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 March 31, 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 ofincorporation or organization)
            (IRS
      EmployerIdentification 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 May 10, 2010 was 21,225,541









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
            
            18Item
      1A.
            Risk
      Factors
            
            18Item
      2.
            Unregistered
      Sales of Securities and Use of Proceeds
            
            18Item
      3.
            Defaults
      Upon Senior Securities
            
            18Item
      4.
            Submissions
      of Matters to a Vote of Security Holders
            
            18Item
      5.
            Other
      Information
            
            18Item
      6.
            Exhibits
            
            18SIGNATURES
            
            19









PART
1. FINANCIAL INFORMATION





Item
1. Financial Statements.





AXION
      INTERNATIONAL HOLDINGS, INC.CONSOLIDATED
      BALANCE SHEETS





March
      31,
            
            
            September
      30,2010
            
            
            2009unauditedASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            272,497
            
            
            $
            1,257,516Accounts
      receivable
            
            
            180,322
            
            
            
            314,027Unbilled
      revenue
            
            
            40,708
            
            
            
            -Inventories
            
            
            345,514
            
            
            
            76,533Prepaid
      expenses
            
            
            244,481
            
            
            
            1,915Total
      current assets
            
            
            1,083,522
            
            
            
            1,649,991Property,
      equipment, and leasehold improvements, at cost:Equipment
            
            
            13,754
            
            
            
            9,838Machinery
      and equipment
            
            
            480,505
            
            
            
            406,639Purchased
      software
            
            
            56,404
            
            
            
            56,404Furniture
      and fixtures
            
            
            13,091
            
            
            
            9,322Leasehold
      improvements
            
            
            950
            
            
            
            29,300564,703
            
            
            
            511,503Less
      accumulated depreciation
            
            
            (306,011
            )
            
            
            (205,156
            )Net
      property and leasehold improvements
            
            
            258,692
            
            
            
            304,347License,
      at acquisition cost,
            
            
            68,284
            
            
            
            68,284Deposits
            
            
            10,713
            
            
            
            10,713Total
      assets
            
            $
            1,421,211
            
            
            $
            2,035,334LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
            
            $
            761,001
            
            
            $
            546,920Accrued
      liabilities
            
            
            304,346
            
            
            
            357,172Notes
      payable
            
            
            -
            
            
            
            14,000Current
      portion of convertible debentures, net of discount
            
            
            197,871
            
            
            
            253,795Total
      current liabilities
            
            
            1,263,218
            
            
            
            1,171,886Convertible
      debentures, net of discount
            
            
            -
            
            
            
            157,347Total
      liabilities
            
            
            1,263,218
            
            
            
            1,329,233Commitments
      and contingencies
            
            
            -
            
            
            
            -Stockholders'
      equity (deficit):Common
      stock, no par value; authorized, 100,000,000
              shares;21,125,541
      and 19,243,669 shares issued and
              outstanding
      at March 31, 2010 and September 30,
              2009,
      respectively
            
            
            13,776,424
            
            
            
            10,009,677Retained
      earnings (deficit)
            
            
            (13,618,432
            )
            
            
            (9,303,576
            )Total
      stockholders' equity (deficit)
            
            
            (157,992
            )
            
            
            706,101Total
      liabilities and stockholders' equity (deficit)
            
            $
            1,421,211
            
            
            $
            2,035,334


See
accompanying notes to consolidated financial statements.




1




AXION
      INTERNATIONAL HOLDINGS INC.CONSOLIDATED
      STATEMENT OF OPERATIONS





Three
      months endedMarch 31, 2010
            
            
            Three
      months endedMarch 31, 2009
            
            
            Six
      months ended March 31, 2010
            
            
            Six
      months endedMarch 31, 2009Unaudited
            
            
            Unaudited
            
            
            Unaudited
            
            
            UnauditedRevenue
            
            $
            402,693
            
            
            $
            433,362
            
            
            $
            705,234
            
            
            $
            437,562Cost
      of goods sold
            
            
            459,472
            
            
            
            483,337
            
            
            
            705,512
            
            
            
            483,337Gross
      margin
            
            
            (56,779
            )
            
            
            (49,975
            )
            
            
            (277
            )
            
            
            (45,775
            )Operating
      expenses:Research
      and development costs
            
            
            45,267
            
            
            
            30,513
            
            
            
            71,883
            
            
            
            161,763Marketing
      and sales
            
            
            141,307
            
            
            
            72,491
            
            
            
            254,637
            
            
            
            120,399General
      and administrative expenses
            
            
            1,304,001
            
            
            
            1,189,335
            
            
            
            3,757,311
            
            
            
            1,640,282Depreciation
      and amortization
            
            
            65,791
            
            
            
            50,977
            
            
            
            130,156
            
            
            
