<PAGE>   1
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ---------------
                                  FORM 10-KSB
(Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                          COMMISSION FILE NO. 0-11933

                                  AXCESS INC.
                         (formerly Lasertechnics, Inc.)
              (Exact name of Small Business Issuer in Its charter)
<TABLE>
<S>                                                         <C>       
          DELAWARE                                                        85-0294536
(State or other jurisdiction of                              (I.R.S. employer identification no.)
 incorporation or organization)

 3208 COMMANDER DRIVE, CARROLLTON, TEXAS                                   75006
 (Address of principal executive offices)                                 (Zip Code)
</TABLE>

                                 (972) 407-6080
                (Issuer's Telephone Number, Including Area Code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities Registered Pursuant to Section 12(g) of the Act:

  COMMON STOCK, PAR VALUE $.01 PER SHARE                  3,179,368
            (Title of Class)                    (Number of Shares Outstanding
                                                     as of March 19, 1999)

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 preceding 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[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Issuer's revenues for the fiscal year ended December 31, 1998 were $43,146.
There were 112,492 shares of non-voting common stock outstanding as of March
19, 1999.

The aggregate market value of voting and non-voting common stock held by
nonaffiliates of the Issuer is approximately $3,050,760. This amount was
calculated by reducing the total number of shares of the Issuer's common stock
outstanding by the total number of shares of common stock held by officers and
directors, and stockholders owning in excess of 5% of the Issuer's common stock,
and multiplying the remainder by the average of the bid and asked price for the
Issuer's common stock on March 19, 1999, as reported on the over-the-counter
Nasdaq SmallCap Market. The information provided shall in no way be construed as
an admission that any officer, director or more than 5% stockholder of the
Issuer may be deemed an affiliate of the Issuer or that such person is the
beneficial owner of shares reported as being held by such person, and any such
inference is hereby disclaimed.

Transitional Small Business Disclosure Format (check one):
Yes [ ]   No [ ]

================================================================================



<PAGE>   2




                                     PART I

ITEM 1.  BUSINESS.

THE COMPANY

AXCESS Inc., a Delaware corporation, was formed in November 1982 (as
Lasertechnics, Inc.). AXCESS is principally engaged in providing Radio Frequency
Identification ("RFID") products through dealers and distributors for tracking
assets, vehicles and personnel. See "Business - RFID Systems and Services." The
company's principal offices are located at 3208 Commander Drive, Carrollton,
Texas, 75006, and its telephone number is 972-407-6080.

Discontinued Operations: Sandia Imaging Systems Corporation, a Delaware
corporation and 96% owned subsidiary of the company, was engaged in distributing
and reselling high-end dye-sublimation card printers and consumables until its
operations were discontinued in October 1998. The company sold this business in
December 1998. Lasertechnics Marking Corporation, a Delaware corporation and
wholly-owned subsidiary of the company, was engaged in fabricating, distributing
and selling high speed laser marking equipment used by manufacturers on various
food products, other date sensitive consumer goods and industrial products to
minimize product counterfeiting, facilitate inventory control and insure product
traceability. The company entered into a definitive agreement in March 1999 to
sell LMC along with the company's rights and interests in DataGlyph(TM) and the
technology under development with XL Vision, Inc. to affiliates of Amphion
Capital Management, a major stockholder of the company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."

RFID TECHNOLOGY ACQUISITION

In September 1998, the company consummated the acquisition of the RFID based
intellectual property assets of ASGI, Inc. and Nauta, Inc. The intellectual
property assets included a patent, trade secret rights, software, hardware,
product designs and all other technical information necessary for the company to
manufacture and market radio frequency identification products to the access
control and asset management markets. These assets will be further developed and
enhanced by the company in connection with its efforts to develop and market
products which utilize RFID based intellectual property assets. See "Business -
Patents."

RFID SYSTEMS AND SERVICES

The company designs the hardware components of its RFID products and outsources
all manufacturing operations. Once the hardware components are combined with the
company's software, the RFID systems are capable of identifying and tracking
assets, vehicles and personnel. The company's RFID systems consist of radio
frequency tags, antennas and readers. Tags are affixed to assets, personnel ID
badges or vehicles, depending on the application. The company's RFID system is
active rather than passive. Active systems have a battery in the tag which
offers greater range than passive systems. The tags contain tiny
transmitters/receivers that communicate with the reader through an antenna
located next to a transportation lane, doorway or covertly installed in a
ceiling, wall or picture frame. As the tag enters the coverage zone the reader
transmits a "wake up" signal to activate the tag. Encoded in the activation
signal is a command with special instructions for the tag. The tag interprets
these instructions

                                     - 1 -

<PAGE>   3




and responds accordingly by permitting or denying access via an alarm sound or a
gate (door) being opened.

The company sells and markets its RFID systems to end users through indirect
channels such as distributors, VAR's (value added resellers), OEM's (original
equipment manufacturers) and dealers. The use of these indirect sales and
distribution channels by the company permits it to operate with a smaller sales
and support staff, as well as reduces marketing expenses compared to
direct-to-user sales channel efforts.

Examples of specific applications of the company's RFID systems are:

         o        Automatic Vehicle Access Control and Tracking for Commercial
                  Access Control, Residential Gate Control, Fleet Management,
                  and Parking Systems;

         o        Automatic Asset Identification for Theft Deterrence, Covert
                  Monitoring, and Asset and Personnel Tracking; and

         o        Automatic Personnel Identification for Access Control,
                  Personnel Tracking, Time and Attendance, Compliance
                  Monitoring, Marshaling and Mustering, and Guard Tour.

RFID HARDWARE AND SOFTWARE

Each RFID system requires three components: tags; readers; and antennas. The
hardware configuration may vary, however, depending on the specific application.
In some applications an end user may utilize an antenna tuning unit which allows
the installer to vary the field coverage area. The tags are high performance
active tags containing an on-board battery. Branded NeuroTags(R) respond to the
reader which is the electronic "brain" of the system. It detects the tag and
interfaces with the host equipment via standard communication protocols.

Antennas come in three types. A bar antenna is utilized in monitoring
applications for personnel, vehicles and assets. A road loop antenna is buried
in the pavement and is well suited for tagged vehicles and equipment. The
picture frame antenna provides a "hidden" coverage zone for tracking people and
assets. Secure Monitor(TM) is the resource management software which is used in
combination with the NeuroTag RFID system to locate personnel, vehicles and
assets in real-time.

RESEARCH AND DEVELOPMENT

Although the RFID technology acquired by the company had been in development and
use for some time, significant modifications and enhancements were made to the
technology by the company since its acquisition. These modification and
enhancements were necessary for the successful commercialization of the RFID
systems. Since its acquisition of the RFID technology in September 1998, the
company has expended approximately $389,000 through December 31, 1998, to
upgrade the software and hardware. The company expects to continue to upgrade,
enhance and develop the technology through continued research and development
expenditures in 1999 and the future.


                                     - 2 -

<PAGE>   4




PATENTS AND PROPRIETARY TECHNOLOGY

The company relies on a combination of patents, trade secrets, technology
licenses, and other intellectual property rights. The company has several
patents in various stages of prosecution with the necessary global patent
authorities and several additional patents being prepared for filing. The
company intends to protect and enforce its intellectual property rights to the
fullest extent and to preserve its rights relating to its key product
technologies. The company has registered a number of trade and service marks,
including but not limited to the following: AXCESS Inc.(TM); the AXCESS Inc.
(logo)(TM); NeuroTag(R); Functional Linkage(TM); TAG-to-TAG(TM); and Secure
Monitor(TM).

COMPETITION

Competing technologies are generally specialized for specific market application
segments. The characteristics and attributes of the applications generally cause
one technology to be more applicable than other competing technologies. Passive
tags are commonly used in a number of retail environments where the individual
item is relatively inexpensive, such that the cost of the tag must also be very
low and need only serve a very limited function. Active tags are more commonly
used when the individual asset is of relatively higher value and the tag
attached to it is to serve multiple purposes. There are currently a limited
number of small companies directly competing with the company for applications
suited for active RFID technology.

MANUFACTURING AND SUPPLIERS

The company depends upon a number of outside suppliers to manufacture its RFID
systems. The company has two tag manufacturers currently in use and one reader
manufacturer. The company is currently engaged in discussions with other
potential manufacturers. Although to date the company has generally been able to
secure adequate manufacturers to produce its RFID systems, the inability of the
company in the future to obtain sufficient manufacturers of its RFID systems
could have material adverse effects on the company's results of operations.

The company depends on a number of outside suppliers for components of its RFID
systems. There are a limited number of components for which there is a single
source of supply and the company expects to either identify additional sources
of supply, substitute components or make the necessary engineering changes to
eliminate any dependence on a component that cannot be obtained from multiple
sources. Although the company has generally been able to secure adequate
suppliers, the inability of the company in the future to obtain sufficient
suppliers of component parts could have material adverse effects on the
company's results of operations.

There are currently no formal agreements between the company and its
manufacturers or suppliers, but the company has entered into these arrangements
with the expectation that these arrangements will lead to long-term
relationships or contracts with these suppliers.

SALES AND MARKETING

The company markets, sells and supports dealers, distributors, OEMs, VARs and
systems integrators who sell, install and support end users in applying RFID
systems and services to their particular application

                                     - 3 -

<PAGE>   5




requirements. The company markets to end users as part of its support of this
distribution channel, but does not sell direct to end users.

EMPLOYEES

As of December 31, 1998, the company employed 41 people, excluding LMC.

GOVERNMENT REGULATION

Government regulations have not had, nor are they expected to have, a material
effect on the company's financial condition, results of operations or
competitive position.

ENVIRONMENTAL FACTORS

There has been, and it is anticipated that there will continue to be, no
material effect upon the company's capital expenditures, earnings, or
competitive position due to compliance with existing provisions of federal,
state and local laws regulating the discharge of material into, or otherwise
relating to the protection of, the environment.

YEAR 2000 COMPLIANCE

The company's management recognizes the need to ensure that its operations and
relationships with vendors, customers and other third parties will not be
adversely impacted by the Year 2000 issue. The Year 2000 problem is a result of
computer programs being written using two digits rather than four to define the
applicable year. Based on its assessment, the company determined a portion of
its software and certain hardware will require modification or replacement so
that those systems will properly utilize dates beyond December 31, 1999. The
company's assessment indicated that its significant information technology
systems would not be affected.

The company has also established a program to review its product line of RFID
systems and identify date-sensitive inventory and the level of Year 2000
compliance of its RFID systems. This program is to ensure that customers receive
systems that are Year 2000 compliant, or at a minimum, are made aware of systems
that are not compliant. The company also depends on the systems of its
suppliers, manufacturers and customers. Consequently, the company is in the
process of receiving adequate assurances from its suppliers, manufacturers and
customers that those systems and the components on which the company relies are
or will be Year 2000 compliant before the end of 1999.

To the extent possible, the company will develop and implement contingency plans
designed to allow continued operations in the event of failure of the company's
or third party systems to be Year 2000 compliant. These contingency plans have
substantially been completed, and are expected to be completed and implemented
by the end of 1999.

Management of the company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. The company does not believe the
costs related to the Year 2000 program will be material to its financial
position or results of operation. Since the RFID based software and hardware
were recently developed and were developed with Year 2000 compliance awareness,
Year 2000 compliance is less significant to the company's business than is the
case for other businesses.

                                     - 4 -

<PAGE>   6




Management expects to complete its program without incurring any significant
incremental expenditures utilizing internal resources. However, the company has
not yet completed all necessary phases of the Year 2000 program. Further, the
failure of the company or third parties upon which the company relies, to
identify Year 2000 issues and successfully and timely resolve them could then
have a material adverse impact on the operations of the company.

CAUTIONARY STATEMENTS

Except for the historical information contained herein, this Report includes
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the company believes that the expectations reflected in
such forward looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Certain important factors that could
cause actual results to differ materially from the company's expectations
("Cautionary Statements") are disclosed in this Report on Form 10-KSB and
qualify the forward looking statements included in this Report. All subsequent
written and oral forward looking statements attributable to the company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.

RISK FACTORS

Investing in the company's common stock is very risky. You should be able to
bear a complete loss of your investment. You should carefully consider the
following factors, in addition to the other information in this Form 10-KSB.

History of Losses and Expectation of Future Losses; Uncertainty of Future
Profitability

From its incorporation in 1982 through December 31, 1998, the company has
incurred an accumulated loss of approximately $83.7 million and has been
profitable in only one fiscal year during that time. There can be no assurance
that the company will generate sufficient revenues to achieve profitability in
the future.

Auditors' Report

Our auditors have included an explanatory paragraph in their audit opinion with
respect to our consolidated financial statements related to a significant
uncertainty with respect to our financial position at December 31, 1998, which
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. Between 1996 and 1998, we arranged for
an aggregate of $45 million in additional financing. As a result, there can be
no assurance that our future financial statements will not include a similar
explanatory paragraph if we are unable to raise sufficient funds either through
financing or from operations to cover the cost of our operations. 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.


                                     - 5 -

<PAGE>   7




Future Development of RFID Products

Introducing new technology involves risks of "bugs", prior release
compatibility, customer modifications affecting standard interfaces,
unanticipated application environment anomalies, to name a few. Although we use
rigorous testing procedures and protocols, delays in new or modified product
introductions or shipments could have a material adverse effect on our results
of operation.

Much of our ability to compete in the RFID security segment depends on trade
secrets, know-how and proprietary technical knowledge that is unprotected by
patents. Although we continue to implement protective measures and intend to
defend our proprietary rights vigorously, there can be no assurance that these
efforts will be successful. Such protections may not preclude competitors from
developing products similar to ours. In addition, the laws of certain foreign
countries do not protect intellectual property rights to the same extent as do
the laws of the United States. There can also be no assurance that third parties
will not assert intellectual property infringement claims against us. Any such
infringement claim could result in protracted and costly litigation and could
have a material adverse effect on our results of operation regardless of the
outcome.

Dependence on Manufacturers Suppliers to Produce RFID Systems

If we were unable to obtain sufficient components and manufacturers for the RFID
systems, or develop alternative sources, delays in product introductions or
shipments could occur and could have a material adverse effect on our results of
operation.

Substantial Additional Financing Requirements; Uncertainty of Available Funding

We are currently in discussions with a number of existing and potential
corporate, strategic and institutional investors. Our actual funding needs will
depend upon numerous factors, however, including actual expenditures and
revenues generated from our operations compared to our business plan. Our actual
funding needs will also depend on the successful development of the RFID systems
and other unanticipated expenditures, none of which can be predicted with
certainty. There can be no assurance, however, that we will acquire the
additional funding we need to fully pursue our business objectives.

Nasdaq Listing

Our common stock is listed on the Nasdaq SmallCap Market, which requires
maintenance of certain quantitative and other standards for continual listing
thereon.

On August 22, 1998, the Securities and Exchange Commission approved the New
Nasdaq Listing Requirements (as defined below) for continued listing on the
Nasdaq SmallCap Market. In particular, the New Nasdaq Listing Requirements
require that a company currently included in Nasdaq meet each of the following
standards to maintain its continued listing: (i) either (A) net tangible assets
(defined as total assets, minus goodwill, minus total liabilities) of $2
million, (B) total market capitalization of $35 million, or (C) net income (in
the latest fiscal year or in two of the last three fiscal years) of $500,000;
(ii) public float of at least 500,000 shares, with a market value of at least $1
million; (iii) minimum bid price of $1; (iv) at least two market makers; (v) at
least 300 round lot beneficial shareholders; and (vi) compliance with certain
corporate governance requirements (the "New Nasdaq Listing Requirements"). As of
March 19, 1999, the closing bid price of our common stock was $1.75 per share,
which is in excess of the

                                     - 6 -

<PAGE>   8




minimum bid price of $1.00 per share established by the New Nasdaq Listing
Requirements. There can be no assurance, however, that our continued losses or
other factors beyond our control will not cause us to fail to meet such
requirements.

