Settlement Agreement

SETTLEMENT AGREEMENT







This Settlement Agreement ("Agreement"), which is subject to the Bankruptcy Court approvals hereinafter set forth, is made this _____ day of December, 2005, by and between: (a) Mega-C Power Corporation, a Nevada corporation (" Mega-C" or "Debtor") by William M. Noall ("Noall"), the duly appointed and acting Chapter 11 Trustee ("Trustee"); (b) Mega-C's subsidiary, Mega-C Corporation, an Ontario corporation ("Mega-C Ontario"); (c) Axion Power International Inc., a Delaware corporation, fka Tamboril Cigar Company ("Axion" ); (d) Axion's wholly owned subsidiary, Axion Power Corporation, a Canadian federal corporation ("Axion Ontario"); (e) Axion's wholly owned subsidiary, C and T Co. Inc., an Ontario corporation ("C & T"); (f) Robert Averill, Joe Piccirilli, The Canadian Consultants Bureau Inc., James Smith, James Eagan, Tom Granville ("Granville"), Joe Souccar, HAP Investments, LLC, Paul Bancroft (collectively, the "Lenders") Glenn Patterson, Igor Filipenko, Ron Bibace and Kirk Tierney (collectively, except for Paul Bancroft and HAP Investments, LLC, " Founders"), and Infinity Group, LLC, James Keim and Turitella Corporation (collectively with the Founders, the "Investors"); (g) the trust created by the Trust Agreement For the Benefit of Shareholders of Mega-C Power Corporation (" Shareholders Trust"); (h) Sally Fonner ("Fonner") in both her capacity as Debtor's sole officer and director as of the Petition Date (as defined below) and as trustee of the Shareholders Trust; and (i) Yuri Volkovich and Pavel Shmatko (the "Scientists"); and (j) Albert Shtemberg, Edward Shtemberg, C&T Co., Inc. in Trust, Oksana Fylypenko, Andriy Malitskiy, Valeri Shtemberg, Yuri Shtemberg, Victor Eshkenazi, Miraslav E. Royz, and Rimma Shtemberg (collectively, with the Scientists, the "C&T Scientists ?). Axion, Axion Ontario, C & T, Founders, Lenders, Investors, C&T Scientists, Shareholders Trust and Fonner are collectively defined as the "Counterparties." The Counterparties, Mega-C, Mega-C Ontario, and the Trustee together are collectively defined as the "Parties."



RECITALS



The Shareholders Trust



Effective as of December 31, 2003, Axion, as grantor, created an irrevocable trust, the Shareholders Trust, by that certain document entitled Trust Agreement For the Benefit of Shareholders of Mega-C Power Corporation (the "Trust Agreement") for the benefit of Mega-C creditors and equity security interest holders, pursuant to which Benjamin Rubin was appointed the trustee. The corpus of the Shareholders Trust was 117,239,736 shares of Axion common stock (which as a result of a reverse stock split was reduced to 7,327,500 shares of Axion common stock (the "Initial Axion Stock")). Pursuant to a Succession Agreement Pursuant to the Provisions of the Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation , Benjamin Rubin resigned as the trustee and Fonner was appointed the Successor Trustee effective March 26, 2004. As of February 26, 2005, Fonner and Axion entered into the First Amended and Restated Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation ("First Amended Trust Agreement"), which, among other things, increased the shares of Axion common stock held by the Shareholders Trust to 7,827,500 (together with the Initial Axion Stock, the "Axion Stock").











The Technology and the Canadian Litigation



C & T was the owner of a lead-acid-carbon energy storage device and for which C&T was ultimately granted U.S. Patent No. 6,706,079 (method of formation and charge of the negative polarizable carbon electrode in an electric double layer capacitor); U.S. Patent No. 6,628,504 (electric double layer capacitor); and U.S. Patent No. 6,466,429 (electric double layer capacitor), referred to herein as the "Supercell Technology" or the "Technology". The Scientists invented the Technology. Pursuant to a Joint Venture Agreement dated December 23, 1999, C&T and Chip Taylor In Trust agreed to license a limited class of stationary applications of the Technology to a corporation that they organized to hold the license. C&T and Chip Taylor In Trust formed Mega C Technologies, Inc. for this purpose.