            61,852Total
      operating costs and expenses
            
            
            1,556,367
            
            
            
            1,343,316
            
            
            
            4,213,986
            
            
            
            1,984,296Loss
      from operations
            
            
            (1,616,146
            )
            
            
            (1,393,291
            )
            
            
            (4,214,263
            )
            
            
            (2,030,071
            )Other
      expense (income), net:Other
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Interest
      expense, net
            
            
            65,807
            
            
            
            104,130
            
            
            
            100,593
            
            
            
            164,892Debt
      conversion expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      other expense, net
            
            
            65,807
            
            
            
            104,130
            
            
            
            100,593
            
            
            
            164,892Loss
      before income taxes
            
            
            (1,678,952
            )
            
            
            (1,497,421
            )
            
            
            (4,314,856
            )
            
            
            (2,194,963
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (1,678,952
            )
            
            $
            (1,497,421
            )
            
            $
            (4,314,856
            )
            
            $
            (2,194,963
            )Weighted
      average common shares - basic and diluted
            
            
            19,972,443
            
            
            
            14,560,963
            
            
            
            19,759,388
            
            
            
            13,773,527Basic
      and diluted net loss per share
            
            $
            (0.08
            )
            
            $
            (0.10
            )
            
            $
            (0.22
            )
            
            $
            (0.16
            )See
      accompanying notes to consolidated financial
  statements.





2




AXION
      INTERNATIONAL HOLDINGS INCCONSOLIDATED
      STATEMENTS OF CASH FLOWS





Six
      months endedMarch 31, 2010
            
            
            Six
      months endedMarch 31, 2009Unaudited
            
            
            UnauditedCash
      flow from operating activities:Net
      loss
            
            $
            (4,314,856
            ))
            
            $
            (2,194,963
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      and amortization
            
            
            100,856
            
            
            
            61,852Accretion
      of interest expense on convertible debentures
            
            
            53,976
            
            
            
            131,232Issuance
      of common stock, options and warrants for services and for accrued
      interest
            
            
            2,312,857
            
            
            
            551,405Changes
      in operating assets and liabilities:Accounts
      receivable and unbilled revenue
            
            
            92,977
            
            
            
            (437,562
            )Inventories
            
            
            (268,981
            )
            
            
            (81,469
            )Prepaid
      expenses and other
            
            
            -
            
            
            
            361Accounts
      payable
            
            
            214,082
            
            
            
            215,482Accrued
      liabilities
            
            
            3,418
            
            
            
            52,316Net
      cash (used in) operating activities
            
            
            (1,869,718
            )
            
            
            (1,071,346
            )Cash
      flows from investing activities:Purchase
      of equipment and leasehold improvements
            
            
            (53,201
            )
            
            
            (96,490
            )Net
      cash (used in) provided by investing activities
            
            
            (53,201
            )
            
            
            (96,490
            )Cash
      flows from financing activities:Proceeds
      from short term notes
            
            
            300,000
            
            
            
            609,000Issuance
      of common stock, net of expenses
            
            
            651,900
            
            
            
            1,375,000Repayment
      of notes and convertible debentures
            
            
            (14,000
            )
            
            
            (125,000
            )Net
      cash provided by financing activities
            
            
            937,900
            
            
            
            1,859,000Net
      increase (decrease) in cash
            
            
            (985,018
            )
            
            
            61,164Cash
      at beginning of period
            
            
            1,257,516
            
            
            
            138,826Cash
      at end of period
            
            $
            272,497
            
            
            $
            199,990Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            39,469
            
            
            $
            -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.





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. We must raise additional capital through the sale of equity
or debt securities, through an offering of debt securities, or through
borrowings from financial institutions.




4




(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 March 31, 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.  No adjustment has been made
to the cost of finished goods inventories as of March 31,
2010.





(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.  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.  Unbilled revenue represents revenue related to services
completed but not billed, and advance billings represent billings in advance of
services performed.





(g)       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.




5





(h)         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.





(i)          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.





(j)         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 six-month periods ended March 31, 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
6,885,666 as of March 31, 2010.





(k)         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.





(l)          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 March 31, 2010 are substantially
all due from one customer.





(m)         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.




6





(2)           Lincoln
Park Capital Transaction





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. Pursuant to the registration rights agreement, we filed a registration
statement with the Securities and Exchange Commission (the “SEC”) covering the
shares that have been issued or may be issued to LPC under the Purchase
Agreement.





After the
initial purchase of 100,000 shares, over a 360 business day period(approximately
18 months), we have the right to direct LPC to purchase up to 1,400,000 shares
of our common stock which shares will be purchased in increments of 20,000
shares as often as every five business days at our discretion provided, however,
that under the Purchase Agreement, no additional sales may occur if the price of
our stock, as calculated under the agreement, is below $1.50 per
share.  Upon entering into the Purchase Agreement, we issued to LPC
85,000 shares of our common stock as consideration for entering into the
agreement.  The aggregate value of the 85,000 commitment shares,
$178,500, is included as deferred offering costs in other current assets,
together with $59,092 of other deferred offering costs.





