UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







Form
10-Q/A





R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from          to





Commission
File Number:     0-13111





AXION
INTERNATIONAL HOLDINGS, INC


(Exact
name of registrant as specified in its charter)





Colorado
              
              84-0846389(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)





665
Martinsville Road, Basking Ridge, New Jersey 07920


(Address
of principal executive offices)





908-542-0888


(registrant’s
telephone number, including area code)




_______________




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes o     No
þ




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes £ No  þ
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes £  No
þ





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer £
                
                Accelerated
      filer £Non-accelerated
      filer £
                
                Smaller
      reporting company þ





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


Yes £  No
þ





The
number of outstanding shares of the registrant’s common stock, without par
value, as of May 11, 2009 was 15,581,209











TABLE
OF CONTENTS





PAGEPART
      I.
                    
                    FINANCIAL
      INFORMATIONItem
      1.
                    
                    Financial
      Statements
                    
                    1Item
      2.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    15Item
      3.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    18Item
      4.
                    
                    Controls
      and Procedures
                    
                    18PART
      II.
                    
                    OTHER
      INFORMATION
                    
                    20Item
      1.
                    
                    Legal
      Proceedings
                    
                    20Item
      1A.
                    
                    Risk
      Factors
                    
                    20Item
      2.
                    
                    Unregistered
      Sales of Securities and Use of Proceeds
                    
                    20Item
      3.
                    
                    Defaults
      Upon Senior Securities
                    
                    20Item
      4.
                    
                    Submissions
      of Matters to a Vote of Security Holders
                    
                    20Item
      5.
                    
                    Other
      Information
                    
                    20Item
      6.
                    
                    Exhibits
                    
                    20SIGNATURES
                    
                    21










Explanatory
Note
  The
consolidated financial statements for the three months ended March 31, 2009 and
related disclosures in this Amendment No.1 to Quarterly Report on Form 10-Q have
been restated in accordance with the changes described below.
 
 In January 2010, we concluded that
it was necessary to amend this Quarterly Report in order to restate its
financial statements for the period ended March 31, 2009 to (1) record
share-based compensation charges not previously recorded and (2) adjust recorded
interest expense as a result of adjustments we made for the fiscal year ended
September 30, 2008 to our accounting for debt discounts and debt
modifications.
 
 No
attempt has been made in this Amendment No. 1 to modify or update the
disclosures in the original Quarterly Report except for the changes to the
financial statements described above and related changes to Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
Item 4. Controls and Procedures.





AXION
INTERNATIONAL HOLDINGS. INC
 CONSOLIDATED
BALANCE SHEETS
 
 Unaudited
                              
                              
                              AuditedMarch 31, 2009
                              
                              
                              September 30, 2008Assets
                              
                              (Restated)
                              
                              
                              (Restated)Current
      assets:Cash
      and cash equivalents
                              
                              $
                              199,990
                              
                              
                              $
                              138,826Accounts
      Receivable
                              
                              
                              437,562
                              
                              
                              
                              -Inventories
                              
                              
                              191,885
                              
                              
                              
                              110,416Prepaid
      expenses
                              
                              
                              6,903
                              
                              
                              
                              7,264Total
      current assets
                              
                              
                              836,340
                              
                              
                              
                              256,506Property,
      equipment, and leasehold improvements, at cost:Equipment
                              
                              
                              9,838
                              
                              
                              
                              9,838Machinery
      and equipment
                              
                              
                              357,915
                              
                              
                              
                              261,425Purchased
      software
                              
                              
                              56,329
                              
                              
                              
                              56,329Furniture
      and fixtures
                              
                              
                              9,322
                              
                              
                              
                              9,322Leasehold
      improvements
                              
                              
                              29,300
                              
                              
                              
                              29,300462,704
                              
                              
                              
                              366,214Less
      accumulated depreciation
                              
                              
                              (87,461
                              )
                              
                              
                              (25,609
                              )Net
      property and leasehold improvements
                              
                              
                              375,243
                              
                              
                              
                              340,605Long-term
      and intangible assetsLicense,
      at acquisition cost,
                              
                              
                              68,284
                              
                              
                              
                              68,284Deposits
                              
                              
                              4,000
                              
                              
                              
                              4,00072,284
                              
                              
                              
                              72,284Total
      assets
                              
                              $
                              1,283,867
                              
                              
                              $
                              669,395Liabilities and Stockholders'
      DeficitCurrent
      liabilitiesAccounts
      payable
                              
                              $
                              512,826
                              
                              
                              $
                              326,511Accrued
      liabilities
                              
                              
                              282,848
                              
                              
                              
                              202,262Short-term
      notes, net of discount
                              
                              
                              462,922
                              
                              
                              
                              -Interest
      payable
                              
                              
                              70,119
                              
                              
                              
                              55,641Accrued
      payroll
                              
                              
                              9,561
                              
                              
                              
                              23,142Total
      current liabilities
                              
                              
                              1,338,276
                              
                              
                              
                              607,556Senior
      secured convertible debenture, net of discount
                              
                              
                              610,992
                              
                              
                              
                              576,666Total
      liabilities
                              
                              
                              1,949,268
                              
                              
                              
                              1,184,222Commitments
      and contingenciesStockholders'
      deficit:Common
      stock, no par value; authorized, 100,000,000 shares;15,567,004
      shares issued and outstanding
                              
                              
                              5,073,693
                              
                              
                              
                              3,029,334Deficit
      accumulated
                              
                              
                              (5,739,094
                              )
                              
                              
                              (3,544,161
                              )Total
      stockholders' deficit
                              
                              
                              (665,401
                              )
                              
                              
                              (514,827
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              1,283,867
                              
                              
                              $
                              669,395
 
 See
accompanying notes to consolidated financial statements.
 
 1
 
 AXION
INTERNATIONAL HOLDING INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 Three Months Ending
                  
                  
                  Three Months Ending
                  
                  
                  Six MonthsEnding
                  
                  
                  Six MonthsEndingMarch 31, 2009
                  
                  
                  March 31, 2008
                  
                  
                  March 31, 2009
                  
                  
                  March 31, 2008(Restated)
                  
                  
                  
                  
                  
                  (Restated)Revenue
                  
                  $
                  433,362
                  
                  
                  $
                  -
                  
                  
                  $
                  437,562
                  
                  
                  $
                  -Cost
      of goods sold
                  
                  
                  483,337
                  
                  
                  
                  -
                  
                  
                  
                  483,337
                  
                  
                  
                  -Gross
      margin
                  
                  
                  (49,975
                  )
                  
                  
                  -
                  
                  
                  
                  (45,775
                  )
                  
                  
                  -Research
      and development costs
                  
                  
                  30,513
                  
                  
                  
                  39,606
                  
                  
                  
                  161,763
                  
                  
                  
                  62,106Marketing
      and sales
                  
                  
                  72,491
                  
                  
                  
                  21,967
                  
                  
                  
                  120,399
                  
                  
                  
                  21,967General
      and administrative expenses
                  
                  
                  1,189,335
                  
                  
                  
                  345,065
                  
                  
                  
                  1,640,282
                  
                  
                  
                  391,542Depreciation
      and amortization
                  
                  
                  50,977
                  
                  
                  
                  5,110
                  
                  
                  
                  61,852
                  
                  
                  
                  5,110Total
      operating costs and expenses
                  
                  
                  1,343,316
                  
                  
                  
                  411,748
                  
                  
                  
                  1,984,296
                  
                  
                  
                  480,725Loss
      from operations
                  
                  
                  (1,393,291
                  )
                  
                  
                  (411,748
                  )
                  
                  
                  (2,030,071
                  )
                  
                  
                  (480,725
                  )Other
      expenseInterest
      expense, net
                  
                  
                  104,130
                  
                  
                  
                  43,226
                  
                  
                  
                  164,892
                  
                  
                  
                  43,226Total
      other expense, net
                  
                  
                  104,130
                  
                  
                  
                  43,226
                  
                  
                  
                  164,892
                  
                  
                  
                  43,226Loss
      before income taxes
                  
                  
                  (1,497,421
                  )
                  
                  
                  (454,974
                  )
                  
                  
                  (2,194,963
                  )
                  
                  
                  (523,951
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  
                  (1,497,421
                  )
                  
                  
                  (454,974
                  )
                  
                  
                  (2,194,963
                  )
                  
                  
                  (523,951
                  )Weighted
      average common shares - basic and diluted
                  
                  
                  14,560,963
                  
                  
                  
                  8,977,065
                  
                  
                  
                  13,773,527
                  
                  
                  
                  8,043,852Basic
      and diluted net loss per share
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.07
                  )
 
 See
accompanying notes to consolidated financial statements.
 