By letter agreement dated September 11, 2001, Mega C Tech granted the Debtor an exclusive license to commercialize Mega C Tech's license, in consideration of payments and contributions to Mega C Tech.



On April 2, 2002, C&T, Mega C Tech and the Debtor entered into an Agreement of Association, wherein C&T granted the Debtor a license to the Technology for stationary applications subject to certain royalties. In a letter dated June 9, 2003, the Debtor asserted a declaration of default by Mega C Tech and demanded arbitration. In a letter dated June 10, 2003, Mega C Tech asserted an intent to terminate the Agreement of Association with the Debtor. In a letter dated June 24, 2003, C&T asserted a notice of termination of the Joint Venture Agreement to Chip Taylor in Trust and Mega C Tech. The affects of these various notices of default are a matter of dispute.



On July 30, 2003, an action styled Jared Taylor v. Mega-C Power Corporation, a Nevada corporation, Mega-C Power Corporation, an Ontario corporation, Rene Pardo, Gary Usling, Jim Estill, Nelson Thall, Brian Hewat, Joe Piccirilli, Ronald Bibace, Kirk Tierney, and Marvin Winick , was filed in the Ontario Superior Court of Justice as court file no. 03-CV-253159 (referred to herein as "Jared Taylor v. Mega-C Litigation").



On September 11, 2003, an action styled Chip Taylor, In Trust v. Mega-C Power Corporation (a Nevada corporation) and C&T Co. Incorporated , was filed in the Ontario Superior Court of Justice as court file no. 03-CV-255175 (referred to herein as "Chip Taylor v. Mega-C Litigation").



On February 10, 2004, Lewis (Chip) Taylor, Chip Taylor, In Trust, Jared Taylor, Elgin Investments, Inc., and Mega C Technologies, Inc. commenced an action in Ontario Superior Court of Justice as court file no. 04-CL-5317 against the Debtor, Axion, Axion Ontario and others (referred to herein as "Taylor v. Tamboril Litigation" and, collectively with the Jared Taylor v. Mega-C Litigation and Chip Taylor v. Mega-C Litigation, the "Canadian Litigation").











Axion's Acquisition of the Technology



On February 18, 2003, the Ontario Securities Commission sent the Debtor a letter of inquiry regarding the promotion and distribution of Mega C securities.



In the summer of 2003, the Lenders loaned the Debtor $390,000.00 in emergency funding and sought to determine if the Debtor's affairs could be restructured. Thereafter, the Founders formed Axion Ontario, which entered into a Development and License Agreement with C&T dated November 15, 2003. On December 31, 2003, Axion entered into a Reorganization Agreement with Axion Ontario, whereby Axion acquired the majority of outstanding securities in Axion Ontario in a reverse-takeover. On January 9, 2004, C&T, Axion Ontario and Axion entered into a First Amendment to License and Development Agreement, which provided that Axion purchase all of C&T's right, title and interest in the Technology.



The Chapter 11 Reorganization Proceeding



On April 6, 2004 ("Petition Date"), Axion Ontario, Axion and Granville filed an involuntary petition for relief under Chapter 11, Title 11 of the United States Code ("Code") against Mega-C with the United States Bankruptcy Court for the District of Nevada ("Court"), styled In re: Mega-C Power Corporation , Case Number BK-N-04-50962-GWZ (the "Case," and the estate in such Case, the ? Estate").



On April 9, 2004, Mega-C, by and through its sole officer, Fonner, and with the consent of its then directors, consented to the entry of an order for relief in the Case.



Thereafter, on May 13, 2004, the Court entered an order granting Mega-C relief under Chapter 11 of the Code.



