UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_______________


Form
10-Q




R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended June 30, 2010




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
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.)


180
South Street, Suite 104, New Providence, NJ 07974




(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 þ     No
£




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 August 6, 2010 was 21,871,296.





TABLE
OF CONTENTS





PAGEPART
      I. FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements
              1Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              17Item
      4.
              Controls
      and Procedures
              17PART
      II. OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              19Item
      1A.
              Risk
      Factors
              19Item
      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





PART
1. FINANCIAL INFORMATION





Item
1. Financial Statements.





AXION
      INTERNATIONAL HOLDINGS, INC.CONSOLIDATED
      BALANCE SHEETS





June 30,
                
                
                September 30,2010
                
                
                2009unauditedASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                567,654
                
                
                $
                1,257,516Accounts
      receivable and unbilled revenue
                
                
                295,688
                
                
                
                314,027Inventories
                
                
                463,803
                
                
                
                76,533Prepaid
      expenses
                
                
                93,016
                
                
                
                1,915Total
      current assets
                
                
                1,420,161
                
                
                
                1,649,991Property,
      equipment, and leasehold improvements, at cost:Equipment
                
                
                13,754
                
                
                
                9,838Machinery
      and equipment
                
                
                520,035
                
                
                
                406,639Purchased
      software
                
                
                56,404
                
                
                
                56,404Furniture
      and fixtures
                
                
                13,091
                
                
                
                9,322Leasehold
      improvements
                
                
                950
                
                
                
                29,300604,234
                
                
                
                511,503Less
      accumulated depreciation
                
                
                (376,584
                )
                
                
                (205,156
                )Net
      property and leasehold improvements
                
                
                227,650
                
                
                
                306,347License,
      at acquisition cost,
                
                
                68,284
                
                
                
                68,284Deposits
                
                
                10,713
                
                
                
                10,713Total
      assets
                
                $
                1,726,808
                
                
                $
                2,035,335LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
                
                $
                1,408,652
                
                
                $
                546,920Accrued
      liabilities
                
                
                589,504
                
                
                
                357,172Notes
      payable
                
                
                50,775
                
                
                
                14,000Current
      portion of convertible debentures, net of discount
                
                
                341,848
                
                
                
                253,795Total
      current liabilities
                
                
                2,390,779
                
                
                
                1,171,887Convertible
      debentures, net of discount
                
                
                1
                
                
                
                157,347Total
      liabilities
                
                
                2,390,780
                
                
                
                1,329,234Commitments
      and contingencies
                
                
                -
                
                
                
                -Stockholders'
      equity (deficit):Common
      stock, no par value; authorized, 100,000,000 shares;21,848,276 and
      19,243,669 shares issued and outstanding at June 30, 2010 and September
      30, 2009, respectively
                
                
                15,164,795
                
                
                
                10,009,677Retained
      earnings (deficit)
                
                
                (15,828,767
                )
                
                
                (9,303,576
                )Total
      stockholders' equity (deficit)
                
                
                (663,972
                )
                
                
                706,101Total
      liabilities and stockholders' equity (deficit)
                
                $
                1,726,808
                
                
                $
                2,035,335





See
accompanying notes to consolidated financial statements.


1





AXION
      INTERNATIONAL HOLDINGS INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS





Three months
                  ended June 30,
                  2010
                
                
                Three months
                  ended June 30,
                  2009
                
                
                Nine months
                  ended June 30,
                  2010
                
                
                Nine months
                  ended June 30,
                  2009Unaudited
                
                
                Unaudited
                
                
                Unaudited
                
                
                UnauditedRevenue
                
                $
                445,939
                
                
                $
                566,849
                
                
                $
                1,151,173
                
                
                $
                1,004,411Cost
      of goods sold
                
                
                544,028
                
                
                
                332,602
                
                
                
                1,249,540
                
                
                
                815,939Gross
      margin
                
                
                (98,089
                )
                
                
                234,247
                
                
                
                (98,367
                )
                
                
                188,472Operating
      expenses:Research
      and development costs
                
                
                58,913
                
                
                
                19,057
                
                
                
                130,795
                
                
                
                180,819Marketing
      and sales
                
                
                218,348
                
                
                
                149,109
                
                
                
                482,444
                
                
                
                306,420General
      and administrative expenses
                
                
                1,594,082
                
                
                
                983,386
                
                
                
                5,342,183
                
                
                
                2,932,738Depreciation
      and amortization
                
                
                70,572
                
                
                
                54,703
                
                
                
                200,728
                
                
                
                116,555Total
      operating costs and expenses
                
                
                1,941,915
                
                
                
                1,206,255
                
                
                
                6,156,150
                
                
                
                3,194,532Loss
      from operations
                
                
                (2,040,004
                )
                
                
                (972,008
                )
                
                
                (6,254,517
                )
                
                
                (3,006,060
                )Other
      expense (income), net:Other
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Interest
      expense, net
                
                
                170,082
                
                
                
                109,440
                
                
                
                270,674
                
                
                
                274,303Debt
      conversion expense
                
                
                -
                
                
                
                46,153
                
                
                
                -
                
                
                
                46,153Total
      other expense, net
                
                
                170,082
                
                
                
                155,593
                
                
                
                270,674
                
                
                
                320,456Loss
      before income taxes
                
                
                (2,210,086
                )
                
                
                (1,127,601
                )
                
                
                (6,525,191
                )
                
                
                (3,326,516
                )Provision
      for income taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (2,210,086
                )
                
                $
                (1,127,601
                )
                
                $
                (6,525,191
                )
                
                $
                (3,326,516
                )Weighted
      average common shares - basic and diluted
                
                
                21,457,324
                
                
                
                15,035,526
                
                
                
                20,325,366
                
                
                
                14,753,006Basic
      and diluted net loss per share
                
                $
                (0.10
                )
                
                $
                (0.07
                )
                
                $
                (0.32
                )
                
                $
                (0.23
                )





See
accompanying notes to consolidated financial statements.


