**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 JUNE 30, 2003** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|

 

**or**

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

 

**COMMISSION FILENUMBER: 0-11933**

 

**AXCESS INTERNATIONAL INC.**

**(formerly AXCESSInc.)**

(Exact name of small business issuer asspecified in its 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 filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ýNo o

 

Number of shares of commonstock outstanding on August 1, 2003: 19,403,649

 

Transitional Small BusinessDisclosure Format: Yes oNo ý

 

 

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**AXCESS INC.**

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |   |
|                              | Item 1. Financial Statements: |
|                              |   |   |
|                              |   | Balance Sheets at June 30, 2003 and December 31, 2002 |
|                              |   |   |
|                              |   | Statements of Operations for the Three  Months ended June 30, 2003 and 2002 and for the Six Months ended June 30,  2003 and 2002 |
|                              |   |   |
|                              |   | Statements of Cash Flows for the Six Months  ended June 30, 2003 and 2002 |
|                              |   |   |
|                              |   | 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**                    |
|                              |   |   |

 

----

 

**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**AXCESS INC.**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                            |   | **June 30,  2003** |       | **December  31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                                                            |   | **(Unaudited)**    |       |                    |       |
| ASSETS                                                                                                                                                                                          |   |               | ** ** |                    | ** ** |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Current assets:                                                                                                                                                                                 |   |               |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                       |   | $                  | 1,053,256  |                    | $          | 33,249 |   |
| Restricted Cash                                                                                                                                                                                 |   | —             |       | 140,000                 |       |
| Accounts receivable - trade, net of  allowance for doubtful accounts                                                                                                                            |   | 70,286             |       | 85,379                  |       |
| Inventory                                                                                                                                                                                       |   | 256,554            |       | 231,619                 |       |
| Prepaid expenses and other                                                                                                                                                                      |   | 71,179             |       | 93,944                  |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Total current assets                                                                                                                                                                            |   | 1,451,275          |       | 584,191                 |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Property, plant and equipment, net                                                                                                                                                              |   | 116,475            |       | 213,794                 |       |
| Intellectual property, net                                                                                                                                                                      |   | 298,474            |       | 447,245                 |       |
| Other assets                                                                                                                                                                                    |   | —             |       | 29,384                  |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Total assets                                                                                                                                                                                    |   | $                  | 1,866,224  |                    | $          | 1,274,614 |   |
|                                                                                                                                                                                            |   |               |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)                                                                                                                                            |   |               |       |                    |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Current  liabilities:                                                                                                                                                                           |   |               |       |                    |       |
| Accounts payable                                                                                                                                                                                |   | $                  | 1,221,947  |                    | $          | 1,404,060 |   |
| Other accrued liabilities                                                                                                                                                                       |   | 1,852,848          |       | 1,501,727               |       |
| Restricted cash for future funding                                                                                                                                                              |   | —             |       | 140,000                 |       |
| Notes payable:                                                                                                                                                                                  |   |               |       |                    |       |
| Stockholders, includes $6,477,979 in  default                                                                                                                                                   |   | 10,405,227         |       | 10,405,227              |       |
| Other                                                                                                                                                                                           |   | 15,254             |       | 65,844                  |       |
| Dividends payable                                                                                                                                                                               |   | 654,780            |       | 455,285                 |       |
| Total current liabilities                                                                                                                                                                       |   | 14,150,056         |       | 13,972,143              |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Note payable to stockholder                                                                                                                                                                     |   | 1,305,000          |       | 1,000,000               |       |
| Discount on convertible debt                                                                                                                                                                    |   | (974,568           | )          | (956,148                | )          |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Total liabilities                                                                                                                                                                               |   | 14,480,488         |       | 14,015,995              |       |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Stockholders’ equity (deficit):                                                                                                                                                            |   |               |       |                    |       |
| Convertible preferred stock, 7,000,000  shares authorized; 11,976 shares issued and outstanding in 2003 and 2002;  $4,872,847 aggregate liquidation preference in 2003 and 2002                 |   | 4,872,847          |       | 4,872,847               |       |
| Common stock, $.01 par value, 50,000,000  shares authorized in 2003 and 2002; 19,403,649 shares issued and outstanding  in 2003 and 16,566,148 shares issued and outstanding in 2002            |   | 194,037            |       | 165,662                 |       |
| Non-voting convertible common stock, $.01  par value, 2,250,000 shares authorized; no shares issued or outstanding in  2003 or 2002, convertible into common stock on a one for one share basis |   | —             |       | —                  |       |
| Additional paid-in capital                                                                                                                                                                      |   | 125,982,350        |       | 123,768,261             |       |
| Note receivable and accrued interest due  from stockholder                                                                                                                                      |   | (4,711,915         | )          | (4,711,915              | )          |
| Accumulated deficit                                                                                                                                                                             |   | (138,951,583       | )          | (136,836,236            | )          |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Total stockholders’ deficit                                                                                                                                                                |   | (12,614,264        | )          | (12,741,381             | )          |
|                                                                                                                                                                                            |   |               |       |                    |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                |   | $                  | 1,866,224  |                    | $          | 1,274,614 |   |

 

See accompanying notes to unaudited financial statements.