Since January 1, 1998, Antiope Partners, L.L.C. ("Antiope Partners") and Amphion
Ventures, L.P. ("Amphion Ventures") purchased $12.1 million in shares of our
convertible preferred stock to fund our operations and provide for the continued
maintenance of our net tangible assets above the New Nasdaq Listing
Requirements. As of March 31, 1999, our net tangible assets were in excess of
the $2 million threshold established by the New Nasdaq Listing Requirements.
Although management believes that we will be able to preserve the listing of our
common stock on the Nasdaq SmallCap Market, there can be no assurance that we
will be able to do so.

If our common stock were delisted from the Nasdaq SmallCap Market, trading, if
any, would likely be conducted in the over-the-counter market on the National
Association of Securities Dealers' OTC Bulletin Board and/or on the pink sheets
of the National Quotation Bureau. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of our
common stock. In addition, our common stock would be subject to rules
promulgated under the Exchange Act applicable to penny stocks. The Commission
has adopted regulations that generally define a "penny stock" to be an equity
security that has a market price (as determined pursuant to regulations adopted
by the Commission) or exercise price of less than $5.00 per share, subject to
certain exceptions. By virtue of being listed on the Nasdaq SmallCap Market, our
common stock will be exempt from the Definition of "penny stock." If, however,
our common stock is removed from the Nasdaq SmallCap Market, our securities may
become subject to the penny stock rules that impose additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Consequently, the penny stock
rules may affect the ability of broker-dealers to sell our common stock and may
affect the ability of purchasers of our common stock to sell such securities in
the secondary market.

Dependence on Key Personnel

We believe that our ability to successfully implement our business strategy is
highly dependent on our management and product development team. One of our
executive officers has entered into an employment agreement which provides for
ninety (90) days severance on termination. The loss of services of one or more
of these individuals might hinder the achievement of our development objectives.
We are highly dependent on our ability to hire and retain qualified RFID
technical personnel. The competition for these employees is intense. We cannot
give any assurance that we will continue to be able to hire and retain the
qualified personnel needed for our business. The loss of the services of or the
failure to recruit key technical personnel could adversely affect our business,
operating results and financial condition.

Potential Adverse Effect of Shares Eligible for Future Sale; Outstanding
Convertible Securities and Warrants

Future sales of our common stock in the public market by existing stockholders,
warrant holders and holders of convertible securities subsequent to the date
hereof could adversely affect the market price of the our common stock. At
December 31, 1998, an aggregate of approximately 1,700,000 shares of common
stock were outstanding and freely tradeable without restriction under the
Securities Act. In

                                     - 7 -

<PAGE>   9




addition, up to 767,000 shares were eligible for resale in accordance with the
manner of sale and volume limitations of Rule 144 promulgated under the
Securities Act.

We have reserved approximately 2,300,000 shares of common stock for issuance
upon the exercise of outstanding convertible securities and warrants. As of
December 31, 1998, there were 57,692, 52,817, 35,427, 623 and 1,688 shares of
Series A, B, C, I and J convertible preferred stock outstanding, respectively.
Each share of Series A, B and C convertible preferred stock is convertible at
any time, at the option of the holder, into one share of common stock. The
conversion price for the Series I and Series J convertible preferred stock is
$4.00 per share. See "Recent Sale of Unregistered Securities" below.

There are also currently 584,431 warrants outstanding to acquire the same number
of shares of common stock, as well as $535,000 of indebtedness, convertible into
common stock at $5.00 per share.

We have also reserved approximately 1,050,000 shares of common stock for
issuance to key employees, officers, directors and consultants pursuant to the
company's benefit plans. As of December 31, 1998, there were 772,391 options
outstanding.

Competition

New competitors are likely to emerge who also see the absence of a dominant
player. The RFID segment of the security industry is undergoing, and is expected
to continue to undergo, rapid and significant technological change. The
development by others of new, improved or more cost-effective processes or
products may make our products less attractive or render them commercially
obsolete.

Absence of Dividends

We have never declared or paid cash dividends. We do not intend to declare or
pay any cash dividends in the foreseeable future.

Small Trading Volume and Volatility of Stock Price

The weekly trading volume of our common stock in the over-the-counter market has
varied from a few thousand shares to 400,000 shares, which may tend to increase
the volatility of the price. Since January 1994, the closing bid price of our
common stock in the over-the-counter market has varied from a low of $1.219 to a
high of $85.625 per share. There can be no assurance that the price volatility
will not continue in the future.

ITEM 2.  PROPERTIES.

The company leases a 14,508 square foot facility in Carrollton, Texas used for
administrative, engineering and sales offices. This facility is rented under a
three year agreement that terminates in 2000. The company's facilities are
suitable and adequate to accommodate the company's operations.

                                     - 8 -

<PAGE>   10




ITEM 3.  LEGAL PROCEEDINGS.

As previously reported in the company's report on Form 10-QSB for the period
ended March 31, 1998, on February 28, 1996, an investor group filed suit against
the company in the United States District Court for the Southern District of New
York. This lawsuit arises out of the company's refusal to recognize the investor
group's attempt to exercise an option to purchase 70,000 shares of the company's
common stock at a price of $9.90 per share. The option had been granted to the
company's former President and CEO who attempted to transfer his option to the
investor group on the last day of the option term in September of 1995. On that
same day, the investor group attempted to exercise the option. The company
refused to recognize the attempted transfer of the option to the investor group
on the primary grounds that the option was granted personally to the company's
former President and CEO and was not transferable to third-parties. The lawsuit
seeks issuance and registration of the 70,000 shares upon payment of the
exercise price, or in the alternative, monetary damages, which the investor
group alleges to be not less than $2,800,000 not including pre-judgment
interest, fees and expenses. On May 1, 1996 the company moved to dismiss the
complaint on the grounds that the court in New York lacked personal jurisdiction
over the company. The court denied the motion to dismiss by order dated June 10,
1997. Subsequently, the company filed an answer, denying the material
allegations of the complaint and asserting various defenses. On December 31,
1997, plaintiffs moved for partial summary judgment on the question of
liability, as to whether or not the option was assignable. The company filed
papers opposing this motion on or about January 26, 1998. On September 30, 1998,
the court granted plaintiffs' partial summary judgment after determining that
the option was assignable.

On September 17, 1998, the plaintiffs filed a separate suit against Amphion
Ventures L.P., Antiope Partners L.L.C., J.P. Morgan Investment Corporation and
two of the company's directors, Richard C.E. Morgan and Seth Cunningham, which
asserts claims for tortious interference by these defendants in connection with
the investor group's attempt to exercise the option described above. The
defendants filed their answer denying all allegations along with a motion to
dismiss the lawsuit.

In March 1999, the plaintiffs, the company and the other named defendants in the
second lawsuit described above agreed to the principal terms under which both
lawsuits would be settled and dismissed, with prejudice. Although the company
anticipates consummating a settlement sometime during the second quarter of
1999, there can be no assurance, however, that the company will consummate any
such settlement.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.



                                     - 9 -

<PAGE>   11

                                    PART II

ITEM 5.  MARKET FOR AXCESS COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.

The company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol AXSI. The table below sets forth high and
low last sale prices for the common stock during each of the periods indicated,
as reported by the Nasdaq. Such price quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.



<TABLE>
<CAPTION>
                                             1998 LAST CLOSING PRICES                  1997 LAST CLOSING PRICES
                                             ------------------------                  ------------------------
CALENDAR PERIOD                               LOW                 HIGH                 LOW                   HIGH
---------------                               ---                 ----                 ---                   ----
<S>                                          <C>                 <C>                  <C>                  <C>   
January 1-March 31                           $3.76               $6.26                $18.76               $26.88
April 1-June 30                               2.19                5.00                 11.88                18.76
July 1-September 30                           1.44                3.38                 10.62                17.50
October 1-December 31                         1.22                2.69                  5.00                12.50
</TABLE>

As of December 31, 1998, the company had approximately 1,500 holders of record
of voting common stock and one holder of record of non-voting common stock. The
company estimates that there were approximately 9,000 beneficial owners of its
common stock as of the same date.

The company has not paid dividends on its common stock and does not anticipate
the payment of cash dividends in the foreseeable future as it contemplates
retaining all earnings to finance the continued growth of the company's
business. In addition, certain covenants contained in the company's financing
arrangements restrict the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Notes 9 and 10 to Notes to Consolidated Financial
Statements for the years ended December 31, 1998, 1997 and 1996.

RECENT SALE OF UNREGISTERED SECURITIES

During 1998, the company issued unregistered securities in connection with each
of the transactions described below. The issuance of the preferred stock, common
stock and warrants were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as a transaction not involving
a public offering and an appropriate restrictive legend was affixed to the
certificates and warrants.

EQUITY COMMITMENT BY MAJOR STOCKHOLDER

Prior to the purchase of the 213 shares of Series J Preferred Stock by Amphion
Ventures L.P. during the three month period ended December 31, 1998, which is
described below under the heading Equity Purchases by Major Stockholder, Amphion
Ventures L.P. had previously purchased 205 shares and 792 shares of the

                                     - 10 -

<PAGE>   12




company's Series G Convertible Preferred Stock (the "Series G Preferred
Stock") and Series H Convertible Preferred Stock (the "Series H Preferred
Stock"), respectively, for a total purchase price of $9,970,000. In October
1998, the company obtained a formal commitment from Amphion Ventures L.P. to
purchase up to an additional $2.3 million of shares of either the company's
Series G Convertible Preferred Stock (the "Series G Preferred Stock"), Series H
Preferred Stock, Series I Convertible Preferred Stock (the "Series I Preferred
Stock") or Series J Preferred Stock (the "Series J Preferred Stock"), raising
their commitment to a total of $6.3 million, to fund the company's operations
(the "1998 Amphion Commitment"). In connection with this commitment, Amphion
Ventures L.P. received common stock warrants to purchase 264,998 shares of the
company's common stock at an exercise price of $2.50 per share.

Each share of Series I Preferred Stock is convertible in whole or in part at any
time at the option of the holder into shares of voting common stock of the
company equal to the quotient of (a) the aggregate original Series I Preferred
Stock issue price of $10,000 per share (the "Original Series I Issue Price")
divided by (b) the conversion price of $4.00 per share, which is subject to
being adjusted from time to time. See "Exercise of Preferred Stock Reset Right
by Stockholders" below. The Series J Preferred Stock is substantially the same
as the Series I Preferred Stock, except the Series J Preferred Stock is
convertible in whole or in part at any time at the option of the holder into
shares of the company's non-voting common stock of the company based on the same
formula. The original Series J Preferred Stock issue price is also $10,000 per
share (the "Original Series J Issue Price").

The Series I Preferred Stock and the Series J Preferred Stock are both subject
to the optional redemption at any time by the company, in whole or in part, at a
redemption price per share equal to the Original Series I Issue Price or the
Original Series J Issue Price, as the case may be, plus any accrued, but unpaid
dividends thereon. The company's optional right of redemption is subject to each
Series I Preferred Stock or Series J Preferred Stock holder's right, as the case
may be, to convert such Series I Preferred Stock or Series J Preferred Stock, as
the case may be, into common stock within ten (10) business days after the
company's notice of redemption.

The Series I Preferred Stock and the Series J Preferred Stock are also subject
to the mandatory conversion by the company into shares of the company's voting
or non-voting common stock, as the case may be, if the closing bid price of the
company's voting common stock on the Nasdaq SmallCap Market is at least $10.00
per share for a period of at least ninety (90) consecutive trading days.
Although the company's non-voting common stock may be converted to common stock
at any time by a holder thereof, Amphion Ventures L.P. has agreed not to convert
any shares of non-voting common stock to voting common stock without the prior
consent of the company.

EXERCISE OF PREFERRED STOCK RESET RIGHT BY STOCKHOLDERS

In connection with the issuance of the company's Series G Preferred Stock and
the Series H Preferred Stock during 1997 and 1998, the company agreed with the
initial holders of the Series G Preferred Stock and the Series H Preferred
Stock, that if, at any time prior to December 31, 1999, the company were to
complete an equity financing raising at least $3,000,000 in new equity, such
initial holders would have the non-assignable right (the "Reset Right"), but not
the obligation to exchange all or a portion of their shares of Series G
Preferred Stock or Series H Preferred Stock for shares of a new series of
preferred stock with substantially the same terms and conditions offered to the
participants in the new equity financing. No such change, however, would result
in an increase in the conversion price above $10.00 per share.

                                     - 11 -

<PAGE>   13




The 1998 Amphion Commitment described above triggered the reset right held by
the holders of the Series G Preferred Stock and the Series H Preferred Stock. As
a result, all of the holders of the Series G Preferred Stock and the Series H
Preferred Stock elected to exercise their rights to exchange all shares of
Series G Preferred Stock held by such holders for shares of Series I Preferred
Stock, as well as all shares of Series H Preferred Stock held by such holders
for shares of Series J Preferred Stock.

In connection with its exercise of the Reset Right, Amphion Ventures L.P.
exchanged all 405 shares of Series G Preferred Stock held by it for 405 shares
of Series I Preferred Stock and all 792 shares of Series H Preferred Stock held
by it for 792 shares of Series J Preferred Stock. Also, Antiope Partners L.L.C.
converted all 50 shares of Series G Preferred Stock held by it for 50 shares of
Series I Preferred Stock and the other holder converted all 40 shares of Series
G Preferred Stock held by it for 40 shares of Series I Preferred Stock. The
Series I Preferred Stock and Series J Preferred Stock also contain a similar
reset provision such that if at any time prior to December 31, 1999, the company
were to complete an equity financing with third parties raising at least
$1,000,000 in new equity, the initial holders would have the non-assignable
right (the "Series I and J Reset Right"), but not the obligation to exchange all
or a portion of their shares of Series I Preferred Stock or Series J Preferred
Stock for shares of a new series of preferred stock with substantially the same
terms and conditions offered to the participants in the new equity financing.
Further, if the company fails to complete such an equity financing prior to
December 31, 1999, the conversion price of the Series I Preferred Stock and
Series J Preferred Stock would automatically be reset to not less than the
greater of $1.00 or one-half of the average closing bid price of the company's
common stock on the Nasdaq SmallCap Market during the last twenty (20)
consecutive trading days of 1999.

EQUITY PURCHASES BY MAJOR STOCKHOLDER

Under the terms of the Amphion Commitment, 213 shares of Series J Convertible
Preferred Stock were purchased during the three month period ended December 31,
1998, for an aggregate purchase price of $2,130,000. $1,110,000 of the purchase
price was payable primarily by the delivery of unconditional promissory notes
payable to the company by Amphion Ventures L.P., the balance of which was paid
in full by December 31, 1998. In addition, the company issued 98 shares of
Series J Preferred Stock to Amphion Ventures L.P. on December 31, 1998, for a
total purchase price of $980,000 and 5 shares of Series J Preferred Stock to
Antiope Partners L.L.C. for a total purchase price of $50,000. The purchase
price for both of these issuances was payable in cash by each of Amphion
Partners L.P. and Antiope Partners L.L.C.