2





AXION
      INTERNATIONAL HOLDINGS INCCONSOLIDATED
      STATEMENTS OF CASH FLOWS





Nine months ended
                  June 30, 2010
                
                
                Nine months ended
                  June 30, 2009Unaudited
                
                
                UnauditedCash
      flow from operating activities:Net
      loss
                
                $
                (6,525,191
                )
                
                $
                (3,326,516
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      and amortization
                
                
                171,428
                
                
                
                116,555Accretion
      of interest expense on convertible debentures
                
                
                202,901
                
                
                
                175,804Issuance
      of common stock, options and warrants for services and for accrued
      interest
                
                
                3,035,456
                
                
                
                1,145,569Changes
      in operating assets and liabilities:Accounts
      receivable and unbilled revenue
                
                
                18,339
                
                
                
                (172,623
                )Inventories
                
                
                (387,270
                )
                
                
                (153,872
                )Prepaid
      expenses and other
                
                
                (27,976
                )
                
                
                1,006Accounts
      payable
                
                
                1,140,732
                
                
                
                260,534Accrued
      liabilities
                
                
                44,088
                
                
                
                72,931Net
      cash (used in) operating activities
                
                
                (2,327,493
                )
                
                
                (1,834,459
                )Cash
      flows from investing activities:Purchase
      of equipment and leasehold improvements
                
                
                (92,731
                )
                
                
                (136,863
                )Net
      cash (used in) provided by investing activities
                
                
                (92,731
                )
                
                
                (136,863
                )Cash
      flows from financing activities:Proceeds
      from short term notes
                
                
                650,000
                
                
                
                1,004,000Issuance
      of common stock, net of expenses
                
                
                1,107,544
                
                
                
                1,590,000Repayment
      of notes and convertible debentures
                
                
                (27,182
                )
                
                
                (550,000
                )Net
      cash provided by financing activities
                
                
                1,730,362
                
                
                
                2,044,000Net
      increase (decrease) in cash
                
                
                (689,861
                )
                
                
                72,678Cash
      at beginning of period
                
                
                1,257,516
                
                
                
                138,826Cash
      at end of period
                
                $
                567,654
                
                
                $
                211,504Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                
                $
                -
                
                
                $
                -





See
accompanying notes to consolidated financial statements.


3


AXION
INTERNATIONAL HOLDINGS INC.AND SUBSIDIARIES





Notes
to Consolidated Financial Statements





(1)       Summary
of Significant Accounting Policies





(a)         Business
and Basis of Financial Statement 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.  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, sold certain operations and
briefly transitioned its principal business into that of an independent oil and
gas enterprise.  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.





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.





In the
opinion of management, all adjustments necessary for a fair presentation of such
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.  These consolidated financial statements should be
read in conjunction with our consolidated financial statements included in our
annual report on Form 10-K for the year ended September 30, 2009.





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 since inception and we have a working capital
deficit. These conditions raise substantial doubt about our ability to continue
as a going concern. The accompanying financial statements do not include any
adjustment that might result from the outcome of this uncertainty.  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 and others.


4


(b)         Statement
of Cash Flows





For
purposes of the statement of cash flows, we consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.





(c)         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 two to
five years.  Repairs and maintenance are charged directly to
operations as incurred.





(d)         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 June 30, 2010 we had an allowance for
doubtful accounts of $0.





(e)       Inventories.





Inventories
are priced at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials and finished goods.   Finished goods
inventories as of June 30, 2010 reflect lower-of-cost-or-market adjustments of
$19,655 recorded in the quarter then ended.





(f)          Revenue
and Cost Recognition





Revenue
from product sales 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 defined in
the contracts.  When billed, such amounts are recorded as accounts
receivable.





Revenue
on construction projects is recognized on the percentage-of-completion method
based on contract costs.  Contract costs include purchased material,
material processing, subcontractor services, labor and other direct costs. 
Costs of uninstalled materials specifically produced for a project are included
in costs used to measure extent of progress toward project completion. 
Losses on contracts are recognized in the period such losses are
determined.  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.  Unbilled
revenue represents revenue related to services completed but not billed, and
advance billings represent billings in advance of services
performed.





(g)           Warranty
costs.





The
Company may provide written warranties with certain sales of its
materials.  When it does, the Company will record a provision for the
estimated future costs of replacement materials in the period in which such
costs become probable. The Company has provided a limited warranty on certain
materials supplied on its Fort Eustis project and has recorded a provision for
warranty costs. There is limited historical experience on the performance of
Company material.  Accordingly, actual warranty costs may vary significant
from Company estimates.  Accrued warranty costs are reviewed periodically
for adequacy based on actual and expected experience and changes in estimated
replacement costs.


5


(h)       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 as  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 our recent
history of unprofitable operations and due to the continuing uncertainties
surrounding our future 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.





(i)         Impairment
of Long-Lived Assets Other Than Goodwill





We assess
the potential for impairment in the carrying values of our long-term assets
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.





(j)          Stock-Based
Compensation





We record
stock-based compensation for transactions in which we exchange our equity
instruments for services of employees, consultants and others based on the fair
value of the equity instruments issued at the date of grant or other measurement
date.  The fair value of common stock awards is based on the observed
market value of our stock.  We calculate the fair value of options and
warrants using the Black-Scholes option pricing model.  Expense is
recognized, net of expected forfeitures, over the period of performance. 
When the vesting of an award is subject to performance conditions, no expense is
recognized until achievement of the performance condition is deemed to be
probable.