 

1

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**AXCESS INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                 |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                 |   | **2003**                          |       | **2002**                        |   | **2003** |   | **2002** |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Sales                                                |   | $                                 | 245,427    |                            | $      | 407,695 |   | $ | 535,991 |   | $ | 784,652 |   |
| Cost of sales                                        |   | 160,278                           |       | 341,579                         |   | 334,990 |   | 628,573 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Gross profit                                         |   | 85,149                            |       | 66,116                          |   | 201,001 |   | 156,079 |   |
| Expenses:                                            |   |                              |       |                            |   |   |   |   |   |
| Research and development                             |   | 157,753                           |       | 517,280                         |   | 294,146 |   | 1,140,878 |   |
| General and administrative                           |   | 331,902                           |       | 464,244                         |   | 590,469 |   | 875,085 |   |
| Selling and marketing                                |   | 49,937                            |       | 354,884                         |   | 138,534 |   | 816,673 |   |
| Depreciation and amortization                        |   | 113,789                           |       | 141,229                         |   | 232,951 |   | 314,221 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Operating expenses                                   |   | 653,381                           |       | 1,477,637                       |   | 1,256,100 |   | 3,146,857 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Loss from operations                                 |   | (568,232                          | )          | (1,411,521                      | )      | (1,055,099 | ) | (2,990,778 | ) |
| Other income  (expense):                             |   |                              |       |                            |   |   |   |   |   |
| Interest expense                                     |   | (306,353                          | )          | (286,640                        | )      | (525,993 | ) | (614,994 | ) |
| Interest income                                      |   | —                            |       | 80,889                          |   | — |   | 160,889 |   |
| Other                                                |   | 137,299                           |       | (998                            | )      | 140,091 |   | (998 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Other expense, net                                   |   | (169,054                          | )          | (206,749                        | )      | (385,902 | ) | (455,103 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Net loss                                             |   | (737,286                          | )          | (1,618,270                      | )      | (1,441,001 | ) | (3,445,881 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Preferred stock dividend requirements                |   | (575,153                          | )          | (112,777                        | )      | (674,349 | ) | (222,374 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Net loss applicable to common stock                  |   | $                                 | (1,212,141 | )                               | $      | (1,731,047 | ) | $ | (2,115,350 | ) | $ | (3,668,255 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Basic and diluted net loss per share                 |   | $                                 | (0.07      | )                               | $      | (0.11 | ) | $ | (0.12 | ) | $ | (0.23 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Weighted average shares of common stock  outstanding |   | 17,698,593                        |       | 15,848,179                      |   | 17,224,325 |   | 15,848,179 |   |

 

See accompanying notes to unaudited financial statements.

 

2

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**AXCESS, INC.**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **2003**                        |       | **2002** |   |
|                                                                         |   |                            |       |   |   |
| Cash flows from operating activities:                                        |   |                            |       |   |   |
| Net loss                                                                     |   | $                               | (1,441,001 | ) | $ | (3,445,881 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |   |                            |       |   |   |
| Depreciation and amortization                                                |   | 232,951                         |       | 314,221 |   |
| Amortization of financing discount and  issuance costs                       |   | 211,097                         |       | 68,849 |   |
| Shares issued for services rendered                                          |   | 80,000                          |       | — |   |
| Loss on disposal of assets                                                   |   | 13,139                          |       | — |   |
| Changes in operating assets and  liabilities:                                |   |                            |       |   |   |
| Accounts receivable                                                          |   | 15,093                          |       | (234,307 | ) |
| Inventory                                                                    |   | (24,935                         | )          | 324,685 |   |
| Prepaid expenses and other                                                   |   | 20,236                          |       | 245,922 |   |
| Other assets                                                                 |   | 29,384                          |       | (150 | ) |
| Accounts payable                                                             |   | (182,113                        | )          | (217,016 | ) |
| Other liabilities                                                            |   | 351,121                         |       | 700,655 |   |
| Net cash used by operating activities                                        |   | (695,028                        | )          | (2,243,022 | ) |
|                                                                         |   |                            |       |   |   |
| Cash flow from financing activities:                                         |   |                            |       |   |   |
| Borrowings under financing agreements                                        |   | 305,000                         |       | 2,419,000 |   |
| Principal payments on financing agreements                                   |   | (50,590                         | )          | (63,130 | ) |
| Net proceeds from issuance of common and  preferred stock                    |   | 1,460,625                       |       | — |   |
| Net cash provided by financing activities                                    |   | 1,715,035                       |       | 2,355,870 |   |
|                                                                         |   |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | 1,020,007                       |       | 112,848 |   |
| Cash and cash equivalents, beginning of  period                              |   | 33,249                          |       | — |   |
| Cash and cash equivalents, end of period                                     |   | 1,053,256                       |       | 112,848 |   |
|                                                                         |   |                            |       |   |   |
| Supplemental information:                                                    |   |                            |       |   |   |
| Cash paid during the year for interest                                       |   | $                               | —     |   | $ | — |   |

 

3

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**AXCESS**

**NOTES TO FINANCIAL STATEMENTS**

**(Unaudited)**

 

**(1) Summary of Significant AccountingPolicies**

 

**(a) Description ofBusiness**

 

The Companyprovides advanced security and asset management systems, which locate,identify, track, monitor and protect assets. The main applications of theCompany’s systems are security video through closed circuit television (calledCCTV), personnel and vehicle access control, and automatic asset tracking andprotection. The Company provides solutions in the recently identified homelandsecurity markets such as air and ground transportation, water treatmentfacilities, oil and gas, power plants, as well as in the markets for datacenters, retail / convenience stores, education, healthcare, and corporateoffices. AXCESS utilizes two patented and integrated technologies:network-based radio frequency identification (RFID) and tagging and streamingvideo.  Both application andbrowser-based software options deliver critical real-time information tailoredto each end user via the enterprise network or Internet, also providing customalerts in the form of streaming video, e-mail, or messages delivered towireless devices.