On June 1, 2004, Mega-C commenced an adversary proceeding, being Adversary No. 04-5144-GWZ, styled Mega-C Power Corporation, aka Net Capital Ventures, Inc., v. Lewis "Chip" Taylor, et al. (the "Taylor Group Adversary"), which proceeding is pending before the Court.



On Schedule F of its schedules and statements filed on June 10, 2004 ("Schedule F"), the Debtor listed undisputed claims of the Lenders as follows: Robert Averill, $50,000.00; Paul Bancroft, $15,000.00; Seymour Berger, $50,000.00 (whose claim is properly in the name of Canadian Consultants Bureau); James Eagan, $50,000.00; Tom Granville, $50,000.00; HAP Investments, $50,000.00; Joe Piccirilli, $50,000.00; James Smith, $50,000.00; and Joe Souccar $25,000.00 (collectively, the "Lenders Scheduled Claims"). Between July, 2004, and December 21, 2004, the Founders, HAP Investments and Paul Bancroft filed the following proofs of claim and proofs of interest, which are listed by the official claim number assigned by the Court: (1) Claim No. 428, filed by Robert Averill, in the amount of $1,050,000.00; (2) Claim No. 501, filed by Joseph Piccirilli, in the amount of $415,000.20; (3) Claim Nos. 65 and 131 filed by The Canadian Consultants Bureau Inc., in the amounts of $27,000.00 and $50,000.00; (4) Claim No. 456, filed by James Smith, in the amount of $525,000.00; (5) Claim No. 193, filed by James Eagan, in the amount of $350,000.00; (6) Claim Nos. 808 and 810, filed by Thomas Granville, in unspecified amount; (7) Claim No. 284, 285 and 297 filed by Joe Souccar, in the amount of $25,000.00; $50,000.00 and $20,000.00; (8) Claim No. 389, filed by HAP Investments, LLC, in the amount of $50,000.00; (9) Claim No. 430, filed by Glenn Patterson, in the amount of $550,000.00; (10) Claim No. 327, filed by Igor Filipenko, in the amount of $239,428.00; and (11) Claim No. 61 in the amount of $15,000.00, Claim No. 62 in the amount of $150,000.00, and Claim No. 64 in the amount of $1.00 filed by Paul Bancroft; and (12) Claim No. 48, filed by Ronald Bibace, in the amount of $227,500.00 (together, the "Founders Proofs of Claim/Interest"). While the Trustee has made an initial determination that these are allowable claims, a final determination has not been made in this regard and the Trustee reserves all rights to object to the allowance of the Founders Proofs of Claim/Interest.



On December 20, 2004, Axion Ontario filed a Proof of Claim in the Case, Claim No. 816, asserting an unsecured claim in the amount of $5,175.35. On the same day, Axion also filed a Proof of Claim in the Case, Claim No. 817, asserting an unsecured claim in the amount of $385,784.00. Axion and Axion Ontario have subsequently asserted unsecured, pre-petition claims in an amount greater than Claim Nos. 816 and 817, although no amended proofs of claims have yet been filed by either Axion or Axion Ontario which Axion or Axion Ontario contend were not required by virtue of claims of Axion Ontario in the amount of $903,319.00 being listed as undisputed on Schedule F. Axion and/or Axion Ontario also contend that they have certain administrative claims for monies loaned to the Debtor post-petition in accordance with the ordinary course of business and dealings between the parties in the amount of approximately $464,000.00, including $100,000 contributed to the Estate after the Trustee was appointed for administrative expenses ("Axion/Axion Ontario Administrative Claim" and collectively with the scheduled claims of Axion Ontario, Axion and Claims 816 and 817, the "Axion/Axion Ontario Proofs of Claim"). The Trustee does not agree with and reserves all rights to object to the Axion/Axion Ontario Proofs of Claim and does not stipulate or agree that any such claims are allowable. With specific regard to the $100,000 referenced above, the Trustee objects to any assertion that this was an administrative loan or contribution to be repaid by the Estate. Axion and Axion Ontario are not asserting that they have filed or have the right to file proofs of interest in the Estate.