(k)         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 includes the effects of
the potential dilution of outstanding options, warrants, and convertible debt on
our common stock as determined using the treasury stock method. For the three-
and nine-month periods ended June 30, 2010, there were no dilutive effects of
such securities because we incurred a net loss in each period.  Potential
dilutive common shares issuable under our convertible instruments, warrant
agreements and stock option plans amounted to 7,793,495 as of June 30,
2009.





(l)         Financial
Instruments





The
carrying amounts of financial instruments approximate their 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.





(m)          Concentration
of Credit Risk





We
maintain our cash with a major U.S. domestic bank. The amounts held in this bank
exceed the insured limit of $250,000 from time to time.  We have not
incurred losses related to these deposits.  The Company’s accounts
receivable and unbilled revenue balances as of June 30, 2010 consist primarily
of amounts due from a limited number of customers.


6


(n)         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.





(2)            Project
revenue





In
November 2009, the Company received two “Delivery Order Authorizations”
(“DOA’s”), or contract purchase orders, from Centennial Contractors Enterprises,
Inc. together with collateral contract documents for the demolition and
construction of two bridges located on the United States Army base at Fort
Eustis in the state of Virginia.  The contract award of $957,587 includes
the costs and expenses for equipment, labor and the Company’s composite
construction materials. The Company contracted with third-parties for the design
and build specifications and the demolition and rebuild work. The project
officially commenced upon receipt of the DOA’s and was substantially completed
in the quarter ended June 30, 2010.  In connection with the bonding
activities related to the project, the Company has granted a broad security
interest in its assets to an insurance company.





(3) Inventories





The
components of inventories are:





June 30, 2010
                
                
                September 30, 2009Finished
      goods
                
                $
                440,988
                
                
                $
                46,731Raw
      materials
                
                
                22,410
                
                
                
                29,802Total
      inventories
                
                $
                463,398
                
                
                $
                76,533





(4) Accrued
liabilities





The
components of accrued liabilities are:





June 30, 2010
                
                
                September 30, 2009Payable
      to insurer for legal settlement
                
                $
                100,000
                
                
                $
                100,000Refundable
      oil and gas receipts
                
                
                129,334
                
                
                
                129,334Warrant
      compensation
                
                
                279,000
                
                
                
                -Accrued
      interest
                
                
                49,047
                
                
                
                76,644Other
                
                
                32,123
                
                
                
                51,194Total
      accrued liabilities
                
                $
                589,504
                
                
                $
                357,172





(5) Debt





The
components of debt are summarized as follows.





Due
                  
                  June 30, 2010
                  
                  
                  September 30,
                    200910%
      convertible debenture
                  
                  August
      2010
                  
                  $
                  300,000
                  
                  
                  $
                  300,0009%
      convertible debentures
                  
                  September
      2010
                  
                  
                  -
                  
                  
                  
                  278,2368.75%
      convertible debenture
                  
                  December
      2010
                  
                  
                  172,500
                  
                  
                  
                  172,50010%
      convertible debenture
                  
                  February
      2011
                  
                  
                  300,000
                  
                  
                  
                  300,00010%
      convertible debentures
                  
                  March
      2011
                  
                  
                  300,000
                  
                  
                  
                  300,0007%
      convertible debenture
                  
                  May
      2012
                  
                  
                  350,000
                  
                  
                  
                  350,000Discount
                  
                  
                  
                  
                  (1,080,651
                  )
                  
                  
                  (639,594
                  )341,849
                  
                  
                  
                  411,142Less
      current portion
                  
                  
                  
                  
                  341,848
                  
                  
                  
                  253,795$
                  1
                  
                  
                  $
                  157,347


7


The
Company’s 9% convertible debentures were issued in the year ended September 30,
2008 in connection with debt modifications which resulted in debt conversion
expense charges in that year.  In March 2010, the debentures were
converted, prior to their maturity dates and in accordance with their terms,
into an aggregate of 927,453 shares of common stock.  The unamortized
discount pertaining to these notes, amounting to $12,488 in the aggregate, was
charged to interest expense upon conversion.





The
Company’s 8.75% convertible debenture was issued in the year ended September 30,
2008 in connection with debt modifications which resulted in debt conversion
expense charges in that year.  The recorded discount on the debenture,
$3,907 as of June 30, 2010, is being amortized to interest expense on the
interest method through its scheduled maturity date.





The
Company’s 10% convertible debentures were issued under purchase agreements in
the year ended September 30, 2009, together with warrants, for aggregate
proceeds of $600,000.  The total of the calculated fair value of the
warrants and the intrinsic value of beneficial conversion features contained in
the debentures exceeded the proceeds received.  Accordingly, the Company
recorded a discount on the notes substantially equal to the principal amount of
the notes.  The recorded discount on these debentures, $599,634 in the
aggregate as of June 30, 2010, is being amortized to interest expense on the
interest method through their scheduled maturity dates.  As a result of the
application of the interest method, unless the debentures are converted earlier,
substantially all of the discount is expected to be amortized during the first
two quarters of the Company’s fiscal year ending September 30,
2011.





In
February 2010,we
issued a 10% short-term note in the amount of $300,000, convertible at the rate
of $2.00 per share, together with five-year warrants to purchase 100,000 shares
of our common stock at an exercise price of $2.50 per share. In addition we
entered into a consulting agreement with an affiliate of the purchaser for
financial consulting services.  We allocated to the warrant $122,005 of the
total proceeds received, based upon the relative fair values of the note and
warrant, as determined using the Black-Scholes pricing model, and recorded this
amount as a discount on the note.  We also allocated $167,005 of the
proceeds to a beneficial conversion feature, representing the difference between
the fair value of common stock issuable upon conversion at the date of purchase
and the amount of proceeds allocated to the note, and recorded this amount as an
additional discount on the note.  The total discount, amounting to $127,110
at June 30, 2010, is being amortized to interest expense on the interest method
through the scheduled maturity date of the note.  We issued 200,000 shares
of common stock under the consulting agreement and recorded consulting expense
of $460,000 at issuance for the fair value of the shares based on the reported
market price of our stock on the OTC Bulletin Board.





