**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------|
|       |                                                                                   |
|       | **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002**                                  |

 

**or**

 
| **o** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|-------|----------------------------------------------------------------------|

 

**COMMISSION FILE NUMBER: 0-11933**

 

**AXCESS INC.**

(Exact name of small business issuer as specified inits charter)

 
| **Delaware**                                                                         |   | **85-0294536**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                      |   | (I.R.S.  Employer Identification No.) |
|                                                                                 |   |                                  |
| **3208 Commander DriveCarrollton, Texas 75006  (972) 407-6080**                      |
| (Address,  including telephone number and area code, of principal executive offices) |

 

Check whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý No o

 

Number of shares of common stock outstandingon November 15, 2002: 16,566,148.

 

Transitional Small Business DisclosureFormat: Yes o No ý

 

 

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**AXCESS INC.INDEX**

 
| **PART I. FINANCIAL  INFORMATION** |
|------------------------------------|
|                               |   |   |
|                               | Item 1. Financial  Statements: |
|                               |   |   |
|                               |   | Balance Sheets at September  30, 2002 and December 31, 2001 |
|                               |   |   |
|                               |   | Statements of  Operations for the Three Months ended September 30, 2002 and 2001 and for the  Nine Months ended September 30, 2002 and 2001 |
|                               |   |   |
|                               |   | Statements of Cash  Flows for the Nine Months ended September 30, 2002 and 2001 |
|                               |   |   |
|                               |   | Notes to Financial  Statements |
|                               |   |   |
|                               | Item  2. Management’s Discussion and Analysis or Plan of Operation |
|                               |   |
|                               | Item 3. Controls and  Procedures |
|                               |   |
| **PART II. OTHER INFORMATION**     |
|                               |   |   |
|                               | Item 1. Legal Proceedings |
|                               |   |   |
|                               | Item 2. Changes in  Securities |
|                               |   |   |
|                               | Item 3.  Defaults Upon Senior Securities |
|                               |   |   |
|                               | Item  4. Submission of Matters to a Vote of Security Holders |
|                               |   |   |
|                               | Item 5. Other Information |
|                               |   |   |
|                               | Item 6.  Exhibits and Reports on Form 8-K |
|                               |   |   |
| **SIGNATURES**                     |
|                               |
| **CERTIFICATIONS**                 |
|                                    |  |  |  |

 

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**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**AXCESS INC.CONSOLIDATED BALANCE SHEETS(Unaudited)**

** **
|                                                                                                                                                                                                    |   | **September  30,  2002** |      | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
| ASSETS                                                                                                                                                                                                  |   |                     |      |                    |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Current assets:                                                                                                                                                                                         |   |                     |      |                    |   |
| Cash and cash equivalents                                                                                                                                                                               |   | $                        | 231,711   |                    | $      | — |   |
| Accounts receivable - trade, net of allowance for doubtful accounts                                                                                                                                     |   | 214,782                  |      | 158,279                 |   |
| Inventory                                                                                                                                                                                               |   | 272,883                  |      | 699,058                 |   |
| Prepaid expenses and other                                                                                                                                                                              |   | 178,126                  |      | 623,224                 |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Total current assets                                                                                                                                                                                    |   | 897,502                  |      | 1,480,561               |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Property, plant and equipment, net                                                                                                                                                                      |   | 261,893                  |      | 519,049                 |   |
| Intellectual property, net                                                                                                                                                                              |   | 521,631                  |      | 744,787                 |   |
| Other assets                                                                                                                                                                                            |   | 29,384                   |      | 29,234                  |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Total assets                                                                                                                                                                                            |   | $                        | 1,710,410 |                    | $      | 2,773,631 |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                     |   |                     |      |                    |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Current liabilities:                                                                                                                                                                                    |   |                     |      |                    |   |
| Accounts payable                                                                                                                                                                                        |   | $                        | 1,411,974 |                    | $      | 1,850,596 |   |
| Other accrued liabilities                                                                                                                                                                               |   | 1,322,027                |      | 863,768                 |   |
| Notes payable:                                                                                                                                                                                          |   |                     |      |                    |   |
| Stockholders                                                                                                                                                                                            |   | 10,005,227               |      | 7,912,378               |   |
| Other                                                                                                                                                                                                   |   | 116,256                  |      | 47,105                  |   |
| Dividends payable                                                                                                                                                                                       |   | 64,223                   |      | 25,282                  |   |
| Total current liabilities                                                                                                                                                                               |   | 12,919,707               |      | 10,699,129              |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Note payable to stockholder                                                                                                                                                                             |   | 1,400,000                |      | —                  |   |
| Discount on convertible debt                                                                                                                                                                            |   | (974,994                 | )    | —                  |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Total liabilities                                                                                                                                                                                       |   | 13,344,713               |      | 10,699,129              |   |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Stockholders’ equity (deficit):                                                                                                                                                                    |   |                     |      |                    |   |
| Convertible preferred stock, 7,000,000 shares authorized; 12,005  shares issued and outstanding in 2002 and 12,028 in 2001; $5,196,578  aggregate liquidation preference in 2002 and $5,392,847 in 2001 |   | 5,196,578                |      | 5,392,847               |   |
| Common stock, $.01 par value, 50,000,000 shares authorized in 2002  and 2001; 16,566,148 shares issued and outstanding in 2002 and 15,848,179  shares issued and outstanding in 2001                    |   | 165,662                  |      | 158,482                 |   |
| Non-voting convertible common stock, $.01 par value, 2,250,000 shares  authorized; 112,492 shares issued and outstanding in 2001, convertible into  common stock on a one for one share basis           |   | —                   |      | 1,125                   |   |
| Additional paid-in capital                                                                                                                                                                              |   | 123,517,207              |      | 121,447,062             |   |
| Shares of common stock issuable pursuant to asset purchase agreement                                                                                                                                    |   | —                   |      | 592,000                 |   |
| Note receivable and accrued interest due from stockholder                                                                                                                                               |   | (4,954,581               | )         | (4,711,915              | )      |
| Accumulated deficit                                                                                                                                                                                     |   | (135,559,169             | )         | (130,805,099            | )      |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Total stockholders’ equity (deficit)                                                                                                                                                               |   | (11,634,303              | )         | (7,925,498              | )      |
|                                                                                                                                                                                                    |   |                     |      |                    |   |
| Total liabilities and stockholders’ equity (deficit)                                                                                                                                               |   | $                        | 1,710,410 |                    | $      | 2,773,631 |   |

 

Seeaccompanying notes to unaudited financial statements.