PAYMENT OF DIVIDENDS ON PREFERRED STOCK

The holders of the Series G Preferred Stock, the Series H Preferred Stock, the
Series I Preferred Stock and the Series J Preferred Stock are entitled to
receive dividends on each such share held by a holder at the annual rate of 8%
of the original issue price of each such share ($10,000) payable in arrears,
when, as and if declared by the company's board of directors, in cash or
additional shares of preferred stock. On December 31, 1998, the company issued:
(a) 71 shares of Series I Preferred Stock to Amphion Ventures L.P. as payment in
full for the $710,000 of accrued, but unpaid dividends on the Series I Preferred
Stock as of such date (which included all accrued, but unpaid dividends on the
Series G Preferred Stock as of the October 31, 1998, exchange date); (b) 4
shares of Series I Preferred Stock to Antiope Partners L.L.C. as payment in full
for the $40,000 of accrued, but unpaid dividends on the Series I Preferred Stock
as of such date (which included all accrued, but unpaid dividends on the Series
G Preferred Stock as of the

                                     - 12 -

<PAGE>   14




October 31, 1998, exchange date); and (c) 30 shares of Series J Preferred Stock
to Amphion Ventures L.P. as payment in full for the $300,000 of accrued, but
unpaid dividends on the Series J Preferred Stock as of such date (which included
all accrued, but unpaid dividends on the Series H Preferred Stock as of the
October 31, 1998, exchange date).

CONVERSION OF NOTES PAYABLE BY STOCKHOLDERS

Under the terms of a Note Purchase Agreement dated December 29, 1997 (the "Note
Purchase Agreement"), the company borrowed a total of $3,020,233 from Amphion
Ventures L.P. ($400,000), Antiope Partners L.L.C. ($1,820,233) and J.P. Morgan
Investment Corporation ($800,000). In December 1998, Amphion Ventures L.P.,
Antiope Partners L.L.C. and J. P. Morgan Investment Corporation each elected to
convert one-half of the outstanding indebtedness of the company to each of them
under the Note Purchase Agreement, including all accrued, but unpaid interest
thereon through December 31, 1998, into shares of the company's Series I
Preferred Stock or Series J Preferred Stock. In addition, Amphion Ventures L.P.
elected to convert $100,000 of the accrued, but unpaid interest under the terms
of its $1.47 million note payable from the company (the "Amphion Note Payable"),
the proceeds of which were used by the company to settle its dispute with Xerox
Corporation in December 1998, into shares of Series I Preferred Stock or Series
J Preferred Stock.

As a result of the debt conversions described above, the company issued: (a) 35
shares of Series J Preferred Stock to Amphion Partners L.P. for its conversion
of indebtedness of the company in the aggregate amount of $350,000 ($200,000
under the terms of the Note Purchase Agreement plus $50,000 of accrued, but
unpaid interest thereon, and $100,000 of accrued, but unpaid interest on the
Amphion Note Payable); (b) 118 shares of Series J Preferred Stock to Antiope
Partners L.L.C. for its conversion of indebtedness of the company in the
aggregate amount of $1,180,000 ($910,000 under the terms of the Note Purchase
Agreement plus $270,000 of accrued, but unpaid interest thereon); and (c) 50
shares of Series I Preferred Stock to J.P. Morgan Investment Corporation for its
conversion of indebtedness of the company in the aggregate amount of $500,000
($400,000 under the terms of the Note Purchase Agreement plus $100,000 of
accrued, but unpaid interest thereon).

Also in December 1998, Amphion Ventures L.P., Antiope Partners L.L.C. and J.P.
Morgan Investment Corporation agreed with the company to extend the maturity
date of the balance remaining under the senior notes issued under the Note
Purchase Agreement for a period of one year. The balance of the indebtedness
under the senior notes issued under the Note Purchase Agreement is now due in
full by the company on December 31, 1999.

ACQUISITION OF RFID TECHNOLOGY

In September 1998, as a part of the total consideration paid by the company to
ASGI, Inc. and Nauta, Inc. in connection with its acquisition of the RFID
technology from those entities, the company issued an aggregate of 400,000
shares of its restricted common stock.


                                     - 13 -

<PAGE>   15




ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

In September 1998, the company acquired its active Radio Frequency
Identification (RFID) technology. See Note 5 to Notes to Consolidated Financial
Statements. The company determined this technology to be its primary and core
strategic focus, based on market demand, market size, product differentiation,
competitive environment and other factors.

On October 21, 1998, the company's Board of Directors approved a plan to exit
the imaging business as part of the strategy to redeploy and refocus the
company's resources on its core RFID asset, vehicle and personnel tracking
business. The sale of the imaging business was completed on December 15 , 1998.
The company reported a sales price of $500,000 and recorded a loss of $1,095,920
on the disposal in 1998. The remaining $1,511,320 of net assets of the
discontinued operations consist primarily of trade and other receivables, which
are valued at net realizable value as of December 31, 1998.

In March 1999, the company entered into a definitive agreement to sell its
Lasertechnics Marking Corporation subsidiary ("LMC") to affiliates of Amphion 
Capital Management, a major stockholder of the company. The company's rights
and interests in DataGlyph(TM) and the technology under development with XL
Vision, Inc. were also included in the sale. The company will receive $2.5
million in cash at closing, $0.5 million demand note receivable, a $4.0 million
note receivable due March 2002 (or 2004 under certain conditions) and a warrant
to purchase equity in the Amphion-controlled enterprise to which Amphion will
transfer these businesses and assets with an exercise price of $2.50 per share,
representing approximately 8% of that enterprise. If LMC is sold within two
years of its purchase, the company has the option to exchange its warrant for
twenty percent of the defined excess profits from any such sale. The company's
net book value of LMC and the assets sold was approximately $3.0 million. The
gain on disposition will be recorded in the first quarter of 1999 in connection
with the consummation of the purchase and sale of the stock and assets under
the purchase agreement, after giving effect to changes in the company's
investment in LMC through the sale date. The company's net assets of LMC of
$1,675,000 at December 31, 1998, are included in net assets of discontinued
operations.

RESULTS OF OPERATION

Sales and Gross Profit. Sales applicable to the businesses of the company's
discontinued operations are not included in the company's sales in any period
presented in the company's results of operations.

Although the RFID technology acquired in September 1998 had been in development
and use for some time, significant modifications and enhancements were and are
necessary for its successful commercialization, manufacture and distribution in
volume. Through December 31, 1998, the company had not yet shipped a significant
volume of RFID systems. Sales and marketing efforts were launched in the fourth
quarter of 1998 and orders were being accepted. All orders taken during the
period will be realized as sales when the systems have been manufactured and
shipped to the customer.

As a result there are no sales or gross profit reported for the company in any
of the prior periods. Sales for 1998 were $43,146 on which the company realized
a gross profit of $38,848.

Operating Expenses. Operating expenses were $8,738,140, $3,250,383, and
$2,983,734 in 1998, 1997 and 1996, respectively.

                                     - 14 -

<PAGE>   16




Corporate general and administrative expenses were $5,165,756, $3,250,383, and
$2,983,734 in 1998, 1997 and 1996, respectively. The increase in general and
administrative expenses in 1998 and 1997 was primarily a result of increased
legal expenses and litigation related provisions.

Research and development expenses were $2,939,107 in 1998 which includes new
product development costs associated with the Technology Development Agreement
with XL Vision, Inc. of $2,550,000. Because the company's continuing operations
were not initiated until September 1998, no research and development expenses
were incurred prior to that time.

Selling and marketing expenses were $633,277 in 1998. No selling and marketing
expenses were incurred in 1997 and 1996 because the company's continuing
operations were not initiated until September 1998.

Other expense, net was $510,936, $1,743,533, and $1,485,695 in 1998, 1997 and
1996 respectively, and consists primarily of interest expense. The decrease in
1998 from 1997 resulted from the absence of beneficial conversion features of
the company's convertible notes payable fully accreted to interest expense
during 1997. See Notes 9 and 10 to Notes to Consolidated Financial Statements.

Loss from Continuing Operations was $9,210,228, $4,993,916 and $4,469,429 in
1998, 1997 and 1996, respectively. The primary elements of the increased loss in
1998 over 1997 and 1996, were the additional $2,550,000 of development costs
associated with the XL Vision, Inc. technology development agreement and
increased legal expenses and litigation-related provisions.

Loss from Discontinued Operations was $6,248,828, $7,826,525 and $6,929,566 in
1998, 1997 and 1996, respectively. The loss on disposal of the imaging business
was recorded in the third quarter of 1998. See Note 3 to Notes to Consolidated
Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the company has utilized the proceeds from a number of public
and private sales of its equity securities, the exercise of options and warrants
and more recently, convertible debt and short-term bridge loans from
shareholders to meet its working capital requirements.

The company's operations continued to generate losses in 1998, primarily due to
lower than expected sales in both the imaging and marking businesses which were
discontinued in 1998. The company's future working capital requirements will
depend upon many factors, including the extent and timing of the company's
product sales, the company's operating results and the status of competitive
products. The company anticipates that its existing working capital resources
and revenues from operations will not be adequate to satisfy its funding
requirements in 1999. The company is continuing discussions with a number of
existing and potential corporate, strategic and institutional investors. The
company's actual funding needs will depend on numerous factors, including actual
expenditures and revenues generated from its operations compared to its business
plan. The company's actual funding needs will also depend on the successful
development and commercialization of the RFID systems and other unanticipated
expenditures, none of which can be predicted with certainty. There can be no
assurance that the company will acquire the additional funding it needs to fully
pursue its business objectives. If the company's losses continue, the company
may have to obtain sufficient funds to meet its cash requirements through
strategic or other financial transactions with compatible entities having the
resources to support its

                                     - 15 -

<PAGE>   17




programs, the sale of securities or other financing arrangements, or it will be
required to curtail its programs or seek a merger partner. Any additional
funding may be on terms which 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.

OTHER

Inflation. Inflation has not had and is not expected to have a material impact
on the operations and financial condition of the company.

Caution Regarding Forward-Looking Statements. The company occasionally makes
forward-looking statements concerning its plans, goals, product and service
offerings, and anticipated financial performance. These forward-looking
statements may generally be identified by introductions such as "outlook" for an
upcoming period of time, or words and phrases such as "should", "expect",
"hope", "plans", "projected", "believes", "forward-looking" (or variants of
those words and phrases) or similar language indicating the expression of an
opinion or view concerning the future.

These forward-looking statements are subject to risks and uncertainties based on
a number of factors and actual results or events may differ materially from
those anticipated by such forward-looking statements. These factors include, but
are not limited to: the ability to raise capital; the growth rate of the
company's revenue and market share; the consummation of new, and the
non-termination of, existing relationships with customers and suppliers; the
company's ability to effectively manage its business functions while growing the
company's business in a rapidly changing environment; the ability of the company
to adapt and expand its services in such an environment; the effective and
efficient development of new products; the quality of the company's plans and
strategies; and the ability of the company to execute such plans and strategies.

In addition, forward-looking statements concerning the company's expected
revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which the company has no control. The company does not plan to generally
publicly update prior forward-looking statements for unanticipated events or
otherwise and, accordingly, prior forward-looking statements should not be
considered to be "fresh" simply because the company has not made additional
comments on those forward-looking statements. See "Risk Factors."

 .






                                     - 16 -

<PAGE>   18




ITEM 7.  FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                                                                                             <C>
CONSOLIDATED FINANCIAL STATEMENTS:
     Independent Auditors' Report..............................................................  F-1
     Consolidated Balance Sheets as of December 31, 1998 and 1997..............................  F-2
     Consolidated Statements of Operations for the Years
         Ended December 31, 1998, 1997 and 1996................................................  F-3
     Consolidated Statements of Stockholders' Equity for the Years
         Ended December 31, 1998, 1997 and 1996................................................  F-4
     Consolidated Statements of Cash Flows for the Years
         Ended December 31, 1998, 1997 and 1996................................................  F-5
     Notes to Consolidated Financial Statements ...............................................  F-6
</TABLE>


FINANCIAL STATEMENT SCHEDULE

     Schedule II--Valuation and Qualifying Accounts

The company has not presented Schedule II "Valuation and Qualifying Accounts" as
all such accounts relate to assets and liabilities of the discontinued
operations, which were presented as "Net assets of discontinued operations" on
the accompanying consolidated balance sheets. Net assets of discontinued
operations are recorded at estimated net realizable value.

All other financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements and notes thereto.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE.

None.


                                     - 17 -

<PAGE>   19




                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information regarding Directors, Executive Officers, Promoters and Control
Persons is incorporated by reference in this Form 10-KSB to the sections
entitled "Principal Shareholders," "Management," and "General" in the company's
Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 1999.

ITEM 10.  EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference in this Form
10-KSB to the section entitled "Management" in the company's Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.

The information required by this item is incorporated by reference in this Form
10-KSB to the sections entitled "Principal Shareholders" and "Management" in the
company's Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference in this Form
10-KSB to the section entitled "Management" in the company's Proxy Statement.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Exhibits

         3.1      --Certificate of Incorporation of the company. Incorporated
                  herein by reference to Exhibit 3.1 to the company's
                  Registration Statement on Form S-1 (Registration No.
                  2-80946).

         3.2      --By-laws of AXCESS. Incorporated herein by reference to
                  Exhibit 3.2 to the company's Registration Statement on Form
                  S-1 (Registration No. 2-80946).

         3.3      --First Amendment to Certificate of Incorporation of the
                  company dated June 6, 1986. Incorporated herein by reference
                  to Exhibit 3.3 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1987.

         3.4      --Second Amendment to Certificate of Incorporation of the
                  company dated May 27, 1987. Incorporated herein by reference
                  to Exhibit 3.4 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1987.


                                     - 18 -

<PAGE>   20




         3.5      --Third Amendment to Certificate of Incorporation of the
                  company dated November 11, 1994. Incorporated herein by
                  reference to Exhibit 4.4 to the company's Registration
                  Statement on Form S-3 (Registration No. 333- 10665).

         3.6      --Fourth Amendment to Certificate of Incorporation of the
                  company dated July 28, 1995. Incorporated herein by reference
                  to Exhibit 4.5 to the company's Registration Statement on
                  Form S-3 (Registration No. 333- 10665).

         3.7      --Fifth Amendment to Certificate of Incorporation of the
                  company dated June 17, 1997. Incorporated herein by reference
                  to Exhibit 4.6 to the company's Registration Statement on
                  Form S-3 (Registration No. 333-10665).

         3.8      --Sixth Amendment to Certificate of Incorporation of the
                  company dated March 31, 1998. Incorporated herein by
                  reference to Exhibit 99.1 to the company's Report on Form 8-K
                  dated April 13, 1998.

         3.9      --Seventh Amendment to Certificate of Incorporation of the
                  company dated March 31, 1998. Incorporated herein by
                  reference to Exhibit 99.2 to the company's Report on Form 8-K
                  dated April 13, 1998.

         3.10     --Eighth Amendment to Certificate of Incorporation of the
                  company dated April 9, 1998. Incorporated herein by reference
                  to Exhibit 99.3 to the company's Report on Form 8-K dated
                  April 13, 1998.

         4.1      --Certificate of Designation of the Company's Series A, B and
                  C Preferred Stock, dated December 27, 1995. Incorporated
                  herein by reference to Exhibit 4.7 to the company's
                  Registration Statement on Form S-3 (Registration No.
                  333-10665).

         4.2      --Certificate of Designation of the company's Series I
                  Preferred Stock.*

         4.3      --Certificate of Designation of the company's Series J
                  Preferred Stock.*

         10.1     --1991 Incentive Stock Option Plan, dated August 14, 1991.
                  Incorporated herein by reference to Exhibit 10.10 to
                  Lasertechnics' Annual Report on Form 10-KSB for the year
                  ended December 31, 1991.