In May
2010,we issued a 7%
two-year note in the amount of $350,000, convertible at the rate of $1.20 per
share, together with 41,667 shares of our common stock and five-year warrants to
purchase 166,667 shares of our common stock at an exercise price of $1.40 per
share.  We allocated to the shares and warrant $45,052 and $155,688,
respectively, of the total proceeds received, based upon the relative fair
values of the note, shares and warrant, as determined using the Black-Scholes
pricing model, and recorded these amount as a discount on the note.  We
also allocated $199,260 of the proceeds to a beneficial conversion feature,
representing the difference between the fair value of common stock issuable upon
conversion at the date of purchase and the amount of proceeds allocated to the
note, and recorded this amount as an additional discount on the note.  The
total discount, amounting to $350,000 at June 30, 2010, is being amortized to
interest expense on the interest method through the scheduled maturity date of
the note.





Each of
the debentures above contains features that allow the Company to redeem the
notes prior to their scheduled due dates under certain circumstances.  In
certain events of default by the Company, the holders may generally require the
Company to redeem the notes at 120% of their principal amounts or their
conversion value.  Based on the life of the notes and the likelihood and
effect of substantive exercise of these provisions the Company has determined
that these features have minimal value.


8


In the
quarter ended June 30, 2010, a former holder of a convertible note claimed that
additional compensation was payable by the Company in the form of warrants
related to a note conversion in 2008.  The Company has determined that
issuance of additional warrants based on the claim is probable and has charged
$279,000 to general and administrative expenses for the estimated value of
warrants that are expected to be issued.





(6) Stockholder’s
Equity





In
October 2009, the Company issued 200,000 shares of its common stock to
consultants for services performed in the Company’s strategic planning and
financing activities. The shares had a fair value of $600,000 at issuance based
on the quoted market price of the Company’s stock on the OTC Bulletin Board.
This amount were recognized in general and administrative expenses in the three
months ended December 31, 2009.





In
November 2009, the Company sold 200,000 shares of common stock and 20,000
three-year warrants, exercisable at $2.91 per share, for aggregate proceeds of
$410,000. As a placement fee, the Company paid $8,200 and issued 20,000
three-year warrants, also at the exercise price of $2.91 per share.





In
November 2009, the Company issued 360,000 five-year warrants exercisable at
$0.90 per share to a consultant for strategic planning, business development and
investor relations services to be performed. The warrants had a fair value of
$1,033,909 at December 31, 2009 based on the Black Scholes pricing model, of
which $344,636 was recognized in general and administrative expenses in the
three months ended December 31, 2009. Also in November, the Company issued
74,726 shares of common stock to a consultant for business development,
marketing and sales services performed. The shares had a fair value of $198,024
at issuance based on the quoted market price of the Company’s stock on the OTC
Bulletin Board. Under the agreement, which expires in 2011, the consultant will
be granted options to purchase up to 500,000 additional shares of common stock
at an exercise price of $0.01 per share contingent on attaining specified sales
targets.





In
December 2009, the Company agreed to issue 104,554 five-year warrants
exercisable at $0.88 per share to a consultant for services performed in the
Company’s financing efforts. The warrants had a fair value of $283,788 at the
date of grant based on the Black Scholes pricing model, which was recognized in
general and administrative expenses in the three months ended December 31,
2009.





In
February 2010, we sold 122,200 shares of common stock and 12,200 five-year
warrants, exercisable at $2.50 per share, for aggregate proceeds of
$250,100.





On
February 23, 2010, we executed a purchase agreement and a registration rights
agreement with Lincoln Park Capital, LLC (“LPC”), pursuant to which LPC agreed
to purchase 100,000 shares of our common stock at $2.05 per share together with
warrants to purchase 50,000 shares at an exercise price of $2.91 per share for
total consideration of $205,000.  LPC also agreed to purchase up to an
additional 1,400,000 shares of our common stock at our option as described
below. Upon entering into the Purchase Agreement, we issued to LPC 85,000 shares
of our common stock as consideration for entering into the agreement. 
Pursuant to the registration rights agreement, we filed a registration statement
with the Securities and Exchange Commission (the “SEC”) covering the shares
issued to LPC under the Purchase Agreement.  The registration statement
became effective and the initial purchase of 100,000 shares and 50,000 warrants
was completed in May 2010.  The aggregate value of the 85,000 commitment
shares, $178,500, was charged to paid-in capital, together with $84,575 of other
offering costs.  After the effective date, in May 2010, we sold an
additional 20,000 shares under the agreement and received proceeds of
$30,666.  In July 2010, we and LPC mutually terminated the Purchase
Agreement and related agreements.





In May
and June 2010, we issued units consisting of an aggregate of 261,068 shares of
common stock and five-year warrants to purchase 130,534 shares of common stock
at an exercise price of $1.40 per share.





The
following table sets forth the number of shares of Common Stock that were
issuable upon exercise of outstanding warrants as of June 30, 2010.  Net
share settlement is available to warrant holders.