 2
  AXION
INTERNATIONAL HOLDING INC
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 
 Six Months ending
                    
                    
                    Six Months endingMarch 31, 2009
                    
                    
                    March 31, 2008(Restated)Cash
      flow from operating activities:Net
      loss
                    
                    $
                    (2,194,963
                    )
                    
                    $
                    (523,951
                    )Adjustments
      to reconcile net loss to netcash
      used in operating activitiesDepreciation,
      and amortization
                    
                    
                    61,852
                    
                    
                    
                    5,110Accretion
      of interest expense on convertible debentures
                    
                    
                    131,232
                    
                    
                    
                    35,513Issuance
      of common stock, options and warrants for accrued interest and
      services
                    
                    
                    551,405
                    
                    
                    
                    20,000Changes
      in operating assets and liabilitiesAccounts
      receivable
                    
                    
                    (437,562
                    )
                    
                    
                    14,163Inventory
                    
                    
                    (81,469
                    )
                    
                    
                    -Prepaid
      expenses and other
                    
                    
                    361
                    
                    
                    
                    (76,971
                    )Accounts
      payable
                    
                    
                    215,482
                    
                    
                    
                    170,816Accrued
      liabilities
                    
                    
                    52,316
                    
                    
                    
                    (29,632
                    )Net
      cash used in operating activities
                    
                    
                    (1,701,346
                    )
                    
                    
                    (384,952
                    )Cash
      flows from investing activities:Purchase
      of equipment and leasehold improvements
                    
                    
                    (96,490
                    )
                    
                    
                    (119,173
                    )Cost to acquire license
                    
                    
                    -
                    
                    
                    
                    (48,284
                    )Net
      cash provided by investing activities
                    
                    
                    (96,490
                    )
                    
                    
                    (167,457
                    )Cash
      flows from financing activities:Proceeds from short term note (net)
                    
                    
                    609,000
                    
                    
                    
                    27,164Issuance of common stock, net of expenses
                    
                    
                    1,375,000
                    
                    
                    
                    795,165Repayment of Short-term Notes
                    
                    
                    (125,000
                    )
                    
                    
                    -Cash acquired in reverse merger
                    
                    
                    -
                    
                    
                    
                    43,011Net
      cash provided by financing activities
                    
                    
                    1,859,000
                    
                    
                    
                    865,340Net
      increase in cash
                    
                    
                    61,164
                    
                    
                    
                    312,931Cash
      at beginning of period
                    
                    
                    138,826
                    
                    
                    
                    -Cash
      at end of period
                    
                    $
                    199,990
                    
                    
                    $
                    312,931Non-cash
      financing activities:Common
      stock for services
                    
                    $
                    -
                    
                    
                    $
                    20,000Conversion
      of Debenture ( Notes)
                    
                    $
                    -
                    
                    
                    $
                    27,164Common
      stock issued in lieu of cash interest
                    
                    $
                    15,187
                    
                    
                    $
                    -Common
      stock issued for license agreement
                    
                    $
                    -
                    
                    
                    $
                    20,000Common
      stock issued pursuant to merger
                    
                    $
                    -
                    
                    
                    $
                    358,385
 
 See
accompanying notes to consolidated financial statements.




3





AXION
INTERNATIONAL HOLDING INC.


AND
SUBSIDIARIES





Notes
to Consolidated Financial Statements


March
31, 2009


(Unaudited)





(1)       Description
of the Business and Basis of Presentation





Axion
International Holdings, Inc. (“Holdings”), formerly Analytical Surveys, Inc.,
was formed in 1981 to provide data conversion and digital mapping services to
users of customized geographic information systems.  However, Holdings
experienced a steady decrease in the demand for its services. In fiscal 2006,
Holdings acted upon its belief that it would not be able to sustain the
operations of its historical business.  Holdings focused on completing
its long-term contracts that would generate cash and sold its Wisconsin-based
operations and assigned its long-term contracts that required new or additional
working capital to complete.  Holdings transitioned its principal
business into that of an independent oil and gas enterprise focused on
leveraging non-operating participation in drilling and production prospects for
the development of U.S. on-shore oil and natural gas reserves.





Holdings’
efforts as an oil and gas company was unsuccessful.  In May 2007,
Holdings terminated its oil and gas executives and took steps to reduce expenses
and commitments in oil and gas investments.





As a
result, in November 2007, Holdings entered into an Agreement and Plan of Merger,
among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly
created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and Axion
International, Inc., a Delaware corporation which incorporated on August 6, 2006
with operations commencing in November 2007 (“Axion”).  On March 20,
2008 (the “Effective Date”), Holdings consummated the merger (the “Merger”) of
Merger Sub into Axion, with Axion continuing as the surviving corporation and a
wholly-owned subsidiary of Holdings.  Each issued and outstanding
share of Axion became 47,630 shares of Holdings’ common stock (“Common Stock”),
or 9,190,630 shares in the aggregate constituting approximately 90.7% of
Holdings’ issued and outstanding Common Stock as of the Effective Date of the
Merger.  The Merger resulted in a change of control, and as such,
Axion (“we”, “our” or the “Company”) is the surviving entity.





Effective
as of August 4, 2008, Holdings effected a 1-for-4 reverse split of its
outstanding shares of Common Stock.  All references to the numbers of
shares of Holding’s Common Stock have been retroactively adjusted and are on a
post-reverse split basis.





In the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included. Such adjustments consist
of normal recurring items. Interim results are not necessarily indicative of
results for a full year.





The
interim consolidated financial statements and notes thereto are presented as
permitted by the Securities and Exchange Commission (“SEC”), and do not contain
certain information which will be included in our annual consolidated financial
statements and notes thereto.





These
consolidated financial statements should be read in conjunction with our
consolidated financial statements included in our annual report on Form 10-KSB
for the year ended September 30, 2008, as filed with the SEC on January 13,
2009.





The
preparation of the financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.





Our
consolidated financial statements include the accounts of our majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.





Reverse
Merger.  The Merger has been accounted for as a reverse merger
in the form of a recapitalization with Axion as the successor.  The
recapitalization has been given retroactive effect in the accompanying financial
statements. The accompanying consolidated financial statements represent those
of Axion for all periods prior to the consummation of the Merger.





Going Concern. We have
incurred significant losses in the three months and six month periods ended
March 31 2009, and we have a working capital deficit. These conditions raise
doubt about our ability to continue as a going concern. We must raise additional
capital through the sale of equity or debt securities, through an offering of
debt securities, or through borrowings from financial institutions.





4





(2)
Summary of Significant Accounting Policies





Cash and Cash Equivalents: We
consider all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.





Equipment and Leasehold
Improvements:Equipment
and leasehold improvements are recorded at cost and are depreciated and
amortized using the straight-line method over estimated useful lives of three to
ten years.  Repairs and maintenance are charged directly to operations
as incurred.





Allowance for Doubtful
Accounts:We
accrue a reserve on a receivable when, based upon the judgment of management, it
is probable that a receivable will not be collected and the amount of any
reserve may be reasonably estimated.  As of March 31, 2009 we had an
allowance for doubtful accounts of $0.





Inventories: 
Inventories are priced at the lower of cost (first–in, first–out) or market and
consist primarily of raw materials.  As of March 31, 2009 we have “work in
progress” raw material inventory of $191,885.





Revenue and Cost Recognition:Our revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) No. 104, “Revenue Recognition.”   Revenue is
recognized when persuasive evidence of an agreement with the customer exists,
products are shipped or title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and when there are no significant future
performance obligations.





Customers
are billed based on the terms included in the contracts, which are generally
upon delivery of certain products or information, or achievement of certain
milestones as defined in the contracts.  When billed, such amounts are
recorded as accounts receivable.  Revenue earned in excess of billings
represents revenue related to services completed but not billed, and billings in
excess of revenue earned represent billings in advance of services
performed.





Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools and
depreciation costs.  Losses on contracts are recognized in the period
such losses are determined.  We do not believe warranty obligations on
completed contracts are significant.  Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.





Income Taxes: Income taxes
are reflected under the liability method, which establishes deferred tax assets
and liabilities to be recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.





U.S.
generally accepted accounting principles require that we record a valuation
allowance against deferred tax assets if it is “more likely than not” that we
will not be able to utilize it to offset future taxes.  Due to the
size of the net operating loss carry forward in relation to our recent history
of unprofitable operations and due to the continuing uncertainties surrounding
our future operations as discussed above, we have not recognized any of this net
deferred tax asset.  We currently provide for income taxes only to the
extent that we expect to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) on current taxable income.





Impairment of Long-Lived Assets
Other Than Goodwill: We account for the impairment and disposition of
long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that our long-lived
assets be assessed for potential impairment in their carrying values whenever
events or changes in circumstances indicate such impairment may have
occurred.  An impairment charge to current operations is recognized
when the estimated undiscounted future net cash flows of the asset are less than
its carrying value. Any such impairment is recognized based on the differences
in the carrying value and estimated fair value of the impaired
asset.





Stock-Based Compensation: We
have three nonqualified stock option plans with 2,117,970 shares available for
grant as of March 31, 2009.  The exercise price of the options are
established by the Board of Directors on the date of grant and are generally
equal to the market price of the stock on the grant date.  The Board
of Directors may determine the vesting period of any option issued. The options
issued are exercisable in whole or in part for a period of up to ten years from
the date of grant. All outstanding options pursuant to such plans on the date of
the Merger became fully vested pursuant to the change of control that occurred
in connection with the Merger.  No options have been granted pursuant
to the plans since the effective date of the Merger. Subsequent to the Merger
the options granted to the employees under the provisions of these plans have
expired.  Accordingly, at March 31, there were no options issued and
outstanding under these plans.





5





We
have also issued stock options pursuant to employment agreements with our Chief
Executive Officer and our President, granting the right to 762,076 and 381,038
shares of Common Stock, respectively, at an exercise price of $.00002 per share,
under the terms of certain performance-based stock
options.




Earnings (Loss) Per
Share:Basic
earnings (loss) per share are computed by dividing earnings (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period.  Diluted earnings (loss) per share include the effects
of the potential dilution of outstanding options, warrants, and convertible debt
on our Common Stock as determined using the treasury stock method. Additionally,
for the three month period ended March 31, 2009, potential dilutive common
shares under our convertible instruments, warrant agreements and stock option
plans of 3,607,012 were not included in the calculation of diluted earnings per
share as they were antidilutive.





Financial Instruments: The
carrying amounts of financial instruments are estimated to approximate estimated
fair values. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of cash, receivables, accounts payable, and accrued
liabilities approximate fair value due to the short maturity of these
instruments. The carrying amounts of debt approximate fair value due to the
variable nature of the interest rates and short-term maturities of these
instruments.





Concentration of Credit Risk:
We maintain our cash with a major U.S. domestic bank. The amounts are held in a
noninterest bearing transaction account which has unlimited FDIC
coverage.   The terms of these deposits are on demand to minimize
risk.  We have not incurred losses related to these
deposits.





Operating Cycle; In
accordance with industry practice, we include in current assets and liabilities
amounts relating to long-term contracts, which generally have operating cycles
extending beyond one year. Other assets and liabilities are classified as
current and non-current on the basis of expected realization within or beyond
one year.





Impact
of Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”). This Statement replaces SFAS No. 141, Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent
consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS No. 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as
a step acquisition) to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values (or other amounts determined in accordance with SFAS No.
141(R)). In addition, SFAS No. 141(R)'s requirement to measure the
noncontrolling interest in the acquiree at fair value will result in recognizing
the goodwill attributable to the noncontrolling interest in addition to that
attributable to the acquirer.  SFAS No. 141(R) amends SFAS No. 109,
Accounting for Income
Taxes, to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances. It also amends
SFAS No. 142, to, among other things; provide guidance on the impairment testing
of acquired research and development intangible assets and assets that the
acquirer intends not to use. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. We do not
expect the adoption of SFAS No. 141(R) will have a material impact on our
financial statements.




In May
2008, the FASB issued SFAS 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS 162 becomes effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments AU Section 411 “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.” The Company does not expect that the
adoption of SFAS 162 will have a material impact on its consolidated financial
statements.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of
Intangible Assets,” (“FSP No. 142-3”). FSP No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, in order to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No. 141R,
“Business Combinations”
(revised 2007), and other U.S. generally accepted accounting principles. FAS
142-3 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The Company is currently evaluating the impact, if any,
that FAS 142-3 will have on its consolidated financial position, results of
operations and cash flows.





6




In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
03-6-1”), which classifies unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents as participating
securities and requires them to be included in the computation of earnings per
share pursuant to the two-class method described in SFAS No. 128, “Earnings per
Share.” FSP 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. It
requires all prior period earnings per share data presented to be adjusted
retrospectively. The Company is currently evaluating the effect, if any, that
the adoption of FSP 03-6-1 will have on its consolidated financial position,
results of operations and cash flows.




In
September 2008, the FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (“FSP 133-1”). FSP 133-1 requires more extensive
disclosure regarding potential adverse effects of changes in credit risk on the
financial position, financial performance, and cash flows of sellers of credit
derivatives. FSP 133-1 also amends FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others,” to require additional disclosure about
the current status of the payment or performance risk of a guarantee. FSP 133-1
also clarifies the effective date of FASB Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities,” by stating that the disclosures
required should be provided for any reporting period (annual or quarterly
interim) beginning after November 15, 2008. The Company is currently evaluating
the effect, if any, that the adoption of FSP 133-1 will have on its consolidated
financial position, results of operations and cash flows.





(3)
Merger





On March
20, 2008, we consummated a merger pursuant to an Agreement and Plan of Merger,
among Axion, Holdings, and the Merger Sub.  The Merger Sub was merged
into Axion, with Axion continuing as the surviving corporation and a
wholly-owned subsidiary of Holdings.   Each issued and
outstanding share of Axion became 47,630 shares of Common Stock of Holdings, or
9,190,630 shares in the aggregate constituting approximately 90.7% of the issued
and outstanding capital stock of Holdings as of the effective date of the
merger.  For accounting purposes, these actions resulted in a reverse
merger, and Axion is the accounting survivor and surviving business entity;
however, Holdings is the surviving legal entity.





We
assumed liabilities in excess of the fair value of the assets we
acquired.  We reduced paid in capital as follows:





Fair
      value of net assets acquired:
                          
                          $
                          600,612Consideration
      given:Fair
      value of liabilities assumed
                          
                          
                          1,120,746Net
      liabilities acquired over fair value of assets, recorded as a reduction to
      paid in capital
                          
                          $
                          520,134





(4)       Intangibles
and Exclusive Agreement





In
February 2007, we acquired an exclusive, royalty-bearing license in specific but
broad global territories to make, have made, use, sell, offer for sale, modify,
develop, import, export products made using patent applications owned by Rutgers
University.  We plan to use such these revolutionary patented
technologies in the production of structural plastic products such as railroad
crossties, bridge infrastructure,  marine pilings, and bulk
heading.





We paid
approximately $32,000 and issued 714,447 shares of our Common Stock as
consideration to Rutgers.  We have estimated the fair market value of
the consideration received in exchange for the shares totaled approximately
$20,000.  We recorded these amounts, as well as legal expenses we
incurred to acquire the license, as an intangible asset.  The license
has an indefinite life and will be tested for impairment on an annual
basis





We are
obligated to pay royalties on various product sales to Rutgers, and to reimburse
Rutgers for certain patent defense costs.  Patent defense costs paid
to Rutgers, a related party, for the three month period ended March 31, 2009 we
did not incur any expense.  We also pay annual membership dues to
AIMPP, a department of Rutgers, as well as consulting fees for research and
development processes.  Membership dues and consulting fees totaled
$20,000 for the three months ended March 31, 2009 and $119,965 for the six month
period ended March 31, 2009.





7





(5)       Debt





The
components of debt are summarized as follows.