 

The Company’sbusiness plan for 2003 is predicated principally upon the successful marketingof its RFID and digital video products. During 2002, operating activitiesutilized approximately $3.2 million of cash. During the second quarter of 2003 theCompany raised a net of $1,460,625 of additional working capital through anexempt Preferred Stock offering.  ThePreferred Stock is designated as 2003 Preferred and each $75,000 unit consistedof 100,000 shares of Preferred Stock bearing a 7% dividend approximately 15,000shares of Common Stock, and 100,000 warrants to purchase the Company’s commonstock exercisable for two years at $1.00 per share.  However, even with the additional funding,the Company anticipates that its existing working capital resources andrevenues from operations will not be adequate to satisfy its fundingrequirements in 2003.

 

The futureresults of operations and financial condition of the Company will be impactedby the following factors, among others: changes from anticipated levels ofsales, 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, dependenceon key personnel, availability of key component parts, dependence on thirdparty manufacturers, vendors, contractors, product liability, casualty to orother 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 theCompany’s losses or lack of operating capital continue, the Company will haveto obtain funds to meet its cash requirements through business alliances, suchas strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or the Company may be required tocurtail its operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tothe Company or disadvantageous to existing stockholders. In addition, noassurance may be given that the Company will be successful in raisingadditional funds or entering into business alliances.

 

**(b) Company Organizationand Basis of Presentation**

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its majority-owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

The Companyhas received working capital in various forms from Amphion Ventures, L. P. andaffiliates of Amphion Ventures, L. P. including Amphion Partners, AmphionInvestments LLC, Antiope Partners, VennWorks LLC (formerly incuVest LLC),Amphion Capital Management, and NVW, LLC (collectively, the “Amphion Group”).Following the conversion of the 2003 preferred stock held by the Amphion Groupinto common stock in 2003, the Amphion Group owns approximately 67% of theoutstanding voting stock of the Company.

 

4

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**(c) Inventory**

 

Inventory isvalued at the lower of cost or market using the first-in, first-out method.Inventory was comprised of the following at June 30, 2003 and December 31,2002:

 
|            |   | **June 30,  2003** |    | **December  31,  2002** |   |
|-----------------|--------|--------------------|---------|-------------------------|--------|
| Raw materials   |   | $                  | 140,750 |                    | $      | 162,806 |   |
| Work-in-process |   | 2,398              |    | 3,370                   |   |
| Finished goods  |   | 113,406            |    | 65,443                  |   |
|            |   | $                  | 256,554 |                    | $      | 231,619 |   |

 

**(d) Stock Options**

 

The Companyaccounts for its stock-based compensation plan under Accounting PrinciplesBoard (“ABP”) Opinion No. 25, Accounting for Stock Issued to Employees.  The pro forma information below is based onprovisions of Statement of Financial Accounting Standard (“FAS”) No. 123,Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting forStock-Based Compensation – Transition and Disclosure, issued in December 2002.

 
|                                                       |   | **Three  Months Ended  June 30,** |     | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------|--------|-----------------------------------|----------|---------------------------------|--------|
|                                                       |   | **2003**                          |     | **2002**                        |   | **2003** |   | **2002** |   |
| **Pro forma impact of fair value method (FAS 148)**        |   |                              |     |                            |   |   |   |   |   |
| Reported net loss attributed to common  stock              |   | $                                 | (837,584 | )                               | $      | (1,731,047 | ) | $ | (1,640,495 | ) | $ | (3,668,255 | ) |
| Less: fair value of employee stock  compensation           |   | (105,206                          | )        | (47,128                         | )      | (224,628 | ) | (97,128 | ) |
| Pro forma net loss attributed to common  stock             |   | (942,790                          | )        | (1,778,175                      | )      | (1,865,123 | ) | (3,765,383 | ) |
|                                                       |   |                              |     |                            |   |   |   |   |   |
| **Loss per common share**                                  |   |                              |     |                            |   |   |   |   |   |
| Basic and diluted net loss per share – as  reported   |   | $                                 | (0.05    | )                               | $      | (0.11 | ) | $ | (0.10 | ) | $ | (0.23 | ) |
| Basic and diluted net loss per share – pro  forma     |   | $                                 | (0.05    | )                               | $      | (0.11 | ) | $ | (0.11 | ) | $ | (0.24 | ) |
|                                                       |   |                              |     |                            |   |   |   |   |   |
| **Weighted average Black-Scholes fair value  assumptions** |   |                              |     |                            |   |   |   |   |   |
| Risk free interest rate                                    |   | 5.0                               | %        | 5.0                             | %      | 5.0 | % | 5.0 | % |
| Expected life                                              |   | 10 years                          |     | 10 years                        |   | 10 years |   | 10 years |   |
| Expected volatility                                        |   | 88% -92                           | %        | 88% - 92                        | %      | 88% - 92 | % | 88% - 92 | % |
| Expected dividend yield                                    |   | 0.0                               | %        | 0.0                             | %      | 0.0 | % | 0.0 | % |

 

**(e) Recent AccountingPronouncements**

 

In July 2002,the FASB issued Statement of Financial Accounting Standards No. 146, *Accounting for Costs Associated with Exit or DisposalActivities* (SFAS No. 146). SFAS 146 nullifies FASB Emerging IssuesTask Force (EITF) Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)”. It requires that a liability be recognizedfor those costs only when the liability is incurred, that is, when it meets thedefinition of a liability in the FASB’s conceptual framework. SFAS No. 146 alsoestablishes fair value as the objective for initial measurement of liabilitiesrelated to exit or disposal activities. SFAS 146 is effective for exit ordisposal activities that are initiated after December 31, 2002, with earlieradoption encouraged. The adoption of SFAS 146 did not have a material impact onits financial position or results from operations.