 

1

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**AXCESS INC.CONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)**

 
|                                                |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
|                                                |   | **2002**                               |       | **2001**                              |   | **2002** |   | **2001** |   |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Sales                                               |   | $                                      | 504,779    |                                  | $      | 750,813 |   | $ | 1,289,431 |   | $ | 2,458,374 |   |
| Cost of sales                                       |   | 379,871                                |       | 780,435                               |   | 1,008,445 |   | 2,000,175 |   |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Gross profit                                        |   | 124,908                                |       | (29,622                               | )      | 280,986 |   | 458,199 |   |
| Expenses:                                           |   |                                   |       |                                  |   |   |   |   |   |
| Research and development                            |   | 286,366                                |       | 572,574                               |   | 1,427,244 |   | 1,900,971 |   |
| General and administrative                          |   | 311,146                                |       | 617,918                               |   | 1,186,229 |   | 1,647,230 |   |
| Selling and marketing                               |   | 130,687                                |       | 494,766                               |   | 947,356 |   | 2,090,994 |   |
| Depreciation and amortization                       |   | 129,560                                |       | 386,277                               |   | 443,780 |   | 1,172,331 |   |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Operating expenses                                  |   | 857,759                                |       | 2,071,535                             |   | 4,004,609 |   | 6,811,526 |   |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Loss from operations                                |   | (732,851                               | )          | (2,101,157                            | )      | (3,723,623 | ) | (6,353,327 | ) |
| Other income (expense):                             |   |                                   |       |                                  |   |   |   |   |   |
| Interest expense                                    |   | (329,430                               | )          | (317,034                              | )      | (944,425 | ) | (1,047,004 | ) |
| Interest income                                     |   | 81,778                                 |       | 81,779                                |   | 242,667 |   | 246,149 |   |
| Other                                               |   | 34,981                                 |       | (782                                  | )      | 33,983 |   | (490 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Other expense, net                                  |   | (212,671                               | )          | (246,038                              | )      | (667,775 | ) | (801,345 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Net Loss                                            |   | (945,522                               | )          | (2,347,195                            | )      | (4,391,398 | ) | (7,154,672 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Preferred stock dividend requirements               |   | (140,298                               | )          | (2,115,948                            | )      | (362,672 | ) | (5,995,868 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Net loss applicable to common stock                 |   | $                                      | (1,085,820 | )                                     | $      | (4,463,143 | ) | $ | (4,754,070 | ) | $ | (13,150,540 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Basic and diluted net loss per share                |   | $                                      | (0.07      | )                                     | $      | (1.27 | ) | $ | (0.30 | ) | $ | (3.77 | ) |
|                                                |   |                                   |       |                                  |   |   |   |   |   |
| Weighted average shares of common stock outstanding |   | 16,257,722                             |       | 3,506,184                             |   | 15,986,193 |   | 3,490,986 |   |

 

Seeaccompanying notes to unaudited financial statements.

 

2

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**AXCESS,INC.CONSOLIDATED STATEMENT OF CASH FLOWS(Unaudited)**

 
|                                                                         |   | **Nine  Months Ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2002**                              |       | **2001** |   |
|                                                                         |   |                                  |       |   |   |
| Cash flows from operating activities:                                        |   |                                  |       |   |   |
| Net loss                                                                     |   | $                                     | (4,391,398 | ) | $ | (7,154,672 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |   |                                  |       |   |   |
| Depreciation and amortization                                                |   | 443,780                               |       | 1,172,331 |   |
| Amortization of financing discount and issuance costs                        |   | 588,429                               |       | 256,321 |   |
| Interest income earned but not received                                      |   | (242,666                              | )          | — |   |
| Loss on sale of assets                                                       |   | 26,202                                |       | — |   |
| Changes in operating assets and liabilities:                                 |   |                                  |       |   |   |
| Accounts receivable                                                          |   | (56,503                               | )          | (174,588 | ) |
| Inventory                                                                    |   | 426,175                               |       | 420,673 |   |
| Prepaid expenses and other                                                   |   | 137,577                               |       | 154,036 |   |
| Other assets                                                                 |   | (150                                  | )          | (69,640 | ) |
| Accounts payable                                                             |   | (438,622                              | )          | 817,615 |   |
| Other liabilities                                                            |   | 458,259                               |       | 493,357 |   |
| Net cash used by operating activities                                        |   | (3,048,917                            | )          | (4,084,567 | ) |
|                                                                         |   |                                  |       |   |   |
| Cash flow from investing activities:                                         |   |                                  |       |   |   |
| Proceeds from asset sales                                                    |   | 11,016                                |       | — |   |
| Capital expenditures                                                         |   | (686                                  | )          | (67,890 | ) |
| Net cash provided (used) by investing activities                             |   | 10,330                                |       | (67,890 | ) |
|                                                                         |   |                                  |       |   |   |
| Cash flow from financing activities:                                         |   |                                  |       |   |   |
| Borrowings under financing agreements                                        |   | 3,379,000                             |       | 3,595,000 |   |
| Principal payments on financing agreements                                   |   | (108,702                              | )          | — |   |
| Net proceeds from issuance of common and preferred stock                     |   | —                                |       | 103,083 |   |
| Net cash provided by financing activities                                    |   | 3,270,298                             |       | 3,698,083 |   |
|                                                                         |   |                                  |       |   |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 231,711                               |       | (454,374 | ) |
| Cash and cash equivalents, beginning of period                               |   | —                                |       | 454,374 |   |
| Cash and cash equivalents, end of period                                     |   | 231,711                               |       | — |   |
|                                                                         |   |                                  |       |   |   |
| Supplemental information:                                                    |   |                                  |       |   |   |
| Cash paid during the year for interest                                       |   | $                                     | —     |   | $ | 1,771 |   |

 

Seeaccompanying notes to unaudited financial statements.

 

3

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**AXCESSNOTES TO FINANCIAL STATEMENTS(Unaudited)**

 

**(1) Summary of Significant Accounting Policies**

 

**(a) Description of Business**

 

On October 16, 2002, AXCESSInc. (“AXCESS” or the “Company”) furloughed all of its employees due to a lackof operating capital. The furlough is intended to be temporary while theCompany continues to search for funding. Nearly all of the Company’s furloughed employees have volunteered tocontinue to work, without any compensation. This has allowed the Company to continue to ship its products andmaintain customer support.  However, noassurance can be given that the Company’s furloughed employees will continue towork and that the Company will be able to maintain its operations.  The Company is attempting to raise anotherround of funding.  No assurance can be given that theCompany will be successful in raising additional funds.

 

The Company providesadvanced security and asset management systems, which locate, identify, track,monitor and protect assets. The main applications of the Company’s systems aresecurity video through closed circuit television (called CCTV), personnel andvehicle access control, and automatic asset tracking and protection. TheCompany provides solutions in the recently identified homeland security marketssuch as air and ground transportation, water treatment facilities, oil and gas,power plants, as well as in the markets for data centers, retail / conveniencestores, education, healthcare, and corporate offices. AXCESS utilizes twopatented and integrated technologies: network-based radio frequencyidentification (RFID) and tagging and streaming video.  Both application and browser-based softwareoptions deliver critical real-time information tailored to each end user viathe enterprise network or Internet, also providing custom alerts in the form ofstreaming video, e-mail, or messages delivered to wireless devices.

 

The Company’s business planfor 2002 is predicated principally upon the successful marketing of its RFIDand digital video products. During 2001, operating activities utilizedapproximately $5.0 million of cash.  OnJuly 30, 2002 the Company raised $1 million for additional workingcapital.  However, the Companyanticipates that its existing working capital resources and revenues fromoperations will not be adequate to satisfy its funding requirements in 2002.

 

The future results ofoperations and financial condition of the Company will be impacted by thefollowing factors, among others: changes from anticipated levels of sales,access to capital, future national or regional economic and competitiveconditions, changes in relationships with customers, difficulties in developingand marketing new products, marketing existing products, customer acceptance ofexisting and new products, validity of patents, technological change,dependence on key personnel, availability of key component parts, dependence onthird party manufacturers, vendors, contractors, product liability, casualty toor other disruption of the production facilities, delays and disruptions in theshipment of the Company’s products, and the ability of the Company to meet itsstated business goals.

 

If the Company’s losses orlack of operating capital continue, the Company will have to obtain funds tomeet its cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or the Company may be required to curtail itsoperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to the Companyor disadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

**(b) Company Organization and Basisof Presentation**

 

The accompanyingconsolidated financial statements include the accounts of the Company and itsmajority-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation. Certain amounts from prioryears have been reclassified to conform to the 2001 presentation.

