Summary of AXIS TECHNOLOGIES GROUP INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited financial statements and related notes that appear elsewhere in this Form 10-Q filing and in conjunction with our audited financial statements and related notes that appear in our Form 10-K filed with the Securities and Exchange Commission on April 15, 2009.

Forward Looking Statements and Information

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or similar expressions, indicates a forward-looking statement.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict. Stockholders are cautioned not to put undue reliance on any forward-looking statements, which speak only to the date made.

Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance and underlying assumptions and other statements, which are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demands and acceptance, changes in technology, economic conditions, the impact of competition and pricing, and government regulation and approvals. The Company cautions that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Some of the key factors which could cause actual results to vary from those the Company expects include changes in product prices, the timing of planned capital expenditures, availability of acquisitions, operational factors, the condition of the capital markets generally, as well as our ability to access them, and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business.

Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties. There can be no assurance, however, that our expectations, beliefs or projections will result, be achieved, or be accomplished. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no duty to update these forward-looking statements.

Overview

Axis Technologies Group, Inc. is in the business of developing and marketing energy-saving electronic components for the commercial lighting sector. Our primary products are self-contained electronic, dimming and daylight harvesting, fluorescent ballasts. A "ballast" is an electronic component that regulates voltage in lighting. We develop, test, and patent unique technology to create energy efficient products that meet federal energy code standards and encourage Green initiatives for high-profile companies. Extensive testing is conducted to ensure product reliability and energy-saving properties. We have obtained and own the patent rights for our ballasts' unique control system and have trademarked our slogan "The Future of Fluorescent Lighting". Underwriters Laboratory ("UL"), the lighting industry's certification authority, has approved our products for use in the United States and Canada.

Our current and primary product is the patented T8 Axis Daylight Harvesting Dimming Ballast (the "Axis Ballast"). This ballast uses simple technology that transforms the standard ballast, into a dynamic energy saving system that can reduce lighting energy costs by up to 70% over a magnetic ballast utilizing T12 lamps and up to 42% over traditional electronic ballasts. The Axis Ballast utilizes an individual photo sensor to automatically adjust the amount of electrical current flowing to the light fixture and then dims or increases lighting in conjunction with the amount of available sunlight. Based on our knowledge, the Axis Ballast is the only ballast on the market that has automatic dimming controls integrated into each ballast. We believe this feature reduces the costs of acquisition and installation over that of competing dimming systems, which require that first, a dimming ballast must be acquired along with a separate control system, and a separate photocell; then all components must be "hard-wired" together and "commissioned" or "balanced" in order to operate properly. The Company believes that this extra equipment and labor for competing systems can increase the cost of acquisition and installation over that of the T8 ballast system. We have recently completed a redesign of our T8 ballast which is awaiting UL approval.

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We have under development a high-output T5HO ballast that capitalizes on the features of our current T8 Axis Ballast. When development is complete, this product will be submitted to UL for testing and approval. T5 fluorescent lamps are used mainly in "high-bay" fixtures which are installed in warehouses, gymnasiums, etc., in conjunction with skylights. These high-output T5 lamps in conjunction with an Axis dimming ballast would be an energy-saving choice for these applications.

Also under development is our next generation ballast, which utilizes PLC (power line carrier), or a wirelessly addressable, load shedding ballast, and offers power companies the ability to reduce the lighting load (load shedding) for their customers during peak demand periods. Most utility companies charge their customers a surcharge or "peak demand" charge during those times of day when the load on the power plants are at the highest. Usually this means the power companies must start up higher cost generators, and/or buy power from the electrical grid at even higher rates. This ballast allows the consumer or the power company to reduce the output of the ballast. The consumer who installs this ballast can agree to participate in the power company's Peak Demand Reduction Program which can offer reduced electric rates. Utility companies have expressed interest in working with Axis to complete the development of the load shedding ballasts in order to provide for the installation of the ballasts in their customers' facilities; however, we have entered into no formal agreements with any such utility companies to date.

Power companies nation-wide are being pressured to reduce their greenhouse gas emissions and reduce energy consumption. There are many states that have passed legislation that require lighting controls, and in some cases (California for example), there are requirements that new construction projects and major lighting retrofits incorporate daylight harvesting. These regulations are specific to lighting, and there are many further regulations in place from cities and states, that require government buildings to save a certain amount of all forms of energy by specified dates. We believe that the Axis dimming ballast system can help greatly in achieving these energy-reduction goals.