 

In December 2002, the FASB issued Statement of Financial AccountingStandards 148, *Accounting for Stock-BasedCompensation - Transition and Disclosure - an amendment of FASB Statement 123*(“SFAS 148”).  For entities that changetheir accounting for stock-based compensation from the intrinsic method to thefair value method under SFAS 123, the fair value method is to be appliedprospectively to those awards granted after the beginning of the period ofadoption (the prospective method).  Theamendment permits two additional transition methods for adoption of the fairvalue method.  In addition to theprospective method, the entity can choose to either (i) restate all periodspresented (retroactive restatement method) or (ii) recognize compensation costfrom the beginning of the fiscal year of adoption as if the fair value methodhad been used to account for awards (modified prospective method).  For fiscal years beginning after December 15,2003, the prospective method will no longer be allowed.  The Company currently accounts for itsstock-based compensation using the intrinsic value method as proscribed by APBNo. 25, Accounting for Stock Issued to Employees, and plans to continue using thismethod to account for stock options. Therefore, it does not intend to adopt the transition requirements asspecified in SFAS 148.

 

5

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**(2) Contingencies**

 

Pioneer Standard Electronics, Incorporated (“Pioneer”), filed a lawsuitagainst the Company in the county court in Dallas County, Texas on September28, 2001.  Pioneer was a vendor to theCompany and seeks damages of $81,533 for non-payment for servicesprovided.  During the first quarter of2003, Pioneer was granted a judgment for the entire amount.  The Company has reached a settlement withPioneer and is making payments.

 

The Company is also engaged in a number of lawsuitswith approximately fifteen vendors who claim they are owed amounts from $500 to$45,000, which aggregate in total $251,117. The Company is currently defendingor seeking to settle each of the vendor’s claims.  At June 30, 2003, the Company has accrued the delinquent amountspayable for the claims described in this paragraph.

** **

**(3) Preferred Stock**

 

The Companyhas authorized 7,000,000 shares of convertible preferred stock, of which sharesdesignated in five series have been issued. Information with respect to theseries of preferred stock outstanding at each balance sheet date is summarizedbelow.

 
|                                                                    |   | **Series C**                          |   | **Series I**                          |   | **Series J**                           |   | **Series 1999**                       |   | **2003 Series**                       |   |
|-------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|
| Number of shares authorized                                             |   | 1,500,000                             |   | 2,500                                 |   | 2,500                                  |   | 2,500                                 |   | 2,133,333                             |   |
|                                                                    |   |                                  |   |                                  |   |                                   |   |                                  |   |                                  |   |
| Stated value                                                            |   | $                                     | 30.20  |                                  | $      | 10,000                                 |   | $                                     | 10,000 |                                  | $      | 10,000 |   | $ | 1.00 |   |
|                                                                    |   |                                  |   |                                  |   |                                   |   |                                  |   |                                  |   |
| Number of shares issued and outstanding:                                |   |                                  |   |                                  |   |                                   |   |                                  |   |                                  |   |
| December 31, 2002                                                       |   | 11,522                                |   | 125                                   |   | 177                                    |   | 152                                   |   | —                                |   |
| June 30, 2003                                                           |   | 11,522                                |   | 125                                   |   | 177                                    |   | 152                                   |   | —                                |   |
|                                                                    |   |                                  |   |                                  |   |                                   |   |                                  |   |                                  |   |
| 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    |   | 1 to 1 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 |   | Stated value  plus accrued  dividends |   |
|                                                                    |   |                                  |   |                                  |   |                                   |   |                                  |   |                                  |   |
| Dividend rights                                                         |   | 10% per  annum,  cumulative           |   | 8% per  annum,  cumulative            |   | 8% per  annum,  cumulative             |   | 8% per  annum,  cumulative            |   | 7% per  annum,  cumulative            |   |
|                                                                         |        |                                       |        |                                       |        |                                        |        |                                       |        |                                       |        |  |  |  |  |  |

 

The Company’s non-voting common stock may beconverted to voting common stock at any time by the holder thereof, on aone-to-one basis.

 

The holders ofthe Company’s Series C Preferred Stock are entitled to receive quarterlydividends on each such share held at the annual rate of 10% of the originalissue price of each share payable in arrears, when, as and if declared by theCompany’s board of directors, in cash or additional shares of preferred stockat the option of the holder. During the three months ended June 30, 2003 therewere $8,793 of dividends accrued. Dividends payable for Series C Preferred Stock were $70,541 and $53,051at June 30, 2003 and December 31, 2002, respectively.

 

The holders ofSeries I Preferred Stock, Series J Preferred Stock, and Series 1999 VotingPreferred Stock are entitled to receive semi-annual dividends on each suchshare at the annual rate of 8% of the original issue price of each sharepayable in arrears, when, as and if declared by the Company’s board ofdirectors, in cash or additional shares of preferred stock.   Shares of Series I Preferred Stock, SeriesJ Preferred Stock and Series 1999 Preferred Stock are convertible into sharesof common stock at a conversion price of $2.51 per share.  During the three months ended June 30, 2003there were $25,315, $35,544 and $30,647 of dividends accrued for Series IPreferred Stock, Series J Preferred Stock and Series 1999 Voting PreferredStock, respectively.   Dividends payableof $179,597 and $129,245 of dividends payable for Series I Preferred Stock atJune 30, 2003 and December 31, 2002, respectively. Dividends payable of$220,763 and $150,067 of dividends payable for Series J Preferred Stock at June30, 2003 and December 31, 2002, respectively. Dividends payable of $183,878 and$122,922 of dividends payable for Series 1999 Voting Preferred Stock at June30, 2003 and December 31, 2002, respectively.

