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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

o                   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to               .

COMMISSION FILE NUMBER: 0-11933

AXCESS INTERNATIONAL INC.

(Exact name of small business issuer as specified in its charter)

16650 Westgrove Drive, Suite 600
Addison, Texas 75001
(972) 407-6080

(Address, including telephone number and area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated file and “Smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark weather the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of common stock outstanding on July 30, 2010: 33,825,528

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AXCESS INTERNATIONAL INC.

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

AXCESS INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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AXCESS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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AXCESS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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AXCESS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)                                 Summary of Significant Accounting Policies

(a) Description of Business and Going Concern

The Company is a leading provider of patented Radio Frequency Identification (“RFID”) and Real Time Location Systems (“RTLS”) solutions that locate, track, monitor, count and protect people, assets, and vehicles, thereby improving productivity, security and access to real-time intelligence.  The Company’s multiuse, single-system solutions include active, dual and semi-active RFID tags, activators and readers that support automatic monitoring and tracking applications, such as electronic asset protection and asset management, and automatic personnel and vehicle access control.  Axcess’ web-based software provides a suite of management tools that include reporting, display, decision and control functions that enable productivity, security and local positioning.

The Company’s business plan for 2010 is predicated principally upon the successful marketing of its RFID products. During the first six months of 2010, operations utilized approximately $819,000 of cash. The Company anticipates that its existing working capital resources and revenues from operations will not be adequate to satisfy its funding requirements for all of 2010. We are currently experiencing declining liquidity, losses from operations and negative operating cash flows, which make it difficult for us to meet our current cash requirements, including payments to vendors, and may jeopardize our ability to continue as a going concern. Management is attempting to obtain equity financing for use in the Company’s operations. In addition, management is trying to expand the Company’s sales and obtain profitable operations.

Our auditors have included an explanatory paragraph in their audit opinion with respect to our consolidated financial statements at December 31, 2009. The paragraph states that our recurring losses from operations and resulting continued dependence on access to external financing raise substantial doubts about our ability to continue as a going concern. Furthermore, the factors leading to and the existence of the explanatory paragraph may adversely affect our relationship with customers and suppliers and have an adverse effect on our ability to obtain financing.

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

If the Company’s losses or lack of operating capital continue, the Company will have to obtain funds to meet its cash requirements through business alliances, such as strategic or financial transactions with third parties, the sale of securities or other financing arrangements, or the Company may be required to curtail its operations, seek a merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to the Company or disadvantageous to existing stockholders. In addition, no assurance may be given that the Company will be successful in raising additional funds or entering into business alliances.

(b) Company Organization

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

The Company has received working capital in various forms from Amphion Ventures, L. P. and affiliates of Amphion Ventures, L. P. including Amphion Partners, Amphion Investments LLC, Antiope Partners LLC, VennWorks LLC (formerly incuVest LLC), Amphion Capital Management LLC, Amphion Innovations plc, Amphion Innovations US Inc. and NVW, LLC (collectively, the “Amphion Group”). The Amphion Group owns approximately 49% of the outstanding voting common stock of the Company.

(c) Basis of presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed below, the Company makes significant assumptions in recording its allowance for doubtful accounts, inventory valuation, impairment of long-lived assets, warranty costs, the valuation allowance for deferred tax assets, the

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value of components of equity and debt instruments and stock based compensation expense. Actual results could differ from those estimates, and the differences may be significant.

The accompanying unaudited financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of December 31, 2009 and for the year then ended included in our annual report on Form 10-K for the fiscal year ended December 31, 2009.

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed below, the Company makes significant assumptions in recording its allowance for doubtful accounts, inventory valuation, and impairment of long-lived assets, warranty costs, the valuation allowance for deferred tax assets and the value of the components of equity and debt instruments. Actual results could differ from those estimates, and the differences may be significant.