Our target market is small to large commercial users of fluorescent lighting including office buildings, wholesale and retail buildings, hospitals, schools and government buildings. We have arrangements with sales representatives, electrical distributors, electrical contractors, retrofitters, ESCO's (Energy Service Companies), and OEM's (Original Equipment Manufacturers) to market, distribute and install the Company's products. Through these arrangements, sales to contractors, distributors, ESCO's and OEM's are made through purchase orders submitted by them to the Company. However, we have not entered into any written agreements regarding on-going or future sales involving any of these parties.

Our revenues consist primarily of sales of our T8 fluorescent ballasts to electrical distributors and OEM's for placement in commercial and governmental buildings. Our next generation ballast is expected to be sold primarily to utility companies in addition to our existing customer market.

Recent increases in energy costs have spurred many government agencies and private companies to work towards decreasing their energy consumption. This "green" movement has helped to increase the awareness of our product. Our company is dedicated to helping our nation reduce its energy consumption and greenhouse gas emissions.

The first quarter sales figures were less than anticipated due mainly to delays in getting our redesigned T8 ballast to market. Axis has contracted with a new supplier from China to help in the development and manufacture of this updated ballast. The UL has taken longer than predicted to assess our newly designed ballast as it has several improvements over our previous design that necessitated additional testing. We anticipate that UL approval will occur in June 2009. Axis has received purchase orders of nearly three quarter million dollars for these ballasts, and we were not able to deliver them due to the UL delays. In anticipation of the UL approval, we have arranged for our new Chinese supplier to start manufacturing the newly designed T8 ballasts that will translate into approximately $330,000 in sales, of which there can be no assurances, once UL approval is obtained.

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Results of Operation

Quarter ended March 31, 2009:

Consolidated net sales for the quarter ended March 31, 2009 and 2008 totaled $127,051 and $122,709, respectively, for an increase of $4,342. This increase is due to increased product awareness as the Company continues to market its ballasts nationwide. Cost of goods sold for the quarter ended March 31, 2009 and 2008 was $95,441 and $96,369, respectively, a decrease of $928. The decrease is primarily due to a reduction in freight costs. After deducting costs of goods sold, including warehouse salaries and allocated overhead, we finished the quarter ended March 31, 2009 with $31,610 in gross profit, compared to a gross profit of $26,340 for the quarter ended March 31, 2008, an increase of $5,270. Gross profit as a percentage of sales for the quarter ended March 31, 2009 was 24.9%, compared to 21.5% for the quarter ended March 31, 2008, a 3.4% increase in gross profit as a percentage of sales. Our increased sales volume has allowed us to improve our overall gross profit by covering relatively fixed and unchanged overhead costs.

For the quarter ended March 31, 2009, operating expenses totaled $201,628 compared to $146,168 for the quarter ended March 31, 2008, an increase of $55,460. This increase is primarily due to additional professional fees, including audit, accounting and legal fees, incurred in connection with our SEC filings. For the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008, professional fees increased by $30,610, salaries and wages increased by approximately $26,000 (which increase is due to an increase in amounts paid to existing management employees) and consulting fees and commissions increased by roughly $12,600. These increases were offset by decreases in other operating expenses.

For the quarter ended March 31, 2009, interest expense was $312,823 compared to $2,920 for the quarter ended March 31, 2008, an increase of $309,903. This increase was the result of the Company issuing a convertible note payable that had significant transaction costs that are being amortized to interest expense and debt discounts related to an original issue discount, warrants issued and a beneficial conversion feature that are being accreted over the term of the debt to interest expense. Non-cash interest expense for the quarter ended March 31, 2009 included $276,739 attributable to the amortization of the original issue discount, beneficial conversion feature, debt issuance costs and warrant discounts. The details of this note are listed in Note 6 to the consolidated financial statements of the Company.

For the quarter ended March 31, 2009, the net loss was $482,822 compared to a net loss of $122,740 for the quarter ended March 31, 2008, an increase of $360,082. This increase in net loss is attributable to the increase in interest expense and operating expenses, partially offset by the increase in gross profit, as described above.

Assets, Liabilities and Employees; Research and Development

As of March 31, 2009, the Company has total current assets of $499,098, which includes $44,230 of cash, $34,556 of accounts receivable, $261,715 of inventory, $153,247 of inventory deposits and $5,350 of prepaid expenses. As of March 31, 2009, the Company also has $18,188 of property and equipment, less accumulated depreciation of $13,498, and total other assets of $142,983, consisting primarily of debt financing costs.

As of March 31, 2009, the Company has total liabilities, consisting entirely of current liabilities, of $1,685,852, including $138,422 of accounts payable, $76,337 of accrued expenses, $825,826 of convertible note payable, $150,000 of notes payable, and $495,247 of accrued salary of officers/stockholders.

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As of March 31, 2009, the Company has a working capital deficit of $1,186,754.