         10.2     --Purchase of common stock and Convertible Note Agreement
                  between the company and J.P. Morgan Investment Corporation,
                  dated July 8, 1994. Incorporated herein by reference to
                  Exhibit 10.19 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1994.

         10.3     --Amendment to the OEM License Agreement between the company
                  and Xerox Corporation, dated December 27, 1997. Incorporated
                  by reference to Exhibit 10.12 to the company's Annual Report
                  on Form 10-KSB for the year ended December 31, 1997.

         10.4     --Note Purchase Agreement dated June 25, 1998, by and among
                  the company, J.P. Morgan Investment Corporation and
                  Wolfensohn Associates L.P.

                                     - 19 -

<PAGE>   21




                  Incorporated by reference to Exhibit 10.15 to the company's
                  Quarterly Report on Form 10-QSB for the period ended
                  September 30, 1998.

         10.5     --Intellectual Property Transfer Agreement dated January 8,
                  1998, by and between XL Vision, Inc. and the company.
                  Incorporated herein by reference to Exhibit 10.15 to the
                  company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1998.

         10.6     --Amendment to Notes and Note Purchase Agreement dated
                  December 31, 1998, by and among the company, Antiope Partners
                  L.L.C. and J.P. Morgan Investment Corporation. Incorporated
                  herein by reference to Exhibit 10.16 to Amendment No. 1 to
                  the company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1997.

         10.7     --Series H Preferred Stock Purchase Agreement dated December
                  29, 1997, by and among the company and Amphion Ventures L.P.
                  Incorporated herein by reference to Exhibit 10.17 to
                  Amendment No. 1 to the Company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1997.

         10.8     --Preferred Stock Purchase Agreement dated October 21, 1998
                  by and between the company and Amphion Ventures L.P.*

         10.9     --Pledge Agreement dated August 18, 1997, by and among the
                  company, Antiope Partners L.L.C. and J.P. Morgan Investment
                  Corporation. Incorporated herein by reference to Exhibit
                  10.18 to Amendment No. 1 to the company's Annual Report on
                  Form 10-KSB for the year ended December 31, 1997.

         10.10    --Form of Warrant to purchase shares of the company's common
                  stock issued to Antiope Partners L.L.C. and Amphion Ventures
                  L.P. Incorporated herein by reference to Exhibit 10.20 to
                  Amendment No. 1 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1997.

         10.11    --Settlement Agreement dated as of April 21, 1998, by and
                  between the company and Xerox Corporation. Incorporated
                  herein by reference to Exhibit 10.21 to Amendment No. 1 to
                  the company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1997.

         10.12    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and Amphion Ventures L.P.*

         10.13    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and Antiope Partners L.L.C.*

         10.14    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and J.P. Morgan Investment
                  Corporation.*

         10.15    --Stock and Asset Purchase Agreement dated March 30, 1999, by
                  and between the company and Amphion Ventures L.P.*

         21       --Subsidiaries of the company.*

                                     - 20 -

<PAGE>   22




         23       --Consent of KPMG LLP.*

         27.1     --Financial Data Schedule.*

         27.2     --1997 Restated Financial Data Schedule*

         27.3     --1996 Restated Financial Data Schedule*


     --------------
     *Filed herewith.


(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed by the company during the last
         quarter of fiscal 1998.





                                     - 21 -

<PAGE>   23




                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 31, 1999         AXCESS INC.


                              By:/s/ Richard C.E. Morgan               
                                 ---------------------------------------------
                                    Richard C.E. Morgan, Chairman of the Board

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1999.

<TABLE>
<CAPTION>
     SIGNATURE                                                CAPACITY
     ---------                                                --------

<S>                                                       <C>   
/s/ Richard C.E. Morgan                                   Chairman of the Board
--------------------------------
Richard C.E. Morgan


/s/ Harry S. Budow                                        Director and President and Chief Executive Officer
--------------------------------
 Harry S. Budow


/s/ Danny G. Hair                                         Executive Vice President and Chief Financial
--------------------------------                          Officer (Principal Financial and Accounting Officer)
Danny G.  Hair                                            


/s/ Paul J. Coleman, Jr.                                  Director
--------------------------------
Paul J. Coleman, Jr.


/s/ C. Seth Cunningham                                    Director
--------------------------------
C. Seth Cunningham


/s/ Richard M. Clarke                                     Director
--------------------------------
Richard M. Clarke


/s/ Gregory W. Haskell                                    Director
--------------------------------
Gregory W. Haskell
</TABLE>


<PAGE>   24





                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
AXCESS Inc.

We have audited the accompanying consolidated balance sheets of AXCESS Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AXCESS Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the company's recurring losses from
operations and resulting continued dependence upon access to additional external
financing raise substantial doubt about its ability to continue as an ongoing
concern. Management's plans in regard to these matters are also described in
note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                                              KPMG LLP
Dallas, Texas
March 19, 1999

                                      F-1

<PAGE>   25




                          AXCESS INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
ASSETS                                                                                  1998               1997
                                                                                        ----               ----
<S>                                                                                <C>                   <C>          
Current assets:
         Cash and cash equivalents                                                 $      1,575,429      $   1,102,341
         Note receivable from stockholder                                                 1,030,624          1,158,684
         Accounts receivable--trade                                                          30,987                  -
         Inventory                                                                          256,216                  -
         Prepaid expenses and other                                                         160,087            154,234
                                                                                   ----------------      -------------
                  Total current assets                                                    3,053,343          2,415,259

Net assets of discontinued operations (note 3)                                            3,186,253          7,738,134
Property, plant and equipment, net (note 6)                                                 574,499            662,149
RFID technology (note 5)                                                                  1,714,449                  -
Deferred license fee, net (note 12)                                                         532,881          1,400,000
Other assets                                                                                  9,923            111,660
                                                                                   ----------------      -------------
                                                                                   $      9,071,348      $  12,327,202
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
         Notes payable to stockholders (notes 5 and 9)                             $      1,966,900      $   2,931,821
         Notes payable (note 12)                                                             90,882          3,942,495
         Accounts payable                                                                   466,940          1,445,418
         Dividends payable                                                                  481,339             60,916
         Accrued liabilities (note 8)                                                     1,985,002            937,350
                                                                                   ----------------      -------------
                  Total current liabilities                                               4,991,063          9,318,000
Notes payable, long-term (notes 9, 10 and 12)                                               535,205            535,205
Notes payable to stockholder, long-term (note 12)                                         1,470,000                  -
Other long-term liabilities                                                                       -              4,694
                                                                                   ----------------      -------------
                  Total liabilities                                                       6,996,268          9,857,899
Commitments and contingencies (notes 5 and 14)                                                                      
Stockholders' equity (notes 4, 9, 10, 11, 12 and 13):
Convertible preferred stock:
         Series A: $26.00 stated value; 57,692 shares issued and outstanding
           in 1998 and 1997                                                               1,500,000          1,500,000
         Series B: $28.40 stated value; 52,817 shares issued and outstanding
           in 1998 and 1997                                                               1,500,000          1,500,000
         Series C: $30.20 stated value; 35,427 shares issued and outstanding
           in 1998 and 1997                                                               1,069,880          1,069,880
         Series G: $10,000 stated value; no shares issued and outstanding in
           1998, and 790 in 1997                                                                  -          7,897,353
         Series I: $10,000 stated value; 623 shares issued and outstanding in
           1998 and none in 1997                                                          6,230,000                  -
         Series J: $10,000 stated value; 1,688 shares issued and outstanding
         in                                                                              16,880,000                  -
           1998 and none in 1997
Common stock, $.01 par value, 6,250,000 shares authorized in 1998 and 2,837,500
   in 1997; 2,879,368 shares issued and outstanding in 1998 and
   2,331,748 in 1997                                                                         28,794             23,318
Non-voting convertible common stock, $.01 par value, 112,500 shares
   authorized in 1998 and 1997; 112,492 shares issued and outstanding in
   1998 and 1997; convertible into common stock on a share for share basis                    1,125              1,125
Paid-in capital                                                                          58,515,848         57,168,716
Accumulated deficit                                                                    (83,650,567)       (66,691,089)
                                                                                   ----------------      -------------
                  Total stockholders' equity                                              2,075,080          2,469,303
                                                                                   ----------------      -------------
                                                                                   $      9,071,348      $  12,327,202
                                                                                   ================      =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-2

<PAGE>   26






                          AXCESS INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                              1998              1997              1996
                                                              ----              ----              ----

<S>                                                       <C>               <C>               <C>          
Sales                                                     $     43,146      $         --      $         --
Cost of sales                                                    4,298                --                --
                                                          ------------      ------------      ------------
         Gross profit                                           38,848                --                --

Expenses:
Research and development                                     2,939,107                --                --
General and administrative                                   5,165,756         3,250,383         2,983,734
Selling and marketing                                          633,277                --                --
                                                          ------------      ------------      ------------
         Operating expenses                                  8,738,140         3,250,383         2,983,734
                                                          ------------      ------------      ------------
         Loss from operations                               (8,699,292)       (3,250,383)       (2,983,734)
Other income (expense):
Interest expense                                              (532,797)       (1,742,543)       (1,582,621)
Interest income                                                      2             8,232            69,497
Other                                                           21,861            (9,222)           27,429
                                                          ------------      ------------      ------------
         Other expense, net                                   (510,936)       (1,743,533)       (1,485,695)
                                                          ------------      ------------      ------------
Loss from continuing operations                             (9,210,228)       (4,993,916)       (4,469,429)

Discontinued operations (note 3):
Loss from operations                                        (5,152,908)       (7,826,525)       (6,929,566)
Loss on disposal of discontinued operations                 (1,095,920)               --                --
                                                          ------------      ------------      ------------
         Loss from discontinued operations                  (6,248,828)       (7,826,525)       (6,929,566)
                                                          ------------      ------------      ------------
                  Net loss                                 (15,459,056)      (12,820,441)      (11,398,995)
Preferred stock dividend requirement                        (1,500,422)       (1,072,389)       (1,865,115)
                                                          ------------      ------------      ------------
                  Net loss applicable to common stock     $(16,959,478)     $(13,892,830)     $(13,264,110)
                                                          ============      ============      ============

Basic and diluted net loss per share:
         For continuing operations                        $      (3.43)     $      (2.24)     $      (2.60)
         For discontinued operations                      $      (2.33)     $      (3.50)     $      (4.04)
         For preferred stock dividends                    $      (0.56)     $      (0.48)     $      (1.09)
                                                          ------------      ------------      ------------
         Net loss applicable per common share             $      (6.32)     $      (6.22)     $      (7.73)
                                                          ============      ============      ============

Weighted average shares of common stock outstanding          2,681,456         2,234,239         1,716,966
                                                          ============      ============      ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-3

<PAGE>   27




                          AXCESS INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                                                  
                                                                                 CONVERTIBLE                                      
                                                                               PREFERRED STOCK              COMMON STOCK          
                                                                            ------------------------   ----------------------     
                                                                                                                                  
                                                                             SHARES        AMOUNT         SHARES       AMOUNT     
                                                                            --------    ------------    ----------    --------    
<S>                                                                          <C>        <C>              <C>          <C>         
Balance at December 31, 1995                                                 145,937    $  4,016,668     1,414,040    $ 141.40    
Exercise of common stock options (note 13)                                        --              --         4,461          45    
Increasing rate preferred stock discount (note 11)                                --          53,212            --          --    
Conversion feature of debentures and detachable warrants issued (note 10)         --              --            --          --    
Conversion feature of Series D Preferred Stock (note 11)                          --      (1,198,055)           --          --    
Debentures converted, net of expenses (note 10)                                   --              --       334,128       3,341    
Warrant discount net of related debenture conversion (note 10)                    --              --            --          --    
Issuance of convertible preferred stock, net of expenses (note 11)               835       8,350,000            --          --    
Preferred stock accretion and dividends (note 11)                                 --       1,455,721            --          --    
Preferred stock converted, including related accretion (note 11)                (250)     (2,558,352)      114,047       1,140    
Retirement of treasury stock                                                      --              --       (10,000)       (100)   
Other                                                                             --              --            --          --    
Net loss                                                                          --              --            --          --    
                                                                            --------    ------------    ----------    --------    
Balance at December 31, 1996                                                 146,522      10,119,194     1,856,676      18,566    
Issuance of common stock                                                          --              --         1,149          12    
Issuance of common stock for extension of stockholder notes payable
(note 9)                                                                          --              --         5,647          56    
Conversion feature of stockholder notes payable (note 9)                          --              --            --          --    
Conversion feature of debentures issued (note 10)                                 --              --            --          --    
Issuance of common stock in connection with stockholder notes payable
(note 9)                                                                          --              --        36,713         367    
Debentures converted, net of expenses (note 10)                                   --              --        99,045         990    
Issuance of Series G Preferred Stock, net of expenses and conversion of
Series F Preferred Stock, including common stock issued (note 11)                802       7,980,842            --          --    
Issuance of common stock for the conversion of Series F to Series G
Preferred Stock                                                                   --              --        44,868         449    
Preferred stock accretion and dividends (note 11)                                 --         231,911            --          --    
Preferred stock converted, including related accretion (note 11)                (359)     (3,829,218)      287,650       2,878    
Preferred stock redeemed (note 11)                                              (133)     (1,350,000)           --          --    
Preferred stock converted to debt (note 11)                                     (106)     (1,185,496)           --          --    
Issuance of warrants in connection with the stockholder notes payable
agreement and December 1997 restructuring (notes 9, 10, and 11)                   --              --            --          --    
Other                                                                             --              --            --          --    
Net loss                                                                          --              --            --          --    
                                                                            --------    ------------    ----------    --------    
Balance at December 31, 1997                                                 146,726      11,967,233     2,331,748      23,318    
Issuance of common stock                                                          --              --        12,500         125    
Issuance of restricted common stock in connection with settlement 
(note 12)                                                                         --              --       120,000       1,200    
Issuance of  preferred stock                                                      --           2,647            --          --    
Issuance of common stock in connection with notes payable to
stockholders (note 12)                                                            --              --        15,120         151    
Restricted common stock issued with asset purchase (note 5)                       --              --       400,000       4,000    
Issuance of Series G Preferred Stock and exchanged for Series I Preferred
Stock (note 11)                                                                  205       2,050,000            --          --    
Issuance of Series H Preferred Stock and exchanged for Series J Preferred
Stock (note 11)                                                                  792       7,920,000            --          --    
Issuance of Series J Preferred Stock (note 11)                                   213       2,130,000            --          --    
Conversion of stockholders' notes payable to Series J Preferred Stock
(note 9)                                                                         153       1,530,000            --          --    
Conversion of stockholders' notes payable to Series I Preferred Stock
(note 9)                                                                          50         500,000            --          --    
Issuance of Series I and Series J Preferred Stock for dividends payable
(note 10)                                                                        108       1,080,000            --          --    
Preferred stock dividends (note 11)                                               --              --            --          --    
Purchase of treasury stock                                                        --              --            --          --    
Other                                                                             --              --            --          --    
Net loss                                                                          --              --            --          --    
                                                                            --------    ------------    ----------    --------    
Balance at December 31, 1998                                                 148,247    $ 27,179,880     2,879,368    $ 28,794    
                                                                            ========    ============    ==========    ========    
</TABLE>