(e) Inventory

Inventory is valued at the lower of cost or market using the first-in, first-out method. Inventory, net of valuation allowance of $8,392 at June 30, 2010 and December 31, 2009, respectively, was comprised of the following:

The components of cost of sales are summarized as follows:

(f) Stock-Based Compensation

ASC Topic 718, Compensation — Stock Compensation requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on the grant date fair value of those awards.  In accordance with ASC Topic 718, this cost is recognized over the period for which an employee is required to provide service in exchange for the award.  Stock based compensation expense for 2010 and 2009 was $577,332 and $297,402, respectively which was recorded in operating expenses.  This expense decreased net profit per share by $0.017 and $0.009 for 2010 and 2009, respectively.  The Company did not recognize a tax benefit from the stock compensation expense because the Company considers it is more likely than not the related deferred tax assets, which have been reduced by a full valuation allowance, will not be realized.

The Black-Scholes option-pricing model was used to estimate the option fair value.  The option pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility, risk-free interest rate and the expected option term (the amount of time from the grant date until the options are exercised or expire).  Expected volatility was calculated based upon actual historical stock price movements over the most recent periods at the time of the grants equal to the expected option term, which is consistent with ASC Topic 718.

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The following table illustrates the effect on operating expenses:

(g) Stock Options and Warrants

Under the Company’s 2005 Equity Incentive Plan, the Company may grant up to 5,000,000 shares of common stock to its employees. The exercise price of each option is not less than the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years.  Options are generally granted each year and have various vesting requirements. Options granted typically vest over a four-year period.  Shares issued upon stock options exercised are issued as new shares.  During the six months ended June 30, 2010, the Company granted 1,114,961 stock options under the stock option plan.  Key assumptions are as follows:

As of June 30, 2010 the Company had 165,900 options outstanding from the 1991 Equity Plan, 20,000 from the Directors plan, 1,519,961 from the 2001 Equity plan and 515,000 issued as inducements to hire.  In total the Company had 2,220,861 employee options outstanding from plans other than the 2005 Equity Incentive Plan.

The following table summarizes employee stock options outstanding and changes during the six months ended June 30, 2010:

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The options outstanding at June 30, 2010 have exercise prices as indicated in the table below:

The Company has issued warrants to purchase common stock in connection with issuance of notes payable to stockholders and preferred stock. The following table summarizes warrants outstanding at June 30, 2010:

The warrants outstanding at June 30, 2010 have exercise prices as indicated in the table below.

During the six months ended June 30, 2010 the Company issued an additional 820,000 warrants in conjunction with various debt agreements.  The warrant had a strike price of $0.75 and they expire on December 31, 2014.  The Company estimates the fair market value of the warrant using Black-Scholes Valuation Model.  Key assumptions used to estimate the fair market value of the warrants include the exercise price of $0.75, the expected term (five years), the expected volatility of the Company’s stock over the warrants expected term (ranging from 93% to 99%) and risk free interest rate (ranging from 3.59% to 3.89%).

(2)                             Contingencies

From time to time we may be named in claims arising in the ordinary course of business. Currently, no material legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

Axcess is engaged in a number of lawsuits with approximately four vendors and one customer who claim they are owed amounts from $500 to $27,000, which aggregates in total $47,676. We are currently defending or seeking to settle each of the vendor’s and customer claims.  At June 30, 2010, we accrued $30,676, which represents the delinquent amounts we expect to be liable for, for the claims described in this paragraph.

On March 31, 2008, Axcess entered into an agreement with the developer of our next generation RFID product, the Dot, whereby Axcess has agreed to pay a minimum commercialization fee of one million dollars over the next six years.  The amount is still contingent on the supplier completing the testing and certifying the product is within all of the original specifications.  The testing is ongoing but the product has not passed all of the preliminary testing and we are still evaluating the impact on the product.  As of June 30, 2010 Axcess has not signed off on the completion of the product and Innovison has issued a letter of termination for failure to pay. We currently have accrued $392,808 for services that have been completed; however, we have not accrued the remainder for services that have not been completed.

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(3)                                 Preferred Stock

The Company has authorized 10,000,000 shares of convertible preferred stock, of which shares designated in three series are currently outstanding. Information with respect to the series of preferred stock outstanding at each balance sheet date is summarized below.

