**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, 2004**                                            |
| ** ** | ** ** | ** **                                                                                  |
| **or**     |
| ** ** | ** ** | ** **                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                   |

 

**COMMISSION FILE NUMBER: 0-11933**

 

**AXCESS INTERNATIONAL INC.**

(Exact name of small businessissuer as specified in its charter)

 

| **Delaware**                                                                         | ** ** | **85-0294536**                       |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or  organization)                     |       | (I.R.S. Employer Identification No.) |
| ** **                                                                           |       |                                 |
| **3208 Commander  Drive**Carrollton, 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 befiled by Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes ý No o

 

Number of shares of common stock outstanding on August 14, 2004:24,632,626

 

Transitional Small Business Disclosure Format: Yes oNo ý

 

 

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**AXCESS INTERNATIONAL INC.INDEX**

 
| **PART  I. FINANCIAL INFORMATION** |                                                                    |
|------------------------------------|-------------------------------------------------------------------------|
|                               |                                                                    |   |   |
|                               | Item  1. Financial Statements:                                          |   |
|                               |                                                                    |   |   |
|                               |                                                                    | Balance Sheets at June 30, 2004 and  December 31, 2003 |   |
|                               |                                                                    |   |   |
|                               |                                                                    | Statements of Operations for the Three  Months ended June 30, 2004 and 2003 and for the Six Months ended  June 30, 2004 and 2003 |   |
|                               |                                                                    |   |   |
|                               |                                                                    | Statements of Cash Flows for the Six Months ended June 30, 2004  and 2003 |   |
|                               |                                                                    |   |   |
|                               |                                                                    | 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**                     |                                                                    |

 

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**PART 1.FINAN****CIAL INFORMATION**

**Item 1.Financ****ial Statements**

 

**AXCESSINTERNATIONAL INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)  June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                |       |                                 |       |                        |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Current assets:                                                                                                                                                                       |       |                                 |       |                        |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                                    | 1,749,239  |                        | $          | 2,163,977 |   |
| Accounts receivable - trade, net of  allowance for doubtful accounts                                                                                                                  |       | 77,669                               |       | 85,248                      |       |
| Inventory                                                                                                                                                                             |       | 116,374                              |       | 131,515                     |       |
| Prepaid expenses and other                                                                                                                                                            |       | 144,990                              |       | 148,490                     |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Total current assets                                                                                                                                                                  |       | 2,088,272                            |       | 2,529,230                   |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Property, plant and equipment, net                                                                                                                                                    |       | 58,050                               |       | 61,756                      |       |
| Intellectual property, net                                                                                                                                                            |       | 933                                  |       | 149,704                     |       |
| Deferred debt issuance costs                                                                                                                                                          |       | 591,371                              |       | 675,852                     |       |
| Other assets                                                                                                                                                                          |       | 595                                  |       | 595                         |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Total assets                                                                                                                                                                          |       | $                                    | 2,739,221  |                        | $          | 3,417,137 |   |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                            |       |                                 |       |                        |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Current liabilities:                                                                                                                                                                  |       |                                 |       |                        |       |
| Accounts payable                                                                                                                                                                      |       | $                                    | 490,896    |                        | $          | 813,976 |   |
| Other accrued liabilities                                                                                                                                                             |       | 752,414                              |       | 802,355                     |       |
| Dividends payable                                                                                                                                                                     |       | 152,592                              |       | 125,999                     |       |
| Total current liabilities                                                                                                                                                             |       | 1,395,902                            |       | 1,742,330                   |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Note payable to stockholder                                                                                                                                                           |       | 3,936,332                            |       | 4,058,956                   |       |
| Convertible notes payable (includes  $116,000 and $120,000 with related party in 2004 and 2003, respectively)                                                                         |       | 903,333                              |       | 1,288,333                   |       |
| Discount on convertible debt                                                                                                                                                          |       | (242,369                             | )          | (680,457                    | )          |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Total liabilities                                                                                                                                                                     |       | 5,993,198                            |       | 6,409,162                   |       |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Stockholders’ deficit:                                                                                                                                                           |       |                                 |       |                        |       |
| Convertible preferred stock, 7,000,000  shares authorized                                                                                                                             |       |                                 |       |                        |       |
| With liquidation preference; 54 shares  issued and outstanding in 2003                                                                                                                |       | —                               |       | 536,623                     |       |
| Without liquidation preference; $0.01 par  value, 2,415,000 and 1,790,000 shares issued and outstanding in 2004 and  2003, respectively                                               |       | 24,150                               |       | 17,900                      |       |
| Common stock, $0.01 par value, 50,000,000  shares authorized in 2004 and 2003; 24,607,626 shares issued and outstanding  in 2004 and 19,446,028 shares issued and outstanding in 2003 |       | 246,076                              |       | 194,461                     |       |
| Shares of common stock to be issued, 25,000  and 4,529,345 shares in 2003 and 2004, respectively                                                                                      |       | 250                                  |       | 45,293                      |       |
| Non-voting convertible common stock, $0.01  par value, 2,250,000 shares authorized; no shares issued and outstanding in  2004 or 2003                                                 |       | —                               |       | —                      |       |
| Additional paid-in capital                                                                                                                                                            |       | 149,683,433                          |       | 146,246,094                 |       |
| Accumulated deficit                                                                                                                                                                   |       | (153,207,886                         | )          | (150,032,396                | )          |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Total stockholders’ deficit                                                                                                                                                      |       | (3,253,977                           | )          | (2,992,025                  | )          |
|                                                                                                                                                                                  |       |                                 |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                                                                      |       | $                                    | 2,739,221  |                        | $          | 3,417,137 |   |

 

See accompanying notes to unaudited financialstatements.