The
registration statement became effective and the initial purchase of 100,000
shares and 50,000 warrants was completed in May 2010.





(3)            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 has 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 is expected to be completed
within the fiscal year ending September 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.





(4)Inventories





The
components of inventories are:





March
      31,2010
            
            
            September
      30, 2009Finished
      goods
            
            $
            317,480
            
            
            $
            46,731Raw
      materials
            
            
            27,765
            
            
            
            29,802Total
      inventories
            
            $
            345,245
            
            
            $
            76,533





(5)Accrued
liabilities





The
components of accrued liabilities are:





March
      31,2010
            
            
            September
      30,2009Payable
      to insurer for legal settlement
            
            $
            100,000
            
            
            $
            100,000Refundable
      oil and gas receipts
            
            
            129,334
            
            
            
            129,334Accrued
      interest
            
            
            23,773
            
            
            
            76,644Other
            
            
            51,239
            
            
            
            51,194Total
      accrued liabilities
            
            $
            304,346
            
            
            $
            357,172





7




(6)Debt





The
components of debt are summarized as follows.





Due
            
            March
      31,2010
            
            
            September
      30, 200810%
      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
            
            
            
            300,000Discount
            
            
            
            
            (874,629
            )
            
            
            (639,594
            )197,871
            
            
            
            411,142Less
      current portion
            
            
            
            
            197,871
            
            
            
            253,795$
            -
            
            
            $
            157,347





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,
$7,743 as of March 31, 2010, is being amortized to interest expense on the
interest method through its scheduled maturity date.





The
Company’s 10% convertible debentures due February 2011 and March 2011 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, $599,977 in the aggregate as of March 31,
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 $266,909 at March 31, 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.





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




(7)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.





The
following table sets forth the number of shares of Common Stock that were
issuable upon exercise of outstanding warrants as of March 31,
2010.  Net share settlement is available to warrant
holders.





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
            
            20,000Weighted
      average exercise price and total shares issuable
            
            
            
            
            1.49
            
            3,734,200





9




The
following table sets forth the number of shares of Common Stock that were
issuable upon conversion of convertible debt as of March 31, 2010.





Principal
      Amount
            
            Conversion/
      Exercise Price
            
            Common
      Shares
              Issuable10%
      convertible debenture due in 2010
            
            300,000
            
            $
            2.00
            
            150,0008.75%
      convertible debenture
            
            172,500
            
            
            1.50
            
            115,00010%
      convertible debentures due in 2011
            
            600,000
            
            
            0.90
            
            666,667





(8)Stock–based
compensation





The
following table summarizes stock option activity in the six months ended March
31, 2010:





Number
      of Shares
            
            
            Weighted
      Average Exercise PriceOutstanding
      at beginning of period
            
            
            2,219,799
            
            
            $
            0.47Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Outstanding
      at end of period
            
            
            2,219,799
            
            
            $
            0.47





(9)             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..





10




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





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.





Inventories. Inventories are
priced at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials.





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





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 an 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.




13





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 Six-Month Periods Ended March 31, 2010 Compared to the Three- and Six-Month
Periods Ended March 31, 2009





Revenue.For the three and six
months ended March 31, 2010, we recognized $402,693 and $705,234 of revenue
compared to $433,362 and $437,562 of revenue for the three and six months ended
March 31, 2009.  Revenue in the current fiscal year primarily
represents work on our contract for the demolition and construction of two
bridges on the United States Army base at Fort Eustis in Virginia, which are
expected to be completed during our year ending September 30,
2010.  In addition, the six months ended March 31, 2010 includes
approximately $40,000 and $10,000 respectively from other construction
activities and the sale of railroad ties.  Other construction
activities pertained primarily to modifications on our Fort Bragg bridge project
substantially completed in the year ended September 30, 2009.  Revenue
in the three and six months ended March 31, 2009 represents revenue earned on
the Fort Bragg project.  As of March 31, 2010, except for an
additional $304,194 remaining to be recognized under the Fort Eustis contract,
backlog on firm orders received was not significant.