Long-Term Debt
                  
                  March 31, 2009Senior
      secured convertible debentures
                  
                  $
                  725,736Discount
      for beneficial conversion feature
                  
                  
                  (114,744
                  )610,992Less
      current portion
                  
                  
                  —$
                  610,992





Pursuant
to the Merger, we assumed three 13% Senior Secured Convertible Debentures (the
“Debentures”) totaling $1,643,050.  Simultaneous with the Merger, in
connection with the assignment of $1,000,000 of the outstanding principal amount
of the Debentures, the holders of the Debentures agreed to extend the maturity
date to June 30, 2008 and to cancel 361,234 warrants to purchase shares of our
Common Stock at an exercise price of $0.40 per share, which warrants had been
issued in connection with the original issuance of the Debentures.  In
April 2008 in connection with the assignment of the remaining $643,050 of the
Debentures, the maturity date of the Debentures was further extended to March
30, 2009, the remaining 231,542 warrants which had been issued in connection
with the original issuance of the Debentures were cancelled, and the principal
amount of the $643,050 being assigned was increased to $650,000.





In April
2008, holders of the Debentures elected to convert $100,000 principal into
250,000 shares of Common Stock, and we repaid $200,000 of the outstanding
principal. In May 2008, we issued a Series B Debenture (the “Series B
Debenture”) in the principal amount of $200,000 to ADH Ventures, LLC (“ADH”),
one of the holders of the Debentures and which beneficially owns more than 5% of
our outstanding Common Stock, with substantially the same terms as the existing
Debentures.





In August
2008, one of the holders of the Debentures elected to convert $282,564 of
principal into 706,410 shares of Common Stock. In September 2008, the Debenture
holders converted an additional $714,200 into 2,109,834 shares of Common Stock.
They also agreed to amend and restructure the Debentures and the Series B
Debentures to (i) lower the interest rate from 13% to 9%, (ii) extend the
maturity date to September 30, 2010 and (iii) eliminate such holders’ security
interest in the assets of the Company and its subsidiaries. In addition, the
Debenture and Series B Debenture in the aggregate principal amount of $667,436
held by ADH were amended to reduce the conversion price from $.40 to
$.30.  A loss on
debt extinguishment of $931,327 was recognized as debt conversion
expense.  The amount of the loss represents the excess of the fair
value of shares of common stock and new convertible debentures issued, amounting
to $1,336,253 and $989,480, respectively, over the value of the beneficial
conversion options present in the extinguished notes at the extinguishment date,
$1,051,212, plus the carrying value of the extinguished notes,
$342,808. 
 In
September 2008, we restructured $325,000 of outstanding 13% convertible
debentures, under which such debentures were converted at a conversion price of
$0.40 per share into 812,500 shares of common stock and a new 9% Convertible
Debenture due September 30, 2010 (the “New Debenture) in the principal amount of
$172,500 to Divash Capital Partners LLC.  The New Debenture was issued
without any further cash consideration and is convertible at a conversion price
of $1.50 per share.  We treated the transaction as an induced
conversion and recorded debt conversion expense of $173,547, representing the
fair value of the consideration issued.




At the
time of the merger we evaluated the application of EITF 98-05, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments” and concluded that the conversion option
of the Debentures was a beneficial conversion feature with intrinsic
value.  We recorded the fair value of the beneficial conversion
feature of the Debentures, which we estimate to be $825,000, as a discount to
par value which was being amortized over the term of the Debentures. As the
Debentures have been converted and restructured the intrinsic value as been
adjusted and will continue to be amortized over the remaining
term.





The
following table summarizes the issuances, repayments, and conversion of the
Series A, Series B, and New Debentures from inception to March 31,
2009:





Acquired
      in Merger
                      
                      $
                      1,643,050Repayments
                      
                      
                      (200,000
                      )Issuances
                      
                      
                      379,450Conversion
                      
                      
                      (1,096,764
                      )Balance,
      March 31, 2009
                      
                      $
                      725,736





Required
principal payments on long-term debt at March 31, 2009 totaled $0 and $725,736
for fiscal 2010.





8





(6)       Stockholder’s
Equity





We are
authorized to issue 100,000,000 shares of Common Stock, no par value, and
2,500,000 shares of Preferred Stock, no par value. There were 15,567,004 shares
of Common Stock and no outstanding shares of Preferred Stock on March 31,
2009.





We may
issue up to 2,500,000 shares of preferred stock, no par value, with dividend
requirements, voting rights, redemption prices, liquidation preferences and
premiums, conversion rights and other terms without a vote of the
shareholders.  We also may issue up to 2,117,970 shares pursuant to
our three nonqualified stock option plans and 1,350,614 shares pursuant to stock
options that were granted outside the parameters of such plans.





From
inception through March 31, 2009, we have issued shares of Common Stock to our
founders, partners, and investors as follows.  We have adjusted the
number of shares issued to reflect the post-merger shares, or the number of
shares the holders received in exchange for Axion shares, and for the 1-for 4
reverse stock split:





In August
2006, we issued 4,048,529 shares of our Common Stock to founding stockholders
without consideration.





In
February 2007, we issued 714,447 shares of our Common Stock to Rutgers
University as partial consideration for issuance of an exclusive license
agreement to the Company.  We have estimated the fair market value of
those shares to be $20,000.





Pursuant
to a management consulting agreement with Regal Capital LLC (“Regal’), we issued
2,572,007 shares of our Common Stock to Regal as payment for management
consulting services.  The consulting agreement also provides for a
monthly fee of $10,000 each during the term of the consulting services and an
additional payment of a $230,000 fee structured over time.  We
accounted for the entire fee, other than the $10,000 monthly fee, as a cost of
raising capital and reduced the proceeds of the private placement completed in
December 2007 accordingly.  As of September 30, 2008, we had paid the
entire $230,000 fee.





In
December and January 2008 we completed a private placement of 1,855,655 shares
of Common Stock at $0.548 per share, with gross proceeds totaling
$1,019,064.  Approximately 49,535 shares were to repay a $27,164 note
payable, with the balance received in cash.





In April,
2008, we issued 37,493 shares of our Common Stock to five former Holdings board
members in full settlement of all outstanding past due directors’ compensation,
payment of which had not been made since October 2006.  We also issued
25,000 shares to Holdings’ former Chief Executive Officer in lieu of a cash
bonus that she was entitled to receive as a result of the Merger.





In April
2008, holders of the Debentures elected to convert $100,000 principal into
250,000 shares of Common Stock, and we repaid $200,000 of the outstanding
principal. In May 2008, we issued the Series B Debenture in the principal amount
of $200,000, with substantially the same terms as the Debentures. We also
completed an additional private placement of 471,900 common shares at $0.88 per
share during the period from June 2008 to September 2008.





In August
2008, one of the holders of the Debentures elected to convert $282,564 of
principal into 706,410 shares of Common Stock. In September the Debenture
holders converted an additional $714,200 into 2,109,834 shares of Common Stock.
They also agreed to amend and restructure the debentures to lower the interest
rate from 13% to 9% and extend the maturity date to September 30. 2010. In
September, we issued the New Debenture in the principal amount of $172,500, with
a maturity date of September 30, 2010 and a conversion price of
$1.50.  In March 2009, the New Debenture was amended to lower the
interest rate from 9% to 8.75% and the maturity date was extended to December
31, 2010.





In
January 2009, we completed a private placement of 1,562,00 shares of Common
Stock at $.88 per share and issued 15,469 shares of Common Stock in lieu of cash
interest expense to our debenture holders.





The
following table sets forth the number of shares of Common Stock that were
issuable upon conversion of outstanding warrants and convertible debt as of
March 31, 2009.