 

1

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEME****NTS OFOPERATIONS(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Sales                                                |       | $                                     | 225,129    |                                | $          | 245,427 |   | $ | 431,807 |   | $ | 535,991 |   |
| Cost of sales                                        |       | 124,787                               |       | 160,278                             |       | 223,673 |   | 334,990 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Gross profit                                         |       | 100,342                               |       | 85,149                              |       | 208,134 |   | 201,001 |   |
| Expenses:                                            |       |                                  |       |                                |       |   |   |   |   |
| Research and development                             |       | 166,534                               |       | 157,753                             |       | 351,892 |   | 294,146 |   |
| General and administrative                           |       | 461,863                               |       | 331,902                             |       | 866,079 |   | 590,469 |   |
| Selling and marketing                                |       | 172,162                               |       | 49,937                              |       | 346,745 |   | 138,534 |   |
| Depreciation and amortization                        |       | 88,434                                |       | 113,789                             |       | 182,065 |   | 232,951 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses                                   |       | 888,993                               |       | 653,381                             |       | 1,746,781 |   | 1,256,100 |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Loss from operations                                 |       | (788,651                              | )          | (568,232                            | )          | (1,538,647 | ) | (1,055,099 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Other income (expense):                              |       |                                  |       |                                |       |   |   |   |   |
| Interest expense                                     |       | (334,830                              | )          | (306,353                            | )          | (657,553 | ) | (525,993 | ) |
| Gain in vendor settlements                           |       | 64,509                                |       | 137,299                             |       | 152,751 |   | 140,091 |   |
| Other                                                |       | —                                |       | —                              |       | 6,509 |   | — |   |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Other expense, net                                   |       | (270,321                              | )          | (169,054                            | )          | (498,293 | ) | (385,902 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                             |       | (1,058,972                            | )          | (737,286                            | )          | (2,036,940 | ) | (1,441,001 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Preferred stock dividend requirements                |       | (70,490                               | )          | (575,153                            | )          | (136,011 | ) | (674,349 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net loss applicable to common stock                  |       | $                                     | (1,129,462 | )                                   | $          | (1,312,439 | ) | $ | (2,172,951 | ) | $ | (2,115,350 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share                 |       | $                                     | (0.05      | )                                   | $          | (0.07 | ) | $ | (0.09 | ) | $ | (0.12 | ) |
|                                                 |       |                                  |       |                                |       |   |   |   |   |
| Weighted average shares of common stock  outstanding |       | 24,303,151                            |       | 17,698,593                          |       | 22,951,611 |   | 17,224,325 |   |

 

See accompanying notes to unaudited financialstatements.

 

2

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**AXCESSINTERNATIONAL INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                        |       |                                |       |   |   |
| Net loss                                                                     |       | $                                   | (2,036,940 | ) | $ | (1,441,001 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                |       | 182,065                             |       | 232,951 |   |
| Amortization of financing discount and  issuance costs                       |       | 522,570                             |       | 211,097 |   |
| Shares issued for services rendered                                          |       | 65,000                              |       | 80,000 |   |
| Gain on vendor settlements                                                   |       | (152,751                            | )          | — |   |
| Loss on disposal of assets                                                   |       | —                              |       | 13,139 |   |
| Changes in operating assets and  liabilities:                                |       |                                |       |   |   |
| Accounts receivable                                                          |       | 7,579                               |       | 15,093 |   |
| Inventory                                                                    |       | 15,141                              |       | (24,935 | ) |
| Prepaid expenses and other                                                   |       | 3,500                               |       | 20,236 |   |
| Other assets                                                                 |       | —                              |       | 29,384 |   |
| Accounts payable                                                             |       | (170,329                            | )          | (182,113 | ) |
| Other liabilities                                                            |       | 88,520                              |       | 351,121 |   |
| Net cash used by operating activities                                        |       | (1,475,645                          | )          | (695,028 | ) |
|                                                                         |       |                                |       |   |   |
| Cash flow from investing activities:                                         |       |                                |       |   |   |
| Capital expenditures                                                         |       | (29,589                             | )          | — |   |
| Net cash used by investing activities                                        |       | (29,589                             | )          | — |   |
|                                                                         |       |                                |       |   |   |
| Cash flow from financing activities:                                         |       |                                |       |   |   |
| Borrowings under financing agreements                                        |       | —                              |       | 305,000 |   |
| Principal payments on financing agreements                                   |       | (122,624                            | )          | (50,590 | ) |
| Net proceeds from issuance of common stock  from employees options           |       | 13,120                              |       | — |   |
| Net proceeds from issuance of common and  preferred stock                    |       | 1,200,000                           |       | 1,460,625 |   |
| Net cash provided by financing activities                                    |       | 1,090,496                           |       | 1,715,035 |   |
|                                                                         |       |                                |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | (414,738                            | )          | 1,020,007 |   |
| Cash and cash equivalents, beginning of  period                              |       | 2,163,977                           |       | 33,249 |   |
| Cash and cash equivalents, end of period                                     |       | $                                   | 1,749,239  |   | 1,053,256 |   |
|                                                                         |       |                                |       |   |   |
| Supplemental information:                                                    |       |                                |       |   |   |
| Cash paid during the period for interest                                     |       | $                                   | —     |   | $ | — |   |
|                                                                         |       |                                |       |   |   |
| Supplemental Disclosure of Non-Cash  Investing and Financing Activities:     |       |                                |       |   |   |
| Conversions of notes payable into common  stock                              |       | $                                   | 384,999    |   | — |   |
| Conversions of accrued interest into common  stock                           |       | 138,461                             |       | — |   |
| Conversions of preferred stock into common  stock                            |       | 536,623                             |       | — |   |
| Conversion of accrued dividends into common  stock                           |       | 109,417                             |       | — |   |
| Preferred stock dividends accrued                                            |       | 136,011                             |       | 674,349 |   |

 

See accompanying notes to unaudited financialstatements.