 

6

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The Companycompleted a $1,537,500 exempt Preferred Stock Offering during May of 2003.  ThePreferred Stock is designated as 2003 Preferred and each $75,000 unit consistedof 100,000 shares of Preferred Stock bearing a 7% dividend approximately 15,000shares of Common Stock, and 100,000 warrants to purchase the Company’s commonstock exercisable for two years at $1.00 per share.  The offering also included an automatic conversion into CommonStock on a one for one basis if the closing twenty-day average stock price isover $2.00.  On June 5, 2003 the closingtwenty-day average was at $2.02 and the 2003 Preferred converted to 2,050,001shares of Common Stock.

 

**(4) Notes Payable to Stockholders**

 

The Companyentered into a 6.75% convertible note with Amphion Investments LLC datedJanuary 25, 2002. During the three months ended June 30, 2003, the Companyrepaid $50,000 under this note. The principal outstanding under this note maybe converted into securities of the Company at the option of AmphionInvestments. The borrowings are unsecured and are due and payable on demand byAmphion Investments.  The Company repaidthis note during the three months ended June 30, 2003.

 

**(5)Significant Customers**

 

During thethree months ended June 30, 2003 the Company had three customers that accountedfor 37% of the overall revenue, three customers accounted for 83% of thedigital video product sales and one customers accounted for 18% of the RFIDproduct sales.  During the three monthsended June 30, 2002 the Company had two customers that accounted for 41% of theoverall revenue, two customers accounted for 55% of the digital video productsales and one customers accounted for 15% of the RFID product sales.

 

During the sixmonths ended June 30, 2003 the Company had two customers that accounted for 29%of the overall revenue, three customers accounted for 76% of the digital videoproduct sales and two customers accounted for 22% of the RFID productsales.  During the six months ended June30, 2002 the Company had two customers that accounted for 32% of the overallrevenue, two customers accounted for 40% of the digital video product sales andone customers accounted for 22% of the RFID product sales.

 

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**Item 2. Management’s Discussion and Analysisor Plan of Operation**.

 

**Forward-LookingStatements**

This quarterlyreport on Form 10-QSB includes “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934, as amended,which can be identified by the use of forward-looking terminology such as,“may,” “expect,” “could,” “plan,” “seek,” “anticipate,” “estimate,” or“continue” or the negative thereof or other variations thereon or comparableterminology.

 

Theseforward-looking statements are subject to various risks and uncertainties thatcould cause actual results to differ materially from those referred to in theforward-looking statements and are made pursuant to the “safe-harbor”provisions of the Private Securities Litigation Reform Act of 1995.  These statements are made based onmanagement’s current expectations or beliefs as well as assumptions made by,and information currently available to, management.

 

A variety offactors could cause actual results to differ materially from those anticipatedin the Company’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 a detaileddiscussion of these and other cautionary statements and factors that couldcause actual results to differ from the Company’s forward-looking statements,please refer to the Company’s filings with the Securities and ExchangeCommission, especially  “Item 1.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 2002 Annual Report on Form 10-KSB.

 

Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof. The Companydoes not undertake any obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the date hereof.Readers should carefully review the risk factors described in other documentsthe Company files from time to time with the Securities and ExchangeCommission.

 

**RecentDevelopments:  Going Concern andLiquidity Problems**

 

Our auditors have included an explanatory paragraph in their auditopinion with respect to our consolidated financial statements at December 31,2002. The paragraph states that our recurring losses from operations andresulting continued dependence on access to external financing raisesubstantial doubts about our ability to continue as a going concern.Furthermore, the factors leading to and the existence of the explanatoryparagraph may adversely affect our relationship with customers and suppliersand have an adverse effect on our ability to obtain financing.

 

We do not have sufficient working capital to sustain ouroperations.  We have been unable togenerate sufficient revenues to sustain our operations. We will have to obtainfunds to meet our cash requirements through business alliances, such asstrategic or financial transactions with third parties, the sale of securitiesor other financing arrangements, or we may be required to curtail ouroperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to us ordisadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

**Liquidity and Capital Resources**

 

Since inception, the Company has utilized the proceeds from a number ofpublic and private sales of its equity securities, the exercise of options andwarrants and more recently, convertible debt and short-term bridge loans fromstockholders to meet its working capital requirements. At June 30, 2003, theCompany had a working capital deficit of $12,698,781.

 

The Company’s operations continued to generate losses in 2003. TheCompany’s cash increased $1,020,003 during the six months ended June 30, 2003with operating activities using $695,028 of cash. The Company funded operationsprimarily through borrowings from Amphion and other accredited investors andproceeds from the 2003 Preferred stock issued to accredited investors with financingactivities providing net cash of $1,715,035. No assurance can be given thatsuch sources will continue to provide funding to the Company.  The Company’s business plan for 2003 ispredicated principally upon the successful marketing of its RFID and digitalvideo products. The Company anticipates that its existing working capitalresources and revenues from operations will not be adequate to satisfy itsfunding requirements in 2003.  Duringthe second quarter of 2003 the Company raised a net of  $1,460,625 of additional working capitalthrough an exempt Preferred Stock offering. The Preferred Stock is designated as 2003 Preferred and each $75,000unit consisted of 100,000 shares of Preferred Stock bearing a 7% dividendapproximately 15,000 shares of Common Stock and 100,000 warrants to purchasethe Company’s common stock exercisable for two years at $1.00 per share.

 

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The Company’sworking capital requirements depend upon many factors, including the extent andtiming of the Company’s product sales, the Company’s operating results, thestatus of competitive products, and actual expenditures and revenues comparedto its business plan. The Company is currently experiencing decliningliquidity, including negative working capital balances, losses from operationsand negative 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 theCompany’s losses or lack of operating capital continue, the Company will haveto obtain funds to meet its cash requirements through business alliances, suchas strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or the Company may be required tocurtail its operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tothe Company or disadvantageous to existing stockholders. In addition, noassurance may be given that the Company will be successful in raisingadditional funds or entering into business alliances.