9





Expiration
                                      
                                      Conversion/
                                        Exercise Price
                                      
                                      
                                      Common
                                        Shares
                                        IssuableClass
      A Warrants
                                      
                                      2011
                                      
                                      $
                                      5.36
                                      
                                      
                                      
                                      95,473Class
      B Warrants
                                      
                                      2011
                                      
                                      
                                      5.96
                                      
                                      
                                      
                                      95,473Class
      E Warrants
                                      
                                      2011
                                      
                                      
                                      4.74
                                      
                                      
                                      
                                      188,018AdvisorWarrants
                                      
                                      2011
                                      
                                      
                                      2.36
                                      
                                      
                                      
                                      47,482Warrants
      issued in short-term borrowings
                                      
                                      2012
                                      
                                      
                                      1.00
                                      
                                      
                                      
                                      100,000Warrants
      issued in short-term borrowings
                                      
                                      2013
                                      
                                      
                                      0.88
                                      
                                      
                                      
                                      200,000Warrants
      issued in short-term borrowings
                                      
                                      2014
                                      
                                      
                                      0.88
                                      
                                      
                                      
                                      671,000Warrants
      attached to 10% convertible notes
                                      
                                      2014
                                      
                                      
                                      0.90
                                      
                                      
                                      
                                      1,500,000September
      2009 investor warrants
                                      
                                      2012
                                      
                                      
                                      3.13
                                      
                                      
                                      
                                      50,000September
      2009 finder warrants
                                      
                                      2012
                                      
                                      
                                      3.13
                                      
                                      
                                      
                                      50,000November
      2009 finder warrants
                                      
                                      2012
                                      
                                      
                                      2.91
                                      
                                      
                                      
                                      20,000November
      2009 finder warrants
                                      
                                      2012
                                      
                                      
                                      2.91
                                      
                                      
                                      
                                      20,000November
      2009 consultant warrants
                                      
                                      2014
                                      
                                      
                                      0.90
                                      
                                      
                                      
                                      360,000December
      2009 consultant warrants
                                      
                                      2012
                                      
                                      
                                      0.88
                                      
                                      
                                      
                                      104,554February
      2010 consultant warrants
                                      
                                      2015
                                      
                                      
                                      2.50
                                      
                                      
                                      
                                      100,000February
      2010 investor warrants
                                      
                                      2015
                                      
                                      
                                      2.50
                                      
                                      
                                      
                                      12,200February
      2010 consultant warrants
                                      
                                      2015
                                      
                                      
                                      2.05
                                      
                                      
                                      
                                      20,000LPC
      warrants
                                      
                                      2015
                                      
                                      
                                      2.91
                                      
                                      
                                      
                                      50,000May
      2010 investor warrants
                                      
                                      2015
                                      
                                      
                                      1.40
                                      
                                      
                                      
                                      166,667June
      2010 investor warrants
                                      
                                      2015
                                      
                                      
                                      1.40
                                      
                                      
                                      
                                      130,534Weighted
      average exercise price and total shares issuable
                                      
                                      
                                      
                                      
                                      1.50
                                      
                                      
                                      
                                      4,081,401





The
following table sets forth the number of shares of Common Stock that were
issuable upon conversion of convertible debt as of June 30, 2010.





Principal
                  Amount
                
                
                Conversion/
                  Exercise Price
                
                
                Common
                  Shares
                  Issuable10%
      convertible debentures due in 2010
                
                
                300,000
                
                
                
                2.00
                
                
                
                150,0008.75%
      convertible debenture due in 2010
                
                
                172,500
                
                
                
                1.25
                
                
                
                138,00010%
      convertible debentures due in 2011
                
                
                600,000
                
                
                
                0.90
                
                
                
                666,6677%
      convertible debentures due in 2012
                
                
                350,000
                
                
                
                1.20
                
                
                
                291,667





The
following table summarizes stock option activity in the nine months ended June
30, 2010:





Number of Shares
                          
                          
                          Weighted Average
                            Exercise PriceOutstanding
      at beginning of period
                          
                          
                          2,219,799
                          
                          
                          $
                          0.47Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Cancelled
                          
                          
                          (381,038
                          )
                          
                          $
                          0.00Outstanding
      at end of period
                          
                          
                          1,838,761
                          
                          
                          $
                          0.57





The
Company has agreements with consultants which provide for the issuance of up to
650,000 shares of company common stock or warrants for common stock that are
contingent on the achievement of sales performance targets that are not
currently considered probable of achievement.


10


(8)             Impact
of Accounting Pronouncements





In April
2008, the Financial Accounting Standards Board (“FASB”) issued guidance.
generally codified under ASC Topic 350, “Intangibles – Goodwill and Other”, that
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
in order to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset and was effective for fiscal years beginning after December
15, 2008. The adoption of these changes did not have a material effect on the
Company’s consolidated financial statements..





In June
2008, the FASB issued guidance. generally codified under ASC Topic 260,
“Earnings per Share”,, 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 and was 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 adoption of these
changes did not have a material effect on the Company’s consolidated financial
statements.





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 adoption of these changes did
not have a material effect on the Company’s consolidated financial
statements..





In June
2008, the FASB issued guidance, generally codified under ASC Topic 815,
“Derivatives and Hedging”, on how an entity should determine whether an
instrument (or an embedded feature) is indexed to an entity’s own stock. This
guidance provides for use of a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument’s contingent exercise and settlement
provisions. This guidance was effective for financial statements issued for
fiscal years beginning after December 15, 2008. The adoption of these changes
did not have a material effect on the Company’s consolidated financial
statements.





In
October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue
Recognition – Multiple-Deliverable Arrangements” which addresses how to separate
deliverables and how to measure and allocate arrangement consideration to one or
more units of accounting. The provisions of this update will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating the effect, if any, that adoption will have on its consolidated
financial statements.





In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value
Measurements and Disclosures – Improving Disclosures about Fair Value
Measurements”, which adds and clarifies certain disclosures about the use of
fair value measurements in financial statements.  The provisions of this
update will be effective for interim and annual reporting periods beginning
after December 15, 2009. The adoption of these changes did not have a material
effect on the Company’s consolidated financial statements.


11


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 1A. “Risk
Factors” and elsewhere in our Annual Report on Form 10-K.  All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
Cautionary Statements.





Basis
of Presentation





The
financial information presented 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. (“we”, “our” or the “Company”) is the exclusive
licensee of 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.





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.