Prior to December 21, 2004, the bar date to file proofs of claim or proofs of interest, C&T, and the C&T Scientists filed certain proofs of claim and/or proofs of interest in the Case, including, but not limited to, C&T and C&T ?s Scientists' proofs of interest for 950,000.00 Mega-C common shares, which are enumerated in Schedule A attached hereto. ("C&T/Scientists Proofs of Claim/Interest").



Mega-C continued to manage its property as debtor-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code until March 2, 2005, at which time, the Court entered its Order Approving U.S. Trustee's Appointment of Chapter 11 Trustee , wherein Noall was appointed as the Chapter 11 trustee for Mega-C pursuant to Section 1104(a) of the Code.



On April 14, 2005, in accordance with Section 1106(a)(4)(A) of the Code, the Trustee filed his Preliminary Report of William M. Noall, Chapter 11 Trustee ("First Report"), in which the Trustee, based on his preliminary investigation, requested that the Court deny Mega-C's request that 500,000 shares of Axion's stock be transferred to the Shareholders Trust to fund Mega-C and deny the Unaffiliated Shareholders' Motion for Order Enforcing Automatic Stay or, in the Alternative, for a Ruling that the Stay does not Prevent an Application in Ontario to Remove the Trustee of the Axion Trust . Additionally, the First Report generally set forth the Trustee's investigatory efforts, his initial observations regarding the Technology, Axion' s ability to exploit the Technology, and his conclusion that the corpus of the stock held in the Shareholders Trust is property of the Estate, which must be recovered either by negotiation or through the commencement of an adversary proceeding.



On July 15, 2005, again in accordance with Section 1106(a)(4)(A) of the Code, the Trustee filed his Chapter 11 Trustee's First Interim Status Report Pursuant to 11 U.S.C. a7 1106(a)(4) ("Second Report ?) wherein the Trustee reported to the Court that he believed causes of action existed in favor of the Debtor and the Estate against Axion, Axion Ontario, C&T, Lenders and the Founders and further reported his intention to seek the disallowance in whole or in part of the Axion/Axion Ontario Proofs of Claim, the Lenders Scheduled Claims and the Founders Proofs of Claim/Interest (collectively, the "Alleged Claims Against Axion"), as well as discussed the status of the pending Trust Adversary, defined herein, and the Taylor Group Adversary. The Trustee has not announced any intentions with regard to the C&T/Scientists Proofs of Claim/Interest.



On December 5, 2005, again in accordance with Section 1106(a)(4)(A) of the Code, the Trustee filed his Chapter 11 Trustee's Third Interim Status Report Pursuant to 11 U.S.C. a7 1106(a)(4) ("Third Report ?) wherein the Trustee reported to the Court that the Ontario Securities Commission had commenced an enforcement proceeding against certain parties in interest in the Case including the Debtor, Rene Pardo, Gary Usling, Lewis Taylor, Sr., Lewis Taylor, Jr., Jared Taylor, Colin Taylor and 1248136 Ontario Limited ("OSC Action").



The Post-Petition Adversary Proceedings Involving Mega-C,



Noall as Trustee, Fonner, Axion, and Axion Ontario



1. Trust Adversary . On June 7, 2005, the Trustee commenced an adversary proceeding against Fonner being Adversary No. 05-05042-GWZ, entitled William M. Noall, as Chapter 11 Trustee of Mega-C Power Corporation v. Sally Fonner, Trustee of Trust For the Benefit of the Shareholders of Mega-C Power Corporation ("Trust Adversary") seeking to recover 7,327,500 shares of Axion common stock (as previously defined, the "Initial Axion Stock") in the Shareholders Trust as property of the Estate pursuant to Section 541 of the Code, among other things. The Trust Adversary is pending hearing of the Trustee's request for a permanent injunction.



