SECOND AMENDMENT TO DEVELOPMENT AND LICENSE AGREEMENT

SECOND AMENDMENT TO

DEVELOPMENT AND LICENSE AGREEMENT

THIS AGREEMENT is made, entered into and effective as of the 18th day of March 2005 between and among Axion Power International, Inc. (“ Axion ”), a corporation organized under the laws of the State of Delaware, C and T Co. Inc., (“ C&T ”) a corporation organized under the laws of the Province of Ontario, Canada, and the persons who collectively own 100% of the issued and outstanding common stock of C&T ( “C&T Shareholders” ).

WHEREAS, between November 15, 2003 and January 9, 2004 Axion and its wholly owned subsidiary negotiated a series of agreements to purchase all of the issued and outstanding common stock of C&T, free and clear of all encumbrances and corporate obligations of C&T, in exchange for a consideration that included $1,794,000 in cash that would be payable in installments and 1,562,900 capital warrants that would each represent the two-year right to purchase one Axion share at a price of $2.00 per share; and

WHEREAS, after giving effect to the required warrant issuances and cash payments, Axion owes $1,100,500 for balance of the purchase obligations and the parties have agreed to settle and fully satisfy the remaining obligations for a consideration consisting of $100,500 in cash and 100,000 shares of Axion’s 8% Convertible Senior Preferred Stock; and

WHEREAS, C&T, the C&T Shareholders and C&T’s directors, officers and affiliates have agreed to acknowledge and memorialize their continuing obligations to deliver certain intellectual property to Axion and assist in efforts to develop and commercialize the E ³ Cell Technology;

NOW THEREFORE , in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the Parties agree as follows:

1.1   Integration of Agreements. This Agreement is an amendment, continuation and extension of a business relationship established between November 15, 2003 and January 9, 2004. The documents identified below (collectively the “Prior Agreements”) establish and define the terms of the parties’ relationship with each other:

Except to the extent that the terms of any Prior Agreements are amended by the express terms of a later agreement, such Prior Agreements are intended to continue in full force and effect. In the event of an inconsistency between the Prior Agreements and this Agreement, the contracts shall be interpreted in a manner that will give fair application to all agreements between the parties. If provisions of any agreements between the parties are inconsistent with the terms of an earlier agreement, the terms of the later agreement shall be given priority. To the extent possible, the agreements between the parties are to be interpreted as an integrated whole and if any terms are held to be invalid; the remainder shall not be affected thereby. By execution of this Agreement, C&T and Axion expressly affirm their mutual intention to fully comply with all applicable requirements of the Prior Agreements.

2.1   Delivery of Cash Payment. Upon execution of this Agreement, Axion shall pay $100,500 to such account or accounts as may be designated by C&T in final satisfaction of all debts owed to C&T under the Development and License Agreement and the prior amendments thereto.

2.2   Issuance of Preferred Stock. Upon execution of this Agreement, Axion shall issue 100,000 shares of its 8% Convertible Senior Preferred Stock (the “Preferred Stock”) to C&T’s creditors and shareholders in such numbers as C&T may direct. The Preferred Stock is more fully described in Axion’s Private Placement Memorandum dated February 16, 2005, copies of which have been provided to C&T and each person who is entitled to receive shares of Preferred Stock pursuant to the provisions of this paragraph. As a condition to the distribution of the shares of Preferred Stock pursuant to the requirements of this paragraph, each creditor and each C&T Shareholder shall be required to complete and execute a Stock Purchase Agreement and Investment Representation Letter in the form attached as Exhibit C to the memorandum.

2.3   Release of Security Interest. Subject only to the payment of the cash balance specified in paragraph 2.1, the issuance and delivery of certificates for the Preferred Stock specified in paragraph 2.2, C&T declares that the purchase money security interest specified in paragraph 3.1 of the First Amendment to Development License Agreement dated January 9, 2004 has been satisfied by Axion and is hereby released by C&T. From and after the payment of the referenced consideration Axion shall be the sole and exclusive owner of all right title and interest in the patents, know-how and other intellectual property embodied in the E ³ Cell Technology, including:

3.1   Assignment of Patents and Patent Applications. Upon C&T’s receipt of the cash payment specified in paragraph 2.1 together with proof of Axion’s delivery of certificates for the shares of Preferred Stock specified in paragraph 2.2, C&T shall promptly transfer to Axion by appropriate assignments all patents and all patent applications owned by C&T that relate in any way to the E ³ Cell Technology.

3.2   Warranty of Title. C&T hereby warrants that with the exception of:

it has clear and unencumbered title to the patents, know-how and other intellectual property embodied in the E ³ Cell Technology; it has not granted any license or other rights to the patents, know-how and other intellectual property embodied in the E ³ Cell Technology to any other person or entity; and it has not conveyed or transferred any ownership interest in the patents, know-how and other intellectual property embodied in the E ³ Cell Technology to any person or entity. C&T further warrants that the agreements referred to in subparagraphs (a) and (b) above, complete copies of which have previously been provided to Axion, fairly represent all material terms of the agreements between the parties thereto and have not been amended in any respect.

3.3   Assignment of Other Assets. Upon C&T’s receipt of the cash payment specified in paragraph 2.1 together with proof of Axion’s delivery of certificates for the shares of Preferred Stock specified in paragraph 2.2, C&T shall promptly assign, transfer, convey and deliver to Axion, all right, title, interest and benefit, including all of C&T’s right, title, interest and benefit, of whatever kind and nature, real, personal and mixed, tangible and intangible, whether or not reflected on C&T’s books and records, known or unknown, accrued, absolute, contingent or otherwise, in and to the assets, properties and rights owned by C&T, free and clear of and expressly excluding all debts, liabilities, obligations, taxes, liens and encumbrances of any kind, character or description, whether accrued, absolute, contingent or otherwise (and whether or not reflected or reserved against in the balance sheets, books of account and records of C&am