 

The Company has receivedworking capital in various forms from Amphion Ventures, L. P. and affiliates ofAmphion Ventures, L. P. including Amphion Partners, Amphion Investments LLC,Antiope Partners, and VennWorks LLC (formerly incuVest LLC) (collectively, the“Amphion Group”). Following the conversion of preferred stock held by theAmphion Group into common stock in 2001, the Amphion Group owns approximately83% of the outstanding voting stock of the Company.  The Company also received working capital in July 2002 through abridge financing from several accredited investors.

 

4

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**(c) Inventory**

 

Inventory is valued at thelower of cost or market using the first-in, first-out method. Inventory wascomprised of the following at September 30, 2002 and December 31, 2001:

 

|            |   | **September  30,  2002** |    | **December  31,  2001** |   |
|-----------------|--------|--------------------------|---------|-------------------------|--------|
| Raw materials   |   | $                        | 163,930 |                    | $      | 300,133 |   |
| Work-in-process |   | 3,626                    |    | 12,928                  |   |
| Finished goods  |   | 105,327                  |    | 385,997                 |   |
|            |   | $                        | 272,883 |                    | $      | 699,058 |   |

 

**(d) Recent AccountingPronouncements**

 

In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statements of Financial AccountingStandards No. 141, Business Combinations, and No. 142, Goodwill and OtherIntangible Assets, (“FAS 142”), effective for fiscal years beginning afterDecember 15, 2001. Under the new rules, goodwill and intangible assets deemedto have indefinite lives will no longer be amortized, but will be subject toannual impairment tests in accordance with the Statements. Other intangibleassets will continue to be amortized over their useful lives. The Company beganto apply the new rules on accounting for other intangible assets in the first quarterof 2002. The Company’s intangible assets at December 31, 2001 will continue tobe amortized after adoption of FAS 142. Accordingly, adopting FAS 142 did nothave a material effect on the Company’s financial condition or results ofoperation.

 

The following table reflectsthe components of intellectual property:

 

|                          |   | **September  30, 2002**     |      | **December  31, 2001**        |   |
|-------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                          |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Purchased video technology    |   | $                           | 5,087,483 |                          | $      | 4,565,852 |   | $ | 5,087,483 |   | $ | 4,342,696 |   |
| Purchased RFID technology     |   | 1,714,449                   |      | 1,714,449                     |   | 1,714,449 |   | 1,714,449 |   |
| Internally developed software |   | 350,337                     |      | 350,337                       |   | 350,337 |   | 350,337 |   |
|                          |   | $                           | 7,152,269 |                          | $      | 6,630,638 |   | $ | 7,152,269 |   | $ | 6,407,482 |   |

 

Amortization expense onintellectual property was $223,156 and $921,142 for the nine months endedSeptember 30, 2002 and 2001, respectively. Amortization expense on intellectual property was $74,565 and $329,082for the three months ended September 31, 2002 and 2001, respectively.

 

The following table setsforth the estimated amortization expense on the intellectual property for thefiscal years ended December 31:

 

| 2002  |   | $       | 298,260 |   |
|-------|--------|---------|---------|--------|
| 2003  |   | 298,260 |    |
| 2004  |   | 148,267 |    |
| Total |   | $       | 744,787 |   |

 

The FASB has also recentlyissued FAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets (“FAS 144”), which the Company adopted on January 1, 2002. The FASB’snew rules on asset impairment supersede FAS No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of(“FAS 121”). FAS 144 retains the requirements of FAS 121 to (a) recognize animpairment loss only if the carrying amount of a long-lived asset is notrecoverable from its undiscounted cash flows and (b) measure an impairment lossas the difference between the carrying amount and fair value of the asset, butremoves goodwill from its scope. This aspect of FAS 144 will primarily impactthe accounting for intangible assets subject to amortization and property andequipment. The Company’s adoption of FAS 144 did not have a significant impacton its financial condition or results of operations.

 

5

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**(2) Contingencies**

 

In Stephen L. Briggs v.AXCESS Inc., JAMS Arbitration filed on October 2, 2001, Stephen Briggs, aformer employee of the Company, asserted that he had good cause to terminatehis employment under his employment agreement and is owed $300,000 incontractual severance pay. In Charles Martin v. AXCESS Inc., JAMS Arbitrationfiled on or about October 2001, Charles Martin, a former employee of theCompany, asserted that he had good cause to terminate his employment under hisemployment agreement and is owed $300,000 in contractual severance pay. TheCompany believes these cases are without merit and intends to contest thesematters vigorously.  An arbitrationhearing for the Martin matter was held during the three months ended September30, 2002 and the Company is currently waiting for the results of that hearing.

 

Barth TechnologiesIncorporated (“BTI”) filed a lawsuit against the Company in state districtcourt in Tarrant County, Texas on October 18, 2001. BTI was a vendor to theCompany and seeks damages of $263,655 for non-payment for services and suppliesprovided. The Company is attempting to settle this claim, but has limitedresources to do. Other similar cases have been filed against the Company withclaims aggregating $272,540. At September 30, 2002, the Company has accrued theamounts expected to be paid to settle the claims described in this paragraph.

 

**(3) In Process Research and Development**

 

During the period ended June30, 2002, the Company spent $182,578 to complete the products purchased in theIVEX transaction.  The IVEX transactionis explained in greater detail in Note 7 “Common Stock Issuable Pursuant toAsset Purchase Agreement” below.  As ofSeptember 30, 2002, these products were substantially complete.

 

**(4) Preferred Stock**

 

The Company has authorized7,000,000 shares of convertible preferred stock, of which shares designated infour series have been issued. Information with respect to the series ofpreferred stock outstanding at each balance sheet date is summarized below.

 
|                                                                    |   | **Series C**                         |   | **Series I**                         |   | **Series J**                         |   | **Series 1999**                      |   |
|-------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
| Number of shares authorized                                             |   | 1,500,000                            |   | 2,500                                |   | 2,500                                |   | 2,500                                |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Stated value                                                            |   | $                                    | 30.20  |                                 | $      | 10,000                               |   | $                                    | 10,000 |   | $ | 10,000 |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Number of shares issued and outstanding:                                |   |                                 |   |                                 |   |                                 |   |                                 |   |
| December 31, 2001                                                       |   | 11,522                               |   | 177                                  |   | 177                                  |   | 152                                  |   |
| September 30, 2002                                                      |   | 11,522                               |   | 134                                  |   | 187                                  |   | 162                                  |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Conversion ratio (or conversion price) of preferred shares into  common |   | 1 to 1 into voting common  stock     |   | $ 2.51 into voting common  stock     |   | $ 2.51 into non-voting  common stock |   | $ 2.51 into voting common  stock     |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Liquidation preference                                                  |   | Stated value plus accrued  dividends |   | Stated value plus accrued  dividends |   | Stated value plus accrued  dividends |   | Stated value plus accrued  dividends |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Dividend rights                                                         |   | 10% per annum, cumulative            |   | 8% per annum, cumulative             |   | 8% per annum, cumulative             |   | 8% per annum, cumulative             |   |
|                                                                         |        |                                      |        |                                      |        |                                      |        |                                      |        |  |  |  |  |

 

TheCompany’s non-voting common stock may be converted to voting common stock atany time by the holder thereof, on a one-to-one basis.