<TABLE>
<CAPTION>
                                                                                         NONVOTING                               
                                                                                        CONVERTIBLE                              
                                                                                        COMMON STOCK                             
                                                                                      ----------------                           
                                                                                                            PAID-IN       
                                                                                      SHARES    AMOUNT      CAPITAL       
                                                                                      -------   ------   ------------     
<S>                                                                                   <C>       <C>      <C>              
Balance at December 31, 1995                                                          112,492   $1,125   $ 36,710,433     
Exercise of common stock options (note 13)                                                 --       --        110,746     
Increasing rate preferred stock discount (note 11)                                         --       --             --     
Conversion feature of debentures and detachable warrants issued (note 10)                  --       --      1,555,981     
Conversion feature of Series D Preferred Stock (note 11)                                   --       --      1,198,055     
Debentures converted, net of expenses (note 10)                                            --       --      8,859,726     
Warrant discount net of related debenture conversion (note 10)                             --       --         53,792     
Issuance of convertible preferred stock, net of expenses (note 11)                         --       --       (762,964)    
Preferred stock accretion and dividends (note 11)                                          --       --             --     
Preferred stock converted, including related accretion (note 11)                           --       --      2,557,212     
Retirement of treasury stock                                                               --       --            100     
Other                                                                                      --       --        (17,708)    
Net loss                                                                                   --       --             --     
                                                                                      -------   ------   ------------     
Balance at December 31, 1996                                                          112,492    1,125     50,265,373     
Issuance of common stock                                                                   --       --         40,671     
Issuance of common stock for extension of stockholder notes payable                                                       
(note 9)                                                                                   --       --         28,180     
Conversion feature of stockholder notes payable (note 9)                                   --       --        687,833     
Conversion feature of debentures issued (note 10)                                          --       --         88,235     
Issuance of common stock in connection with stockholder notes payable                                                     
(note 9)                                                                                   --       --        390,675     
Debentures converted, net of expenses (note 10)                                            --       --      1,032,456     
Issuance of Series G Preferred Stock, net of expenses and conversion of                                                   
Series F Preferred Stock, including common stock issued (note 11)                          --       --             --     
Issuance of common stock for the conversion of Series F to Series G                                                       
Preferred Stock                                                                            --       --        236,376     
Preferred stock accretion and dividends (note 11)                                          --       --             --     
Preferred stock converted, including related accretion (note 11)                           --       --      3,826,340     
Preferred stock redeemed (note 11)                                                         --       --             --     
Preferred stock converted to debt (note 11)                                                --       --             --     
Issuance of warrants in connection with the stockholder notes payable                                                     
agreement and December 1997 restructuring (notes 9, 10, and 11)                            --       --        567,593     
Other                                                                                      --       --          4,984     
Net loss                                                                                   --       --             --     
                                                                                      -------   ------   ------------     
Balance at December 31, 1997                                                          112,492    1,125     57,168,716     
Issuance of common stock                                                                   --       --         49,875     
Issuance of restricted common stock in connection with settlement (note                                                   
                                                                       12)                 --       --        561,300     
Issuance of  preferred stock                                                               --       --         (2,647)    
Issuance of common stock in connection with notes payable to                                                              
stockholders (note 12)                                                                     --       --         99,923     
Restricted common stock issued with asset purchase (note 5)                                --       --        621,200     
Issuance of Series G Preferred Stock and exchanged for Series I Preferred                                                 
Stock (note 11)                                                                            --       --             --     
Issuance of Series H Preferred Stock and exchanged for Series J Preferred                                                 
Stock (note 11)                                                                            --       --             --     
Issuance of Series J Preferred Stock (note 11)                                             --       --             --     
Conversion of stockholders' notes payable to Series J Preferred Stock                                                     
(note 9)                                                                                   --       --             --     
Conversion of stockholders' notes payable to Series I Preferred Stock                                                     
(note 9)                                                                                   --       --             --     
Issuance of Series I and Series J Preferred Stock for dividends payable                                                   
(note 10)                                                                                  --       --             --     
Preferred stock dividends (note 11)                                                        --       --             --     
Purchase of treasury stock                                                                 --       --        (50,000)    
Other                                                                                      --       --         67,481     
Net loss                                                                                   --       --             --     
                                                                                      -------   ------   ------------     
Balance at December 31, 1998                                                          112,492   $1,125   $ 58,515,848     
                                                                                      =======   ======   ============     
</TABLE>







<TABLE>
<CAPTION>
                                                                                         ACCUMULATED                         
                                                                                        S  DEFICIT           TOTAL           
                                                                                       --------------    ------------        
<S>                                                                                     <C>              <C>                 
Balance at December 31, 1995                                                             $(39,534,149)   $  1,208,217        
Exercise of common stock options (note 13)                                                         --         110,791        
Increasing rate preferred stock discount (note 11)                                                 --          53,212        
Conversion feature of debentures and detachable warrants issued (note 10)                          --       1,555,981        
Conversion feature of Series D Preferred Stock (note 11)                                           --              --        
Debentures converted, net of expenses (note 10)                                                    --       8,863,067        
Warrant discount net of related debenture conversion (note 10)                                     --          53,792        
Issuance of convertible preferred stock, net of expenses (note 11)                                 --       7,587,036        
Preferred stock accretion and dividends (note 11)                                          (1,865,115)       (409,394)       
Preferred stock converted, including related accretion (note 11)                                   --              --        
Retirement of treasury stock                                                                       --              --        
Other                                                                                              --         (17,708)       
Net loss                                                                                  (11,398,995)    (11,398,995)       
                                                                                         ------------    ------------        
Balance at December 31, 1996                                                              (52,798,259)      7,605,999        
Issuance of common stock                                                                           --          40,683        
Issuance of common stock for extension of stockholder notes payable                                                          
(note 9)                                                                                           --          28,236        
Conversion feature of stockholder notes payable (note 9)                                           --         687,833        
Conversion feature of debentures issued (note 10)                                                  --          88,235        
Issuance of common stock in connection with stockholder notes payable                                                        
(note 9)                                                                                           --         391,042        
Debentures converted, net of expenses (note 10)                                                    --       1,033,446        
Issuance of Series G Preferred Stock, net of expenses and conversion of                                                      
Series F Preferred Stock, including common stock issued (note 11)                                  --       7,980,842        
Issuance of common stock for the conversion of Series F to Series G                                                          
Preferred Stock                                                                                    --         236,825        
Preferred stock accretion and dividends (note 11)                                          (1,072,389)       (840,478)       
Preferred stock converted, including related accretion (note 11)                                   --              --        
Preferred stock redeemed (note 11)                                                                 --      (1,350,000)       
Preferred stock converted to debt (note 11)                                                        --      (1,185,496)       
Issuance of warrants in connection with the stockholder notes payable                                                        
agreement and December 1997 restructuring (notes 9, 10, and 11)                                    --         567,593        
Other                                                                                              --           4,984        
Net loss                                                                                  (12,820,441)    (12,820,441)       
                                                                                         ------------    ------------        
Balance at December 31, 1997                                                              (66,691,089)      2,469,303        
Issuance of common stock                                                                           --          50,000        
Issuance of restricted common stock in connection with settlement (note                                                      
                                                                       12)                         --         562,500        
Issuance of  preferred stock                                                                       --              --        
Issuance of common stock in connection with notes payable to                                                                 
stockholders (note 12)                                                                             --         100,074        
Restricted common stock issued with asset purchase (note 5)                                        --         625,200        
Issuance of Series G Preferred Stock and exchanged for Series I Preferred                                                    
Stock (note 11)                                                                                    --       2,050,000        
Issuance of Series H Preferred Stock and exchanged for Series J Preferred                                                    
Stock (note 11)                                                                                    --       7,920,000        
Issuance of Series J Preferred Stock (note 11)                                                     --       2,130,000        
Conversion of stockholders' notes payable to Series J Preferred Stock                                                        
(note 9)                                                                                           --       1,530,000        
Conversion of stockholders' notes payable to Series I Preferred Stock                                                        
(note 9)                                                                                           --         500,000        
Issuance of Series I and Series J Preferred Stock for dividends payable                                                      
(note 10)                                                                                          --       1,080,000        
Preferred stock dividends (note 11)                                                        (1,500,422)     (1,500,422)       
Purchase of treasury stock                                                                         --         (50,000)       
Other                                                                                              --          67,481        
Net loss                                                                                  (15,459,056)    (15,459,056)       
                                                                                         ------------    ------------        
Balance at December 31, 1998                                                             $(83,650,567)   $  2,075,080        
                                                                                         ============    ============        
</TABLE>




          See accompanying notes to consolidated financial statements
                                                                                

                                      F-4

<PAGE>   28




                          AXCESS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                         1998           1997            1996
                                                                                         ----           ----            ----
<S>                                                                                  <C>             <C>            <C>          
Cash flows from operating activities:
   Loss from continuing operations                                                   $ (9,210,228)   $(4,993,916)   $ (4,469,429)
        Adjustments to reconcile net loss to net cash used by  operating activities:                     
            Depreciation and amortization                                                 781,243        700,000         174,571
            Amortization of financing discount and issuance costs                         188,486             --              -- 
            Non-cash compensation                                                          50,000             --              -- 
            Changes in operating assets and liabilities:
                 Accounts receivable                                                      (30,987)            --              -- 
                 Inventory                                                               (256,216)            --              -- 
                 Prepaid expenses and other                                                (5,853)       113,749        (100,995)
                 Deferred license fees                                                         --             --      (2,100,000)
                 Other assets                                                             101,737        308,124         587,379
                 Accounts payable                                                        (978,478)       119,422        (880,218)
                 Other liabilities                                                      1,787,916       (225,249)        489,057
                                                                                     ------------    -----------    ------------
                     Net cash used by operating activities                             (7,572,380)    (3,977,870)     (6,299,635)

Cash flow from investing activities:
   RFID technology purchase                                                              (404,249)            --              -- 
   Capital expenditures                                                                   (46,450)        (6,163)             -- 
                                                                                     ------------    -----------    ------------
                     Net cash used by investing activities                               (450,699)        (6,163)             -- 

Cash flows from financing activities:
   Borrowings under financing agreements                                                1,611,685      6,099,024       1,772,347
   Principal payments on financing agreements                                          (3,591,631)    (3,115,544)     (4,075,715)
   Net proceeds from issuance of common and preferred stock                            12,245,542      6,229,795      18,152,959
                                                                                     ------------    -----------    ------------
                     Net cash provided by financing activities                         10,265,596      9,213,275      15,849,591

                     Net cash used by discontinued operations                          (1,769,429)    (5,072,869)     (8,602,999)

                     Net increase in cash and cash equivalents                            473,088        156,373         946,957
Cash and cash equivalents, beginning of period                                          1,102,341        945,968            (989)
                                                                                     ------------    -----------    ------------
Cash and cash equivalents, end of period                                             $  1,575,429    $ 1,102,341    $    945,968
                                                                                     ============    ===========    ============

Supplemental information:
   Cash paid during the year for interest                                                 112,446          2,031         151,354
                                                                                     ============    ===========    ============
   Conversions to common stock (notes 9, 10 and 11):
        Debentures, net of unamortized discount and expenses                                   --      1,000,000       9,225,000
        Accrued interest                                                                       --         33,446         483,435
        Preferred stock                                                                        --      3,829,218              -- 
   Convertible preferred stock accretion (note 11)                                             --        231,911         257,666
                                                                                     ============    ===========    ============
   Other conversions:
   Restricted common stock issued in connection with Xerox settlement (note 12)           562,500             --              -- 
                                                                                     ============    ===========    ============
   Restricted common stock issued in connection with RFID Asset Purchase (note 5)         625,200             --              -- 
                                                                                     ============    ===========    ============
   Note payable to stockholder in connection with RFID asset purchase (Note 5)            685,000             --              --
                                                                                     ============    ===========    ============
   Detachable warrants and restricted common stock issued in conjunction
   with notes payable to stockholders (note 12)                                           100,704             --              -- 
                                                                                     ============    ===========    ============
   Detachable warrants stock issued in conjunction with convertible debt
   and preferred stock (notes 9, 10 and 11)                                                    --        567,593         462,000
                                                                                     ============    ===========    ============
   Conversion feature of debentures and stockholder notes issued (notes 9 and 10)              --        776,068       1,555,981
                                                                                     ============    ===========    ============
   Common stock issued in connection with stockholder notes payable 
   and preferred stock                                                                         --        656,103              -- 
                                                                                     ============    ===========    ============
   Debentures and accrued interest converted to short- and long-term 
   notes payable (note 10)                                                                     --      1,035,205              -- 
                                                                                     ============    ===========    ============
   Preferred stock converted to notes payable (note 11)                                        --      1,185,496              -- 
                                                                                     ============    ===========    ============
   Exchange of convertible preferred stock for new issues (note 11)                    15,050,000             --              -- 
                                                                                     ============    ===========    ============
   Conversion of notes payable to stockholders and accrued interest to 
   preferred stock (Note 11)                                                            2,030,000             --              --
                                                                                     ============    ===========    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>   29





                         AXCESS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Company Organization and Basis of Presentation

                  The accompanying consolidated financial statements include the
accounts of AXCESS Inc. and its 96 percent owned subsidiary Sandia Imaging
Systems Corporation (Sandia), which is no longer operating (see note 3)
(collectively, "the company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the 1997 and 1996 consolidated financial statements to conform
to the 1998 presentation, including classification of the imaging business and
Lasertechnics Marking Corporation ("LMC") as discontinued operations (note 3).

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         (b) Statements of Cash Flows

                  The company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.

         (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 December
31, 1998:


<TABLE>
<S>                                               <C>             
Raw materials                                     $         98,010
Work-in-process                                            137,124
Finished goods                                              21,082
                                                  ----------------
                                                  $        256,216
                                                  ================
</TABLE>

         (d) Depreciation and Amortization

                  Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the respective assets.

         (e) Fair Value of Financial Instruments

                  The carrying amount of cash equivalents, note receivable from
stockholder, accounts receivable, accounts payable, notes payable to
stockholder, notes payable and accrued liabilities approximate fair value
because of the short-term maturity of these instruments.


                                      F-6

<PAGE>   30





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



         The outstanding borrowings under the company's long-term notes payable
(note 9) bear interest at current market rates, and therefore, the carrying
amount of debt approximates estimated fair value at December 31, 1998 and 1997.

         (f) Income Taxes

                  The company accounts for income taxes under the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount more likely than not to be realized. Income tax expense is
the total of tax payable for the period and the change during the period in
deferred tax assets and liabilities.

         (g) Net Loss Per Common Share

                  In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 revised the previous calculation methods and
presentations of earnings per share and requires that all prior-period earnings
(loss) per share data be restated to conform to SFAS No. 128. The company
adopted SFAS No. 128 in the fourth quarter of 1997 as required by this
Statement. In accordance with SFAS No. 128, the company has presented basic loss
per share, computed on the basis of the weighted average number of common shares
outstanding during the year. Diluted earnings per share which includes the
dilutive effect of options and warrants has not been presented since, due to the
net losses recorded by the company for all periods presented, their inclusion
would be antidilutive.

         Net loss applicable to common stock is derived by adding to the
consolidated net loss the accretion of the discount recorded for the company's
increasing rate preferred stock Series A, B and C in 1996, the annual accretion
of Series D, E and F Preferred Stock in 1996 and 1997, and dividend requirements
on Series G, H, I and J Preferred Stock in 1998, the value of warrants issued to
induce conversions from Series F to Series G Preferred Stock during 1997 and in
connection with a 1997 standstill agreement and the intrinsic value of the
beneficial conversion feature of the Series D Preferred Stock (note 11).