9





Conversion/
                        Exercise Price
                      
                      
                      Common Shares
                        IssuableClass
      A Warrants
                      
                      
                      95,473
                      
                      
                      
                      5.36
                      
                      
                      
                      95,473Class
      B Warrants
                      
                      
                      95,473
                      
                      
                      
                      5.96
                      
                      
                      
                      95,473Class
      E Warrants
                      
                      
                      188,018
                      
                      
                      
                      4.74
                      
                      
                      
                      188,018Note
      Warrants issued to advisors in November 2006
                      
                      
                      47,482
                      
                      
                      
                      2.36
                      
                      
                      
                      47,482Debentures
                      
                      
                      78,236
                      
                      
                      
                      0.30
                      
                      
                      
                      260,787Debentures
                      
                      
                      275,000
                      
                      
                      
                      0.40
                      
                      
                      
                      687,500Series
      B Debentures
                      
                      
                      200,000
                      
                      
                      
                      0.30
                      
                      
                      
                      666,667New
      Debentures
                      
                      
                      172,500
                      
                      
                      
                      1.50
                      
                      
                      
                      115,000Other
      Warrants
                      
                      
                      397,000
                      
                      
                      
                      0.88
                      
                      
                      
                      397,000Total
      shares issuable and weighted average prices
                      
                      
                      
                      
                      
                      
                      1.23
                      
                      
                      
                      2,355,400





(7)       Stock–based
compensation




Pursuant
to employment agreements dated January 1, 2008, our Chief Executive Officer will
have the right to purchase up to 762,076 post-merger and post-split shares of
Common Stock at an exercise price of $.0002 per share, and our President has the
right to purchase up to 381,038 shares of Common Stock at an exercise price of
$.0002 per share, under the terms of certain performance-based stock
options.  The options have a five year term and will vest upon the
achievement of annual revenue targets as follows:





Number of shares
                          (post merger and post
                          split)
                        
                        Vests upon
                          achievement of annual
                          revenue totaling
                        
                        Exercise Price
                        
                        
                        Intrinsic
                          value on date
                          of grant190,519
                        
                        $10
      million
                        
                        $
                        .00002
                        
                        
                        $
                        104,600285,779
                        
                        $15
      million
                        
                        $
                        .00002
                        
                        
                        $
                        156,900285,779
                        
                        $25
      million
                        
                        $
                        .00002
                        
                        
                        $
                        156,900381,038
                        
                        $25
      million
                        
                        $
                        .00002
                        
                        
                        $
                        209,200





The
intrinsic value of the options, based on the fair market value of shares sold in
a private placement in December 2007, totaled $627,600.  Stock-based
compensation expense will be recognized in future periods in accordance with the
performance-based terms of the options.




We have
three nonqualified stock option plans with 2,117,970 shares available for grant
as of March 31, 2009.  The exercise price of the options are
established by the Board of Directors on the date of grant and are generally
equal to the market price of the stock on the grant date.  The Board
of Directors may determine the vesting period for each new grant and options
issued are exercisable in whole or in part for a period of up to ten years from
the date of grant. All outstanding options pursuant to such plans on the date of
the Merger became fully vested pursuant to the change of control that occurred
in connection with the Merger.  No options have been granted pursuant
to the plans since the effective date of the Merger. Subsequent to the Merger
the options granted to the employees under the provisions of these plans have
expired.  Accordingly, at March 31, 2009, there were no options
outstanding under these plans.





(8)       Leases





We lease
approximately 1,000 square feet of space in Basking Ridge, New Jersey pursuant
to an oral month-to-month lease at a monthly rent of $4,000. These premises
serve as the corporate headquarters.  Facility rent expense totaled
$12,000 for the three month period ended March 31, 2009. The company also has a
leased facility in San Antonio, Texas which was acquired during the merger. This
property is subleased to a commercial real estate group.





(9)       Litigation
and Other Contingencies





In
November 2005 and November 2007, Holdings was named as party to suits filed in
the State of Indiana by the Sycamore Springs Homeowners Association, as well as
certain homeowners in the Sycamore Springs neighborhood of Indianapolis,
Indiana, and by the developers of the Sycamore Springs
neighborhood.  The claimants alleged that various Mid-States
Engineering entities that are alleged to be subsidiaries of MSE Corporation,
which Holdings acquired in 1997, adversely affected the drainage system of the
Sycamore Springs neighborhood, and sought damages from flooding that occurred on
September 1, 2003.  Mediation efforts held in November 2007 and April
2008 have been successful, and each of the suits has been settled. The agreement
is a compromise of disputed claims asserted or which may be asserted by the
claimants against the settling defendants for any past, present and future
losses, damages, and claims they may have against the settling
defendants.  The claims from the all three lawsuits arise from a
single occurrence with one deductible applying to the matter, and defense of the
actions were provided by Holdings’ insurance carrier.  We assumed a
$100,000 obligation payable to our insurer, which represents the deductible
pursuant to the terms of Holdings’ insurance coverage.





10





In April
2006, Holdings commenced an action against Tonga Partners, L.P. (“Tonga”),
Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court
of New York, for disgorgement of short-swing profits pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended.  On November 10,
2004, Tonga converted a convertible promissory note into 1,701,341 shares of
Common Stock, and thereafter, between November 10 and November 15, 2004, sold
such shares for short-swing profits.  In September 2008, the District
Court granted Holdings summary judgment against Tonga for disgorgement of
short-swing profits in the amount of $4,965,898.  The defendants have
filed an appeal of the order granting Holdings summary judgment





We are
also subject to various other routine litigation incidental to our business.
Management does not believe that any of these routine legal proceedings would
have a material adverse effect on our financial condition or results of
operations.





(10)    Subsequent
Events





None




(11)   
Restatements
  In
connection with the preparation of its Annual Report on Form 10-K for the year
ended September 30, 2009, the Company determined that certain transactions were
not accurately presented in the financial statements included in the Company’s
Annual Report on Form 10-KSB for the year ended September 30, 2008 and the
Company’s Quarterly Reports on Form 10-Q for the three months ended December 31,
2008, March 31, 2009 and June 30, 2009.  These include the
following:
 
 a)
              The
      recognition and accounting for shares of common stock, options and
      warrants issued to service-providersb)
              The
      recognition and accounting for discounts on notes payable and convertible
      notes payable resulting from the concurrent issuance of warrants and from
      beneficial conversion features
 c)
              The
      treatment of debt modifications
 
 The
Company and the Company's audit committee discussed the above errors and
adjustments with the Company's independent registered public accounting firm and
determined that a restatement is necessary. The Annual Report on Form 10-K for
the fiscal year ended September 30, 2009 reflects the changes for the annual
results for the year ended September 30, 2008.
 
 As a
result of the correction of the errors described above, the Company restated its
financial statements for the three months ended December 31, 2008 included in
this Quarterly Report on Form 10-Q as follows:
 
 11
  AXION
INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEET
 Unaudited
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  UnauditedMarch 31, 2009
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  March 31, 2009as
      previously reported
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  Adjustments
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  as
      restatedAssetsCurrent
      assets:Cash
      and cash equivalents
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  199,990
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  199,990Accounts
      Receivable
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  437,562
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  437,562Inventories
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  191,885
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  191,885Prepaid
      expenses
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  6,903
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  6,903Total
      current assets
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  836,340
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  836,340Property,
      equipment, and leasehold improvements, at cost:Equipment
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,838
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,838Machinery
      and equipment
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  357,915
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  357,915Purchased
      software
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  56,329
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  56,329Furniture
      and fixtures
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,322
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,322Leasehold
      improvements
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  29,300
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  29,300462,704
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  462,704Less
      accumulated depreciation
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (87,461
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (87,461
                                                                                                                                                                  )Net
      property and leasehold improvements
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  375,243
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  375,243Long-term
      and intangible assetsLicense,
      at acquisition cost,
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  68,284
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  68,284Deposits
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  4,000
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  4,00072,284
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  72,284Total
      assets
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  1,283,867
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  1,283,867Liabilities
      and Stockholders' DeficitCurrent
      liabilitiesAccounts
      payable
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  512,826
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  -
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  512,826Notes
      payable, net of discount
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  484,000
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (21,078
                                                                                                                                                                  )
                                                                                                                                                                  (b),
      (c)
                                                                                                                                                                  
                                                                                                                                                                  462,922Accrued
      liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  324,906
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (42,058
                                                                                                                                                                  )
                                                                                                                                                                  (d)
                                                                                                                                                                  
                                                                                                                                                                  282,848Interest
      payable
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  70,119
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  70,119Accrued
      payroll
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,561
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  9,561Total
      current liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,401,412
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (63,136
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,338,276Senior
      secured convertible debenture, net of discount
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  377,570
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  233,422
                                                                                                                                                                  
                                                                                                                                                                  (c),
      (d)
                                                                                                                                                                  