 

The holders of the Company’sSeries C Preferred Stock are entitled to receive quarterly dividends on eachsuch share held at the annual rate of 10% of the original issue price of eachshare payable in arrears, when, as and if declared by the Company’s board ofdirectors, in cash or additional shares of preferred stock at the option of theholder. There were no dividends in arrears on the Series C ConvertiblePreferred Stock at September 30, 2002. There was $44,160 of dividends payablefor Series C Preferred Stock at September 30, 2002.

 

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The holders of Series IPreferred Stock, Series J Preferred Stock, and Series 1999 Voting PreferredStock are entitled to receive semi-annual dividends on each such share at theannual rate of 8% of the original issue price of each share payable in arrears,when, as and if declared by the Company’s board of directors, in cash oradditional shares of preferred stock.  Shares of Series I Preferred Stock, Series J Preferred Stock and Series1999 Preferred Stock are convertible into shares of common stock at aconversion price of $2.51 per share.

 

On July 25, 2002 the Companyreceived notice from J.P. Morgan Investment Corporation, a current stockholderof the Company, to convert 52 shares of Series I Preferred Stock into a 207,477fully paid and non-assessable shares of voting Common Stock of theCompany.  The 52 shares had a statedvalue of $10,000 per share and were converted at $2.51 per share.

 

On September 30, 2002, theCompany issued (a) 3 shares of Series I Preferred Stock to holders thereof aspayment in full for the $46,186 of accrued, but unpaid dividends of the SeriesI Preferred Stock as of such date, (b) 4 shares of Series J Preferred Stock toholders thereof as payment in full for the $40,838 of accrued, but unpaiddividends of the Series J Preferred Stock as of such date, and (c) 4 shares ofSeries 1999 Voting Preferred Stock to holders thereof as payment in full forthe $39,504 of accrued, but unpaid dividends of the Series 1999 VotingPreferred Stock as of such date.

 

**(5) Notes Payable to Stockholders**

 

The Company entered into a6.75% convertible note with Amphion Investments LLC dated January 25, 2002.During the nine months ended September 30, 2002, the Company borrowed $350,000under this note. The principal outstanding under this note may be convertedinto securities of the Company at the option of Amphion Investments. Theborrowings are unsecured and are due and payable on demand by AmphionInvestments.

 

The Company entered into a6.75% convertible note with VennWorks LLC dated February 14, 2002. During thenine months ended September 30, 2002, the Company borrowed $814,000 under thisnote. The principal outstanding under this note may be converted intosecurities of the Company at the option of VennWorks. The borrowings are unsecuredand are due and payable on demand by VennWorks.

 

The Company entered into a6.75% convertible note with Amphion Ventures L.P. (“Amphion Ventures”), datedFebruary 28, 2002. During the nine months ended September 30, 2002, the Companyborrowed $1,260,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.

 

On June 27, 2002, J.P.Morgan Investment Corporation, a stockholder of the Company, agreed with theCompany to extend the maturity of the $400,000 balance remaining under a notepurchase agreement originally due December 31, 1999 until December 31, 2003.  The Company issued warrants to J.P. MorganInvestment Corporation to purchase 10,000 shares of Common Stock for $3.00 pershare in consideration for extending the term of this indebtedness.  Using the Black Scholes option-pricing modelcalculation, the warrants are valued at $9,200, which will be amortized tointerest expense over the term of the loan. The warrants are exercisable at any time on or prior to December 31,2003.  The number of shares of CommonStock and the exercise price are subject to adjustment as provided in thewarrants. J.P. Morgan Investment Corporation may transfer the warrants at itsoption.

 

On April 12, 2002, theCompany issued a senior promissory note to J.P. Morgan Investment Corporationin the amount of $400,000, at an annual interest rate of 6.64%, with a maturitydate of December 31, 2003.  This notewas given to J.P. Morgan Investment Corporation in extension and partialrenewal of the original note issued pursuant to the note purchase agreement.  The Company may prepay this note at any timeat its option.  If the Company or any ofits subsidiaries completes (i) an equity or long-term debt financing, (ii) asale of assets outside the ordinary course of business, (iii) a sale-leasebackor similar financing, or (iv) a joint venture or other strategic partnership,and such transaction results in cash proceeds to the Company in excess of $5million, then a portion of the amount of such proceeds in excess of $5 millionshall be applied to prepay the note.

 

**(6) Note and Interest Receivable from Stockholder**

 

A note receivable andrelated interest is due from Amphion Ventures. Interest is due at 8% per annum,payable quarterly. The Company has assigned all payments of principal underthis note receivable to Prism Video, Inc. (“Prism”) until the balance of thenote receivable is paid in full or until the balance due under the note payableto Prism is paid in full, whichever occurs first. Amphion Ventures did not makeits required payments under this note during 2001. Accordingly, the notereceivable and accrued interest has been reclassified in the accompanyingbalance sheets at December 31, 2001 and September 30, 2002 as a reduction ofstockholders’ equity due to the Amphion Group’s controlling voting interest inthe Company and the uncertainty as to the timing of repayment.  For the nine months ended September 30,2002, the Company recorded interest income related to this note of $242,667.

 

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**(7) Common Stock Issuable Pursuant To Asset PurchaseAgreement**

 

Pursuant  to an asset purchase agreement, effectiveNovember 30, 2001 the Company acquired certain property and equipment and therights to certain digital video intellectual property rights from IVEX, Inc.,an investee of the Amphion Group, in exchange for 148,000 shares of theCompany’s common stock. The Company issued these shares of common stock onSeptember 25, 2002. The aggregated purchase price of $592,000 was allocated tothe property and equipment acquired and to in-process research and development.

 

**(8) BridgeFinancing**

 

On July 30, 2002, theCompany entered into a bridge financing agreement with ten accredited investorsfor the sale and issuance of 10 “units” to the investors for an aggregatepurchase price of $1,000,000.  Each unitconsists of a convertible promissory note in the amount of $100,000 and 25,000unregistered shares of the Company’s common stock.

 

Pursuant to the bridgefinancing agreement, the Company is required to use reasonable efforts toregister the shares of common stock comprising the units within 60 days afterthe execution of the bridge financing agreement, or as soon as practicablethereafter.  The Company has notregistered these shares of common stock yet. Upon registration of the common stock, each investor may not sell more thanone-third of the common stock comprising the units during any calendarmonth.  The convertible promissory notescomprising the units bear interest at an annual rate of 7% and mature on July30, 2005.  On each of July 30, 2003,July 30, 2004 and July 30, 2005, the investors have the option to convertone-third of the principal amount of the notes into common stock of theCompany.  The conversion price of thenotes is initially 65% of the average closing price of a share of the Company’scommon stock for the 20 trading days preceding the given anniversary date ofthe notes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company’s shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

In connection with thisbridge financing the Company booked a $1,000,000 debt discount due to the valueof the equity consideration and the beneficial conversion of the financing,pursuant to the guidance issued by the Emerging Issues Task Force.  The debt discount will be amortized usingthe effective interest method over the three-year life of the agreement.

 

**(9)Significant Customers**

 

During the three monthsended September 30, 2002 the Company had two customers that accounted for 56%of the Company’s overall revenue and 92% of the digital video product sales.During that same period the Company had three customers account for 46% of theRFID product sales.

 

During the nine months endedSeptember 30, 2002 the Company had two customers that accounted for 39% of theCompany’s overall revenue and three clients that accounted for 72% of thedigital video product sales.  Duringthat same period the Company had three customers that accounted for 39% of theRFID product sales.

 

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**Item 2. Management’s Discussion and Analysis or Planof Operation**.