(a)                               Series 2005 Preferred Stock

On December 30, 2005, the Company raised $813,021 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005 Preferred and consists of 956,495 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a one to one basis at $0.85.  In addition, the Company issued 956,495 warrants to purchase the Company’s common stock exercisable for five years at $1.50 per share. Each warrant will be callable by the Company if and when the Company’s common stock share price exceeds $3.00 per share for at least twenty (20) consecutive trading days.  The Company used the proceeds for general working capital.

On March 14, 2006, the Company raised an additional $1,489,245 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005 Preferred and consists of 1,752,055 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a one to one basis at $0.85.  In addition, the Company issued 1,752,055 warrants to purchase the Company’s common stock exercisable for five years at $1.50 per share. Each warrant will be callable by the Company if and when the Company’s common stock share price exceeds $3.00 per share for at least twenty (20) consecutive trading days.  The Company used the proceeds for general working capital.

As of June 30, 2010 and December 31, 2009, the Company had 2,649,726 shares of Series 2005 Preferred shares outstanding, respectively.

(b)                               Series 2006 Preferred Stock

On May 31, 2006, the Company raised $1,200,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006 Preferred and consists of 1,200,000 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 600,000 warrants to purchase the Company’s common stock exercisable for five years at $2.00 per share. Each warrant will be callable by the Company if and when the Company’s common stock share price exceeds $5.00 per share for at least twenty (20) consecutive trading days.  The Company used the proceeds for general working capital.

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As of June 30, 2010 and December 31, 2009, the Company had 1,200,000 shares of Series 2006 Preferred shares outstanding.

(c)                                Series 2006B Preferred Stock

On December 1, 2006, the Company raised $750,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006B Preferred and consists of 750,000 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 750,000 warrants to purchase the Company’s common stock exercisable for five years at $2.00 per share.  The Company used the proceeds for general working capital.

$150,000 of the 2006B Preferred Equity Offering was from Amphion Innovations plc, an affiliate of the Amphion Group, our majority shareholder and $300,000 was from Richard C.E. Morgan our chairman and an affiliate of the Amphion Group.

As of June 30, 2010 and December 31, 2009, the Company had 700,000 shares of Series 2006B Preferred shares outstanding.

(d)                               Series 2006C Preferred Stock

On January 29, 2007, the Company raised $2,000,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006C Preferred and consists of 200 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a ten thousand (10,000) to one (1) basis at $1.00.  In addition, the Company issued 1,000,000 warrants to purchase the Company’s common stock exercisable for five years at $2.00 per share.  The Company used the proceeds for general working capital.

As of June 30, 2010 and December 31, 2009, the Company had 100 shares of Series 2006C Preferred shares outstanding.

(e)                                Series 2007 Preferred Stock

During the third quarter of 2007, the Company raised $2,050,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2007 Preferred and consists of 205 shares of Preferred Stock bearing no dividends.  However, the shares are convertible into common stock on a one to ten thousand basis at $1.00.  In addition, the Company issued 1,025,000 warrants to purchase the Company’s common stock exercisable for five years at $2.00 per share.  The Company used the proceeds from the sale of the 2007 Preferred stock for general working capital.

$250,000 of the 2007 Preferred Equity Offering was from Richard C.E. Morgan our chairman and an affiliate of the Amphion Group.

During the first quarter of 2010, one holder of the Series 2007 Preferred elected to convert his 10 shares in to 100,000 shares of Axcess Common shares.  As of June 30, 2010 and December 31, 2009, the Company had 175 and 185 shares of Series 2007 Preferred shares outstanding, respectively.

(f) Series 2008 Preferred Stock

On April 25, 2008, the Company raised $1,200,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors, which have previously invested in Axcess. The Preferred Stock is designated as 2008 Preferred and consists of 120 shares of Preferred Stock bearing no dividends. However, the shares are convertible into common stock on a 1 to 10,000 basis. In addition, the Company issued 1,200,000 warrants to purchase the Company’s common stock exercisable for five years at $1.50 per share.

