The findings are a setback in the plan to send the system, known as the Gorgon Stare, to Afghanistan this winter to improve the military's ability to track insurgents, the Los Angeles Times reported Tuesday.
The drone, in development for two years, transmits live video from nine cameras on the craft's belly to keep a constant watch on nearly everything that moves within a 3-mile area.
Air Force officials have promoted the "all-seeing eye" system as an advance over current drone surveillance systems that provide a single video feed of a much smaller area.
In testing that began in October at Eglin Air Force Base in Florida, the system had trouble tracking humans during the day and larger objects, such as vehicles, at night, testers said.
The testers found the camera system "not operationally effective and operationally suitable," and their report recommended against deploying it, the Times said.