Cost of sales.Cost of sales
amounted to $459,472 and $705,512, respectively, for the three and six months
ended March 31, 2010.  Cost of sales in the comparable periods of the
prior fiscal year amounted to $483,337.  In each period our recognized
cost of sales exceeded our revenue.  In the three months ended March
31, 2010, we agreed to produce additional materials for the Fort Eustis bridge
project based on site conditions encountered during the construction
phase.  As a result of the additional production costs incurred we
adjusted our estimate of the total cost to complete the project and adjusted our
recognized gross margin in the period accordingly.  If we are able to
obtain compensation for our additional costs in future periods, we would record
additional revenue at that time, but there is no assurance that we will be able
to do so.  In the three and six months ended March 31, 2009, we
incurred certain fixed production costs during our initial phase of commercial
production, which negatively impacted our reported gross
margin  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.  In the first three months of the current fiscal year, a
portion of certain fixed production costs, which might otherwise have been fully
allocated to the Fort Eustis project were absorbed in the concurrent production
of inventories of railroad ties.




14





Research and Development
Expense.Research and development expense for the three and
six months ended March 31, 2010 were $45,267 and $71,883, respectively, compared
to $30,513 and $161,763, respectively, in the three and six months ended March
31, 2009. Expenses in the periods were generally related to the development of
our molds, products, and quality control processes. Expenses in the six month
ended March 31, 2009 included higher costs associated with a research project at
Rutgers University. 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 six
months ended March 31, 2010 amounted to $141,307 and $254,637, respectively,
compared to $72,491 and $120,399, respectively, for the three and six months
ended March 31, 2009. The increases in the current-year periods primarily
related to the addition of internal sales personnel since March 31, 2009 and to
fees incurred on new contracts. 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 outside agents and services
for expanding our marketing activities.





General and
Administrative.General and administrative costs for the three
and months ended March 31, 2010 totaled $1,304,001 and $3,757,311, respectively,
compared to $1,189,335 and $1,640,282, respectively in the three and six months
ended March 31, 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.





Depreciation and
Amortization.Depreciation and amortization for the three and
six months ended March 31, 2010 totaled $65,791 and $130,156, respectively,
compared to $50,977 and $61,852, respectively, in the three and six months ended
March 31, 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 six months ended March 31, 2010 totaled
$65,807 and $100,593, respectively, compared to $104,130 and $164,892,
respectively, in the three and six months ended March 31, 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 March 31, 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 $266,909 as of March 31, 2010 has
been recorded on a $300,000 note due August 1, 2010.  This discount is
expected to be fully amortized to interest expense over the next two fiscal
quarters.




15





Liquidity
And Capital Resources:  Plan Of Operation





As of March 31, 2010, we had
$272,497 in cash and cash equivalents and $1,263,218 of current
liabilities.  The undiscounted total face value of our debt amounts to
$1,072,500, which is due between August 2010 and March 2011.  In the
six months ended March 31, 2010, we used $1,869,718 of cash in operations,
primarily as a result of production activities for the Fort Eustis bridge
project and inventory of railroad ties and our expanding general and
administrative activities as discussed above.   Financing activities,
consisting principally of the sale of common stock and the issuance of a
short-term note, generated net cash of $937,900 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:





Payments
      due by periodTotal
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsLong-Term
      Debt Obligations
            
            $
            1,072,500
            
            
            $
            1,072,500
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Minimum
      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.





We
believe we will need to raise additional capital in order to fund our planned
operations and repay our debt obligations. Our current operating plans for the
next fiscal year are to meet our existing customer commitments, enhance our
research and development capabilities, expand our marketing and sales and
engineering staffs, and continue to develop innovative solutions.  In
February 2010, we entered into a purchase agreement with Lincoln Park Capital,
as described in our financial statements, under which we may sell up to
1,500,000 registered shares of common stock at prices as determined under the
agreement, provided our stock price is generally $1.50 per share or
greater.  On May 5, 2010, upon effectiveness of the registration
statement we sold 100,000 common shares at $2.05 per share, as provided in the
agreement.  As of that date, the quoted market price per share of our
common stock on the OTC Bulletin Board was below $1.50 and there can be no
assurance that we will be able to make additional purchases under the
agreement.  Whether or not we make additional purchases under the
agreement, we believe we will need to raise additional capital from time to time
over the next three to twelve months through the issuance of debt or equity
securities.  There can be no assurance that financing will be
available, or if available, that such financing will be upon terms acceptable to
us. 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.




16





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.





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 discussed in Item 9A(T) of our most recent Annual Report on Form
10-K.





(b)
Changes in internal control over financial reporting.





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.




17





PART
II. OTHER INFORMATION





Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





Not
applicable.





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





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
February 2010, we issued 200,000 shares of common stock to consultants for
services performed in our financing efforts.





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.





In
February 2010, we issued 85,000 shares to Lincoln Park Capital, LLC upon
execution of a Purchase Agreement for up to 1,500,000 registered shares upon the
effectivness of a registration statement.





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




18




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:  May
      17, 2010
            /s/
      James KersteinJames
      KersteinChief
      Executive OfficerDate:  May
      17, 2010
            /s/
      Gary AnthonyGary
      AnthonyChief
      Financial Officer





19