 

**Forward-LookingStatements**

 

This quarterly report onForm 10-QSB includes “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933, as amended (the “Securities Act”), andSection 21E of the Securities Exchange Act of 1934, as amended, which can beidentified by the use of forward-looking terminology such as, “may,” “expect,”“could,” “plan,” “seek,” “anticipate,” “estimate,” or “continue” or thenegative thereof or other variations thereon or comparable terminology.

 

These forward-lookingstatements are subject to various risks and uncertainties that could causeactual results to differ materially from those referred to in the forward-lookingstatements and are made pursuant to the “safe-harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995. These statements are made based on management’s current expectations orbeliefs as well as assumptions made by, and information currently available to,management.

 

A variety of factors couldcause actual results to differ materially from those anticipated in theCompany’s forward-looking statements, including the following factors: changes from anticipated levels of sales, accessto capital, future national or regional economic and competitive conditions,changes in relationships with customers, difficulties in developing andmarketing new products, marketing existing products, customer acceptance ofexisting and new products, validity of patents, technological change,dependence on key personnel, availability of key component parts, dependence onthird party manufacturers, vendors, contractors, product liability, casualty toor other disruption of the production facilities, delays and disruptions in theshipment of the Company’s product, and the ability of the Company to meet itsstated business goals.  For adetailed discussion of these and other cautionary statements and factors thatcould cause actual results to differ from the Company’s forward-lookingstatements, please refer to the Company’s filings with the Securities andExchange Commission, especially  “Item1. Description of Business” (including the “Risk Factors” section of Item 1)and “Item 6. Management’s Discussion and Analysis or Plan of Operation” of theCompany’s 2001 Annual Report on Form 10-KSB.

 

Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date hereof. The Company does notundertake any obligation to publicly revise these forward-looking statements toreflect events or circumstances that arise after the date hereof. Readersshould carefully review the risk factors described in other documents theCompany files from time to time with the Securities and Exchange Commission.

 

**Results of Operations **

**Three Months Ended September 30, 2002 Compared to ThreeMonths Ended September 30, 2001**

 

*Sales and Gross Profit*. Sales for the three monthsended September 30, 2002 were $504,779 and $750,813 for the three months endedSeptember 30, 2001, on which a gross profit of $124,908 and ($29,622) wasrealized, respectively.  Sales and grossprofit for the three months ended September 30, 2001 reflect a large singlevideo system sale in the retail/convenience store market that did not recur in2002.  For the three months endedSeptember 30, 2002 two customers accounted for 56% of the overall revenue.

 

Radio frequencyidentification (RFID) product sales were $239,221 for the three months endedSeptember 30, 2002 and $176,174 for the three months ended September 30, 2001.Cost of sales were $174,885 for the three months ended September 30, 2002 and$225,597 for the three months ended September 30, 2001. As a result, grossprofits from RFID products were $64,337 for the three months ended September30, 2002 and ($49,423) for the three months ended September 30, 2001.  For the three months ended September 30,2002 three customers accounted for 46% of the RFID product sales.

 

Digital video product saleswere $265,558 for the three months ended September 30, 2002 and $574,639 forthe three months ended September 30, 2001. Digital video product sales for thethree months ended September 30, 2001 reflect a large single video system salein the retail/convenience store market that did not recur in 2002.  Cost of sales were $204,986 for the threemonths ended September 30, 2002 and $554,838 for the three months endedSeptember 30, 2001. As a result, gross profits from digital video products were$60,572 for the three months ended September 30, 2002 and $19,801 for the threemonths ended September 30, 2001.  Forthe three months ended September 30, 2002 two customers accounted for 92% ofdigital video product sales.

 

*Operating Expenses*. Operating expenses were$857,759 for the three months ended September 30, 2002 and $2,071,535 for thethree months ended September 30, 2001. The Company reduced staff, scaled back advertising and lowered researchand development expenditures resulting in a 39% decrease in operating expensesand had lower amortization expense for intangible assets during 2002.

 

Research and developmentexpenses were $286,366 for the three months ended September 30, 2002 and$572,574 for the three months ended September 30, 2001.  This decrease is a result of limited cashflow to finance new and existing research and development efforts and areduction of staff.

 

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Corporate general andadministrative expenses were $311,146 for the three months ended September 30,2002 and $617,918 for the three months ended September 30, 2001.  This decrease can be attributed to areduction in headcount, reduction in third party services and lower rent forthe three months ended September 30, 2002 compared to the three months endingSeptember 30, 2001.

 

Selling and marketingexpenses were $130,687 for the three months ended September 30, 2002 and$494,766 for the three months ended September 30, 2001. The Company has alteredits focus from direct selling to focus on the indirect sales channel and hasdrastically reduced headcount and marketing expenses.

 

Depreciation and amortization expenses were$129,560 for the three months ended September 30, 2002 compared to $386,277 forthe three months ended September 30, 2001. The decrease is related to the reduction in the intellectual propertybalance as a result of an asset impairment charge of $2,797,063 taken in thethree months ended December 31, 2001 and the closing of the Georgia office.

 

*Other expenses, net*. Other expenses, net, were$212,671 for the three months ended September 30, 2002 compared to $246,038 forthe three months ended September 30, 2001. The Company was able to settle twolarge vendor payables for less than the amount they owed resulting in otherincome of $62,533 which was offset by a $26,202 loss associated with theclosing and selling off of the assets of the Georgia facility.

 

*Loss from Continuing Operations*. Loss fromcontinuing operations was $945,522 for the three months ended September 30,2002 compared to $2,347,195 for the three months ended September 30, 2001, areduction of $1,401,673 or 60%.

 

*Preferred Stock dividend requirements. *Preferred Stock dividendrequirements were $140,298 for the three months ended September 30, 2002 and$2,115,948 for the three months ended September 30, 2001.  The decrease was due to the conversion ofshares of preferred stock into common stock during the last quarter of 2001.

 

**Results ofOperations**

**Nine Months Ended September 30, 2002 Compared to Nine MonthsEnded September 30, 2001**

 

*Sales and Gross Profit*. Sales for the nine monthsended September 30, 2002 were $1,289,431 and $2,458,374 for the nine monthsended September 30, 2001, on which a gross profit of $280,986 and $458,199 wererealized, respectively. Sales and Gross profits for the nine months endedSeptember 30, 2001 reflect a large single video system sale in theretail/convenience store market that did not recur in 2002.  For the nine months ended September 30, 2002two customers accounted for 39% of the overall revenue.

 

Radio frequencyidentification (RFID) product sales were $578,070 for the nine months endedSeptember 30, 2002 and $618,910 for the nine months ended September 30, 2001.Cost of sales were $455,740 for the nine months ended September 30, 2002 and$555,547 for the nine months ended September 30, 2001. As a result, grossprofits from RFID products were $122,330 for the nine months ended September30, 2002 and $63,363 for the nine months ended September 30, 2001.  For the nine months ended September 30, 2002three customers accounted for 39% of the RFID product sales.

 

Digital video product saleswere $711,361 for the nine months ended September 30, 2002 and $1,839,464 forthe nine months ended September 30, 2001. Digital video product sales for the nine months ended September 30, 2001reflect a large single video system sale in the retail/convenience store marketthat did not recur in 2002.  Cost ofsales were $552,705 for the nine months ended September 30, 2002 and $1,444,628for the nine months ended September 30, 2001. As a result, gross profits fromdigital video products were $158,656 for the nine months ended September 30,2002 and $394,836 for the nine months ended September 30, 2001.  For the nine months ended September 30, 2002three customers accounted for 72% of the digital video product sales.