 

3

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**AXCESSNOTES TO FINANCIAL STATEMENTS(Unaudited)**

 

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

 

**(a) Description of Business**

 

The Company provides advanced security and asset management systems,which locate, identify, track, monitor and protect assets. The mainapplications of the Company’s systems are security video through closed circuittelevision (called CCTV), personnel and vehicle access control, and automaticasset tracking and protection. The Company provides solutions in the recentlyidentified homeland security markets such as air and ground transportation,water treatment facilities, oil and gas, power plants, as well as in themarkets for data centers, retail / convenience stores, education, healthcare,and corporate offices. AXCESS utilizes two patented and integratedtechnologies: network-based radio frequency identification (RFID) and taggingand streaming video. Both application and browser-based software optionsdeliver critical real-time information tailored to each end user via theenterprise network or Internet, also providing custom alerts in the form ofstreaming video, e-mail, or messages delivered to wireless devices.

 

The Company’s business plan for 2004 is predicated principally upon thesuccessful marketing of its RFID and digital video products. During the firsthalf of 2004, operating activities utilized approximately $1.5 million of cash.During 2003 and the second quarter of 2004 we raised a net of $4.4 million and$1.2 million, respectively, for additional working capital through three exemptPreferred Stock offering.

 

The future results of operations and financial condition of the Companywill be impacted by the following factors, among others: changes fromanticipated levels of sales, access to capital, future national or regionaleconomic and competitive conditions, changes in relationships with customers,difficulties in developing and marketing new products, marketing existingproducts, customer acceptance of existing and new products, validity ofpatents, technological change, dependence on key personnel, availability of keycomponent parts, dependence on third party manufacturers, vendors, contractors,product liability, casualty to or other disruption of the productionfacilities, delays and disruptions in the shipment of the Company’s products, andthe ability of the Company to meet its stated business goals.

 

Ifthe Company’s losses or lack of operating capital continue, the Company willhave to obtain funds to meet its cash requirements through business alliances,such as 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 Organization and Basis ofPresentation**

 

The accompanying consolidated financial statements include the accountsof the Company and its majority-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.

 

The Company has received working capital invarious forms from Amphion Ventures, L. P. and affiliates of Amphion Ventures,L. P. including Amphion Partners, Amphion Investments LLC, Antiope Partners,VennWorks LLC (formerly incuVest LLC), Amphion Capital Management, and NVW, LLC(collectively, the “Amphion Group”). Following the conversion of the 2003preferred stock held by the Amphion Group into common stock in 2003, theAmphion Group owns approximately 69% of the outstanding voting stock of theCompany.

 

**(c) Inventory**

 

Inventory is valued at the lower of cost or market using the first-in,first-out method. Inventory was comprised of the following at June 30,2004 and December 31, 2003:

 

| ** **      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 62,672     |                        | $          | 36,682 |   |
| Work-in-process |       | —                  |       | 10,513                      |       |
| Finished goods  |       | 53,702                  |       | 84,320                      |       |
|            |       | $                       | 116,374    |                        | $          | 131,515 |   |

 

4

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**(d) Stock Options**

 

The Company accounts for its stock-based compensation plan underAccounting Principles Board (“ABP”) Opinion No. 25, Accounting for Stock Issuedto Employees. The pro forma information below is based on provisions ofStatement of Financial Accounting Standard (“FAS”) No. 123, Accounting forStock-Based Compensation, as amended by FAS 148, Accounting for Stock-BasedCompensation—Transition and Disclosure, issued in December 2002.

 

The Company does not have a history of paying cash dividends and nonehave been assumed in estimating the fair value of its options.

 

The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including expected stock price volatility.Because, among other things, changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable measure of the fair valueof its employee stock options. For purposes of pro forma disclosures, theestimated fair value of the options is amortized to expense over the options’vesting periods. 

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Pro forma impact of  fair value method (FAS 148)**       |       |                                  |       |                                |       |   |   |   |   |
| Reported net loss attributed to common  stock              |       | $                                     | (1,129,462 | )                                   | $          | (1,312,439 | ) | $ | (2,172,951 | ) | $ | (2,115,350 | ) |
| Less: fair value of employee stock  compensation           |       | (136,629                              | )          | (105,206                            | )          | (217,053 | ) | (224,628 | ) |
| Pro forma net loss attributed to common  stock             |       | (1,266,091                            | )          | (1,417,645                          | )          | (2,390,004 | ) | (2,339,978 | ) |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| **Loss per common  share**                                 |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share – as  reported   |       | $                                     | (0.05      | )                                   | $          | (0.05 | ) | $ | (0.09 | ) | $ | (0.12 | ) |
| Basic and diluted net loss per share – pro  forma     |       | $                                     | (0.05      | )                                   | $          | (0.06 | ) | $ | (0.10 | ) | $ | (0.14 | ) |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| **Weighted average  Black-Scholes fair value assumptions** |       |                                  |       |                                |       |   |   |   |   |
| Risk free interest rate                                    |       | 4.25                                  | %          | 5.00                                | %          | 4.25 | % | 5.00 | % |
| Expected life                                              |       | 2 years                               |       | 10 years                            |       | 2 years |   | 10 years |   |
| Expected volatility                                        |       | 175                                   | %          | 88% - 92                            | %          | 175 | % | 88% - 92 | % |
| Expected dividend yield                                    |       | 0.0                                   | %          | 0.0                                 | %          | 0.0 | % | 0.0 | % |