The Company also recorded an additional preferred stock dividend of $558,686 relating to the beneficial conversion feature and the warrants that were issued in connection with the 2008 Preferred Stock Equity.

As of June 30, 2010 and December 31, 2009 the Company had 120 shares of Series 2008 Preferred shares outstanding.

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(g) Series 2008B Preferred Stock

Beginning on September 30, 2008 the Company authorized the raising of $600,000 of additional working capital through an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) private offering of preferred stock to accredited and institutional investors. The Preferred Stock is designated as 2008B Preferred and consists of 80 shares of Preferred Stock bearing no dividends. However, the shares are convertible into common stock on a ten thousand (10,000) to one basis. In addition, the Company issued 400,000 warrants to purchase the Company’s common stock exercisable for five years at $1.50 per share. Each warrant will be callable by the Company if and when the Company’s common stock share price exceeds $3.00 per share for at least twenty (20) consecutive trading days. The Company used the proceeds for general working capital.

The Company also recorded an additional preferred stock dividend of $187,501 relating to the beneficial conversion feature and the warrants that were issued in connection with the 2008B Preferred Stock Equity.

As of June 30, 2010 and December 31, 2009 the Company had 80 shares of Series 2008B Preferred shares outstanding.

(4)                                 Notes Payable

Notes payable to Stockholders consist of the following:

PV Proceeds Holdings, Inc.

On July 28, 1999, the Company acquired substantially all of the assets of PV Proceeds Holdings, Inc. (formerly “Prism Video”), a privately held corporation, and agreed to pay $4,000,000 to PV Proceeds Holdings, Inc. on December 31, 2002. The balance of the indebtedness under the PV Proceeds Holdings, Inc. note issued was due in full by the Company on December 31, 2002 and was in default during 2003 until extended by PV Proceeds Holdings, Inc.  The note payable had an original face amount of $4,000,000 and was collateralized by the Company’s note receivable from Amphion Ventures, LP (“Amphion Ventures”). Pursuant to the Asset Purchase Agreement between Axcess and PV Proceeds Holdings, Inc., Axcess assigned PV Proceeds Holdings, Inc. all payments of principal to be made by Amphion Ventures under the note receivable until the balance of the note receivable was paid in full or the balance due under the note payable to PV Proceeds Holdings, Inc. was paid in full, whichever occurred first. In addition, the shares of common stock, which PV Proceeds Holdings, Inc. may acquire upon conversion of preferred stock or by exercise of the warrant, were subject to a three-year lockup from the date of the closing, which could be reduced to two years upon the occurrence of certain events. The warrant was exercisable on or before July 28, 2004.

Axcess reached an Agreement to Amend Purchase Note and Payment Term with PV Proceeds Holdings, Inc.  PV Proceeds consented to a five-year extension of the note with an interest rate of 5% per annum from January 1, 2003 payable in full at maturity of December 31, 2007.  As further consideration for entering into the agreement Axcess granted to PV Proceeds Holdings, Inc. a warrant to purchase up to 500,000 shares of common stock of Axcess.  The warrants had an exercise price of $2.00 per share and expired on the earlier of February 14, 2008 or forty-five days after the principal and all accrued interest are paid.  Axcess has also agreed to reduce the principal amount due first for 10% of equity proceeds and second 20% of proceeds from options exercised.  Axcess also recorded deferred debt issuance costs of $689,932 for the value of the warrants, which were amortized over the life of the loan.  The deferred debt issuance costs were fully amortized as of December 31, 2007.

Axcess reached an Agreement with PV Proceeds Holdings, Inc. to extend the maturity of the note from December 31, 2007 to December 31, 2011.  Axcess agreed to pay a $25,000 extension fee and to increase the interest rate from 5.0% to 5.5%. The extension fee is reflected as deferred debt issuance cost and amortized as interest expense over the life of the extension.  As of June 30, 2010 the balance is $9,375.  Axcess has also agreed to reduce the principal amount due by 10% of any equity proceeds and 20% of all proceeds from options and warrants exercised.  In connection with the Series 2008 and 2008B Preferred equity offering, $162,000 and $117,000 is due at December 31, 2009 and June 30, 2010, respectively.  This has been reflected as a current liability.  For the six months ended June 30, 2010 and 2009, there were $67,000 and $67,218 of interest expensed for the PV Proceeds Holdings note.  Accrued interest for the PV Proceeds Holdings note were $1,177,710 and $1,110,710 at June 30, 2010 and December 31, 2009, respectively.