         (h) Revenue Recognition

                  The company recognizes revenue on sales of its products either
when the products are shipped from the company or received by the customer,
depending on the shipping terms.

         (i) Impairment of Long-Lived Assets and Long-Lived Assets to
             be Disposed Of

                  Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the

                                      F-7

<PAGE>   31





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



carrying amount of the asset exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

         (j) Stock Compensation Plans

                  On January 1, 1996, the company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair value-based method defined in SFAS No.
123 had been applied. The company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS
No. 123. Under APB Opinion No. 25, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price.

         (k) Capital Structure

                  Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129") was
adopted by the company for the year ended December 31, 1998. SFAS No. 129
requires disclosures about capital structure to include a brief discussion of
rights and privileges for securities outstanding.

         (l) Segment Reporting

                  The company adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," effective January 1, 1998. The
statement supercedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise." The adoption of this statement had no impact on the company as the
company operates in one industry segment upon discontinuing the operations of
LMC and the imaging business.

(2)      OPERATIONS, LIQUIDITY AND GOING CONCERN

         The company's operations in 1998 continued to generate losses. The loss
in 1998 exceeded losses in either 1997 or 1996. Although during 1998, the
company raised gross proceeds of approximately $15 million through equity and
debt transactions, the company's operations, capital expenditures and debt
service requirements have utilized substantially all of such proceeds through
March 1999. These factors raise substantial doubt about the company's ability to
continue as a going concern.

         The company's business plan for 1999 is predicated principally upon the
successful introduction of its new RFID products. Because of the uncertainty and
anticipated timing of new product

                                      F-8

<PAGE>   32
                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



introductions the company will require additional external financing to meet its
1999 requirements. However, there can be no assurance that sufficient additional
external financing can be obtained to fund any increases in financing
requirements resulting from delays in or inability to successfully introduce
planned new products. If the company is unable to obtain such additional funds,
it may be necessary to either reduce or stop certain product development
programs, reduce its sales and marketing efforts or undertake other actions as
may be appropriate.

(3)      DISCONTINUED OPERATIONS

         On October 21, 1998, the company's Board of Directors approved a plan
to exit the imaging business as part of the strategy to redeploy and refocus the
company's resources on its core RFID asset, vehicle and personnel tracking
business. The sale of the imaging business was completed on December 15 , 1998.
The company reported a sales price of $500,000 and recorded a loss of $1,095,920
on the disposal in 1998. The remaining $1,511,320 of net assets of the
discontinued operations consist primarily of trade and other receivables, which
are valued at net realizable value as of December 31, 1998. Below is a summary
of the operating results of the imaging business, which have been reclassified
to loss from discontinued operations for all periods presented (there is no
related income tax benefit or expense).

<TABLE>
<CAPTION>
                                                       1998               1997               1996
                                                       ----               ----               ----
<S>                                                <C>                <C>                <C>         
Sales                                              $ 3,014,465        $ 4,353,318        $  8,197,639
Costs and expenses                                   5,540,978          9,897,212          13,856,525
                                                   -----------        -----------        ------------
Loss from operation of discontinued business       $(2,526,513)       $(5,543,894)       $ (5,658,886)
                                                   ===========        ===========        ============
</TABLE>

         In March 1999, the company entered into a definitive agreement to sell
its Lasertechnics Marking Corporation subsidiary ("LMC") to affiliates of
Amphion Capital Management, a major stockholder of the company. The company's
rights and interests in DataGlyph(TM) and the technology under development with
XL Vision, Inc. were also included in the sale. The company will receive $2.5
million in cash at closing, $0.5 million demand note receivable, a $4.0 million
note receivable due March 2002 (or 2004 under certain conditions) and a warrant
to purchase equity in the Amphion-controlled enterprise to which Amphion will
transfer these businesses and assets with an exercise price of $2.50 per share,
representing approximately 8% of that enterprise. If LMC is sold within two
years of its purchase, the company has the option to exchange its warrant for
twenty percent of the defined excess profits from any such sale. The company's
net book value of LMC and the assets sold was approximately $3.0 million. The
gain on disposition will be recorded in the first quarter of 1999 in connection
with the consummation of the purchase and sale of the stock and assets under the
purchase agreement, after giving effect to changes in the company's investment
in LMC through the sale date. The company's net assets of LMC

                                      F-9

<PAGE>   33





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



of $1,675,000 at December 31, 1998, are included in net assets of discontinued
operations. Below is a summary of the operating results of LMC, which have been
reclassified to loss from discontinued operations for all periods presented
(there is no related income tax benefit or expense).

<TABLE>
<CAPTION>
                                                       1998               1997               1996
                                                       ----               ----               ----
<S>                                                <C>                <C>                <C>         
Sales                                              $ 5,495,475        $ 6,765,021        $  9,383,801
Costs and expenses                                   8,121,870          9,047,652          10,654,481
                                                   -----------        -----------        ------------
Loss from operation of discontinued business       $(2,626,395)       $(2,282,631)       $ (1,270,680)
                                                   ===========        ===========        ============
</TABLE>

(4)      REVERSE STOCK SPLIT

         The company has restated its consolidated financial statements for the
years ended December 31, 1997 and 1996 to give effect to the 1-for-20 reverse
stock split of the outstanding Common Stock, Nonvoting Common Stock, and Series
A, B and C Convertible Preferred Stock effective as of April 2, 1998. There was
no change to total stockholders' equity. However, to reflect the decreased
number of common and non-voting common convertible shares outstanding following
the reverse stock split, there was a reduction in total par value of common
stock and non-voting common stock offset by an increase in paid-in capital. The
effects of the reverse stock split are summarized below. The reverse stock split
had the effect of increasing the company's 1997 and 1996 net loss per common
share by a factor of 20, but had no impact on the net loss or net loss
applicable to common stock, as shown below:


<TABLE>
<CAPTION>
                                                                              Year ended           Year ended
                                                                             December 31,         December 31,
                                                                                 1997                  1996
                                                                                 ----                  ----
<S>                                                                           <C>                 <C>       
Number of weighted average shares of common stock                               44,684,785          34,339,313
  outstanding, as previously reported
Restated number of weighted average shares of common stock                       2,234,239           1,716,966
  outstanding after reverse stock split
Net loss attributable to common stockholders, as previously and               $(13,892,830)       $(13,264,110)
  currently reported
Basic and diluted net loss per share, as previously reported                  $      (0.31)       $      (0.39)
Restated basic and diluted net loss per share after reverse stock split       $      (6.22)       $      (7.73)
</TABLE>


<TABLE>
<CAPTION>
                                                                              As of December 31,
                                                                                     1997
                                                                                     ----
<S>                                                                               <C>            
Balance Sheet:
         Common stock, $.01 par value:
                    Number of shares issued and outstanding
                           As previously reported                                 46,634,964     
                           After reverse stock split                               2,331,748     
                    Total par value, as previously reported                     $    466,350     
                    Total par value, after reverse stock split                        23,318     
                                                                                ------------     
                           Reduction in par value                               $   (443,032)    
         Non-voting convertible common stock, $.01 par value:                                    
                    Number of shares issued and outstanding                                      
                           As previously reported                                  2,249,842     
                           After reverse stock split                                 112,492     
                    Total par value, as previously reported                     $     22,499     
                    Total par value, after reverse stock split                         1,125     
                                                                                ------------     
                           Reduction in par value                               $    (21,374)    
         Paid-in Capital:                                                                        
                    As previously reported                                      $ 56,704,310     
                    After reverse stock split                                     57,168,716     
                                                                                ------------     
                           Increase in paid-in capital                          $    464,406     
                                                                                ------------     
         Net effect on total stockholders' equity                               $         --     
                                                                                ============     
</TABLE>


                                     F-10
<PAGE>   34



                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         Unaudited quarterly financial data was also restated from amounts
previously reported for the fiscal 1997 and 1996 quarterly results (note 16).

(5)      RFID TECHNOLOGY

         In September 1998, the company consummated the acquisition of the RFID
based (Radio Frequency Identification) intellectual property assets of ASGI,
Inc., and Nauta, Inc. (collectively, the "Sellers"). The intellectual property
assets included a patent, trade secret rights, software, hardware, product
designs and all other technical information necessary for the company to
manufacture and market radio frequency identification products in the areas of
access control and asset management. The company accomplished the asset
acquisition pursuant to an Asset Purchase Agreement dated September 9, 1998, by
and among the company and the Sellers. At closing, the company made a cash
payment of $415,000, signed a one-year promissory note for $685,000, interest at
prime, and delivered 400,000 shares of its common stock. Up to an aggregate of
$6,000,000 is payable by the company to Sellers only if certain net operating
profit targets are realized during each of the next five years. The balance
outstanding under the promissory note at December 31, 1998 was approximately
$457,000. Such amounts will be treated as additional cost of the RFID
technology, if and when paid, and amortized over the remaining economic life of
the technology.

(6)      PROPERTY, PLANT AND EQUIPMENT

          Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                              Amortization/
                                                              Depreciation
                                                                    Period          1998           1997
                                                              ------------          ----           ----
<S>                                                           <C>               <C>              <C>       
         Property, plant and equipment:
                  Leasehold improvements                      Lease term        $    55,752      $   31,305
                  Machinery and equipment                     5 to 8 years        1,060,255       1,159,689
                  Furniture and fixtures                      5 years                70,461          99,309
                                                                                -----------      ----------
                                                                                  1,186,648       1,290,303
         Accumulated depreciation and amortization                                 (612,149)       (628,154)
                                                                                -----------      ----------
         Property, plant and equipment, net                                     $   574,499      $  662,149
                                                                                ===========      ==========
</TABLE>

(7)      LEASE OBLIGATIONS

         On November 6, 1998, the company executed a sale-leaseback transaction
for LMC's headquarters facility in Albuquerque, New Mexico, which generated net
cash proceeds of approximately

                                      F-11

<PAGE>   35





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



$725,000, after retiring industrial revenue bonds issued by the City of
Albuquerque. As part of the transaction, the company's long-term capital lease
with the City of Albuquerque was terminated.

    The company leases its office space and certain equipment under operating
leases. The rental expense recorded for operating leases was $162,431, $187,701
and $179,202 for the years ended December 31, 1998, 1997 and 1996, respectively.

At December 31, 1998, future minimum lease payments on operating leases were as
follows:

<TABLE>
<CAPTION>
                  Year ending December 31
                  -----------------------
<S>                                                                <C>     
                           1999                                    $140,909
                           2000                                     123,224
                           2001                                      16,220
                           2002                                       5,407
</TABLE>

(8)      ACCRUED LIABILITIES

          Accrued liabilities consist of the following at December 31, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                  1998                  1997
                                                                  ----                  ----
<S>                                                           <C>                     <C>     
         Accrued payroll and payroll taxes                    $   152,257             $ 60,902
         Accrued vacation                                          82,407               49,665
         Interest payable                                          36,303              255,192
         Accrued legal, litigation settlements and other        1,714,035              571,591
                                                              -----------             --------
                                                              $ 1,985,002             $937,350
                                                              ===========             ========
</TABLE>

(9)      NOTES PAYABLE TO STOCKHOLDERS

         During June and July 1996, the company obtained a 12% working capital
bridge loan totaling $1.7 million from Antiope Partners L.L.C. f/k/a Wolfensohn
Partners L.P. ("Antiope Partners"). The loan principal and related interest were
paid in full in August 1996 with proceeds from the sale of Series D Convertible
Preferred Stock (note 11). In connection with these borrowings, a five year
warrant to purchase a total of 2,817 shares of common stock was issued to
Antiope Partners.

         During the first quarter of 1997, the company obtained a commitment for
a working capital bridge loan of up to $1,000,000 from Antiope Partners. The
company made draws of $1,000,000 under this agreement during the first and
second quarters of 1997. Borrowings bore interest at 12% and were due on demand.
The borrowings were ultimately convertible into the company's voting common
stock. In June 1997, borrowings under this agreement were converted into an
advance under the terms of a new bridge loan financing provided to the company
by Antiope Partners and J.P. Morgan Investment Corporation ("JPMIC") pursuant to
a note purchase agreement dated June 25, 1997 (the "Note Purchase Agreement").
The Note Purchase Agreement provided the company with additional bridge
financing up to a total of

                                      F-12

<PAGE>   36





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



$3,000,000, to be funded 60% by Antiope Partners and 40% by JPMIC. Under the
Note Purchase Agreement, the company received additional fundings of $2,000,000
by September 1997. The Note Purchase Agreement provided for an interest rate of
10% per annum for advances by Antiope Partners and 6.64% per annum for advances
by JPMIC, with a final maturity of December 31, 1997. In connection with the
advances, the company issued to Antiope Partners and JPMIC an aggregate of
15,428 restricted shares of the company's common stock and warrants to purchase
30,000 shares of the company's common stock with a strike price of $14.00. In
connection with the restricted shares and warrants, the company recorded a
discount to equity of $287,144. Further, advances under the Note Purchase
Agreement are convertible into convertible debentures with terms similar to the
currently outstanding convertible debentures (see note 10), which are ultimately
convertible into common stock at a discount. The company recorded a discount to
equity of approximately $688,000 for the intrinsic value of the beneficial
conversion feature. The discount attributable to the restricted shares, warrants
and conversion feature was fully accreted to interest expense during 1997.

         In December 1997, JPMIC, Antiope Partners and Amphion Ventures, L.P.
("Amphion Ventures"), an affiliate of Antiope Partners, extended the maturity of
the Note Purchase Agreement to December 31, 1998 in exchange for 5,647
restricted shares of the company's common stock and warrants to purchase 30,000
shares of common stock at an exercise price of $5.00. The company recorded a
debt discount of $88,412 representing the estimated fair value of the warrants
and restricted stock provided under this arrangement. The debt discount was
accreted to interest expense through the extended maturity date of December 31,
1998.

         The company borrowed additional funds of $4,138,575 from Amphion
Ventures during late September 1997 through early December 1997 under an
informal borrowing agreement. The advances accrued interest at a rate of 10% per
annum. In connection with these advances, the company issued 21,284 restricted
shares of the company's common stock and warrants to purchase 41,385 shares of
the company's common stock at an exercise price of $14.00. The company recorded
a debt discount of approximately $317,000 representing the estimated fair value
of the warrants and restricted stock, which was fully accreted to interest
expense as of December 31, 1997. In December 1997, the company entered into an
agreement whereby it converted the advances under this informal borrowing
agreement into Series G Preferred Stock (see note 11). The effective interest
rate associated with the borrowings from Antiope Partners and JPMIC in 1997 was
71% including the beneficial conversion feature, and 39% excluding the same.

         In December 1998, Amphion Ventures L.P., Antiope Partners and JPMIC
elected to convert one-half of the outstanding indebtedness of the company to
each of them under the Note Purchase Agreement, including all accrued, but
unpaid interest thereon through December 31, 1998, into shares of the company's
Series I Preferred Stock or Series J Preferred Stock. In addition, Amphion
Ventures elected to convert $100,000 of the accrued, but unpaid interest under
the terms of its $1.47 million note payable (the "Amphion Note Payable"), the
proceeds of which were used by the company to settle its dispute with Xerox
Corporation in December 1998, into shares of Series I Preferred Stock or Series
J Preferred Stock.