 

**(e) Recent Accounting Pronouncements**

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51* (“FIN 46”), which was revised andsuperceded by FASB Interpretation No. 46R in December 2003 (FIN 46R).  FIN 46R requires the consolidation of certainvariable interest entities, as defined.  FIN 46R is effective immediatelyfor special purpose entities and variable interest entities created afterDecember 31, 2003, and must be applied to other variable interest entitiesno later than December 31, 2004. The Company believes it has no suchvariable interest entities and as a result FIN No. 46R will have no impact onits results of operations, financial position or cash flows.

 

**(2) Contingencies**

 

Axcess is engaged in a number oflawsuits with approximately eight vendors who claim they are owed amounts from$500 to $45,000, which aggregates in total $117,330. We are currently defendingor seeking to settle each of the vendor’s claims.  At June 30, 2004, we had accrued thedelinquent amounts we expect to be liable for, for the claims described in thisparagraph.

 

5

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**(3) Preferred Stock**

 

The Company has authorized 7,000,000 shares of convertible preferredstock, of which shares designated in five series have been issued. Informationwith respect to the series of preferred stock outstanding at each balance sheetdate is summarized below.

 

| ** **                                                              | ** ** | **Series I**                             | ** ** | **Series J**                                | ** ** | **2003B Series**                       | ** ** | **2004 Series**                        | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Number of shares authorized                                             |       | 2,500                                    |       | 2,500                                       |       | 2,750,000                              |       | 625,000                                |       |
|                                                                    |       |                                     |       |                                        |       |                                   |       |                                   |       |
| Stated value                                                            |       | $                                        | 10,000     |                                        | $          | 10,000                                 |       | $                                      | 0.01       |   | $ | 0.01 |   |
|                                                                    |       |                                     |       |                                        |       |                                   |       |                                   |       |
| Number of shares issued and outstanding:                                |       |                                     |       |                                        |       |                                   |       |                                   |       |
| December 31, 2003                                                  |       | 52                                       |       | 2                                           |       | 1,790,000                              |       | —                                 |       |
| June 30, 2004                                                      |       | —                                   |       | —                                      |       | 1,790,000                              |       | 625,000                                |       |
|                                                                    |       |                                     |       |                                        |       |                                   |       |                                   |       |
| Conversion ratio (or conversion price) of  preferred shares into common |       | $ 2.51 into   voting  common  stock |       | $ 2.51 into  non-voting  common  stock |       | 1 to 1 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 |       |
|                                                                    |       |                                     |       |                                        |       |                                   |       |                                   |       |
| Dividend rights                                                         |       | 8% per  annum,  cumulative               |       | 8% per  annum,  cumulative                  |       | 7% per  annum,  cumulative             |       | 7% per  annum,  cumulative             |       |
|                                                                         |            |                                          |            |                                             |            |                                        |            |                                        |            |  |  |  |  |

 

*(a)**                                     SeriesI and Series J Preferred Stock*

 

The holders of Series I Preferred Stock and Series J Preferred Stockare entitled to receive semi-annual dividends on each such share at the annualrate 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 or additionalshares of preferred stock.  Shares ofSeries I Preferred Stock and Series J Preferred Stock are convertible intoshares of common stock at a conversion price of $2.51 per share.  During the three months ended June 30,2004 there were no of dividends accrued for Series I Preferred Stock and SeriesJ Preferred Stock, respectively. Dividends payable were $0 and $95,182 for Series I Preferred Stock atJune 30, 2004 and December 31, 2003, respectively. Dividends payablewere $0 and $3,384 of dividends payable for Series J Preferred Stock atJune 30, 2004 and December 31, 2003, respectively.

 

During the first quarter of 2004 all shares of the Series of Series Iand Series J preferred stock were retired or converted and there are currentlyno shares outstanding.

 

*(b)**                                     Series2003B Preferred Stock*

 

We completed a $3,132,500 exempt Preferred Stock Offering during thefourth quarter of 2003. The Preferred Stock is designated as 2003B Preferredand each $70,000 unit consisted of 40,000 shares of Preferred Stock bearing a7% dividend, approximately 2,000 shares of common stock and 40,000 warrants topurchase Axcess’ common stock exercisable for two years at $2.75 per share. Theoffering also included an automatic conversion into Common Stock on a one for onebasis if the closing twenty-day average stock price is over $3.75.

 

The holders of the Series 2003B Preferred Stock are entitled to receiveannual dividends on each share held at the annual rate of 7% of the originalissue price of each share payable in arrears, when, as and if declared by theour board of directors, paid in cash of common shares at our option.  During the three months ended June 30,2004 there were $54,669 of dividends accrued. We have also accrued $136,770 and $27,433 of dividends payable forSeries 2003B Preferred Stock at June 30, 2004 and December 31, 2003,respectively. As of June 30, 2004 and December 31, 2003, we had1,790,000 shares of Series 2003B Preferred shares outstanding.