                                                                                                                                                                  610,992Total
      liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,778,982
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  170,286
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,949,268Commitments
      and contingenciesStockholders'
      deficit:Common
      stock, no par value; authorized, 100,000,000 shares;15,449,501
      shares issued and outstanding
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  3,374,045
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,699,648
                                                                                                                                                                  
                                                                                                                                                                  (a),
      (b), (d)
                                                                                                                                                                  
                                                                                                                                                                  5,073,693Deficit
      accumulated during development stage
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (3,869,160
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (1,869,934
                                                                                                                                                                  )
                                                                                                                                                                  (a),
      (c), (d)
                                                                                                                                                                  
                                                                                                                                                                  (5,739,094
                                                                                                                                                                  )Total
      stockholders' deficit
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (495,115
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (170,286
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (665,401
                                                                                                                                                                  )Total
      liabilities and stockholders' deficit
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  1,283,867
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  1,283,867
  12
  AXION
INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENT OF OPERATIONS
 Unaudited
                                                                                Three
      Months Ending
                                                                                March
      31, 2009
                                                                                as
      previously reported
                                                                              
                                                                              
                                                                              
                                                                              Adjustments
                                                                              
                                                                              
                                                                              
                                                                              Unaudited
                                                                                Three
      Months Ending
                                                                                March
      31, 2009
                                                                                restatedRevenue
                                                                              
                                                                              $
                                                                              433,362
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              433,362Cost
      of goods sold
                                                                              
                                                                              
                                                                              334,337
                                                                              
                                                                              
                                                                              $
                                                                              149,000
                                                                              
                                                                              (e)
                                                                              
                                                                              483,337Gross
      margin
                                                                              
                                                                              
                                                                              99,025
                                                                              
                                                                              
                                                                              
                                                                              (149,000
                                                                              )
                                                                              
                                                                              
                                                                              (49,975
                                                                              )Research
      and development costs
                                                                              
                                                                              
                                                                              30,513
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              30,513Marketing
      and sales
                                                                              
                                                                              
                                                                              72,491
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              72,491General
      and administrative expenses
                                                                              
                                                                              
                                                                              873,920
                                                                              
                                                                              
                                                                              
                                                                              315,415
                                                                              
                                                                              (a)(e)
                                                                              
                                                                              1,189,335Depreciation
      and amortization
                                                                              
                                                                              
                                                                              50,977
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              50,977Total
      operating costs and expenses
                                                                              
                                                                              
                                                                              1,027,901
                                                                              
                                                                              
                                                                              
                                                                              315,415
                                                                              
                                                                              
                                                                              
                                                                              1,343,316Loss
      from operations
                                                                              
                                                                              
                                                                              (928,876
                                                                              )
                                                                              
                                                                              
                                                                              (464,415
                                                                              )
                                                                              
                                                                              
                                                                              (1,393,291
                                                                              )Other
      expense (income), netOther
      income
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              -Interest
      expense, net
                                                                              
                                                                              
                                                                              52,491
                                                                              
                                                                              
                                                                              
                                                                              51,639
                                                                              
                                                                              (c)
                                                                              
                                                                              104,130Total
      other expense, net
                                                                              
                                                                              
                                                                              52,491
                                                                              
                                                                              
                                                                              
                                                                              51,639
                                                                              
                                                                              
                                                                              
                                                                              104,130Loss
      before income taxes
                                                                              
                                                                              
                                                                              (981,367
                                                                              )
                                                                              
                                                                              
                                                                              (516,054
                                                                              )
                                                                              
                                                                              
                                                                              (1,497,421
                                                                              )Provision
      for income taxes
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              -Net
      loss
                                                                              
                                                                              $
                                                                              (981,367
                                                                              )
                                                                              
                                                                              $
                                                                              (516,054
                                                                              )
                                                                              
                                                                              $
                                                                              (1,497,421
                                                                              )Weighted
      average common shares - basic and diluted
                                                                              
                                                                              
                                                                              14,560,963
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              14,560,963Basic
      and diluted net loss per share
                                                                              
                                                                              $
                                                                              (0.07
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              (0.10
                                                                              )
 13
  AXION
INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENT OF OPERATIONS
 Unaudited
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                UnauditedSix Months Ending
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                Six Months EndingMarch
      31, 2009
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                March
      31, 2009as
      previously reported
                                                                                                
                                                                                                
                                                                                                Adjustments
                                                                                                
                                                                                                
                                                                                                restatedRevenue
                                                                                                
                                                                                                $
                                                                                                437,562
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                437,562Cost
      of goods sold
                                                                                                
                                                                                                
                                                                                                334,337
                                                                                                
                                                                                                
                                                                                                $
                                                                                                149,000
                                                                                                
                                                                                                (e)
                                                                                                
                                                                                                483,337Gross
      margin
                                                                                                
                                                                                                
                                                                                                103,225
                                                                                                
                                                                                                
                                                                                                
                                                                                                (149,000
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (45,775
                                                                                                )Research
      and development costs
                                                                                                
                                                                                                
                                                                                                161,763
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                161,763Marketing
      and sales
                                                                                                
                                                                                                
                                                                                                120,399
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                120,399General
      and administrative expenses
                                                                                                
                                                                                                
                                                                                                1,253,064
                                                                                                
                                                                                                
                                                                                                $
                                                                                                387,218
                                                                                                
                                                                                                (a)(e)
                                                                                                
                                                                                                1,640,282Depreciation
      and amortization
                                                                                                
                                                                                                
                                                                                                61,852
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                61,852Total
      operating costs and expenses
                                                                                                
                                                                                                
                                                                                                1,597,078
                                                                                                
                                                                                                
                                                                                                
                                                                                                387,218
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,984,296Loss
      from operations
                                                                                                
                                                                                                
                                                                                                (1,493,853
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (536,218
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (2,030,071
                                                                                                )Other
      expense (income), netOther
      income
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Interest
      expense, net
                                                                                                
                                                                                                
                                                                                                103,987
                                                                                                
                                                                                                
                                                                                                
                                                                                                60,905
                                                                                                
                                                                                                (c)
                                                                                                
                                                                                                164,892Total
      other expense, net
                                                                                                
                                                                                                
                                                                                                103,987
                                                                                                
                                                                                                
                                                                                                
                                                                                                60,905
                                                                                                
                                                                                                
                                                                                                
                                                                                                164,892Loss
      before income taxes
                                                                                                
                                                                                                
                                                                                                (1,597,840
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (597,123
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (2,194,963
                                                                                                )Provision
      for income taxes
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Net
      loss
                                                                                                
                                                                                                $
                                                                                                (1,597,840
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (597,123
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (2,194,963
                                                                                                )Weighted
      average common shares - basic and diluted
                                                                                                
                                                                                                
                                                                                                13,773,527
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                13,773,527Basic
      and diluted net loss per share
                                                                                                
                                                                                                $
                                                                                                (0.12
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (0.16
                                                                                                )
 (a)
      Stock option expense of $71,803 and $536,218 in the three- and six-month
      periods ended March 31, 2009, respectively, was recognized for grants of
      stock and options to consultants by increases to general and
      administrative expenses and common stock.(b)
      Discounts on notes payable of $117,953 were recorded in connection with
      the concurrent issuance of warrants, with a correponding increase to
      common stock.(c)
      The amortization of discounts on notes payable and convertible debentures
      was increased by a $9,236 and $60,905 in the three- and six-month periods
      ended March 31, 2009, which increased interest
  expense.(d) Opening
      balance sheet adjustments were recorded for the restatements described in
      note 2 to the Company's financial statements included in its
      annual report on Form 10-K for the year ended September 30, 2009 as
      follows:
 Accrued
      liabilities
                          
                          $
                          (42,058
                          )Convertible
      debentures, net of discount
                          
                          
                          269,423Common
      stock
                          
                          
                          1,045,476Retained
      earnings
                          
                          
                          (1,272,841
                          )


14




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





The
discussion of our financial condition and results of operations set forth below
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this Form 10-Q. This Form 10-Q
contains forward-looking statements that involve risk and uncertainties. The
statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. When used in
this Form 10-Q, or in the documents incorporated by reference into this Form
10-Q, the words “anticipate,” “believe,” “estimate,” “intend”, “expect”, “may”,
“will” and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include, without limitation,
statements relating to competition, management of growth, our strategy, future
sales, future expenses and future liquidity and capital resources. All
forward-looking statements in this Form 10-Q are based upon information
available to us on the date of this Form 10-Q, and we assume no obligation to
update any such forward-looking statements. Our actual results, performance and
achievements could differ materially from those discussed in this Form 10-Q.
Factors that could cause or contribute to such differences (“Cautionary
Statements”) include, but are not limited to, those discussed in Item !.
Business – “Risk Factors” and elsewhere in Holdings’s Annual Report on Form
10-KSB, which are incorporated by reference herein.  All subsequent
written and oral forward-looking statements attributable to Holdings or the
Company, or persons acting on their behalf, are expressly qualified in their
entirety by the Cautionary Statements.