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Amphion Investment LLC

Axcess entered into a 6.75% demand note with Amphion Investments, LLC, dated January 25, 2002. The borrowings are unsecured.  The note was due December 31, 2007, Axcess reached an Agreement with Amphion Investments LLC to extend the maturity of the note to December 31, 2011.  Axcess agreed to increase the interest rate from 5.0% to 5.5%.  For the six months ended June 30, 2010 and 2009, there were $10,740 of interest expensed for the Amphion Investment LLC note.  Accrued interest for the Amphion Investment note was $134,600 and $129,200 at June 30, 2010 and December 31, 2009, respectively.

2009 Convertible Note

Starting on October 29, 2009 through June 30, 2010, Axcess entered into certain convertible notes with several institutional or otherwise accredited investors including Amphion Innovations plc, an affiliate of the Amphion Group, our majority shareholder.  The aggregate principal of the notes is $2,372,426 and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent per annum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into 4,744,852 common shares of Axcess at the option of each of the holders.   As part of the consideration for the Convertible Notes, Axcess also issued to the note holders warrants to purchase an aggregate of 2,372,426 common shares with an exercise price of $0.75. The warrants expire on December 31, 2014.

A portion of the new Convertible Notes was issued for the conversion and retirement of older convertible notes currently held by Amphion Innovations plc. The principal of the notes converted was $1,038,273 and had accrued interest of $79,153.  As of June 30, 2010, total due to Amphion Innovations plc is $1,442,426.  Amphion has not funded the remaining $175,000 that has been committed as of June 30, 2010.

For the six months ended June 30, 2010 and 2009, there were $48,692 and $0 of interest expensed for the 2009 Convertible Notes.  Accrued interest for the 2009 Convertible Notes were $60,935 and $12,242 at June 30, 2010 and December 31, 2009, respectively.

(5)                                 Significant Customers

During the three months ended June 30, 2010, the Company had three customers that accounted for 58% of revenue.  During the three months ended June 30, 2009 the Company had one customer that accounted for 90% of revenue.

During the six months ended June 30, 2010, the Company had three customers that accounted for 44% of revenue.  During the six months ended June 30, 2009 the Company had one customer that accounted for 86% of revenue.

(6)                                 Recent Accounting Pronouncements

In September 2009, the FASB ratified an amendment to accounting standards addressing revenue recognition for arrangements with multiple revenue-generating activities. The amendment addresses how revenue should be allocated to separate elements that could impact the timing of revenue recognition. The amendment is effective for us on a prospective basis for revenue arrangements entered into or materially modified on or after January 1, 2011, and earlier application is permitted. We may elect, but are not required, to apply the standards retrospectively to all prior periods. We are currently evaluating the impact this amendment may have on our consolidated financial position and results of operations.

(7)                                 Subsequent Events

Since June 30, 2010, Axcess has continued to enter into certain 2009 convertible notes with several institutional or otherwise accredited investors including Amphion Innovations plc, an affiliate of the Amphion Group, our majority shareholder.  The aggregate additional principal of the notes is $217,500 issued and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent per annum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into 870,000 common shares of Axcess at the option of each of the holders.   As part of the consideration for the Convertible Notes, Axcess also issued to the note holders warrants to purchase an aggregate of 870,000 common shares with an exercise price of $0.75. The warrants expire on December 31, 2014.

The Company’s payroll due to be paid July 30, 2010 was delayed until August 8, 2010 due to working capital constraints.

On July 15, 2010, the Company filed a lawsuit against Baker Botts L.L.P. asserting negligence, breach of fiduciary duty, and gross negligence related to intellectual property matters.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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 comparable terminology.