 

In connection with the issuance of the 2003B Preferred Stock, theCompany recorded preferred stock dividend requirements of $1,782,831 that willbe reflected as preferred stock dividends as the underlying preferred stockconverts to common stock.  As ofJune 30, 2004 and December 31, 2003 that amount is reflected inaccumulated deficit on the balance sheet.

 

6

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*(c)**                                      Series2004 Preferred Stock*

 

During the second quarter of 2004we raised a net of  $1,200,000 ofadditional working capital through an exempt Preferred Stock offering.  The Preferred Stock is designated as 2004Preferred and consisted of 625,000 shares of Preferred Stock bearing a 7%dividend and 357,142 warrants to purchase our common stock exercisable for twoyears at $3.20 per share.  Theoffering also includes an automatic conversion into Common Stock on a one forone basis if the closing twenty-day average stock price is over $4.00 or whenwe achieve a full quarter of profitability.

 

The holders of the Series 2004 Preferred Stock are entitled to receiveannual dividends on each share held at the annual rate of 7% of the originalissue price of each share payable in arrears, when, as and if declared by ourboard of directors, paid in cash of common shares at our option.  During the three months ended June 30,2004 there were $15,822 of dividends accrued and payable as of June 30,2004 for Series 2004 Preferred Stock. As of June 30, 2004 we have 625,000shares of Series 2004 Preferred shares outstanding.

 

In connection with the issuance of the 2004 Preferred Stock, werecorded preferred stock dividend requirements of approximately $1,002,540 thatwill be reflected as preferred stock dividends as the underlying preferredstock converts to common stock.

 

**(4) Convertible Notes Payable**

 

OnJuly 30, 2002, the Company entered into a bridge financing agreement withten accredited investors for the sale and issuance of 10 “units” to theinvestors for an aggregate purchase price of $1,000,000. Each unit consists ofa convertible promissory note in the amount of $100,000 and 25,000 shares ofthe Company’s common stock.  Eachinvestor has agreed to not sell more than one-third of the common stockcomprising the units during any calendar month. The convertible promissory notescomprising the units bear interest at an annual rate of 7% and mature onJuly 30, 2005. On each of July 30, 2003, July 30, 2004 andJuly 30, 2005, the investors have the option to convert one-third of theprincipal amount of the notes into common stock 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. The maximum conversion price shall be $4.00 pershare and the minimum conversion price shall be $1.00 per share. The conversionprice 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 Company without premium or penalty may prepay the notes in whole orin part.

 

Duringthe three months ended June 30, 2004, seven holders elected to convert$116,667 of their notes plus $43,011 of accrued interest into 103,005 shares ofAxcess common stock.  Inconnection with this conversion, we recorded $62,163 of additional debtdiscount amortization.

 

On January 17, 2003, Axcess entered into a bridge financingagreement with ten accredited investors for the sale and issuance of 3.05“units” to the investors for an aggregate purchase price of  $305,000. Each unit consists of a convertible promissory note in the amount of$100,000 and 50,000 shares of our common stock. By agreement, each investor may not sell more than one-third of thecommon stock comprising the units during any calendar month. The convertiblepromissory notes comprising the units bear interest at an annual rate of 7% andmature on January 31, 2006. On each of January 31, 2004,January 31, 2005 and January 31, 2006, the investors have the optionto convert one-third of the principal amount of the notes into common stock ofAxcess. The conversion price of the notes is initially 65% of the averageclosing price of a share of our common stock for the twenty (20) trading dayspreceding the given anniversary date of the notes. The maximum conversion priceshall be $2.00 per share and the minimum conversion price shall be $0.50 pershare. The conversion price will be subject to adjustment from time to time toreflect any reorganization, recapitalization, reclassification, stock dividend,stock split, reverse stock split or similar change in our shares of commonstock. The notes may be prepaid in whole or in part by us without premium orpenalty.

 

Duringthe three months ended June 30, 2004, eight holders elected to convert$61,667 of their note plus $16,345 of accrued interest into 56,945 shares ofAxcess common stock.  During thethree months ended June 30, 2004 the board elected to convert $9,018 ofaccrued and unpaid dividends into 3,681 shares of Axcess common stock.

 

**(5) Significant Customers**

 

During the three months ended June 30,2004 we had no single customers that accounted for more than 10% of the overallrevenue or RFID product sales.  However,we had two customers account for 72% of the digital video product sales.  During the three months ended June 30,2003 the Company had three customers that accounted for

 

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37% of the overall revenue, three customers accounted for 83% of thedigital video product sales and one customer accounted for 18% of the RFIDproduct sales.

 

During the six months ended June 30, 2004 we had one customer thataccount for 14% of the overall revenue, two customers account for 52% of thedigital video product sales and two customers account for 26% of the RFIDproduct sales. During the six months ended June 30, 2003 we had twocustomers that accounted for 29% of the overall revenue, three customersaccounted for 76% of the digital video product sales and two customersaccounted for 22% of the RFID product sales.

 

**Item 2.Manage****ment’s Discussion andAnalysis or Plan of Operation**.

 

**Forward-Looking Statements**

 

This quarterly report on Form 10-QSB includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended, which can be identified by the use offorward-looking terminology such as, “may,” “expect,” “could,” “plan,” “seek,”“anticipate,” “estimate,” or “continue” or the negative thereof or othervariations thereon or comparable terminology.