12


Use of Estimates. The
preparation of financial statements in conformity with GAAP 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.





Revenue and Cost 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 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.





Warranty costs. The Company
may provide written warranties with certain sales of its materials.  When
it does, the Company will record a provision for the estimated future costs of
replacement materials in the period in which such costs become probable. The
Company has provided a limited warranty on certain materials supplied on its Ft.
Eustis project and has recorded a provision for warranty costs. There is limited
historical experience on the performance of Company material.  Accordingly,
actual warranty costs may vary significant from Company estimates.  Accrued
warranty costs are reviewed periodically for adequacy based on actual and
expected experience and changes in estimated replacement costs.





Inventories. Inventories are
priced at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials and finished goods.  During the first nine
months of the current fiscal year, the Company significantly increased its
inventories, particularly its inventories of railroad ties.  Since
inception, sales of railroad ties have been limited and estimates of future
sales are subject to significant uncertainty.  If the Company cannot sell
its current inventories at expected selling prices in the ordinary course of
business, it may recognize a loss in future periods.





Property and Equipment.Property and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets using principally the straight-line method.
When items are retired or otherwise disposed of, income is charged or credited
for the difference between net book value and proceeds realized thereon. 
Ordinary maintenance and repairs are charged to expense as incurred, and
replacements and betterments are capitalized.  The range of estimated
useful lives to be used to calculate depreciation for principal items of
property and equipment are as follow:





Asset Category
              
              Depreciation/
                Amortization PeriodFurniture
      and fixtures
              
              3
      to 5 yearsComputer
      equipment and purchased software
              
              3
      yearsMachinery
      and equipment
              
              2
      to 5 yearsLeasehold
      improvements
              
              Term
      of lease


13


Goodwill and Intangible
Assets.We do not amortize intangible assets, and instead annually
evaluate the carrying value of intangible assets for impairment.  We hold
licenses and expect the cash flow generated by the use of the licenses to exceed
their carrying value.





Impairment of Long-Lived
Assets. Assets such as property, plant, and equipment, and purchased
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-term asset may not be
recoverable. Goodwill and other intangible assets are tested for impairment
annually. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.  There were no events or changes in circumstances
that necessitated a review of impairment of long lived assets.





Stock Based
Compensation.We record stock-based compensation for transactions in
which we exchange our equity instruments for services of employees, consultants
and others based on the fair value of the equity instruments issued at the date
of grant or other measurement date.  The fair value of common stock awards
is based on the observed market value of our stock.  We calculate the fair
value of options and warrants using the Black-Scholes option pricing
model.  Expense is recognized, net of expected forfeitures, over the period
of performance.  When the vesting of an award is subject to performance
conditions, no expense is recognized until achievement of the performance
condition is deemed to be probable.





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.





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.





Recent Accounting
Pronouncements





In October 2009, the FASB issued
Accounting Standards Update 2009-13, “Revenue Recognition – Multiple-Deliverable
Arrangements” which addresses how to separate deliverables and how to measure
and allocate arrangement consideration to one or more units of accounting. The
provisions of this update will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. We are currently evaluating the effect, if any, that
adoption will have on its consolidated financial statements.





Results
of Operations





Three-
and Nine-Month Periods Ended June 30, 2010 Compared to the Three- and Nine-Month
Periods Ended June 30, 2009





Revenue.For the three months
ended June 30, 2010, we recognized $445,939 of revenue compared to $566,849 of
revenue for the three months ended June 30, 2009.  Bridge construction
projects on United States Army bases at Ft. Eustis, Virginia, and Ft. Bragg,
North Carolina, respectively, contributed revenue of approximately $290,000 and
$351,000 in the three months ended June 30, 2010 and the three months ended June
30, 2009, respectively.  Sales of railroad ties to two customers amounted
to approximately $145,000 in the three months ended June 30, 2010. Sales of
railroad ties to a third customer amounted to approximately $215,000 in the
comparable period of the prior year.


14


For the
nine months ended June 30, 2010, we recognized $1,151,173 of revenue compared to
$1,004,411 of revenue for the nine months ended June 30, 2009. 
 Revenue from bridge construction at Ft. Eustis amounted approximately
$943,000 in the nine months ended June 30, 2010. Revenue from bridge
construction at Ft. Bragg amounted approximately $39,000 in the nine months
ended June 30, 2010 and approximately $784,000 in the nine months ended June 30,
2009.  Sales of railroad ties primarily to two customers amounted to
approximately $155,000 in the nine months ended June 30, 2010. Sales of railroad
ties primarily to a third customer amounted to approximately $220,000 in the
comparable period of the prior year.





As of
June 30, 2010, backlog on firm orders received was approximately
$150,000.





Cost of sales.Cost of sales
amounted to $544,028 and $1,249,540, respectively, for the three and nine months
ended June 30, 2010.  Cost of sales for the three and nine months ended
June 30, 2009 amounted to $332,602 and $815,939, respectively.  Reported
negative gross margins in the three and nine months ended June 30, 2010, were
impacted by costs of additional materials supplied during the fiscal year to the
Ft. Eustis project, increased raw materials prices and the mix of products
manufactured. The three and nine months ended June 30, 2009 were positively
impacted by the allocation of certain fixed manufacturing costs incurred during
our initial phase of commercial production to administrative expenses and to
preceding periods and certain research contracts associated with the Ft. Bragg
project to research and development.  Because we are in the early stages of
commercial activities, costs of these revenues may not be indicative of costs of
revenue in the future, which may vary significantly and are highly dependent on
the pricing of individual contracts, concurrent production activities, the use
of subcontractors and the timing and mix of product sales and
services.