These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those referred to in the forward-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 on management’s current expectations or beliefs as well as assumptions made by, and information currently available to, management.

A variety of factors could cause actual results to differ materially from those anticipated in the Company’s forward-looking statements, including the following factors: changes from anticipated levels of sales, access to capital, future national or regional economic and competitive conditions, changes in relationships with customers, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, validity of patents, technological change, dependence on key personnel, availability of key component parts, dependence on third party manufacturers, vendors, contractors, product liability, casualty to or other disruption of the production facilities, delays and disruptions in the shipment of the Company’s product, and the ability of the Company to meet its stated business goals.  For a detailed discussion of these and other cautionary statements and factors that could cause actual results to differ from the Company’s forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission, especially “Item 1. Description of Business” (including the “Risk Factors” section of Item 1) and “Item 6. Management’s Discussion and Analysis of Plan of Operation” of the Company’s 2009 Annual Report on Form 10-K.

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

Recent Developments:  Going Concern and Liquidity Problems

We do not have sufficient working capital to sustain our operations.  We have been unable to generate sufficient revenues to sustain our operations. We will have to obtain funds to meet our cash requirements through business alliances, such as strategic or financial transactions with third parties, the sale of securities or other financing arrangements, or we may be required to curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing stockholders. In addition, no assurance may be given that we will be successful in raising additional funds or entering into business alliances.

Our auditors have included an explanatory paragraph in their audit opinion with respect to our consolidated financial statements at December 31, 2009. The paragraph states that our recurring losses from operations and resulting continued dependence on access to external financing raise substantial doubts about our ability to continue as a going concern. Furthermore, the factors leading to and the existence of the explanatory paragraph may adversely affect our relationship with customers and suppliers and have an adverse effect on our ability to obtain financing.

Liquidity and Capital Resources

Since inception, we have utilized the proceeds from a number of public and private sales of our equity securities, the exercise of options, convertible debt, and short-term bridge loans from stockholders to meet our working capital requirements. At June 30, 2010, we had a working capital deficit of $2,475,710.

Our operations are not profitable in 2010. Our cash decreased $44,132 during the six months ended June 30, 2010. We funded operations with convertible notes.  No assurance can be given that such activities will continue to be available to provide funding to us.  Our business plan for 2010 is predicated principally upon the successful marketing of our RFID products. We anticipate that our existing working capital resources and revenues from operations will not be adequate to satisfy our funding requirements throughout 2010.

Our working capital requirements will depend upon many factors, including the extent and timing of our product sales, our operating results, the status of competitive products, and actual expenditures and revenues compared to our business plan. We are currently experiencing declining liquidity, modest profits from operations and small positive cash flows, which make it difficult for us to meet our current cash requirements, including payments to vendors, and may jeopardize our ability to continue as a going concern. We intend to address our liquidity problems by controlling costs, seeking additional funding (through capital raising transactions and

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business alliances) and maintaining focus on revenues and collections.

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

Results of Operations

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Sales and Gross Profit. Sales for the three months ended June 30, 2010 were $317,444 and for the three months ended June 30, 2009 were $3,156,836.  Cost of sales for the three months ended June 30, 2010 were $145,766 and for the three months ended June 30, 2009 were $797,930.  The gross profit for the three months ended June 30, 2010 was $171,678 and $2,358,906 for the three months ended June 30, 2009. The majority of the decrease in sales is a result of the Caribbean Port Security Contract awarded in January 2009 that was not repeated during 2010.  The gross margin percent for the three months ended June 30, 2010 was 54% compared to 75% for the same period in 2009.  The lower gross margin percent was a result of the increased services provided in the Port Security Contract and as a result of the timing of the project.  We continue to expect the margin will continue to be stable in the 40% to 50% range.

Operating Expenses. Operating expenses were $650,130 for the three months ended June 30, 2010 and $1,186,861 for the three months ended June 30, 2009.  Overall operating expenses were down over the period.  The decrease relates to reduced selling expense related to the Port Security Contract and lower salary expenses.