Basis
of Presentation





The
financial information presents in this form 10-Q is not audited and is not
necessarily indicative of our future consolidated financial position results of
operations or cash flows. Our fiscal year-end is September 30, and our fiscal
quarters end on December 31, March 31, and June 30. Unless otherwise stated, all
dates refer to our fiscal year and fiscal periods.





Overview





Axion
International Holdings, Inc. (“Holdings”) was formed in 1981 to provide data
conversion and digital mapping services to users of customized geographic
information systems.  On March 20, 2008, Holdings consummated an
Agreement and Plan of Merger (the “Merger”), among Holdings, Axion Acquisition
Corp., a Delaware corporation and direct wholly-owned subsidiary of the Holdings
(the “Merger Sub”), and Axion International, Inc., a Delaware corporation which
incorporated on August 6, 2006 with operations commencing in November 2007,
(“Axion”).  Pursuant to the Merger, the Merger Sub was merged into
Axion, with Axion continuing as the surviving corporation and a wholly-owned
subsidiary of Holdings.  Each issued and outstanding share of Axion
became 47,630 shares of Holdings common stock (“Common Stock”), or 9,190,630
shares in the aggregate constituting approximately 90.7% of Holdings issued and
outstanding Common Stock as of the effective date of the Merger.  The
Merger resulted in a change of control, and as such, Axion (“we”, “our” or the
“Company”) is the surviving entity.





Axion is
the exclusive licensee of revolutionary patented technologies developed for the
production of structural plastic products such as railroad crossties, bridge
infrastructure, marine pilings and bulk heading.  We believe these
technologies, which were developed by scientists at Rutgers University
(“Rutgers”), can transform recycled consumer and industrial plastics into
structural products which are more durable and have a substantially greater
useful life than traditional products made from wood, steel and
concrete.  In addition, we believe our recycled composite products
will result in substantial reduction in greenhouse gases and also offer flexible
design features not available in standard wood, steel or concrete
products.





15





The
Merger has been accounted for as a reverse merger in the form of a
recapitalization with Axion as the successor.  The recapitalization
has been given retroactive effect in the accompanying financial
statements.  The accompanying consolidated financial statements
represent those of Axion for all periods prior to the consummation of the Merger
and the discussion below relates to Axion.





Critical
Accounting Policies





Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in the U.S. The preparation of
financial statements in conformity with GAAP requires management to make
estimates, judgments and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by
management.





An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements.





Cash and Cash
Equivalents.  We consider all highly liquid investments with
maturities of three months or less to be cash equivalents.  Our
investments are subject to potential credit risk. Our cash management and
investment policies restrict investments to low-risk, highly liquid
securities.





Income
Taxes.  Income taxes are reflected under the liability method,
which establishes deferred tax assets and liabilities to be recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.





U.S.
generally accepted accounting principles require that we record a valuation
allowance against deferred tax assets if it is “more likely than not” that we
will not be able to utilize it to offset future taxes.  Because we
have no history of profitable operations, we have not recognized any of this net
deferred tax asset.  We currently provide for income taxes only to the
extent that we expect to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) on current taxable income.





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





Inventories.  Inventories
are priced at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials.  As of March 31, 2009 we have “work in
progress” raw material inventory of $191,885.





Fair Value of Financial
Instruments.  SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”, requires that we disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.





Goodwill and Intangible
Assets:We have
adopted SFAS No. 142, “Goodwill and Other Intangible
Assets”, (“SFAS No. 142”). As a result, we do not amortize goodwill, and
instead annually evaluates the carrying value of goodwill for impairment, in
accordance with the provisions of SFAS No. 142. Goodwill represents the excess
of the cost of investments in subsidiaries over the fair value of the net
identifiable assets acquired.  We hold licenses and expect both
licenses and the cash flow generated by the use of the licenses to continue
indefinitely due to the likelihood of continued renewal at little or no
cost.





Reverse Merger Purchase
Accounting.In connection with our Merger, we have made
estimates regarding the fair value of the assets acquired and the liabilities
assumed.   Adjustments to these estimates are made during the
acquisition allocation period, which is generally up to twelve months from the
acquisition date.  Subsequent to the allocation period, costs incurred
in excess of the recorded acquisition accruals are generally expensed as
incurred and if accruals are not utilized for the intended purpose, the excess
will be recorded as an adjustment to the cost of the acquired entity, which was
charged to paid in capital.





16





Litigation.We are
subject to various claims, lawsuits and administrative proceedings that arise
from the ordinary course of business.  Liabilities and costs
associated with these matters require estimates and judgment based on
professional knowledge and experience of management and our legal
counsel.  When estimates of our exposure for claims or pending or
threatened litigation matters meet the criteria of SFAS No. 5 “Accounting for
Contingencies”, amounts are recorded as charges to
operations.  The ultimate resolution of any exposure may change as
further facts and circumstances become known.  See Note 9 –
“Litigation and Other Contingencies”.





Results
of Operations





Three
Month and Six Month Periods Ended March 31, 2009 Compared to Comparable Periods
in 2008





Revenue.Revenues in the three
and six month periods ended March 31, 2009 were $433,362 and 437,562,
respectively, primarily as the results of the sale of two thermoplastic
composite  bridges to the US Army and 1,400 composite railroad
crossties to a major railroad carrier. Due to the start-up nature of the
business there were no revenues generated in the comparable periods in
2008





Cost of Goods
Sold.Cost of Goods Sold for the three months ended and six
month ended March 31, 2009 totaled $483,337. These expenses are principally
related to direct and indirect labor, quality control, and raw material cost
associated with the production of our products. The increase in expense over the
comparable periods ended March 31, 2008 directly relates to the production of
bridge infrastructure and railroad crossties and facilities
costs.





Research and Development
Costs.Research and Development costs for the three months
ended March 31, 2009 totaled $30,513 and totaled $161,763 for the six month
period ended March 31, 2009, as compared to $39,606 for the three month period
ended March 31, 2008 and $62,106 for the six month period ended March 31,
2008.  These expenses are principally related to the development of
our molds, products, and quality control processes. This also includes expenses
related to professional consulting fees, membership dues paid to
technology-related organizations that are directly related research and
development in polymer plastics. We continue to work with our scientific team at
Rutgers University to enhance our product formulations, develop new innovative
products, and expand the reach of our existing products. The increase in expense
over the comparable periods ended March 31, 2008 directly relates to the
expansion of our research and development activities to expand our product
portfolio.





Marketing and Sales
Expenses.Marketing and selling expenses for the three months
ended March 31, 2009 totaled $72,491 and total $120,399 for the six month period
ended March 31, 2009, as compared to $21,967 for the three month period and six
month period ended March 31, 2008. These expenses are related to the development
and expansion of our marketing and sales activity. We expanded our marketing
staff to pursue opportunities in our target markets. Our initial target markets
are the domestic and international railroad industry, the U.S. military,
vehicular and pedestrian bridges, marine rehabilitation, golf architecture, and
industrial engineering firms.





General and
Administrative.General and administrative costs for the three
months ended March 31, 2009 totaled $1,189,335 and $1,640,282 for the six month
period ended March 31, 2009, as compared to $345,065 for three month period
ended March 31, 2008 and $391,542 for the six month period ended March 31,
2008.  These expenses are primarily related to wages and salaries of
the executive management team, consulting fees related to market opportunities
and financing, travel, supplies, insurance, professional fees and patent defense
costs..
The increase in expense over the comparable periods is a result of our increased
staffing, stock-based compensation, outsourced manufacturing expense,
professional consulting, financing activities and business
growth.