 

*Operating Expenses*. Operating expenses were$4,004,609 for the nine months ended September 30, 2002 and $6,811,526 for thenine months ended September 30, 2001. The Company further reduced staff andscaled back advertising and marketing expenses in the three months endedSeptember 30, 2002.

 

Research and developmentexpenses were $1,427,244 for the nine months ended September 30, 2002 and$1,900,971 for the nine months ended September 30, 2001.  This decrease is a result of limited cashflow to finance new and existing research and development efforts and areduction of staff.

 

Corporate general andadministrative expenses were $1,186,229 for the nine months ended September 30,2002 and $1,647,230 for the nine months ended September 30, 2001.  This decrease can be attributed to areduction in head count, a reduction in third party services and lower rent forthe nine months ended September 30, 2002 compared to the nine months ending September30, 2001.

 

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Selling and marketingexpenses were $947,356 for the nine months ended September 30, 2002 and$2,090,994 for the nine months ended September 30, 2001.  The Company has narrowed its advertisingfocus during 2002 to concentrate on the indirect sales channel resulting inlower headcount and reduced advertising expenses during 2002.

 

Depreciationand amortization were $443,780 for the nine months ended September 30, 2002compared to $1,172,331 for the nine months ended September 30, 2001. Thedecrease is related to the reduction in the intellectual property balance as aresult of an asset impairment charge of $2,797,063 taken in the three monthsended December 31, 2001.

 

*Other expenses, net*. Other expenses, net, was$667,775 for the nine months ended September 30, 2002 compared to $801,345 forthe nine months ended September 30, 2001. Interest expense was $102,579 lower in the nine months ended September30, 2002 compared to the nine months ended September 30, 2001, reflecting thelower interest rate offset by the increased outstanding balance of notespayable in 2001. In 2002, the Company was able to settle two large vendorpayables for less than the amount they owed resulting in other income of$62,533 which was offset by a $26,202 loss associated with the closing andselling off of the assets of the Georgia facility.

 

*Loss from Continuing Operations*. Loss fromcontinuing operations was $4,391,398 for the nine months ended September 30,2002, compared to a loss of $7,154,672 for the same period in 2001.

 

*Preferred Stock dividend requirements. *Preferred Stock dividendrequirements were $362,672 for the nine months ended September 30, 2002 and$5,995,868 for the nine months ended September 30, 2001. The decrease was dueprimarily to the conversion of shares of preferred stock into Common Stockduring the last quarter of 2001.

 

**Liquidity and Capital Resources**

 

On October 16, 2002, AXCESSInc. furloughed all of its employees due to a lack of operating capital. Thefurlough is intended to be temporary while the Company continues to search forfunding.  Nearly all of the Company’sfurloughed employees have volunteered to continue to work, without any compensation.  This has allowed the Company to continue toship its products and maintain customer support.  However, no assurance can be given that the Company’s furloughedemployees will continue to work and that the Company will be able to maintainits operations.  The Company isattempting to raise another round of funding. No assurancecan be given that the Company will be successful in raising additional funds.

 

The Company’s business planfor 2002 is predicated principally upon the successful marketing of its RFIDand digital video products. During 2001, operating activities utilizedapproximately $5.0 million of cash. The Company’s existing working capitalresources and revenues from operations are not adequate to satisfy its fundingrequirements for the remainder of 2002.

 

The Company’s working capitalrequirements depend upon many factors, including the extent and timing of theCompany’s product sales, the Company’s operating results, the status ofcompetitive products, and actual expenditures and revenues compared to itsbusiness plan. The Company is currently experiencing declining liquidity,including negative working capital balances, losses from operations andnegative cash flows, which makes it difficult for the Company to meet itscurrent cash requirements, including payments to vendors, and may jeopardizethe Company’s ability to continue as a going concern. The Company intends toaddress its liquidity problems by controlling costs, seeking additional funding(through capital raising transactions and business alliances) and maintainingfocus on revenues and collections.

 

If the Company’s losses orlack of operating capital continue, the Company will have to obtain funds tomeet its cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or the Company may be required to curtail itsoperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to the Companyor disadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

Since inception, the Companyhas utilized the proceeds from a number of public and private sales of itsequity securities, the exercise of options and warrants and convertible debtand demand notes from stockholders to meet its working capital needs.

 

The Company entered into a6.75% convertible note with Amphion Investments LLC dated January 25, 2002.During the nine months ended September 30, 2002, the Company borrowed $350,000under this note. The principal outstanding under this note may be convertedinto securities of the Company at the option of Amphion Investments. Theborrowings are unsecured and are due and payable on demand by AmphionInvestments.

 

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The Company entered into a6.75% convertible note with VennWorks LLC dated February 14, 2002. During thenine months ended September 30, 2002, the Company borrowed $814,000 under thisnote. The principal outstanding under this note may be converted intosecurities of the Company at the option of VennWorks. The borrowings areunsecured and are due and payable on demand by VennWorks.

 

The Company entered into a6.75% convertible note with Amphion Ventures dated February 28, 2002. Duringthe nine months ended September 30, 2002, the Company borrowed $1,260,000 underthis note. The principal outstanding under this note may be converted intosecurities of the Company at the option of Amphion Ventures. The borrowings areunsecured and are due and payable on demand by Amphion Ventures.

 

On June 27, 2002, J.P.Morgan Investment Corporation, a stockholder of the Company, agreed with theCompany to extend the maturity of the $400,000 balance remaining under a notepurchase agreement originally due December 31, 1999 until December 31,2003.  The Company issued warrants toJ.P. Morgan Investment Corporation to purchase 10,000 shares of Common Stockfor $3.00 per share in consideration for extending the term of thisindebtedness.  Using the Black Scholesoption-pricing model calculation, the warrants are valued at $9,200, which willbe amortized to interest expense over the term of the loan.  The warrants are exercisable at any time onor prior to December 31, 2003.  Thenumber of shares of Common Stock and the exercise price are subject toadjustment as provided in the warrants. J.P. Morgan Investment Corporation maytransfer the warrants at its option.

 

On April 12, 2002, theCompany issued a senior promissory note to J.P. Morgan Investment Corporationin the amount of $400,000, at an annual interest rate of 6.64%, with a maturitydate of December 31, 2003.  This notewas given to J.P. Morgan Investment Corporation in extension and partialrenewal of the original note issued pursuant to the note purchaseagreement.  The Company may prepay thisnote at any time at its option.  If theCompany or any of its subsidiaries completes (i) an equity or long-term debtfinancing, (ii) a sale of assets outside the ordinary course of business, (iii)a sale-leaseback or similar financing, or (iv) a joint venture or otherstrategic partnership, and such transaction results in cash proceeds to the Companyin excess of $5 million, then a portion of the amount of such proceeds inexcess of $5 million shall be applied to prepay the note.

 

On July 30, 2002, theCompany entered into a bridge financing agreement with ten accredited investorsfor the sale and issuance of 10 “units” to the investors for an aggregatepurchase price of $1,000,000.  Each unitconsists of a convertible promissory note in the amount of $100,000 and 25,000unregistered shares of the Company’s common stock.