                                      F-13

<PAGE>   37





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



         As a result of the debt conversions described above, the company
issued: (a) 35 shares of Series J Preferred Stock to Amphion Partners for its
conversion of indebtedness of the company in the aggregate amount of $350,000
($200,000 under the terms of the Note Purchase Agreement plus $50,000 of
accrued, but unpaid interest thereon, and $100,000 of accrued, but unpaid
interest on the Amphion Note Payable); (b) 118 shares of Series J Preferred
Stock to Antiope Partners for its conversion of indebtedness of the company in
the aggregate amount of $1,180,000 ($910,000 under the terms of the Note
Purchase Agreement plus $270,000 of accrued, but unpaid interest thereon); and
(c) 50 shares of Series I Preferred Stock to JPMIC for its conversion of
indebtedness of the company in the aggregate amount of $500,000 ($400,000 under
the terms of the Note Purchase Agreement plus $100,000 of accrued, but unpaid
interest thereon).

         Also in December 1998, Amphion Ventures, Antiope Partners and JPMIC
agreed with the company to extend the maturity date of the balance remaining
under the senior notes issued under the Note Purchase Agreement for a period of
one year. The balance of the indebtedness under the Note Purchase Agreement is
now due in full by the company on December 31, 1999.

(10)     CONVERTIBLE DEBENTURES

         In March 1996, the company completed a $5,500,000 private placement of
10 percent convertible subordinated debentures maturing March 1, 1999 (the "1996
Debentures"). The 1996 Debentures, plus accrued interest, were convertible into
the company's unregistered common stock. The Common Stock issued upon conversion
has registration rights under certain circumstances. In connection with the 1996
Debentures, five year warrants to purchase 9,625 shares of Common Stock at
$44.00 per share were issued to the placement agent for the offering as part of
the placement fee. In addition, five year warrants to purchase 27,500 shares of
Common Stock at $40.00 per share were issued with the 1996 Debentures. The
company recorded a debt discount of approximately $606,341 for the estimated
fair value of such warrants. The company recorded a debt discount of
approximately $950,000 representing the intrinsic value of the beneficial
conversion feature of the 1996 Debentures and approximately $462,000 for the
estimated fair value of the 27,500 related detachable warrants to purchase
Common Stock. The discount related to the detachable warrants was being
amortized ratably as an interest rate adjustment over the life of the 1996
Debentures or until conversion. All outstanding 1996 Debentures were to be
automatically converted into Common Stock prior to maturity. During 1996,
$3,250,000 face amount of the 1996 Debentures plus $127,612 of accrued interest
were converted into 119,603 shares of Common Stock.

         During 1997, $1,000,000 face amount of the 1996 Debentures plus
$181,239 accrued interest were converted into 99,045 shares of the company's
common stock. Additionally, in May 1997, the company redeemed $600,000 principal
of its March 1996 Debentures with the proceeds from the private placement of
$500,000 principal amount of the Series B 10% Convertible Debenture due March
1999 (the "Series B Debenture") with substantially identical terms as the 1996
Debentures and $100,000 in proceeds from the private placement of $500,000 of
Series E convertible preferred stock (see note 11). The company recorded a debt
discount of approximately $88,000 representing the intrinsic value of the
beneficial

                                      F-14

<PAGE>   38





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



conversion feature of the Series B Debenture. The discount was fully accreted to
interest expense during 1997. The company redeemed an additional $50,000 face
amount of the 1996 Debentures during 1997.

         In July 1997, the holders of the 1996 Debentures, Series B Debenture,
Series D Preferred Stock and Series E Preferred Stock (the "Suspended
Securities") agreed to a ninety day suspension of conversion rights on 75% of
their holdings beginning July 14, 1997. From October 14, 1997 and thereafter,
the holders of the Suspended Securities can exercise the suspended portion at a
cumulative rate of 20% per month. In exchange for the standstill agreement, the
holders of the 1996 Debentures and the Series B Debenture received warrants to
purchase 13,594 shares of the company's common stock at an exercise price of
$14.00. In connection with the issuance of these warrants, the company recorded
a charge to interest expense of $59,653, which represents the estimated fair
value of the warrants provided as an inducement to the holders of the Suspended
Securities.

         At December 31, 1997, as part of a series of transactions to convert
debentures and preferred stock into notes payable (the "December 1997
Restructuring"), the remaining $600,000 face amount of the 1996 Debentures were
converted into a 12% short-term note payable with $300,000 principal due in
January 1998 and three installments of $100,000 plus current interest due in
March, April and May 1998. Each of these obligations were paid in full in 1998.
Additionally, the company converted the $500,000 principal amount of the Series
B Debenture into an 8% long-term promissory note due January 15, 2000. In
connection with these conversions, the company issued to the holders warrants to
purchase 30,000 shares of the company's common stock at an exercise price of
$5.00. In connection with the warrants issued, the company recorded a charge to
interest expense of $47,774, which represents the estimated fair value of the
warrants provided as a conversion inducement.

(11)   PREFERRED STOCK

         Series D Preferred Stock

         In July 1996, the company completed an $8,350,000 private placement of
835 shares of a new class of preferred stock, Series D Convertible Preferred
Stock, par value $.01 per share ("Series D Preferred Stock"). Shares of Series D
Preferred Stock were convertible into Common Stock in increments of up to 1/3 of
Series D Preferred Stock purchased at the lesser of (i) $42.812 per share or
(ii) (a) the average closing bid price of the common stock for the ten trading
days immediately prior to the conversion date multiplied by (b) a percentage
which is 90 percent from October 1, 1996 through November 29, 1996, 87.5 percent
from November 30, 1996 through January 28, 1997, and 85 percent thereafter. The
company assigned a value of approximately $1,198,055 to the beneficial
conversion feature of the Series D Preferred Stock, which has been included as a
preferred stock dividend for purposes of calculating loss applicable to common
stockholders for the year ended December 31, 1996 in the accompanying
consolidated financial statements. The Series D Preferred Stock did not accrue
dividends; however, each share possessed an 8 percent per annum accretion rate
prior to conversion which was payable in Common Stock upon conversion or
redemption at the conversion price then in effect. Any shares of Series D
Preferred Stock outstanding on August 2, 1999 were to be subject to automatic
conversion at the

                                      F-15

<PAGE>   39





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



conversion rate then in effect. The company effected a Registration Statement on
Form S-3 (Registration No. 333-10665), which registers up to 300,000 shares of
Common Stock to be offered by the holders of Series D Preferred Stock upon such
holders' conversion of such Series D Preferred Stock into Common Stock.

         In connection with the Series D Preferred Stock, a five year warrant to
purchase 9,752 shares of Common Stock at $42.812 per share was issued to the
placement agent for the offering as part of the placement fee.

         During 1996, 250 shares of Series D Preferred Stock, having an
aggregate face value of $2,500,000, and an aggregate accretion value of $58,352,
were converted into 114,047 shares of Common Stock.

         Series E and F Preferred Stock

         In June 1997, the company completed the private placement of $500,000
Series E Convertible Preferred Stock ("Series E Preferred Stock"). The Series E
Preferred Stock had substantially identical terms as the Series D Preferred
Stock. The proceeds of this placement were used to redeem $400,000 of Series D
Preferred Stock and a portion of the $600,000 principal amount of 1996
Debentures redeemed (see note 10). As discussed in note 10, in July 1997, the
holders of the 1996 Debentures, Series B Debenture, Series D Preferred Stock and
Series E Preferred Stock (the "Suspended Securities") agreed to a ninety day
suspension of conversion rights on 75% of their holdings beginning July 14,
1997. In exchange for the standstill agreement, the holders of the Series D and
Series E preferred stock received warrants to purchase 27,125 shares of the
company's common stock at an exercise price of $14.00. The company recorded a
discount of $119,031 representing the estimated fair value of the warrants
provided for under this arrangement. These warrants provided as an inducement to
the holders of the Suspended Securities have been accounted for as stock
dividends to the Series D and E Preferred Stockholders. In connection with the
standstill agreement, the company converted the outstanding shares of Series D
and Series E Preferred Stock into Series F Convertible Preferred Stock ("Series
F Preferred Stock"). The Series F Preferred Stock had substantially identical
terms as the Series D and Series E Preferred Stock. Additionally, the company
completed a private placement of $480,000 face amount of Series F Preferred
Stock in July 1997 with Antiope Partners, the proceeds of which were used to
redeem $480,000 of existing Series F Preferred Stock from a stockholder.

         During 1997, the company converted a total of $3,590,000 face amount
plus $239,218 in accreted dividends of Series D, E and F Preferred Stock into
287,650 shares of common stock and redeemed for cash a total $1,350,000 face
amount.

         Series G Preferred Stock and December 1997 Restructuring

         In December 1997, in connection with the December 1997 Restructuring,
the company completed a $7,897,353 private placement of Series G Convertible
Preferred Stock (the "Series G Preferred Stock") with stockholders of the
company. Proceeds

                                      F-16

<PAGE>   40




                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



from the private placement were as follows: cash of $931,000; a short-term note
receivable of $1,158,684 (which was repaid in full in January and February
1998); forgiveness of accrued dividends payable of $708,620 on Series A, B and C
Series Preferred Stock; conversion of $4,138,575 principal and $63,121 accrued
interest from the informal borrowing agreement (see note 9); and conversion of
$860,000 face amount plus $37,353 of accreted dividends in Series F Preferred
Stock. In connection with the Series F to Series G Preferred Stock conversion,
the company issued 44,868 shares of common stock to the Series F Preferred
Stockholders with a fair value of $224,338 as a conversion inducement. This
conversion inducement has been accounted for as a stock dividend to the Series F
Preferred Stockholders.

         Additionally, in connection with the December 1997 Restructuring,
$980,000 face amount of Series F Preferred Stock plus $112,768 in accrued
dividends were converted into a short-term note payable due in two installments
in January and September 1998. The remaining $75,000 face amount of Series F
Preferred Stock was converted into a 12% short-term note payable, with accrued
interest at December 31, 1997 of $17,759. In connection with these conversions,
the company issued to the Series F holders warrants to purchase 42,000 shares of
the company's common stock at an exercise price of $10.00 per share. The company
recorded a debt discount of $70,425 representing the estimated fair value of the
warrants provided for under this arrangement. This conversion inducement has
been accounted for as a stock dividend to the Series F Preferred Stockholders.

         1998 Equity Commitment by Major Stockholder

         Prior to the purchase of the 213 shares of Series J Convertible
Preferred Stock (the "Series J Preferred Stock") by Amphion Ventures L.P. during
the three month period ended December 31, 1998, which is described below under
the heading Equity Purchases by Major Stockholder, Amphion Ventures had
previously purchased 205 shares and 792 shares of the company's Series G
Preferred Stock and Series H Convertible Preferred Stock (the "Series H
Preferred Stock"), respectively, for a total purchase price of $9,970,000. In
October 1998, the company obtained a formal commitment from Amphion Ventures to
purchase up to an additional $2.3 million of shares of either the company's
Series G Preferred Stock, Series H Preferred Stock, Series I Convertible
Preferred Stock (the "Series I Preferred Stock") or Series J Preferred Stock,
raising their commitment to a total of $6.3 million, to fund the company's
operations (the "1998 Amphion Commitment"). In connection with this commitment,
Amphion Ventures received common stock warrants to purchase 264,998 shares of
the company's common stock at an exercise price of $2.50 per share.

         Each share of Series I Preferred Stock is convertible in whole or in
part at any time at the option of the holder into shares of voting common stock
of the company equal to the quotient of (a) the aggregate original Series I
Preferred Stock issue price of $10,000 per share (the "Original Series I Issue
Price") divided by (b) the conversion price of $4.00 per share, which is subject
to being adjusted from time to time. The Series J Preferred Stock is
substantially the same as the Series I Preferred Stock, except the Series J
Preferred Stock is convertible in whole or in part at any time at the option of
the holder into shares of the company's non-voting common stock of the company
based on the same formula. The original Series J Preferred Stock issue price is
also $10,000 per share (the "Original Series J Issue Price").


                                      F-17

<PAGE>   41





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



         The Series I Preferred Stock and the Series J Preferred Stock are both
subject to the optional redemption at any time by the company, in whole or in
part, at a redemption price per share equal to the Original Series I Issue Price
or the Original Series J Issue Price, as the case may be, plus any accrued, but
unpaid dividends thereon. The company's optional right of redemption is subject
to each Series I Preferred Stock or Series J Preferred Stock holder's right, as
the case may be, to convert such Series I Preferred Stock or Series J Preferred
Stock, as the case may be, into common stock within ten (10) business days after
the company's notice of redemption.

         The Series I Preferred Stock and the Series J Preferred Stock are also
subject to the mandatory conversion by the company into shares of the company's
voting or non-voting common stock, as the case may be, if the closing bid price
of the company's common stock on the Nasdaq SmallCap Market is at least $10.00
per share for a period of at least ninety (90) consecutive trading days.
Although the company's non-voting common stock may be converted to common stock
at any time by a holder thereof, Amphion Ventures has agreed not to convert any
shares of non-voting common stock to voting common stock without the prior
consent of the company.

         Exercise of Preferred Stock Reset Right by Stockholders

         In connection with the issuance of the company's Series G Preferred
Stock and the Series H Preferred Stock during 1997 and 1998, the company agreed
with the initial holders of the Series G Preferred Stock and the Series H
Preferred Stock, that if, at any time prior to December 31, 1999, the company
were to complete an equity financing raising at least $3,000,000 in new equity,
such initial holders would have the non-assignable right (the "Reset Right"),
but not the obligation to exchange all or a portion of their shares of Series G
Preferred Stock or Series H Preferred Stock for shares of a new series of
preferred stock with substantially the same terms and conditions offered to the
participants in the new equity financing. No such change, however, would result
in an increase in the conversion price above $10.00 per share.

         The 1998 Amphion Commitment described above triggered the reset right
held by the holders of the Series G Preferred Stock and the Series H Preferred
Stock. As a result, all of the holders of the Series G Preferred Stock and the
Series H Preferred Stock elected to exercise their rights to exchange all shares
of Series G Preferred Stock held by such holders for shares of Series I
Preferred Stock, as well as all shares of Series H Preferred Stock held by such
holders for shares of Series J Preferred Stock.

         In connection with its exercise of the Reset Right, Amphion Ventures
exchanged all 405 shares of Series G Preferred Stock held by it for 405 shares
of Series I Preferred Stock and all 792 shares of Series H Preferred Stock held
by it for 792 shares of Series J Preferred Stock. Also, Antiope Partners
converted all 50 shares of Series G Preferred Stock held by it for 50 shares of
Series I Preferred Stock and the other holder converted all 40 shares of Series
G Preferred Stock held by it for 40 shares of Series I Preferred Stock. The
Series I Preferred Stock and Series J Preferred Stock also contain a similar
reset provision such that if at any time prior to December 31, 1999, the company
were to complete an equity financing with third parties raising at least
$1,000,000 in new equity, the initial holders would have the non- 



                                     F-18
<PAGE>   42

assignable right (the "Series I and J Reset Right"), but not the obligation to
exchange all or a portion of their shares of Series I Preferred Stock or Series
J Preferred Stock for shares of a new series of preferred stock with
substantially the same terms and conditions offered to the participants in the
new equity financing. Further, if the company fails to complete such an equity
financing prior to December 31, 1999, the conversion price of the Series I
Preferred Stock and Series J Preferred Stock would automatically be reset to
not less than the greater of $1.00 or one-half of the average closing bid price
of the company's common stock on the Nasdaq SmallCap Market during the last
twenty (20) consecutive trading days of 1999.

