The regulator is running out of spec, so basically it is delivering less than 5 volts to the mega640. The mega640 can actually run at slightly lower than 5 volts, so it still works.
I usually run the Axon at ~4.8v (4 cell nicd battery) so the axon gets even less than that, and it still works. Its just that it won't be running at the voltage it is designed for.