 

These forward-looking statements are subject to various risks anduncertainties that could cause actual results to differ materially from thosereferred to in the forward-looking statements and are made pursuant to the“safe-harbor” provisions of the Private Securities Litigation Reform Act of1995.  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 of factors could cause actualresults to differ materially from those anticipated in the Company’sforward-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  “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 2003 Annual Report on Form 10-KSB.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. The Company does not undertake any obligation to publicly revisethese forward-looking statements to reflect events or circumstances that ariseafter the date hereof. Readers should carefully review the risk factorsdescribed in other documents the Company files from time to time with theSecurities and Exchange Commission.

 

##### **Recent Developments:  Going Concern and Liquidity Problems**

##### ** **

Our auditors have included an explanatoryparagraph in their audit opinion with respect to our consolidated financialstatements at December 31, 2003. The paragraph states that our recurringlosses from operations and resulting continued dependence on access to externalfinancing raise substantial doubts about our ability to continue as a goingconcern. Furthermore, the factors leading to and the existence of theexplanatory paragraph may adversely affect our relationship with customers andsuppliers and have an adverse effect on our ability to obtain financing.

 

We do not have sufficient working capital tosustain our operations.  We have beenunable to generate sufficient revenues to sustain our operations. We will haveto obtain funds to meet our cash requirements through business alliances, suchas strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or we may be required to curtailour operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tous or disadvantageous to existing stockholders. In addition, no assurance maybe given that we will be successful in raising additional funds or enteringinto business alliances.

 

##### **Liquidity and Capital Resources**

##### ** **

Since inception, we have utilized theproceeds from a number of public and private sales of our equity securities,the exercise of options and warrants and more recently, convertible debt,short-term bridge loans from

 

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stockholders and preferred equity offeringsto meet our working capital requirements. At June 30, 2004, we had workingcapital of $692,370.

 

Our operations generated losses in 2003 andcontinue to generate losses in 2004. Our cash decreased $414,738 during the sixmonths ended June 30, 2004 with operating activities using $1,475,645 ofcash. We funded operations primarily through cash on hand from borrowings andequity offerings over the last two years. No assurance can be given that such activities will continue to beavailable to provide funding to us.  Ourbusiness plan for 2004 is predicated principally upon the successful marketingof our RFID and digital video products. We anticipate that our existing workingcapital resources and revenues from operations will not be adequate to satisfyour funding requirements in 2004.

 

Our working capital requirements will dependupon many factors, including the extent and timing of our product sales, ouroperating results, the status of competitive products, and actual expendituresand revenues compared to our business plan. We are currently experiencingdeclining liquidity, losses from operations and negative cash flows, whichmakes it difficult for us to meet our current cash requirements, includingpayments to vendors, and may jeopardize our ability to continue as a goingconcern. We intend to address our liquidity problems by controlling costs,seeking additional funding (through capital raising transactions and businessalliances) and maintaining focus on revenues and collections.

 

If our losses continue, we willhave to obtain funds to meet our cash requirements through business alliances,such as strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or we may be required to curtailour operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tous or disadvantageous to existing stockholders. In addition, no assurance maybe given that we will be successful in raising additional funds or enteringinto business alliances.

 

##### **Sales andMarketing Initiatives**

##### ** **

In the past our sales volumehas not been sufficient to sustain our operations. During the six months endedJune 30, 2004 we were able, through the recent financing, to initiate anew marketing emphasis, which is intended by us to build sales, primarily ofour RFID products. Our marketing team has implemented the following salesstrategies:

 

1.               A marketing communications program to createbrand awareness in the security systems integration space;

2.               The hiring of two additional sales personneland one marketing administrative assistant;

3.               An assessment of the non-security market foractive RFID.

 

While there can be noassurance that our efforts will be successful, we believe that these strategieswill assist us in our goal of becoming profitable.

 

**Results of Operations**

 

##### **Three Months Ended June 30,2004 Compared to Three Months Ended June 30, 2003**

##### ** **

*Sales and Gross Profit*.Sales for the three months ended June 30, 2004 were $225,129 and for thethree months ended June 30, 2003 were $245,427.  Cost of sales for the three months endedJune 30, 2004 were $124,787 and for the three months ended June 30,2003 were $160,278. The gross profit for the three months ended June 30,2004 was $100,342 and $85,149 for the three months ended June 30, 2003.The decrease in sales was due to a large order for the video product in 2003that was not duplicated in 2004.  Themargin improvement is driven by a shift in the product mix and continuedimprovement in margins based on the shift to contract manufacturers.

 

Radio frequency identification (RFID) product sales were $195,300 forthe three months ended June 30, 2004 and $158,658 for the three monthsended June 30, 2003. Cost of sales was $107,979 for the three months endedJune 30, 2004 and $111,311 for the three months ended June 30, 2003.As a result, gross profits from RFID products were $87,321 for the three monthsended June 30, 2004 and $47,347 for the three months ended June 30, 2003.  Sales are continuing to increase based on theincreased exposure in the marketplace. The margin improvement is a result of the product mix shift andcontinued improvement based on the shift to contract manufacturers.

 

Digital video product sales were $29,829 for the three months endedJune 30, 2004 and $86,769 for the three months ended June 30,2003.  Cost of sales was $16,808 for thethree months ended June 30, 2004 and $48,967 for the three months endedJune 30, 2003.  As a result, grossprofits from digital video products were $13,021 for the three months endedJune 30, 2004 and $37,802 for the three months ended June 30,2003.  The decrease in sales is a resultof one large order during 2003 that was not duplicated in 2004.  The margin has been steady as a result of theproduct mix.