Research and Development
Expense.Research and development expense for the three and nine
months ended June 30, 2010 were $58,913 and $130,795, respectively, compared to
$19,057 and $180,819, respectively in the three and nine months ended June 30,
2009. Expenses in the periods were generally related to the development of our
molds, products, and quality control processes. Expenses in the three months
ended June 30, 2010 increased as a result of new research projects with Rutgers
University.  Expenses in the nine months ended June 30, 2009 included
higher costs associated with an earlier research project. We continue to work
with our scientific team at Rutgers to enhance our product formulations, develop
new innovative products, and expand the reach of our existing products and
anticipate that research and development expenses may fluctuate significantly in
the future as a result of such projects.





Marketing and Sales Expenses.Marketing and selling expenses for the three and nine months ended June
30, 2010 amounted to $218,348 and $482,444, respectively, compared to $149,109
and $306,420, respectively, for the three and nine months ended June 30, 2009.
Expenses increased in the three months ended June 30, 2010 compared to the prior
year primarily as a result of increased consulting expenses, which were
partially offset by lower internal sales personnel costs in the period. 
Increased expenses in the nine-month period ended June 30, 2010 primarily
reflects increased consulting expense as well as sales efforts related to
federal government projects and fees related to the Ft. Eustis project,
partially offset by lower spending related to golf architecture. 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 and, accordingly, our marketing
and sales expenses may increase.  In addition, we may make use of
additional outside agents and services for expanding our marketing
activities.





General and Administrative.General and administrative costs for the three and nine months ended June
30, 2010 totaled $1,594,001 and $5,342,183, respectively, compared to $983,386
and $2,932,738, respectively in the three and nine months ended June 30, 2009.
The increase is primarily due to stock-based compensation in the form of shares
and warrants issued to several consultants.  In the current fiscal year, we
substantially increased our general business development efforts and publicity
of our initial completed projects and expanding business activities. In
addition, we engaged consultants to advise on our strategic and financing plans
and activities.  We expect to continue to use stock-based compensation in
dealing with a number of consultants.  As a result, recorded general and
administrative expenses may vary significantly from period to period based on
projects initiated and the price of our common stock.


15


Depreciation and Amortization.Depreciation and amortization for the three and nine months ended June
30, 2010 totaled $70,572 and $200,728, respectively, compared to $54,753 and
$116,555, respectively in the three and nine months ended June 30, 2009. 
These increases primarily reflect entering commercial production in fiscal 2009
and an increased inventory of molds.





Interest Expense, Net.
Interest expense for the three and months ended June 30, 2010 totaled $170,082
and $270,675, respectively, compared to $109,440 and $274,303, respectively, in
the three and nine months ended June 30, 2009.  The decreased expenses in
the current fiscal year primarily reflect lower outstanding debt balances in the
current period. The Company has recorded discounts on certain notes
substantially equal to the principal amount of the notes, which are being
amortized to interest expense on the interest method through their scheduled
maturity dates.  The recorded discount on $600,000 of principal amount of
these debentures amounts to $599,977 in the aggregate as of June 30, 2010. 
As a result of the application of the interest method to these discounts, unless
the debentures are converted earlier, substantially all of the discount is
expected to be amortized during the first two quarters of the Company’s fiscal
year ending September 30, 2011.  In addition, a discount of $350,000 as of
June 30, 2010 has been recorded on a $350,000 note due May 2012.  As a
result of the application of the interest method to this discount, unless the
debentures are converted earlier, substantially all of the discount is expected
to be amortized during the Company’s fiscal year ending September 30,
2012.





Liquidity
And Capital Resources:  Plan Of Operation





As of June 30, 2010, we had $567,654
in cash and cash equivalents and $2,390,779 of current liabilities, a portion of
which has been settled or is expected to be settled with the issuance of common
stock or warrants subsequent to June 30, 2010.  On August 2, 2010, we used
a significant portion of existing cash balances to repay our outstanding
convertible note of $300,000 due on that date.  Following this repayment,
the undiscounted total face value of our convertible debt amounts to $1,122,500,
which is due between December 2010 and May 2012.  In the nine months ended
June 30, 2010, we used $2,327,493 of cash in operations, primarily as a result
of our operating losses and production of inventory of railroad ties, partially
offset by increased accounts payable balances.  Our operating losses,
production of inventory of railroad ties and increases in accounts payable
balances all increased over the comparable period of the prior year as a result
of our expanding business activities. Financing activities, consisting
principally of the sale of common stock and the issuance of short-term and
long-term convertible notes, generated net cash of $1,637,632 in the
period.  We expect to continue to incur net cash outflows from operations
for the foreseeable future.  Our ability to fund our planned operations,
and pay principal and interest on our outstanding debentures when they begin to
come due later in the year if not previously converted, depends on our future
operating performance and ability to raise capital. The timing and amount of our
financing needs will be highly dependent on the success of our sales and
marketing programs, our ability to obtain new construction contracts, the size
of such contracts and any associated working capital requirements.





Contractual
obligations:





PaymentsduebyperiodTotal
                    
                    
                    Less than 1
                      year
                    
                    
                    1-3 years
                    
                    
                    3-5 years
                    
                    
                    More than 5
                      yearsLong-Term
      Debt Obligations
                    
                    $
                    1,122,500
                    
                    
                    $
                    772,500
                    
                    
                    $
                    350,000Minimum
      royalties (a)
                    
                    
                    880,000
                    (a)
                    
                    
                    80,000
                    
                    
                    
                    400,000
                    (a)
                    
                    
                    400,000
                    (a)
                    
                    
                    
                    (a)





(a)
            Subject
      to voluntary termination by us upon 120 days prior notice under our
      license agreement with Rutgers.  After year 5, the minimum
      annual royalty is $200,000 per year.  We may also pay a percentage of
      consideration received for any future
  sublicenses.