On June 10, 2005, the Court entered a Modified Order for Temporary Restraining Order ("TRO") restraining Fonner or any person acting on her behalf or on the behalf of the owners or holders of the Initial Axion Stock, from participating in any vote or taking any action or failing to act at the shareholder meeting scheduled on June 10, 2005, or any subsequent shareholder meeting of Axion that negatively affects the ownership of the Initial Axion Stock or the percentage of ownership of the Initial Axion Stock, which TRO has been continued from time to time by stipulation of the parties and order of the Court.



On August 5, 2005, the Trustee filed his Plaintiff's Motion for Summary Judgment ("Summary Judgment Motion"). Fonner filed her Opposition to Plaintiff's Motion for Summary Judgment on September 12, 2005. The matter has been stayed by agreement of the parties thereto pending approval of this Agreement.



On August 12, 2005, Axion filed a Motion to Intervene ("Motion To Intervene"), which was denied without prejudice by the Bankruptcy Court with the entry of an Order Re Motion To Intervene entered on September 12, 2005. On September 12, 2005, Axion filed its Motion for Reconsideration of Order Denying Motion to Intervene ("Motion for Reconsideration") in Adversary No. 05-5042-GWZ, seeking reconsideration of the Court ?s Order Re Motion to Intervene. The Motion for Reconsideration is pending argument and submission to the Court.



2. Axion Adversary . On July 27, 2005, Axion and Axion Ontario commenced an adversary proceeding against Noall, in his capacity as Trustee, and Fonner, in her capacity as trustee of the Shareholders Trust, entitled Axion Power International, Inc., et al. v. Noall, et al. , Adversary No. 05-05082-GWZ, before the Court ("Axion Adversary"), initially seeking a declaratory judgment providing that: (1) Mega-C's license to commercialize the Technology was terminated in June of 2003 and that Mega-C does not have any interest in the Technology as property of the Estate; (2) Axion and Axion Ontario "did not receive any interest of Mega-C in property wherein the transfer was made, voluntarily or involuntarily, with Mega-C's actual intent to hinder, delay or defraud any entity;" (3) Axion and Axion Ontario did not receive any of Mega-C's interest in property for less than reasonably equivalent value; and (4) if the Court determines that Mega-C had any interest in the Technology that legal interest will preclude the existence of a separate equitable interest in the Technology and Axion can terminate the Shareholders Trust and revest the trust corpus in Axion.



Before the entry of the Court's order denying Axion's Motion to Intervene in the Trust Adversary, on September 9, 2005, Axion and Axion Ontario filed a First Amended Complaint for Declaratory Judgment , alleging five additional claims for relief that: (1) the corpus of the Shareholders Trust is not property of the Estate and that neither legal nor equitable grounds exist for setting aside the Shareholders Trust; (2) if the Court sets aside the Shareholders Trust or enters any order requiring the corpus of the Shareholders Trust to be held other than by the trustee of the Shareholders Trust in accordance with its terms, a resulting trust arises for the benefit of Axion as the settlor of the Shareholders Trust; (3) if the Court sets aside the Shareholders Trust or enters any order requiring the corpus of the Shareholders Trust to be held other than by the trustee of the Shareholders Trust in accordance with its terms, then Fonner holds the assets of the Shareholders Trust for the benefit of Axion and that the Court should enter an order compelling her to release those assets to Axion as the settlor of the Shareholders Trust; (4) neither Axion nor Axion Ontario received any interest of Mega-C in property that is subject to avoidance pursuant to 11 U.S.C. a7 547(b); and (5) neither Axion nor Axion Ontario has committed any act in violation of the automatic stay in bankruptcy.



On September 12, 2005, Axion and Axion Ontario filed their Motion to Consolidate ("Motion to Consolidate," and, together with the Motion for Reconsideration, the "Axion Motions") in Adversary No. 05-5082-GWZ, seeking to consolidate the Trust Adversary with the Axion Adversary. The Motion to Consolidate is pending argument and submission to the Court.