 

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*Operating Expenses*.Operating expenses were $888,993 for the three months ended June 30, 2004and $653,381 for the three months ended June 30, 2003.  This increase was due to increased salaries,increased advertising, additional research and development, higher insuranceand the hiring of outside professional services companies.

 

Research and development expenses were $166,534 for the three monthsended June 30, 2004 and $157,753 for the three months ended June 30,2003.  The increase is a result ofincreased salaries from the recession of the pay reduction implemented during2003 and some additional contract labor relating to certain RFID softwaredevelopment offset by the downsizing of the California facility and a decreasein prototyping of additional tag form factors.

 

Corporate general and administrative expenses were $461,863 for thethree months ended June 30, 2004 and $331,902 for the three months endedJune 30, 2003.  The increase is aresult of increased salaries from the recession of the pay reductionimplemented during 2003, increased spending on an investor relations firms,increased director’s and officer’s insurance and an increase in professionalservices expenses relating to the filing of a registration statement.

 

Selling and marketing expenses were $172,162 for the three months endedJune 30, 2004 and $49,937 for the three months ended June 30,2003.  The increase is a result ofincreased salaries from the recession of the pay reduction implemented during2003, increased headcount and an increase in advertising.  We attended several trade shows during thequarter as well as placed several advertisements.  We are attempting to reestablish our place inthe market.

 

Depreciation and amortization expenses were $88,434 for the threemonths ended June 30, 2004 and $113,789 for the three months endedJune 30, 2003.  The decrease isrelated to lower depreciation expense as a result of the age of the equipment,the closing of the Georgia facility and the downsizing of the Californiafacility.

 

*Other expenses, net*.Other expenses, net, were $270,321 for the three months ended June 30,2004 and $169,054 for the three months ended June 30, 2003. Interestexpense was $28,477 higher during the three months ended June 30, 2004,compared to the three months ended June 30, 2003, reflecting an increasein the amortization of the debt discount related to the convertible notes thatconverted during the quarter offset by the lower debt balance and lowerrate.  We also were able to settle someaccounts payable issues relating to prior periods at a discount from theaccrued amounts, which resulted in a $64,509 gain on settlements.

 

*Net Loss*. Net losswas $1,058,972 for the three months ended June 30, 2004, compared to aloss of $737,286 for the three months ended June 30, 2003.  The increase is mainly relating to theincreased salary expense, increased marketing activity and the hiring ofcertain professional service firms.

 

*Preferred Stock dividend requirements. *Preferred Stockdividend requirements were $70,490 for the three months ended June 30,2004 and $575,153 for the three months ended June 30, 2003. This decreasewas due to a beneficial conversion discount of $474,855 for the 2003 preferredstock converted during 2003.

 

##### **Six Months Ended June 30, 2004Compared to Six Months Ended June 30, 2003**

##### ** **

*Sales and Gross Profit*.Sales for the six months ended June 30, 2004 were $431,807 and for the sixmonths ended June 30, 2003 were $535,991. Cost of sales for the six months ended June 30, 2004 were $223,673and for the six months ended June 30, 2003 were $334,990. The gross profitfor the six months ended June 30, 2004 was $208,134 and $201,001 for thesix months ended June 30, 2003. The decrease in sales was due to a largeorder for the video product in 2003 that was not duplicated in 2004.  The margin improvement is driven by a shiftin the product mix and continued improvement in margins based on the shift tocontract manufacturers.

 

Radio frequency identification (RFID) product sales were $369,607 forthe six months ended June 30, 2004 and $284,658 for the six months endedJune 30, 2003. Cost of sales was $193,477 for the six months endedJune 30, 2004 and $192,246 for the six months ended June 30, 2003. Asa result, gross profits from RFID products were $176,130 for the six monthsended June 30, 2004 and $92,412 for the six months ended June 30,2003.  Sales are continuing to increasebased on the increased exposure in the marketplace.  The margin improvement is a result of theproduct mix shift and continued improvement based on the shift to contractmanufacturers.

 

Digital video product sales were $62,200 for the six months endedJune 30, 2004 and $251,333 for the six months ended June 30,2003.  Cost of sales was $30,196 for thesix months ended June 30, 2004 and $142,744 for the six months endedJune 30, 2003.  As a result, grossprofits from digital video products were $32,004 for the six months endedJune 30, 2004 and $108,589 for the six months ended June 30,2003.  The decrease in sales is a resultof one large order during 2003 that was not duplicated in 2004.  The margin improvement is a result of theproduct mix shift and continued improvement based on the shift to contractmanufacturers.

 

10

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*Operating Expenses*.Operating expenses were $1,746,781 for the six months ended June 30, 2004and $1,256,100 for the six months ended June 30, 2003.  This increase was due to increased salaries,increased advertising, additional research and development, higher insuranceand the hiring of outside professional services companies.

 

Research and development expenses were $351,892 for the six monthsended June 30, 2004 and $294,146 for the six months ended June 30,2003.  The increase is a result ofincreased salaries from the recession of the pay reduction implemented during2003, increase in contract labor for a software development project and someadditional development relating to certain RFID products offset by thedownsizing of the California facility.