16


As a
result of our continued operating losses, net current liabilities as of June 30,
2010 and our subsequent convertible note repayment, we will need to raise
additional capital in the immediate future in order to fund payment of our
current liabilities on a timely basis and continue our planned operations and
repay our debt obligations.  If we are not able to pay our current
liabilities on a timely basis, our current operations could be materially
affected and, under certain circumstances, certain obligations could increase or
accelerate, including amounts owed under our convertible notes.  Provided
sufficient funds are available, our current operating plans for the next fiscal
year are to meet our customer commitments, expand our marketing and sales and
engineering staffs, and continue to develop innovative solutions.  There
can be no assurance that financing will be available, or if available, that such
financing will be upon terms acceptable to us.   In July 2010, we and
Lincoln Park Capital, LLC mutually agreed to terminate our February 2010
purchase agreement for up to 1,500,000 registered shares of our common
stock.  Please see the Risk Factor “We are dependent on our ability to
raise capital from external funding sources. If we are unable to continue to
obtain necessary capital from outside sources, we will be forced to reduce or
curtail operations” in “Item 1A.  Risk Factors” in our Annual Report on
Form 10-K.





In April
2006, we commenced an action against Tonga Partners, L.P. and others (“Tonga”)
for disgorgement of short-swing profits pursuant to Section 16 of the Securities
Exchange Act of 1934, as amended.  In September 2008, we were granted
summary judgment in the amount of approximately $5.0 million; however, the
defendants are appealing the order granting summary judgment.  We may
receive a substantial amount of cash pursuant to the judgment rendered against
Tonga, but the outcome and the timing of the appeal filed by Tonga is
uncertain.





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 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.


17


Based on
our evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, our Chief Executive Officer and our Chief Financial Officer have
concluded that, as of that date, our disclosure controls and procedures were not
effective as a result of material weaknesses in our controls over financial
reporting, including those discussed in Item 9A(T) of our most recent Annual
Report on Form 10-K and the determination in the current fiscal year that based
on the simplicity of the Company’s organizational and communications structures
there are not sufficiently formal procedures for information gathering and
communication across the organization or ensure that agreements or modifications
are identified and reviewed for financial significance on a timely
basis.





(b)
Changes in internal control over financial reporting.





The
Company is dependent upon a small number of key employees for the processing of
transactions and compilation of financial statements.  During the quarter
ended June 30, 2010, the Company experienced turnover in personnel, including a
change in the Company’s president, which could adversely affect the processing
of financially significant transactions and information.  Other than this
personnel turnover, there were 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 have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


18





PART
II. OTHER INFORMATION





Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





If,
as our international sales operations increase, our employees or agents violate
the U.S. Foreign Corrupt Practices Act or anti-bribery laws in other
jurisdictions, we may incur substantial fines or penalties, or experience other
adverse consequences.





In the quarter ended June 30, 2010, we
received our first significant international order and increased our efforts to
arrange international selling activities.  We are subject to the U.S.
Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit
improper payments or offers of payments to foreign governments and their
officials and political parties by the United States and other business entities
for the purpose of obtaining or retaining business. As we begin to operate and
sell internationally, there is an increasing risk of unauthorized payments or
offers of payments by one of our employees, consultants, sales agents or
distributors that could be in violation of various laws including the FCPA, even
though these parties are not always subject to our effective
control.  Our attempts to implement safeguards may not be effective in
preventing employees, consultants, sales agents or distributors from engaging in
conduct for which we might be held responsible. Violations of the FCPA may
result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition.





Because
we occasionally conduct our business through verbal or informal written
agreements with consultants and other third parties, such entities may not be
readily available to us or perform in accordance with our expectations and our
manufacturing, sales and other business activities could be
disrupted.





Although we generally seek written
agreements with our consultants and other service-providers, certain of our
existing arrangements are verbal or informal. Certain of our operations require
the services of persons that may be in demand by others and may not always be
available. In addition, our informal arrangements are subject to a greater
degree of uncertainty of interpretation or enforcement in the event of a dispute
or if our service-providers fail to perform as expected.  If we are
not able to secure written agreements with manufacturers, agents, consultants or
other parties with whom we have verbal or informal agreements, certain of their
activities could be interrupted and our business adversely
affected.





We
depend upon senior management and key personnel. Any loss of their services
could negatively affect our business. Our failure to retain and attract such
personnel could harm our business, operations and product development
efforts.





Our success will depend to a
significant extent, on the performance of a small number of employees and
consultants, including James Kerstein, our CEO. To the extent that the services
of any of our key personnel become unavailable, we will be required to retain
other qualified persons. During the quarter ended June 30, 2010, Marc Green
resigned as our President and Treasurer, and experienced personnel in
engineering and sales left the Company.  We may not be able to find
suitable replacement for any such person. The loss of the services of key
persons could have a material adverse effect on our business, financial
condition and results of operations.





Our products require sophisticated
research and development and marketing and sales. Our success will depend on our
ability to attract, train and retain qualified research and development and
marketing and sales personnel. Competition for personnel in all these areas is
intense and we may not be able to hire sufficient personnel to achieve our
goals. If we fail to attract and retain qualified personnel, our business,
operations and product development efforts most likely would
suffer.


19


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





In May
2010,we issued a 7%
two-year note in the amount of $350,000, convertible at the rate of $1.40 per
share, together with 41,667 shares of common stock and five-year warrants to
purchase 166,667 shares of our common stock at an exercise price of $2.50 per
share.





In May
2010, we issued 300,000 shares of common stock to a consultant for services
performed in our financing efforts and business development
efforts.





In May
and June 2010, we issued units consisting of an aggregate of 261,068 shares of
common stock and five-year warrants to purchase 130,534 shares of common stock
at an exercise price of $1.40 per share.





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:  August
      16, 2010
            /s/ James KersteinJames
      KersteinChief
      Executive OfficerDate:  August
      16, 2010
            /s/ Gary AnthonyGary
      AnthonyChief
      Financial Officer


21