At March 31, 2009, our ballast inventory represented 40.5% of our assets. Inventory is manufactured in China and is shipped to our warehouse in Lincoln, Nebraska. The time from ordering the product to receipt of the product can exceed 60 days. We are currently working to reduce this turnaround time to 45 days. We maintain our inventory at levels that are deemed reasonable based upon projected sales.

At this time, we do not anticipate purchasing or selling any significant equipment or other assets in the near term. Neither do we anticipate any imminent or significant changes in the number of our employees. We may, however, increase the number of independent sales representatives in the event that we expand into other markets or our current market significantly increases.

We expect that we will invest time, effort, and expense in the continued development and refinement of our current and next generation ballasts, through our relationships with lighting labs and the power companies.

Liquidity and Capital Resources; Anticipated Financing Needs

For the quarter ended March 31, 2009, we incurred a net operating loss aggregating $170,018 which was the result of our efforts to secure funding to cover working capital needs, marketing and advertising efforts to increase product awareness, business development and other activities as discussed above.

Net cash of $117,975 was used in operating activities during the quarter ended March 31, 2009, compared to $22,352 in cash provided by operating activities during the quarter ended March 31, 2008. Net cash used in operating activities for the quarter ended March 31, 2009 is primarily attributable to the $482,822 net loss, partially offset by $22,523 of amortization of original issue discount, $51,514 of amortization of debt issuance cost, $202,702 of non-cash interest expense related to issuance of warrants and beneficial conversion feature and $116,053 of decreased accounts receivable.

We had no investing activities for the quarter ended March 31, 2009 or for the quarter ended March 31, 2008.

Net cash of $150,000 was provided by financing activities during the quarter ended March 31, 2009, compared to $11,059 of cash used in financing activities for the quarter ended March 31, 2008. Cash flows from financing activities for the quarter ended March 31, 2009 consisted entirely of proceeds from a note payable of $150,000.

On March 25, 2009, the Company received cash proceeds of $150,000 on a 90 day 10% Senior Secured Note. Additionally, on May 20, 2009, the Company issued a note payable for $150,000 in cash proceeds, which note bears interest at a monthly rate of 2% and is due upon fulfillment of a customer purchase order totaling $247,000. In addition to this funding and working capital generated through anticipated revenue increases from the sale of our current ballasts, we expect to seek additional capital funding of approximately $2,000,000 for the final development and introduction of our next generation ballast, to pay off our convertible note with Gemini Master Fund, Ltd. (as described in Note 6 to the consolidated financial statements), and for the purchase of adequate inventory. If we succeed in raising this money over the next three to six months, it should give us the liquidity and resources to fund operations for the foreseeable future.

Additional financing may not be available on terms favorable to us, especially in light of current debt and equity markets. If additional funds are raised by the issuance of our equity securities, such as through the issuance and/or exercise of common stock warrants, then existing stockholders will experience dilution of their ownership interest. If additional funds are raised by the issuance of debt or other types of (typically preferred) equity instruments, then we may be subject to certain limitations in our operations, and issuance of such securities may have rights senior to those of the then existing holders of our common stock. If adequate funds are not available or not available on acceptable terms, we may be unable to fund expansion, develop or enhance products or respond to competitive pressures.

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Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based on its financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an on going basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While the Company's critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2008, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:

Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred, the selling price is fixed or determinable, collectability is reasonably assured and delivery has occurred per the contract terms.

Warranty and return costs are estimated and accrued based on historical rates.

Accounts Receivable and Allowance for Doubtful Accounts: The accounts receivable arise in the normal course of business of providing services to customers. Accounts are written-off as they are deemed uncollectible based upon a periodic review of the accounts. As of March 31, 2009 and 2008, we have estimated that accounts receivable is fully collectible, and thus, has not established an allowance for doubtful accounts.

Supplier Concentrations and Inventory: We maintain our inventory on a perpetual basis utilizing the first-in first-out (FIFO) method. Inventories have been valued at the lower of cost or market. We have not recorded an obsolescence reserve for inventory at March 31, 2009 and 2008 as all inventory is considered usable and market value is above cost.

Deferred Financing Costs: Costs and discounts related to the convertible note payable issued by the Company on April 25, 2008, are being amortized and accreted using the effective interest method over the term of the debt instrument to April 2010 (see Note 6 of the consolidated financial statements).

Recently Issued Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 157-4, "Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." This FSP provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of the activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. This FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. For the Company, this FSP is effective prospectively beginning April 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on our financial position, results of operations, or cash flows.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to be also required for interim period reporting. In addition, this FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. For The Company, these additional disclosures will be required beginning with the quarter ending June 30, 2009. We are currently evaluating the requirement of these additional disclosures.

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OFF BALANCE SHEET ARRANGEMENTS

None.