 

The Companyentered into a 6.75% convertible note with Amphion Investments LLC datedJanuary 25, 2002. During the three months ended March 31, 2003, the Companyborrowed $50,000 under this note. The principal outstanding under this note maybe converted into securities of the Company at the option of AmphionInvestments. The borrowings are unsecured and are due and payable on demand byAmphion Investments.  The Company repaidthis note during the three months ended June 30, 2003.

 

On January 17,2003, the Company entered into a bridge financing agreement with ten accreditedinvestors for the sale and issuance of 3.05 “units” to the investors for anaggregate purchase price of $305,000. Each unit consists of a convertible promissory note in the amount of$100,000 and 50,000 unregistered shares of the Company’s common stock.

 

Pursuant tothe bridge financing agreement, the Company is required to use reasonableefforts to register the shares of common stock comprising the units within 60days after the execution of the bridge financing agreement, or as soon aspracticable thereafter.  The Company hasnot registered these shares of common stock yet.  Upon registration of the common stock, each investor may not sellmore than one-third of the common stock comprising the units during anycalendar month.  The convertiblepromissory notes comprising the units bear interest at an annual rate of 7% andmature on January 17, 2006.  On each ofJanuary 17, 2004, January 17, 2005 and January 17, 2006, the investors have theoption to convert one-third of the principal amount of the notes into commonstock of the Company.  The conversionprice of the notes is initially 65% of the average closing price of a share ofthe Company’s common stock for the 20 trading days preceding the givenanniversary date of the notes.  Themaximum conversion price shall be $2.00 per share and the minimum conversionprice shall be $0.50 per share.  Theconversion price will be subject to adjustment from time to time to reflect anyreorganization, recapitalization, reclassification, stock dividend, stocksplit, reverse stock split or similar change in the Company’s shares of commonstock.  The notes may be prepaid inwhole or in part by the Company without premium or penalty.

 

In connectionwith this bridge financing, the Company recorded a $224,259 debt discount dueto the value of the equity consideration and beneficial conversion of thefinancing, pursuant to the guidance issued by the Emerging Issues TaskForce.  The debt discount will beamortized using the effective interest method over the three-year life of theagreement.

 

**NotesCurrently In Default**

 

On September 30, 1999, the Company signed a 10% convertible notematuring September 30, 2002 (“Amphion Convertible Note”), under which theCompany could borrow up to $6,000,000 from Amphion Ventures. As of June 30,2003 the balance under this note was $2, 477,979.  The balance of the indebtedness under the 10% convertible noteissued was due in full by the Company on September 30, 2002 and, as of June 30,2003, this note is in default. The Company is negotiating with Amphion Venturesto extend the term of the notes. Amphion Ventures has not pursued any collection activities relating tothis note.  However, no assurances canbe given that they will not in the future.

 

On July 28, 1999, the Company acquired substantially all of the assetsof Prism Video, Inc. (“Prism”), a privately held corporation, and agreed to pay$4,000,000 to “Prism” on December 31, 2002. The balance of the indebtednessunder the Prism note issued was due in full by the Company on December 31,2002; as of June 30, 2003 this note is in default. The Company is negotiatingwith Prism to extend the term of the notes. The note payable has a face amountof $4,000,000 and is collateralized by the Company’s $3,902,375 note receivablefrom Amphion Ventures, L.P. (“Amphion Ventures”). Pursuant to the AssetPurchase Agreement between AXCESS and Prism, AXCESS assigned Prism all paymentsof principal to be made by Amphion Ventures under the note receivable until thebalance of the note receivable is paid in full or the balance due under thenote payable to Prism is paid in full, whichever occurs first.   Prism has not pursued any collectionactivities relating to the collection of this note.  However, no assurances can be given that they will not in thefuture.

 

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**Results of Operations**

**Three Months Ended June 30, 2003 Compared toThree Months Ended June 30, 2002**

 

*Sales and Gross Profit*.Sales for the three months ended June 30, 2003 were $245,427 and for the threemonths ended June 30, 2002 were $407,695, on which a gross profit of $85,149and $66,116 was realized, respectively. The decrease in sales was due to thelack of financing for the Company and the inability to fulfill orders.  The Company has a backlog of sales orders ofover $130,000 as of June 30, 2003.  TheCompany would be able to fulfill those orders within 90 – 120 days.  However, there can be no assurances, due tothe timing of the financing, that all of those sales orders are still valid.   The margin improvement is driven by areduction of the production staff and lower inventory adjustments due to theCompany’s move towards contract manufacturing.

 

Radiofrequency identification (RFID) product sales were $158,658 for the threemonths ended June 30, 2003 and $141,959 for the three months ended June 30,2002. Cost of sales was $111,311 for the three months ended June 30, 2003 and$129,208 for the three months ended June 30, 2002. As a result, gross profitsfrom RFID products were $47,347 for the three months ended June 30, 2003 and$12,751 for the three months ended June 30, 2002.

 

Digital videoproduct sales were $86,769 for the three months ended June 30, 2003 and$265,736 for the three months ended June 30, 2002.  Cost of sales was $48,968 for the three months ended June 30,2003 and $212,372 for the three months ended June 30, 2002.  As a result, gross profits from digitalvideo products were $37,801 for the three months ended June 30, 2003 and$53,364 for the three months ended June 30, 2002.

 

*Operating Expenses*.Operating expenses were $653,381 for the three months ended June 30, 2003 and$1,477,637 for the three months ended June 30, 2002.  This decrease was due to cost reduction programs implementedduring 2002 and continuing through 2003 including a staffing reduction, fewermarketing expenditures and the completion of several research and developmentprojects.