 

Corporate general and administrative expenses were $866,079 for the sixmonths ended June 30, 2004 and $590,469 for the six months endedJune 30, 2003.  The increase is aresult of increased salaries from the recession of the pay reductionimplemented during 2003, increased spending on an investor relations firms,increased director’s and officer’s insurance and an increase in professionalservices expenses relating to the filing of a registration statement.  However, we were able to offset some of thatincrease with a reduction in bad debt expense.

 

Selling and marketing expenses were $346,745 for the six months endedJune 30, 2004 and $138,534 for the six months ended June 30,2003.  The increase is a result ofincreased salaries from the recession of the pay reduction implemented during2003, increased headcount and an increase in advertising.  We attended several trade shows during theperiod as well as placed several advertisements.  We are attempting to reestablish our place inthe market.

 

Depreciation and amortization expenses were $182,065 for the six monthsended June 30, 2004 and $232,951 for the six months ended June 30,2003.  The decrease is related to lowerdepreciation expense as a result of the age of the equipment, the closing ofthe Georgia facility and the downsizing of the California facility.

 

*Other expenses, net*.Other expenses, net, were $498,293 for the six months ended June 30, 2004and $385,902 for the six months ended June 30, 2003. Interest expense was$131,560 higher during the six months ended June 30, 2004, compared to thesix months ended June 30, 2003, reflecting an increase in the amortizationof the debt discount related to the convertible notes that converted during theperiod.  We also were able to settle someaccounts payable issues relating to prior periods at a discount from theaccrued amounts, which resulted in a $152,751 gain on settlements.

 

*Net Loss*. Net losswas $2,036,940 for the six months ended June 30, 2004, compared to a lossof $1,441,001 for the six months ended June 30, 2003.  The increase is mainly relating to theincreased salary expense, increased marketing activity and the hiring of certainprofessional service firms.

 

*Preferred Stock dividend requirements. *Preferred Stockdividend requirements were $136,011 for the six months ended June 30, 2004and $674,349 for the six months ended June 30, 2003. This decrease was dueto a beneficial conversion discount of $474,855 for the 2003 preferred stockconverted during 2003.

 

##### **Other**

 

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

 

**Item 3.Controls****and Procedures**

 

##### **Controls and Procedures**

##### ** **

(a)                                  Evaluationof Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by thisQuarterly Report on Form 10-QSB, the Company’s principal executive officer andprincipal financial officer have concluded that the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensurethat information required to be disclosed by the Company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.

 

(b)                                 Changesin Internal Controls.  During theperiod covered by this report, 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 material weaknesses.

 

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**PART II****. OTHER INFORMATION**

 

**Item 1.Lega****l Proceedings**

 

Axcess is engaged in a number of lawsuitswith approximately eight vendors who claim they are owed amounts from $500 to$45,000, which aggregates in total $117,330. We are currently defending orseeking to settle each of the vendor’s claims. At June 30, 2004, we had accrued the delinquent amounts we expectto be liable for, for the claims described in this paragraph.

 

**Item 2.Chan****ges in Securities**.

 

During the three months ended June 30, 2004, we issuedunregistered securities in connection with the transactions described below.The issuance of stock was exempt from the registration requirements of theSecurities Act, as amended by virtue of Section 4(2) thereof, astransactions not involving a public offering and an appropriate restrictivelegend was affixed to the stock certificates.

 

***Convertible Note***

 

During the three months ended June 30, 2004 seven of the holdersof the July 2002 Convertible debt elected to convert $116,667 of their$350,000 note plus $43,011 of accrued interest into 103,005 of unregisteredcommon stock.  We reissued the notes for$233,333.

 

During the three months ended June 30, 2004 eight of the holdersof the January 2003 Convertible debt elected to convert $61,667 of their$185,000 note plus $16,345 of accrued interest into 56,945 of unregisteredcommon stock.  We reissued the note for$123,333.  During the three months endedJune 30, 2004 the board elected to convert $9,018 of accrued and unpaiddividends into 3,681 shares of Axcess common stock.

 

***2004 PreferredEquity Offering***

 

During the second quarter of 2004the Company raised a net of approximately $1,200,000 of additional workingcapital through an exempt Preferred Stock offering.  The Preferred Stock is designated as 2004Preferred and consists of 625,000 shares of Preferred Stock bearing a 7%dividend and 357,142 warrants to purchase the Company’s common stock exercisablefor two years at $3.20 per share. The offering also included an automatic conversion into common stock ona one for one basis if the closing twenty-day average stock price is over $4.00per share.

 

***Stock Options***

 

During the three months endedJune 30, 2004 four employees exercised 32,800 stock options.

 

***Common Stock forServices Rendered***

 

During the three months endedJune 30, 2004 we issued 25,000 restricted common shares to Equitis, Inc.to compensate them for services provided to Axcess.

 

##### **Item 3.Defau**lts Upon Senior Securities

##### ** **

None

 

##### **Item 4.Submiss**ion of Matters to a Vote of Security Holders

##### ** **

None

 

##### **Item 5. Oth**er Information

##### ** **

None

 

**Item 6.Exhib****its and Reports on Form8-K**.

 

(a) Exhibits:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                       |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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* Filed herewith

 

(b) Reports on Form 8-K:

 
| **Date**           | ** ** | **Description**                                                                                                                                      |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| July 19, 2004 |       | On July 19, 2004, Axcess International Inc. filed an 8-K  announcing they had entered into an Exclusive License Agreement with  TechSearch LLC. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                 | AXCESS INTERNATIONAL 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 12, 2004 |                                                  |

 

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