 

Pursuant to the bridge financingagreement, the Company is required to use reasonable efforts to register theshares of common stock comprising the units within 60 days after the executionof the bridge financing agreement, or as soon as practicable thereafter.  The Company has not registered these sharesof common stock yet.  Upon registrationof the common stock, each investor may not sell more than one-third of thecommon stock comprising the units during any calendar month.  The convertible promissory notes comprisingthe units bear interest at an annual rate of 7% and mature on July 30,2005.  On each of July 30, 2003, July30, 2004 and July 30, 2005, the investors have the option to convert one-thirdof the principal amount of the notes into common stock of the Company.  The conversion price of the notes isinitially 65% of the average closing price of a share of the Company’s commonstock for the 20 trading days preceding the given anniversary date of thenotes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company’s shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

In connection with thisbridge financing, the Company booked a $1,000,000 debt discount due to thevalue of the equity consideration and beneficial conversion of the financing,pursuant to the guidance issued by the Emerging Issues Task Force.  The debt discount will be amortized usingthe effective interest method over the three-year life of the agreement.

 

**Other**

 

*Inflation*. Inflation has not had, andis not expected to have, a material impact on the operations and financialcondition of the Company.

 

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**Item 3. Controls and Procedures**

 

**Controlsand Procedures**

 

(a)           Evaluation of Disclosure Controls and Procedures.  Based on their evaluation as of a datewithin 90 days of the filing date of this Quarterly Report on Form 10-QSB, theCompany’s principal executive officer and principal financial officer haveconcluded that the Company’s disclosure controls and procedures (as defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the“Exchange Act”)) are effective to ensure that information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission.

 

(b)           Changes in Internal Controls.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

In Stephen L. Briggs v.AXCESS Inc., JAMS Arbitration filed on October 2, 2001, Stephen Briggs, aformer employee of the Company, asserted that he had good cause to terminatehis employment under his employment agreement and is owed $300,000 incontractual severance pay. In Charles Martin v. AXCESS Inc., JAMS Arbitrationfiled on or about October 2001, Charles Martin, a former employee of theCompany, asserted that he had good cause to terminate his employment under hisemployment agreement and is owed $300,000 in contractual severance pay. TheCompany believes these cases are without merit and intends to contest thesematters vigorously. An arbitration hearing for the Martin matter was heldduring the three months ended September 30, 2002 and the Company is currentlywaiting for the results of that hearing.

 

Barth TechnologiesIncorporated (“BTI”) filed a lawsuit against the Company in state districtcourt in Tarrant County, Texas on October 18, 2001. BTI was a vendor to theCompany and seeks damages of $263,655 for non-payment for services and suppliesprovided. The Company is attempting to settle this claim, but has limitedresources to do. Other similar cases have been filed against the Company withclaims aggregating $272,540. At September 30, 2002, the Company has accrued theamounts expected to be paid to settle the claims described in this paragraph.

 

Both of these matters werepreviously reported on the Company’s Form 10-QSB for the quarterly period endedMarch 31, 2002.

 

**Item 2. Changes in Securities**.

 

During the three monthsended September 30, 2002, the Company issued unregistered securities inconnection with the transactions described below. The issuance of stock wasexempt from the registration requirements of the Securities Act, as amended byvirtue of Section 4(2) thereof, as transactions not involving a public offeringand an appropriate restrictive legend was affixed to the stock certificates.

 

***Dividends***

 

The holders of the Company’sSeries C Preferred Stock are entitled to received quarterly dividends on eachsuch share held at the annual rate of 10% of the original issue price of eachshare payable in arrears, when, as and if declared by the Company’s board ofdirectors, in cash or additional shares of preferred stock at the option of theholder. There were no dividends in arrears on the Series C ConvertiblePreferred Stock at September 30, 2002. There was $44,160 of dividends payablefor Series C Preferred Stock at September 30, 2002.

 

The holders of Series IPreferred Stock, Series J Preferred Stock, and Series 1999 Voting PreferredStock are entitled to receive semi-annual dividends on each such share at theannual rate of 8% of the original issue price of each share payable in arrears,when, as and if declared by the Company’s board of directors, in cash oradditional shares of preferred stock. On September 30, 2002, the Company issued (a) 3 shares of Series IPreferred Stock to holders thereof as payment in full for the $36,548 ofaccrued, but unpaid dividends of the Series I Preferred Stock as of such date,(b) 3 shares of Series J Preferred Stock to holders thereof as payment in fullfor the $32,315 of accrued, but unpaid dividends of the Series J PreferredStock as of such date, and (c) 3 shares of Series 1999 Voting Preferred Stockto holders thereof as payment in full for the $31,260 of accrued, but unpaiddividends of the Series 1999 Voting Preferred Stock as of such date.

 

***Preferred StockConversion Terms***

 

Each share of Series CConvertible Preferred Stock is convertible at the option of the holders intovoting common stock on a share-for-share basis. The Company may redeem theSeries C Convertible Preferred Stock at any time at the $30.20 stated value,plus accrued dividends, subject to the stock holder’s right to convert tovoting common stock for 10 business days following receipt of the Company’snotice of redemption.

 

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Eachshare of Series I Preferred Stock and Series J Preferred Stock is convertiblein whole or in part at any time at the option of the holder into shares ofvoting or non-voting common stock of the Company, respectively, equal to thequotient of (a) the aggregate original issue price of $10,000 per share dividedby (b) the conversion price of $4.00 per share. The Series I Preferred Stockand the Series J Preferred Stock are both subject to the optional redemption atany time by the Company, in whole or in part, at a redemption price per shareequal to the $10,000 stated value, plus any accrued, but unpaid dividendsthereon. The Company’s optional right of redemption is subject to each Series IPreferred Stock or Series J Preferred Stock holder’s right to convert suchpreferred stock into voting or non-voting common stock, as the case may be,within 10 business days after the Company’s notice of redemption.  The Series I Preferred Stock and the SeriesJ Preferred Stock are also subject to the mandatory conversion by the Companyinto shares of the Company’s voting or non-voting common stock, as the case maybe, if the closing bid price of the Company’s common stock on the NASDAQSmallCap Market is at least $10.00 per share for a period of at least 90consecutive trading days.

 

Each share of Series 1999 is convertible in whole or in part at any time atthe option of the holder into a number of shares of non-voting common stock ofthe Company, as the case may be, equal to the quotient of (a) the aggregateoriginal issue price of $10,000 per share divided by (b) the conversion priceof $2.51.  The Series 1999 PreferredStock is subject to the optional redemption at any time by the Company, inwhole or in part, at a redemption price per share equal to the $10,000 statedvalue, plus any accrued, but unpaid dividends thereon. The Company’s optionalright of redemption is subject to each Series 1999 Preferred Stock holder’sright to convert such preferred stock into non-voting common stock, as the casemay be, within 10 business days after the Company’s notice of redemption.

 

TheSeries 1999 Preferred Stock is also subject to the mandatory conversion by theCompany into shares of the Company’s non-voting common stock, as the case maybe, if (a) the closing bid price of the Company’s common stock on the NASDAQSmallCap Market is at least $7.50 per share for a period of at least 20consecutive trading days and (b) the trading volume of the common stock on theNASDAQ SmallCap Market is at least 50,000 shares per day as measured by NASDAQduring each of such 20 consecutive trading days.

 

***Common StockIssued Pursuant To Asset Purchase Agreement***

 

Pursuant to an assetpurchase agreement, effective November 30, 2001 the Company acquired certainproperty and equipment and the rights to certain digital video intellectualproperty rights from IVEX, Inc., an investee of the Amphion Group, in exchangefor 148,000 shares of the Company’s common stock. The Company issued theseshares of common stock on September 25, 2002. The aggregated purchase price of$592,000 was allocated to the property and equipment acquired and to in-processresearch and development.

 

***Conversion ofSeries I Preferred Stock***

 

On July 25, 2002 the Companyreceived notice from J.P. Morgan Investment Corporation, a current stockholderof the Company, to convert 52 shares of Series I Preferred Stock into a 207,477fully paid and non-assessable shares of voting Common Stock of theCompany.  The 52 shares had a statedvalue of $10,000 per share and were converted at $2.51 per share.