Depreciation and
Amortization.Depreciation and amortization for the three
months ended March 31, 2009 totaled $50,977 and the six month period ended March
31, 2009 totaled $61,852, as compared to $5,110 for the three months and the six
months ended March 31, 2008. This is the results of the expansion of our
manufacturing and operating capability.





Interest Expense, Net.
Commencing on September 29, 2008, our Debentures, Series B Debentures and New
Debentures earned interest at the rate of 9% per annum and mature on September
30, 2010. Accordingly, we recorded coupon interest expense totaling
approximately $17,328 for the three months ended March 31, 2009 and $33,660 for
the six month period. Additionally, we amortize the discount that represents the
fair value of beneficial conversion feature of the Debentures, Series B
Debentures and New Debentures as interest expense. We recorded approximately
$86,802 in non-cash interest expense in the three month period ended March 31,
2009 and $121,966 for the six month period ended March 31, 2009, as we
amortized the debenture discounts. Interest expense for the comparable
periods was $43,226 which principally represented the non-cash interest expense
associated with the amortization of the debenture discount.





Net Loss.We recorded a net loss
of approximately $1,497,421 in the three months ended March 31, 2009 or $0.10
per share as compared to a net loss of $454,973 or $0.05 per share for the
comparable period ended March 31, 2008. For the six month period ended March 31,
2009 we recorded a loss of approximately $2,194,963 or $0.16 per share compared
to a loss of $523,950 or $0.07 per share for the comparable six month period in
2008. We anticipate that we will continue to incur losses during the early
stages of our business development and growth.





17





Liquidity
and Capital Resources:  Plan of Operation





As of
March 31, 2009, we had $199,990 in cash and cash equivalents.  Our
long-term debentures bear interest rates of 9% and 8.75% per annum and are due
and payable on September 30, 2010 and December 30, 2010 if not converted into
Common Stock.  As of March 31, 2009, the aggregate outstanding
principal amount of the debentures was $725,763. The Debentures and the
Series B Debentures are convertible at the option of the holders into Common
Stock at a rate of $0.40 or $0.30 per share, and accordingly, we may issue up to
1,614,954 shares of Common Stock if the remaining principal balance is converted
in its entirety.  The New Debentures are convertible at the option of
the holders into Common Stock at a rate of $1.50 per share, and accordingly, we
may issue up to 115,000 shares of Common Stock if the remaining principal
balance is converted in its entirety.  We may also elect to pay
interest in the form of Common Stock at the applicable conversion rate of each
debenture. We recorded the debentures at a discount after giving effect to the
$825,000 intrinsic value of the beneficial conversion feature and recorded the
discount as equity.  We are amortizing the discount as interest
expense over the life of the debentures as the carrying value of the debentures
accretes to the respective face value.  The carrying value of the
debentures at March 31, 2009 was $610,992. In March 2009 we issued a short-term
convertible secured note of $400,000 with a base rate of 7% per annum with a
maturity date of June 15, 2009, and an additional note of $20,000 with an
interest rate of 8.75% with a maturity date of July 15, 2009





We have
used $1,093,147 in our operating activities in the three months ended March 31,
2009, primarily as a result of our activities relating to the commercialization
of our business and expansion of our distribution capabilities.





Financing
activities, in the three month period ended March 31, 2009 consisting
principally of issuance of short term notes that generated net proceeds of
$434,000.   We invested $89,790 for additional molds and
manifolds that will be used in the production of our products.





We have
used $1,694,896 in our operating activities for the six month period primarily
as a result of our activities devoted to expanding our operating capability and
commercializing our business.   Financing activities, consisting
principally of the sale of securities that generated net cash proceeds totaling
approximately $1,375,000 during the period and this issuance of short term notes
that generated gross proceeds of $609,000 of which $125,000 was repaid during
the six month period ended March 31, 2009.  We used $827,844 to expand
and commercialize the business, including $305,643 for production materials, raw
materials of $191,884, molds and manifolds of $96,949, and outsourced machine
capacity of $233,367. We believe we will need to raise additional capital
through additional equity or debt financing in order to fund our operations and
repay our debt obligations. Our current operating plans for the next fiscal year
are to meet our existing customer commitments, enhance our research and
development capabilities, expand our marketing and sales and engineering staffs,
and continue to develop innovative solutions.  We may receive a
substantial amount of cash pursuant to the judgment rendered against Tonga, but
the outcome and the timing of the decision regarding the appeal filed by Tonga
is uncertain.  Our ability to pay principal and interest on our
outstanding long term debentures, which are due in September and December 2010,
as well as to meet our other debt obligations and requirements to fund our
planned capital expenditures, depends on our future operating performance and
ability to raise capital.We
anticipate that we will have to raise additional funds through the issuance of
debt and/or equity during the next twelve months.  There can be no
assurance that financing will be available, or if available, that such financing
will be upon terms acceptable to us. These conditions raise doubt about our
ability to continue as a going concern.





Disclosure
About Off-Balance Sheet Arrangements





We do not
have any transactions, agreements or other contractual arrangements that
constitute off-balance sheet arrangements.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risks.





Not
applicable.





Item
4. Controls and Procedures





(a) Evaluation of
disclosure controls and procedures. We maintain “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer to
allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our disclosure controls and
procedures have been designed to meet reasonable assurance standards.
Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.





18





Based
on our evaluation, our Chief Executive Officer and our current Chief
Financial Officer have concluded that, as of the end of the period covered by
this Quarterly Report on Form 10-Q, our disclosure controls and procedures were
not effective due to
the following material weaknesses:




·
            Insufficient
      personnel or expertise in the accounting function to provide for adequate
      segregation of duties surrounding the approval, processing and recording
      of transactions, the proper recording of complex transactions, independent
      review of journal entries and account analyses, an adequate monitoring
      program and a robust risk assessment function.·
            Missing
      or nonoperating controls over the recording of stock-based compensation
      transactions, allocation of production costs, and the preparation of
      account analyses.


·
            Insufficient
      formal documentation of accounting policies and procedures to ensure
      continued operating
effectiveness.




As a
result of these weaknesses, certain errors in accounting for debt modifications,
debt discounts and share-based transactions in the year ended September 30, 2008
and the nine months ended June 30, 2009 were not prevented or
detected.




Management
intends to focus its remediation efforts in the near term on developing
additional formal policies and procedures surrounding transaction processing,
particularly with respect to debt and share-based transactions, and
period-end account analyses and providing for additional review and monitoring
procedures and periodically assess the need for additional accounting resources
as the business develops.  Management will continue to monitor and
evaluate the effectiveness of our internal controls and procedures and our
internal control over financial reporting on an ongoing basis and are committed
to taking further action and implementing enhancements or improvements, as
necessary.




(b) Changes in
internal control over financial reporting.





There has
been no changes in our internal control over financial reporting (as defined in
Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during the
period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





19





Part
II


Other
Information





Item 1. Legal
Proceedings.





Please
see Note 9  “Litigation and Other Contingencies” in the notes to the
unaudited Consolidated Financial Statements in Part I above.





Item
1A. Risk Factors.





Not applicable.





Item
2. Unregistered Sales of Securities and Use of Proceeds.





In
January 2009, we completed a private placement of 1,562,00 shares of Common
Stock at $0.88 per share and issued 15,469  common shares in lieu
of cash interest expense to our debenture holders. All of the foregoing
transactions were conducted pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933





Item
3. Defaults Upon Senior Securities.





None.





Item
4. Submission of Matters to a Vote of Security Holders.





None.





Item
5. Other Information.





None.





Item
6. Exhibits.





Exhibits:




31.1
                
                Section
      302 Certification of Chief Executive Officer31.2
                
                Section
      302 Certification of Principal Financial Officer32.1
                
                Section
      906 Certification of Principal Executive Officer32.2
                
                Section
      906 Certification of Principal Financial
Officer





20





SIGNATURES








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





Axion
      International Holdings, Inc.Date:  February
      22, 2010
              /s/ James
KersteinJames
      KersteinChief
      Executive Officer





Date:  February
      22, 2010
              /s/ Gary AnthonyGary
      AnthonyChief
      Financial Officer





21