Research and development expenses were $217,389 for the three months ended June 30, 2010 and $239,240 for the three months ended June 30, 2009.  The majority of the decrease is the result of a pay cut we implemented during the quarter.  All salaries were cut from 20% - 40%.  However, some of that savings was offset by an increase in development of the next generation RFID product.  We are continuing to expense the development as incurred.

Corporate general and administrative expenses were $287,907 for the three months ended June 30, 2010 and $410,470 for the three months ended June 30, 2009.  The majority of the decrease is the result of a pay cut we implemented during the quarter.  All salaries were cut from 20% - 40%.  In addition we had a reduction of bad debt expense.

Selling and marketing expenses were $139,706 for the three months ended June 30, 2010 and $532,093 for the three months ended June 30, 2009.  The majority of the decrease is the result of expenses paid relating to the Caribbean Port Security Contract during 2009.  In addition we implemented a pay cut during the quarter.  All salaries were cut from 20% - 40%.

Depreciation and amortization expenses were $5,128 for the three months ended June 30, 2010 and $5,058 for the three months ended June 30, 2009.  Depreciation is basically flat over the period.

Other expenses, net. Other expenses, net, were $124,884 for the three months ended June 30, 2010 and $56,266 for the three months ended June 30, 2009. Interest expense was $43,920 higher during the three months ended June 30, 2010, compared to the three months ended June 30, 2009, reflecting higher expense associated with warrants that were issued with the convertible notes.   The loss on vendor settlements was also increased by $24,698.

Net income (Loss). Net loss was $603,336 for the three months ended June 30, 2010, compared to income of $1,115,779 for the three months ended June 30, 2009.  The increase in the loss is mainly related to a decrease gross margin mainly relating to the Port Contract.  Offset by lower salary expense as a result of the pay cuts implemented during 2010.

Preferred Stock dividend requirements.  Preferred Stock dividend requirements were $0 for three months ended June 30, 2010 and $47,797 for three months ended June 30, 2009.  The decrease is a result of all holders of the dividend barring preferred shareholders converting their preferred shares to common.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Sales and Gross Profit.  Sales for the six months ended June 30, 2010 were $462,733 and for the six months ended June 30, 2009 were $4,239,518.  Cost of sales for the six months ended June 30, 2010 were $231,814 and for the six months ended June 30, 2009 were $1,543,904.  The gross profit for the six months ended June 30, 2010 was $230,919 and $2,695,614 for the six months

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ended June 30, 2009. The majority of the decrease in sales is a result of the Caribbean Port Security Contract awarded in January 2009 that was not repeated during 2010.  The gross margin percent for the six months ended June 30, 2010 was 50% compared to 64% for the same period in 2009.  The lower gross margin percent was a result of the Port Security contract.  We continue to expect our overall margin will continue to be stable in the 40% to 50% range.

Operating Expenses. Operating expenses were $1,731,685 for the six months ended June 30, 2010 and $2,219,895 for the six months ended June 30, 2009.  The majority of the decrease relates to selling expenses as a result of the Port Security Contract during 2009.

Research and development expenses were $561,067 for the six months ended June 30, 2010 and $548,599 for the six months ended June 30, 2009.  The expenses are basically flat for the two periods.   However, there was an increase in the stock compensation expense (non-cash) and a reduction in salary expenses.  We implemented a 20% - 40% pay reduction during the second quarter of 2010.

Corporate general and administrative expenses were $772,942 for the six months ended June 30, 2010 and $734,923 for the six months ended June 30, 2009.  The expenses are basically flat for the two periods.   However, there was an increase in the stock compensation expense (non-cash) and a reduction in salary expenses.  We implemented a 20% - 40% pay reduction during the second quarter of 2010.

Selling and marketing expenses were $387,292 for the six months ended June 30, 2010 and $926,651 for the six months ended June 30, 2009. The majority of the decrease relates to reduced selling expense relating to the port contract signed and implemented during 2009 that was not repeated in 2010.

Depreciation and amortization expenses were $10,385 for the six months ended June 30, 2010 and $9,722 for the six months ended June 30, 2009.  Depreciation is basically flat over the period.