 

***Conversion ofNon-Voting Convertible Stock***

 

On July 25, 2002 the Companyreceived notice from J.P. Morgan Investment Corporation, a current stockholderof the Company, to convert 112,492 shares of Non-Voting Convertible Stock intoa 112,492 fully paid and non-assessable shares of voting Common Stock of theCompany.

 

***Note Borrowings***

 

The Company entered into a6.75% convertible note with Amphion Ventures L.P. (“Amphion Ventures”) datedFebruary 28, 2002. During the nine months ended September 30, 2002, the Companyborrowed $1,260,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.

 

On July 30, 2002, theCompany entered into a bridge financing agreement with ten accredited investorsfor the sale and issuance of 10 “units” to the investors for an aggregatepurchase price of $1,000,000.  Each unitconsists of a convertible promissory note in the amount of $100,000 and 25,000unregistered shares of the Company’s common stock.

 

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Pursuant to the bridgefinancing agreement, the Company is required to use reasonable efforts toregister the shares of common stock comprising the units within 60 days afterthe execution of the bridge financing agreement, or as soon as practicablethereafter.  The Company has notregistered these shares of common stock yet. Upon registration of the common stock, each investor may not sell morethan one-third of the common stock comprising the units during any calendarmonth.  The convertible promissory notescomprising the units bear interest at an annual rate of 7% and mature on July30, 2005.  On each of July 30, 2003,July 30, 2004 and July 30, 2005, the investors have the option to convertone-third of the principal amount of the notes into common stock of theCompany.  The conversion price of thenotes is initially 65% of the average closing price of a share of the Company’scommon stock for the 20 trading days preceding the given anniversary date ofthe notes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company’s shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

In connection with thisbridge financing, the Company booked a $1,000,000 debt discount due to thevalue of the equity consideration and beneficial conversion of the financing,pursuant to the guidance issued by the Emerging Issues Task Force.  The debt discount will be amortized usingthe effective interest method over the three-year life of the agreement.

 

**Item 3. Defaults Upon Senior Securities**.

 

None.

 

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**Item 4. Submission of Matters to a Vote of SecurityHolders**.

 

None.

 

**Item 5.Other Information**.

 

On October 16, 2002, AXCESSInc. furloughed all of its employees due to a lack of operating capital. Thefurlough is intended to be temporary while the Company continues to search forfunding.  Nearly all of the Company’sfurloughed employees have volunteered to continue to work, without anycompensation.  This has allowed theCompany to continue to ship its products and maintain customer support.  However, no assurance can be given that theCompany’s furloughed employees will continue to work and that the Company willbe able to maintain its operations.  TheCompany is attempting to raise another round of funding.  No assurance can be given that the Company will besuccessful in raising additional funds.

 

If the Company’s losses orlack of operating capital continue, the Company will have to obtain funds tomeet its cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or the Company may be required to curtail itsoperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to the Companyor disadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

On September 24, 2002, theCompany was delisted from the NASDAQ SmallCap Market because it did not complywith the minimum $35 million market capitalization rule for continued listingon the NASDAQ SmallCap Market, based on the share price of the Company’s commonstock.  Since September 24, 2002, theCompany’s common stock has been listed on the Over-the-Counter, or OTC,Bulletin Board.  The result of delistingfrom the NASDAQ SmallCap Market could be a reduction in the liquidity of theCompany’s common stock, even though the Company’s shares are traded on the OTCBulletin Board.  Further, delistingcould reduce the ability of holders of the Company’s common stock to purchaseor sell shares as quickly and as inexpensively as they have done historically.

 

During August 2002, GregoryW. Haskell and David Illingworth resigned from the Company’s board of directorsto pursue other interests.  TheCompany’s board of directors then elected to decrease the size of its boardfrom six directors to five.  OnSeptember 10, 2002, the Company’s board of directors elected Robert F. Husseyas a director of AXCESS to fill the vacancy on the board.  Mr. Hussey will serve as a director untilthe next annual meeting of stockholders or until his successor is duly electedand qualified, whichever occurs first. Subsequently, Mr. Hussey was also elected to serve as the chairman ofthe audit committee of the board of directors.

 

**Item 6. Exhibits and Reports on Form 8-K**.

 

(a) Exhibits:

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                     |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |   | Demand Note dated as of  February 28, 2002, executed by the Company payable to Amphion Ventures, LP in  the principal amount of $150,000 (plus additional amounts shown on the  schedule of advances to the note).* |

 

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*Filed herewith.

 

(b) Reports on Form 8-K:

 

On October 15, 2002, theCompany filed a Current Report on Form 8-K to report the resignation of Ernst& Young LLP as the Company’s independent auditors and the engagement ofHein and Associates as its independent auditors for the fiscal year endingDecember 31, 2002.

 

On August 14, 2002, theCompany filed a Current Report on Form 8-K to report the certification of AllanGriebenow, the Company’s President, Chief Executive Officer and PrincipalExecutive Officer, under Section 906 of the Sarbanes-Oxley  Act of 2002, and the certification of AllanL. Frank, the Company’s Vice President, Chief Financial Officer, Secretary andPrincipal Accounting and Financial Officer, under Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|              | AXCESS INC.,  Registrant                               |
|-------------------|--------------------------------------------------------|
|              |                                                   |
|              | /s/ ALLAN GRIEBENOW                                    |
|              | Allan Griebenow Director,  President and               |
|              | Chief Executive Officer  (Principal Executive Officer) |
|              |                                                   |
|              | /s/ ALLAN L. FRANK                                     |
|              | Allan L. Frank                                         |
|              | Chief Financial Officer  and Secretary                 |
|              | (Principal Accounting and  Financial Officer)          |
|              |                                                   |
| November 19, 2002 |                                                   |

 

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**CERTIFICATIONS**

 

I, Allan Griebenow, certify that:

 

1.     I have reviewed this quarterly report onForm 10-QSB of Axcess, Inc.;

2.               Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.               Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and15d-14) for the registrant and we have:

a)              designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidating subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report was prepared;

b)             evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report  (the “Evaluation Date”); and

c)              presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on the required evaluation as of the Evaluation Date;

5.               The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the   registrant’s auditors and theaudit committee of registrant’s board of directors  (or persons performing the equivalent function):

a)              all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

b)             any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:                    November 19,  2002 |
|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                       |   |   |
|                                                                                                                                       |   | /s/  Allan Griebenow |   |
|                                                                                                                                       |   | Allan Griebenow, President  and Chief Executive Officer |
|                                                                                                                                       |   | (Principal Executive Officer) |

 

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I, Allan Frank, certify that:

 

1.               I have reviewed thisquarterly report on Form 10-QSB of Axcess, Inc.;

2.               Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.               Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and15d-14) for the registrant and we have:

a)              designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidating subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report was prepared;

b)             evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report  (the “Evaluation Date”); and

c)              presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on the required evaluation as of the Evaluation Date;

5.               The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the   registrant’s auditors and theaudit committee of registrant’s board of directors  (or persons performing the equivalent function):

a)              all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

b)             any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

6.               The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:                    November 19,  2002 |
|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                       |   |   |
|                                                                                                                                       |   | /s/        Allan L. Frank |   |
|                                                                                                                                       |   | Allan L. Frank, Vice  President, Chief Financial Officer and Secretary |
|                                                                                                                                       |   | (Principal Accounting and Financial Officer) |

 

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