limits established by our amended and restated of incorporation, our board of directors has the power at any time and without stockholder approval to issue shares of our authorized common stock or preferred stock for cash, to acquire property or for any other purpose that the board of directors believes is in the best interests of our company. Our stockholders have no pre-emptive rights and any decision to issue additional shares of common stock or preferred stock will reduce the percentage ownership of our current stockholders and could dilute our net tangible book value.

Our board of directors has the power to establish the designation, rights and preferences of any preferred stock we issue in the future. Accordingly, our board of directors may, without stockholder approval, issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. Subject to the directors’ duty to act in the best interest of our company, shares of preferred stock can be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult.

The following summary of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our amended and restated certificate of incorporation and our by-laws, each of which are included as exhibits to the registration statement of which this prospectus forms a part and by the provisions of applicable law.

Common Stock

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

Warrants

As of January 14, 2014, we have 20,826,436 outstanding warrants that represent potential future cash proceeds to our company of $6,366,162. The warrants are divided into six classes that are presently exercisable and expire at various times through December 8, 2018. The following table summarizes the number of warrants in each class, the anticipated proceeds from the exercise of each class, and the expiration date of each class.

Warrant Series	Number of Warrants		Exercise Price		Anticipated Proceeds		Expiration Date

2009 Bridge Warrants		45,661		2.00		91,322	August 12, 2014
2013 Senior Warrants		17,281,107		0.302		5,218,894	November 8, 2018
2013 Junior Warrants		1,920,123		0.302		579,878	November 8, 2018
2013 Placement Agent		1,579,545		0.302		476,068	November 8, 2018 - December 8, 2018
TOTAL		20,155,981				6,164,639

Stock Options

As of January 14, 2014, we have 5,192,140 outstanding stock options that represent potential future cash proceeds to our company of $6,419,318. The outstanding options include 3,431,729 options that are currently vested and exercisable, and represent potential future cash proceeds to our company of $5,734,116. The remaining options will vest and become exercisable over the next three years. The following table provides summary information on our outstanding options.

	Vested Option Grants						Unvested Option Grants
	Shares		Wtd Avg. Price		Proceeds		Shares		Wtd Avg Price		Proceeds
2011 Employee & officer plan options		1,734,395	$	1.50	$	2,601,430		801,932	$	0.48	$	388,885
Directors plan options		531,584		1.03		547,061		958,479		0.31		296,317
Non-plan options, consultants and employees		1,165,750		2.22		2,585,625
Total		5,192,140		1.67	$	5,734,116		1,760,411		0.39	$	685,002

Delaware Anti-takeover Statute

We are subject to the provisions of section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

the transaction is approved by the board of directors before the date the interested stockholder attained that status;

upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

on or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines “business combination” to include the following:

any merger or consolidation involving the corporation and the interested stockholder;

any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

A Delaware corporation may opt out of this provision either with an express provision in its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out, and do not currently intend to opt out, of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

Certificate of Incorporation and By-laws

Our amended and restated certificate of incorporation and by-laws include provisions that may have the effect of delaying or preventing a change of control or changes in our management. These provisions include:

the division of our board of directors into three classes of directors that serve for rotating three-year terms;

the right of the board of directors to elect a director to fill a vacancy created by the resignation of a director or the expansion of the board of directors;

the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

the requirement for advance notice for nominations of candidates for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

the ability of the board of directors to issue, without stockholder approval, up to 12,355,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock; and

the right of our board of directors to alter our bylaws without stockholder approval.

Transfer Agent

Our transfer agent is Continental Stock Transfer & Trust, 17 Battery Place, New York, New York 10004.

LEGAL MATTERS

The legality of the shares of common stock offered by this prospectus will be passed upon for us by Jolie Kahn, Esq. of Philadelphia, PA.

EXPERTS

The financial statements as of December 31, 2012 and 2011 included in this prospectus have been so included in reliance on the report of EFP Rotenberg, LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the Securities and Exchange Commission with respect to this offering. This prospectus, which is part of the registration statement, does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits and schedules for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits and schedules attached to the registration statement for copies of the actual contract, agreement or other document.

We also file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission under the Exchange Act. You may read and copy any materials that we may file without charge at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the Securities and Exchange Commission at 1-800-Securities and Exchange Commission-0330 for further information on the operation of the Public Reference Room. You may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. The Securities and Exchange Commission also maintains an Internet site, http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The other information we file with the Securities and Exchange Commission is not part of the registration statement of which this prospectus forms a part.

65,330,714 Shares of Common Stock

Axion Power International (AXPWQ) Inactive 424B3Prospectus supplement