Other expenses, net. Other expenses, net, were $221,302 for the six months ended June 30, 2010 and $119,818 for the six months ended June 30, 2009. Interest expense was $32,977 higher during the six months ended June 30, 2010, compared to the six months ended June 30, 2009, reflecting the expense associated with the warrants that were issued with the convertible notes.   The gain on vendor settlements decreased by $68,507.

Net income ( Loss). Net loss was $1,722,069 for the six months ended June 30, 2010, compared to income of $355,901 for the six months ended June 30, 2009.  The increase is mainly related to a decrease in gross margin mainly relating to the Port Security Contract.

Preferred Stock dividend requirements.  Preferred Stock dividend requirements were $0 for six months ended June 30, 2010 and $95,263 for six months ended June 30, 2009.

Other

Inflation. During the last two fiscal years inflation has not had, and is not expected to have during this fiscal year, a material impact on the operations and financial condition of the Company.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

None

Item 4. Controls and Procedures

Controls and Procedures

The Company’s chief executive officer and chief financial officer are responsible for establishing and maintaining disclosure controls and procedures for the Company.

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as of June 30, 2010. Based on this evaluation, our principal executive officer and our chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective and not adequately designed to ensure that the information required to be disclosed byus in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time

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periods specified in the applicable rules and forms and that such information was accumulated and communicated to our chief executive officer and chief financial officer, in a manner that allowed for timely decisions regarding required disclosure.

Based on our evaluation, management has concluded that our internal control over financial reporting was not effective as of June 30, 2010. Management has determined that (i) we are unable to maintain the proper segregation of various accounting and finance duties because of our small size and limited resources, (ii) much of the financial closing process is done off-line on electronic spreadsheets that are maintained on individual computers and are not backed up and (iii) based on our staffing we rely on our Chief Financial Officer to provide a significant amount of our compensating controls.

We intended to remediate these material weaknesses during 2009 however; liquidity issues prevented us from making changes.  Therefore, we intend to address theses material weaknesses during the second half of 2010 if liquidity improves.  Notwithstanding these material weaknesses, we believe that our financial conditions, results of operations and cash flows presented in this report of Form 10-Q are fairly presented in all material respects.

(b) Changes in Internal Controls

During the period ended June 30, 2010, there has been no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Axcess is engaged in a number of lawsuits with approximately four vendors and one customer who claim they are owed amounts from $500 to $27,000, which aggregates in total $47,676. We are currently defending or seeking to settle each of the vendor’s and customer claims.  At June 30, 2010, we had accrued $30,676, which represents the delinquent amounts we expect to be liable for.

On May 24, 2010, Axcess International Inc. filed suit against Savi Technologies, Inc. a wholly owned subsidiary of Lockheed Martin Corporation for infringing U.S. Patent Nos. 6,294,953 entitled “High Sensitivity Demodulator For A Radio Tag And Method,”and 7,271,727 entitled “Dual Frequency Radio Tag For A Radio Frequency Identification System”. The suit alleges damages past and present in amounts unspecified. The Company feels it had no alternative but to file suit to protect its intellectual property, business, and plans going forward.

Item 1A. Risk Factors

Not required

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended June 30, 2010, the Company issued unregistered securities in connection with the transactions described below.  The proceeds were used for general working capital requirements.  The issuance of stock was exempt from the registration requirements of the Securities Act, as amended by virtue of Section 4(2) thereof, as transactions not involving a public offering and an appropriate restrictive legend was affixed to the stock certificates.

Common Stock

During the three months ended June 30, 2010 the Company issued 1,114,961 stock options with an exercise price of $0.30 and had 100,000 options expire and 48,000 options that were forfeited.

Warrants

During the three months ended June 30, 2010 the Company issued an additional 470,000 warrants in conjunction with various debt offerings.  The warrants had a strike price of $0.75 and they expire on December 31, 2014.

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

None

Item 5. Other Information

None

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

(a) Exhibits:

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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 the undersigned thereunto duly authorized.

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