The Settlement Negotiations



Axion and Axion Ontario believe and have represented to the Trustee that the Technology is a promising innovation that has significant potential value that can only be fully realized if the Technology is ultimately developed into one or more commercial products.



The Trustee's assertion of the Debtor's claimed license of certain rights to the Technology, on the one hand, and Axion and Axion Ontario's purchase of and rights in and to the Technology, including the underlying patents and other related intellectual property, on the other hand, have given rise to sharply contested issues, claims and defenses between the Estate, Axion, Axion Ontario and others ("Technology Disputes").



The Trustee also asserts that the assets of the Shareholders Trust are property of the Estate and that Fonner is in breach of her fiduciary duty to the Estate by resisting the demand of the Trustee to turnover the assets of the Shareholders Trust to the Estate. Fonner and the Shareholders Trust contend that the Estate has no viable claim to the assets of the Shareholders Trust and Fonner is not in breach of her fiduciary duty to the Debtor, Estate or Shareholders Trust. Accordingly, there are sharply contested issues between the Trustee on the one hand, and Fonner and the Shareholders Trust on the other hand.



The Parties desire to and, subject to Court approval, have agreed to settle all matters and controversies between them, including without limitation those that are the subject matter of the Trust Adversary, the Axion Adversary, the Axion Disputes, the Technology Disputes, the Alleged Claims Against Axion, and the Estate's rights or claims against the Counterparties in the Canadian Litigation, and the Parties have agreed, subject to Court approval, to resolve certain contemplated issues and controversies relating to the Axion/Axion Ontario Proofs of Claim, C&T/Scientists Proofs of Claim/Interest, the Founders Proofs of Claim/Interest and the Lenders Scheduled Claims (collectively, the " Disputes"), on the terms and conditions set forth herein.



The Trustee, with the advice of his professionals, has considered the practical, legal, financial, tax, competitive and temporal opportunities of and limitations on Mega-C and the Estate and its interests, and is cognizant of the risks to the Estate from the various conflicting claims, and has determined that, under the terms set forth herein, and as first concluded in the First Report, (a) Axion is best situated to continue to raise capital, research and develop the Technology and ultimately bring the results to market if its efforts are successful and (b) it is in the best interests of the Estate to: (i) enhance Axion's ability to obtain capital by promptly resolving the Disputes; (ii) support Axion's efforts to complete the development of the Technology and ultimately bring any resulting products to market in a systematic and timely manner; and (iii) obtain Axion shares from the Shareholders Trust to satisfy allowed claims and equity security interests.



The Parties have negotiated at arms length and have reached this Agreement in good faith.



In view of these beliefs, realities, determinations, and other considerations, the Parties have entered into this Agreement. The Trustee will seek to have this Agreement approved by an order of the Court ("9019 Order ?) pursuant to Federal Rule of Bankruptcy Procedure 9019 ("9019 Motion") and then together with Axion, Axion Ontario and the Founders as co-proponents, to file a plan of reorganization ("Plan"), accompanying disclosure statement ("Disclosure Statement") and Plan supplements consistent with this Agreement. The Rule 9019 compromise and settlement shall resolve all disputes between the Trustee, Mega-C and Mega-C Ontario, on the one hand, and the Counterparties, on the other hand, which, except for those specific provisions referenced below, are subject to and will be effective on confirmation of the Plan, which Plan shall be binding upon all parties in interest to the Estate, including holders of all claims and equity security interests.



NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:



AGREEMENT



1. Allocation of Axion Stock in Shareholders Trust .



(a) Plan Funding Shares . On the effective date ("Effective Date") of the Plan, 5,700,000 shares of the Axion Stock ("Plan Funding Shares ?) shall be allocated as follows:



(i). Sufficient shares of the Plan Funding Shares to pay in full allowed administrative expenses (including 326 fees), Effective Date cash conditions of the Plan, and allowed priority and uns ...