 

Research anddevelopment expenses were $157,753 for the three months ended June 30, 2003 and$517,280 for the three months ended June 30, 2002.  The decrease is a result of the completion of the integration ofsome of the video and RFID products allowing for a reduction of employees, theclosing a facility in Georgia and the elimination of certain leased equipment.

 

Corporategeneral and administrative expenses were $331,902 for the three months endedJune 30, 2003 and $464,244 for the three months ended June 30, 2002.  During the three months ended June 30, 2003the Company hired a firm to assist in their investor relation activity andexperienced an increase in their cost of insurance.  However, the Company was able to decrease their overall cost ofexpense.  This decrease can beattributed to a reduction in head count, elimination of contract labor, lowerrent with the closure of half of the Texas facility and a reduction of outsidelegal and accounting service fees.

 

Selling andmarketing expenses were $49,937 for the three months ended June 30, 2003 and$354,884 for the three months ended June 30, 2002.  The decrease was caused by the Company’s strategic shift awayfrom a direct selling (our sales people contacting the end users) approach andan increased reliance on an indirect (focus on us selling to the integratorswho sell to the end users) marketing approach. The strategic shift allowed the company to decrease the headcount andlower the advertising.  The indirect sales model allows the Company toaddress multiple industry segments generically, including manufacturing,wholesale / distribution, retail, services, government, education and finance.The indirect sales model fits the characteristics of the Company’s productportfolio with other products, which become system solutions that requirecustom site planning and installation. By working directly with establishedmarketing channel partners, this indirect model also gives the Company the flexibilityto introduce new products and application as they are developed.

 

Depreciationand amortization expenses were $113,789 for the three months ended June 30,2003 and $141,229 for the three months ended June 30, 2002.  The decrease is related to lowerdepreciation expense as a result of the age of the equipment and the closing ofthe Georgia facility.

 

*Other expenses, net*.Other expenses, net, were $169,054 for the three months ended June 30, 2003 and$206,749 or the three months ended June 30, 2002. Interest income was $80,889lower during the three months ended June 30, 2003, compared to the three monthsended June 30, 2002.  Interest expensewas $19,713 higher in the three months ended June 30, 2003 compared to thethree months ended June 30, 2002, reflecting an increase in the amortization ofthe debt discount related to the Convertible notes issued in June 2002 andJanuary 2003.  The Company also was ableto settle several accounts payable issues relating to prior periods at adiscount from the accrued amounts, which resulted in a $138,299 improvement inOther.

 

*Net Loss*. Net losswas $737,286 for the three months ended June 30, 2003, compared to a loss of$1,618,270 for the three months ended June 30, 2002.  The decrease is due primarily to improved gross margins as aresult of lower production staffing and lower inventory adjustments, headcountreductions across all departments, reduced rent due to the Georgia facilitybeing closed, a reduction of outside services and gains on settlements of accountpayables.

 

*Preferred Stock dividend requirements. *Preferred Stockdividend requirements were $575,153 for the three months ended June 30, 2003and $112,777 for the three months ended June 30, 2002. This increase was due tothe recording of the beneficial conversion discount of $474,855 for the 2003Preferred Stock converted during the quarter.

 

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**SixMonths Ended June 30, 2003 Compared to Six Months Ended June 30, 2002**

*Sales and Gross Profit*.Sales for the six months ended June 30, 2003 were $535,991 and for the sixmonths ended March 31, 2002 were $784,652, on which a gross profit of $201,001and $156,079 was realized, respectively. The decrease in sales was due to thelack of financing for the Company and the inability to fulfill orders.  The Company has a backlog of sales orders ofover $130,000 as of June 30, 2003.  TheCompany would be able to fulfill those orders within 90 – 120 days.  However, there can be no assurances, due tothe timing of the financing, that all of those sales orders are stillvalid.   The margin improvement isdriven by a reduction of the production staff and lower inventory adjustmentsdue to the Company’s move towards contract manufacturing.

 

Radiofrequency identification (RFID) product sales were $284,658 for the six monthsended June 30, 2003 and $338,848 for the six months ended June 30, 2002. Costof sales was $192,246 for the six months ended June 30, 2003 and $280,855 forthe six months ended June 30, 2002. As a result, gross profits from RFIDproducts were $92,724 for the six months ended June 30, 2003 and $57,993 forthe six months ended June 30, 2002.

 

Digital videoproduct sales were $251,027 for the six months ended June 30, 2003 and $445,804for the six months ended June 30, 2002. Cost of sales was $142,744 for the six months ended June 30, 2003 and$347,719 for the six months ended June 30, 2002.  As a result, gross profits from digital video products were$108,283 for the six months ended June 30, 2003 and $98,085 for the six monthsended June 30, 2002.

 

*Operating Expenses*.Operating expenses were $1,256,100 for the six months ended June 30, 2003 and$3,146,857 for the six months ended June 30, 2002.  This decrease was due to cost reduction programs implemented during2002 and continuing through 2003 including a staffing reduction, fewermarketing expenditures and the completion of several research and developmentprojects.

 

Research anddevelopment expenses were $294,146 for the six months ended June 30, 2003 and$1,140,878 for the six months ended June 30, 2002.  The decrease is a result of the completion of the integration ofsome of the video and RFID products allowing for a reduction of employees, theclosing a facility in Georgia and the elimination of certain leased equipment.

 

Corporategeneral and administrative expenses were $590,469 for the six months ended June30, 2003 and $875,085 for the six months ended June 30, 2002.  During the six months ended June 30, 2003the Company hired a firm to assist in their investor relation activity and didexperience an increase in their cost of insurance.  However, the Company was able to decrease their overallcost.  The decrease can be attributed toa reduction in head count, elimination of contract labor, lower rent with theclosure of half of the Texas facility and a reduction of outside legal andaccounting service fees.

 

Selling andmarketing expenses were $138,534 for the six months ended June 30, 2003 and$816,673 for the six months ended June 30, 2002.  The decrease was caused by the Company’s strategic shift awayfrom a direct selling (our sales people contacting the end users) approach andan increased reliance on an indirect (focus on us selling to the integratorswho sell to the end users) marketing approach. The strategic shift allowed the company to decrease the headcount andlower the advertising.  The indirect sales model allows the Company toaddress multiple industry segments generically, including manufacturing,wholesale / distribution, retail, services, government, education and finance.The indirect sales model fits the characteristics of the Company’s productportfolio with other products, which become system solutions that requirecustom site planning and installation. By working directly with establishedmarketing channel partners, this indirect model also gives the Company theflexibility to introduce new products and application as they are developed.

 

Depreciationand amortization expenses were $232,951 for the six months ended June 30, 2003and $314,221 for the six months ended June 30, 2002.  The decrease is related to lower depreciation expense as a resultof the age of the equipment and the closing of the Georgia facility.

 

*Other expenses, net*.Other expenses, net, were $385,902 for the six months ended June 30, 2003 and$455,103 for the three months ended June 30, 2002. Interest income was $160,889lower during the six months ended June 30, 2003, compared to the six monthsended June 30, 2002.  Interest expensewas $89,001 lower in the six months ended June 30, 2003 compared to the sixmonths ended June 30, 2002, reflecting a decrease in the amortization of thePrism Note.  The Company also was ableto settle several accounts payable issues relating to prior periods at adiscount from the accrued amounts, which resulted in a $141,089 improvement inOther for the six months ended June 30, 2003 compared to the same period in2002.

 

*Net Loss*. Net losswas $1,441,001 for the six months ended June 30, 2003, compared to a loss of$3,445,881 for the six months ended June 30, 2002.  The decrease is due primarily to improved gross margins as aresult of lower production staffing and lower inventory adjustments, headcountreductions across all departments, reduced rent due to the Georgia facilitybeing closed, a reduction of outside services and gains on settlements ofaccount payables.

 

*Preferred Stock dividend requirements. *Preferred Stockdividend requirements were $674,349 for the six months ended June 30, 2003 and$222,374 for the six months ended June 30, 2002.  This increase was due to the recording of the beneficialconversion discount of $474,855 for the 2003 Preferred Stock converted during2003.

 

**Other**

*Inflation*. Inflationhas not had, and is not expected to have, a material impact on the operationsand financial condition of the Company.

 

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**Item3.****Controls and Procedures**

 

**Controlsand Procedures**

 

(a)           Evaluation of Disclosure Controlsand Procedures.  Based on theirevaluation as of a date within 90 days of the filing date of this QuarterlyReport on Form 10-QSB, the Company’s principal executive officer and principalfinancial officer have concluded that the Company’s disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)) are effective to ensure thatinformation required to be disclosed by the Company in reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securities andExchange 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.

 

**PARTII. OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

Pioneer Standard Electronics, Incorporated (“Pioneer”), filed a lawsuitagainst the Company in the county court in Dallas County, Texas on September28, 2001.  Pioneer was a vendor to theCompany and seeks damages of $81,533 for non-payment for services provided.  During the first quarter of 2003, Pioneerwas granted a judgment for the entire amount. The Company has reached a settlement with Pioneer and is makingpayments.

 

The Company is also engaged in a number of lawsuits with approximatelyfifteen vendors who claim they are owed amounts from $500 to $45,000, whichaggregate in total $251,117. The Company is currently defending or seeking tosettle each of the vendor’s claims.  AtJune 30, 2003, the Company has accrued the delinquent amounts payable for the claimsdescribed in this paragraph.

 

**Item 2. Changes in Securities**.

 

During thethree months ended June 30, 2003, 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.

 

***NoteBorrowings***

 

The Companyentered into a 6.75% convertible note with Amphion Investments LLC datedJanuary 25, 2002. During the three months ended March 31, 2003, the Companyborrowed $50,000 under this note. The principal outstanding under this note maybe converted into securities of the Company at the option of Amphion Investments.The borrowings are unsecured and are due and payable on demand by AmphionInvestments.  The Company repaid the$50,000 it borrowed plus interest during the three months ended June 30, 2003.

 

***PreferredStock Issued***

 

The Companycompleted a $1,537,500 exempt Preferred Stock Offering during May of 2003.  ThePreferred Stock is designated as 2003 Preferred and each $75,000 unit consistedof 100,000 shares of Preferred Stock bearing a 7% dividend approximately 15,000shares of Common Stock and 100,000 warrants to purchase the Company’s commonstock exercisable for two years at $1.00 per share.  The offering also included an automatic conversion into CommonStock on a one for one basis if the closing twenty-day average stock price isover $2.00.  On June 5, 2003 the closingtwenty-day average was at $2.02 and the 2003 Preferred converted to 2,050,001shares of Common Stock.

 

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**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item5. Other Information**

 

None

 

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

 

(a) Exhibits:

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                  |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |   | 2003  Preferred Stock Purchase Agreement dated as of May 15, 2003, between the  Company and certain investors.*                                                                  |
| 31.1            |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 302 of the Sarbanes-Oxley Act of 2002.*                                 |
| 31.2            |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 302 of the Sarbanes-Oxley Act  of 2002.* |
| 32.1            |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 906 of the Sarbanes-Oxley Act of 2002.*                                 |
| 32.2            |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 906 of the Sarbanes-Oxley Act  of 2002.* |

 

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* Filedherewith

 

(b) Reports onForm 8-K:

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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)          |
|                  |                                                   |
| August  13, 2003 |                                                   |

 

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