         Equity Purchases by Major Stockholder

         Under the terms of the Amphion Commitment, 213 shares of Series J
Convertible Preferred Stock were purchased during the three month period ended
December 31, 1998, for an aggregate purchase price of $2,130,000. $1,110,000 of
the purchase price was payable primarily by the delivery of unconditional
promissory notes payable to the company by Amphion Ventures, the balance of
which was paid in full by December 31, 1998. In addition, the company issued 98
shares of Series J Preferred Stock to Amphion Ventures on December 31, 1998, for
a total purchase price of $980,000 and 5 shares of Series J Preferred Stock to
Antiope Partners for a total purchase price of $50,000. The purchase price for
both of theses issuances was payable in cash by each of Amphion Partners and
Antiope Partners.

         Payment of Dividends on Preferred Stock During 1998

         The holders of the Series G Preferred Stock, the Series H Preferred
Stock, the Series I Preferred Stock and the Series J Preferred Stock are
entitled to receive dividends on each such share held by a holder at the annual
rate of 8% of the original issue price of each such share ($10,000) payable in
arrears, when, as and if declared by the company's board of directors, in cash
or additional shares of preferred stock at the company's option. On December 31,
1998, the company issued: (a) 71 shares of Series I Preferred Stock to Amphion
Ventures as payment in full for the $710,000 of accrued, but unpaid dividends on
the Series I Preferred Stock as of such date (which included all accrued, but
unpaid dividends on the Series G Preferred Stock as of the October 31, 1998,
exchange date); (b) 4 shares of Series I Preferred Stock to Antiope Partners as
payment in full for the $40,000 of accrued, but unpaid dividends on the Series I
Preferred Stock as of such date (which included all accrued, but unpaid
dividends on the Series G Preferred Stock as of the October 31, 1998, exchange
date); and (c) 30 shares of Series J Preferred Stock to Amphion Ventures as
payment in full for the $300,000 of accrued, but unpaid dividends on the Series
J Preferred Stock as of such date (which included all accrued, but unpaid
dividends on the Series H Preferred Stock as of the October 31, 1998, exchange
date).

         The company has three additional classes of convertible preferred
stock, Series A, B and C Convertible Preferred Stock, stated value $26.00,
$28.40, and $30.20, respectively. Each share of Series A, B, and C Convertible
Preferred Stock is convertible at the option of the holder into voting Common


                                     F-19
<PAGE>   43





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



Stock on a share for share basis and is entitled to vote as if converted into
voting Common Stock. The company may redeem the preferred stock at any time at
stated value plus accrued dividends.

         The Series A and B Preferred Stock accrue dividends at the following
rates per annum: 0 percent through December 31, 1995; 5 percent January 1, 1996
through March 31, 1996; 7.5 percent April 1, 1996 through June 30, 1996 and 10
percent thereafter. Series C Preferred Stock accrues dividends at 0 percent per
annum through December 31, 1995 and 10 percent per annum thereafter. Dividends
are payable within 15 days following each calendar quarter in cash or in
additional shares of preferred stock at the option of the company through June
30, 1996 (September 30, 1996 for Series C Preferred Stock). After June 30, 1996
(September 30, 1996 for Series C Preferred Stock), dividends are payable in cash
or additional shares of preferred stock at the option of the stockholders. There
were no dividends in arrears at December 31, 1998 and 1997. Dividends payable of
$473,557 were accrued at December 31, 1998.

         A discount on the Series A, B, and C Convertible Preferred Stock was
recorded equal to the present value of the difference between the actual
dividends that would be paid and the 10 percent perpetual dividend amount,
calculated over the increasing dividend rate period. The discount was amortized
to provide a constant effective dividend rate. The 1996 aggregate discount
amortization for all three series of preferred stock was $53,212. The discount
was fully amortized during 1996.

         All series of preferred stock rank senior in right of payment to the
company's Common Stock as to dividends or upon a liquidation or dissolution of
the company.

(12)     NOTES PAYABLE

         On December 27, 1996, the company owed a $2,100,000 note payable to
Xerox Corporation ("Xerox") in connection with a license agreement for certain
technology. Initially, one-third of the note principal plus accrued interest was
due on each of December 15 of 1997, 1998 and 1999. At December 31, 1997, the
outstanding balance of $2,100,000 was classified as a current liability as the
parties were in a dispute as to the obligation. In the first quarter of 1998,
the company agreed to pay Xerox $1.47 million in license fees for certain
technology and issued Xerox 120,000 shares of common stock. Xerox agreed not to
sell any of these shares before December 1999, at which time their shares may be
subject to certain limitations. The difference between the original note and the
sum of the cash and stock ultimately paid was $292,458, which was applied as a
reduction of the deferred licence fee. The company funded the payment to Xerox
from proceeds received from Amphion Ventures under the terms of a two-year loan
which bears interest at the rate of 10% per annum. Amphion Ventures received, as
a loan origination fee, (i) 15,120 shares of restricted common stock and (ii)
3-year warrants to purchase 14,700 shares of common stock with an exercise price
of $5.00 per share.

         The license fee of $2,100,000 was recorded as a deferred license fee
and was being amortized over the three year term of the license agreement.
Accordingly, the company has reflected the unamortized balance of $532,881 and
$1,400,000 at December 31, 1998 and 1997 respectively, as a noncurrent asset.
The company's rights and interests in the technology were included in the sale
of LMC and certain assets to Amphion Ventures in March 1999 (See note 3).



                                     F-20
<PAGE>   44





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



         The balance in notes payable at December 31, 1998 and 1997 include the
following:

<TABLE>
<CAPTION>
                                                                   1998               1997

<S>                                                              <C>              <C>       
Note payable issued to 1996 Debenture holder                     $       --       $  600,000
Notes payable issued to Series F Preferred stockholders                  --        1,167,767
Note payable to Xerox                                                    --        2,100,000
Other notes payable                                                  90,882           74,728
                                                                                  ----------
         Total short-term notes payable                          $   90,882       $3,942,495
                                                                 ==========       ==========

Long-term note payable to stockholder                            $1,470,000               --
                                                                 ==========       ==========
Long-term note payable issued to Series B debenture holder       $  535,205       $  535,205
                                                                 ==========       ==========
</TABLE>

(13)     STOCK COMPENSATION PLANS AND WARRANTS

         The company has two stock-based compensation plans that are described
below. The company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
related to stock option grants since the intrinsic value of stock options
awarded is zero at the date of grant. Had compensation cost for the company's
stock-based compensation plans been determined based on the grant date fair
value method in accordance with SFAS No. 123, the company's net loss and net
loss per share would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                    1998                     1997                   1996
                                                    ----                     ----                   ----
<S>                      <C>                   <C>                      <C>                     <C>          
Net loss applicable
to common stock          As reported           $(16,959,478)            $ (13,892,830)          $(13,264,110)
                         Pro forma              (17,239,562)              (14,140,970)           (13,359,439)
Basic and diluted
net loss per
common share             As reported           $      (6.32)            $       (6.22)          $      (7.73)
                         Pro forma             $      (6.43)            $       (6.33)          $      (7.78)
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: (i) expected volatility of 99, 107 and 92 percent,
(ii) risk-free interest of 5.0%, and (iii) expected lives of 5 years.

         Under the company's 1991 Employee Stock Option Plan, the company may
grant up to 900,000 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 granted vest
over a four year period. The company has issued stock options to various members
of the Board of Directors and officers of the company under this plan. The
exercise price of each option is not less than the average market price of the
company's stock during the thirty trading days immediately prior to the date of
grant and the option term is ten years. Options are generally granted each year
and have various vesting requirements. During 1998, options outstanding of
27,698 under this plan and a


                                     F-21
<PAGE>   45





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



terminated by employee stock option plan were cancelled and the company granted
options to purchase 27,698 shares at an exercise price of $3.00. Further, the
company cancelled options outstanding under a terminated key employee stock
option plan and granted new options primarily with an exercise price of $3.00.


<TABLE>
<CAPTION>
                                                                                      Weighted Average
                                                               Shares                 Exercise Price
                                                               ------                 --------------

<S>                                                            <C>                         <C>       
Balance outstanding at December 31, 1995                       35,358                      $23.80    
Granted                                                         3,500                       36.00    
Exercised                                                      (3,461)                      21.20    
Forfeited                                                      (4,619)                      21.40    
                                                             --------                      ------    
Balance outstanding at December 31, 1996                       30,778                       25.80    
Granted                                                            --                          --    
Exercised                                                          --                          --    
Forfeited                                                      (3,080)                      27.20    
                                                             --------                      ------    
Balance outstanding at December 31, 1997                       27,698                       25.80    
Granted                                                       743,241                        3.00    
Exercised                                                          --                          --    
Forfeited                                                     (58,350)                       3.00    
Cancelled                                                     (27,698)                      27.20    
                                                             --------                      ------    
Balance outstanding at December 31, 1998                      684,891                      $ 3.00    
                                                             ========                      ======    
</TABLE>

         At December 31, 1998, 1997, and 1996, there were 182,556, 25,948 and
26,403 AXCESS Inc. options exercisable, respectively. Weighted-average fair
values of AXCESS Inc. options granted during the year ended December 31, 1998
and 1996 were $3.00 and $32.00 per share, respectively.

         In 1998 the company adopted a director compensation plan pursuant to
which it pays each director who is not employed by the company and who does not
beneficially own more than 5% of the shares of common stock outstanding an
annual grant of 5,000 options to acquire common stock of the company at an
exercise price equal to the fair market value per share of the common stock at
the time the option is granted (the "Annual Grant"). The Annual Grant
customarily occurs on the date of the company's annual meeting. The director
compensation plan also provided for an one-time initial grant of 15,000 to each
director of the company as of July 21, 1998, the date the director compensation
plan was approved by the company's stockholders (the "Initial Grant"). The
company has authorized 150,000 shares for issuance under this plan.

         In 1998, the company issued a total of 87,500 options pursuant to the
terms of the director compensation plan. The company issued 60,000 options at an
exercise price of $4.00 for the Initial Grant, 20,000 options at an exercise
price of $3.00 for the Annual Grant and 7,500 options at an exercise price of
$4.00 to the one new director in 1998.



                                     F-22
<PAGE>   46





                          AXCESS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



         The company has issued warrants to purchase common stock in connection
with issuance of notes payable to stockholders (note 9), convertible debentures
(note 10), and preferred stock (note 11). At December 31, 1998, warrants to
purchase 584,431 shares of the company's common stock are outstanding with a
weighted average exercise price of $10.53. The outstanding warrants have a range
of exercise prices of $2.50 to $56.25.

 (14)    COMMITMENTS AND CONTINGENCIES

         On February 28, 1996, an investor group filed suit against the company.
This lawsuit arose out of the company's refusal to recognize the investor
group's attempt to exercise an option to purchase 70,000 shares of Common Stock
at $9.90 per share. The option had been granted to the company's former
President and CEO who attempted to transfer his option to the investor group on
the last day of the option term in September 1995. On that same day the investor
group attempted to exercise the option. The company refused to recognize the
attempted transfer of the option to the investor group on the primary grounds
that the option was granted personally to the company's former President and CEO
and the company believed that it was not transferable to third parties. The
lawsuit sought monetary damages which the investor group alleged to be not less
than $2,800,000. In March 1999, the plaintiffs, the company and the other named
defendants in the second lawsuit described above agreed to the principal terms
under which both lawsuits would be settled and dismissed, with prejudice.
Although the company anticipates consummating a settlement sometime during the
second quarter of 1999, there can be no assurance, however, that the company
will consummate any such settlement. The company has fully accrued the expected
cost of settlement as of December 31, 1998 (see note 8).

         The company is also involved in various other claims and lawsuits which
are generally incidental to its business. The company is vigorously contesting
all such matters and believes that their ultimate resolution will not have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.

(15)     INCOME TAXES

         Due to the company's losses, no income tax expense was recorded for the
years ended December 31, 1998, 1997 and 1996. At December 31, 1998, the company
had a net operating loss carryforward of approximately $25,100,000 for U.S.
federal income tax purposes, which will begin expiring in 1999. A net operating
loss carryforward approximately $19,000,000 is available for state income tax
purposes. The tax benefit (approximately $21,900,000) of the net operating loss
carryforward has been fully offset by a valuation allowance, since the company
cannot currently conclude that it is more likely than not that the benefit will
be realized. The valuation allowance increased by approximately $4,960,000
during 1998. A change in ownership, as defined for purposes of the Internal
Revenue Code, occurred in 1996 and the company believes that a subsequent
ownership change occurred during 1998, each of which limit the annual
utilization of the U.S. federal net operating loss carryforward under applicable
Internal Revenue Service regulations. Additionally, the company had
approximately $400,000 of research and development carryforwards. The
carryforwards expire from 1999 to 2006. The credit carryforwards will also be
restricted in their usage as a result of the ownership changes.



                                     F-23
<PAGE>   47





(16)     QUARTERLY FINANCIAL DATA (UNAUDITED - AS RESTATED (NOTES 3 AND 4))


<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                             ---------------------------------------------------------------------------
                                             March 31           June 30             September 30        December 31
                                             --------           -------             ------------        -----------
<S>                                          <C>                <C>                 <C>                    <C>          
1998:
   Net revenues                              $             --   $              --   $               --     $      43,146
   Operating loss                                  (1,984,106)         (1,713,330)          (2,065,771)      (2,936,085)
   Loss from continuing operations                 (2,151,235)         (1,860,686)          (2,178,047)      (3,020,261)
   Loss from discontinued operations               (1,171,073)           (822,784)          (2,287,663)      (1,967,308)
   Net loss                                        (3,603,835)         (3,025,500)          (4,879,425)      (5,450,718)
   Basic and diluted net loss per share:
       Continuing operations                            (0.88)              (0.72)               (0.82)           (1.09)
       Discontinued operations                          (0.48)              (0.32)               (0.87)           (0.71)
       Net loss                                         (1.47)              (1.17)               (1.85)           (1.98)

1997:
   Net revenues                                            --                  --                   --               -- 
   Operating loss                                    (615,501)           (997,483)            (927,354)        (710,045)
   Loss from continuing operations                   (697,337)         (1,681,376)          (1,188,857)      (1,426,346)
   Loss from discontinued operations                 (743,674)         (1,248,250)          (3,117,405)      (2,717,196)
   Net loss                                        (1,630,226)         (3,094,533)          (4,459,747)      (4,708,324)
   Basic and diluted net loss per share:
       Continuing operations                            (0.36)              (0.77)               (0.53)           (0.61)
       Discontinued operations                          (0.37)              (0.57)               (1.39)           (1.16)
       Net loss                                         (0.81)              (1.41)               (1.98)           (2.02)

1996:
   Net revenues                                            --                  --                   --               -- 
   Operating loss                                    (845,542)           (924,992)            (862,631)        (350,669)
   (Loss) from continuing operation                (1,139,983)         (1,751,596)          (1,011,488)        (566,362)
   (Loss) from discontinued operations               (896,489)         (2,561,679)          (1,154,039)      (2,317,359)
   Net loss stock                                  (2,144,870)         (4,408,256)          (2,381,174)      (4,321,811)
   Basic and diluted net loss per share:
       Continuing operations                            (0.73)              (1.06)               (0.58)           (0.33)
       Discontinued operations                          (0.57)              (1.55)               (0.66)           (1.35)
       Net loss                                         (1.37)              (2.67)               (1.36)           (2.52)
</TABLE>



<PAGE>   48






                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                              EXHIBIT
       ------                              -------

<S>               <C>                                                  
         3.1      --Certificate of Incorporation of the company. Incorporated
                  herein by reference to Exhibit 3.1 to the Company's
                  Registration Statement on Form S-1 (Registration No.
                  2-80946).

         3.2      --By-laws of AXCESS. Incorporated herein by reference to
                  Exhibit 3.2 to the company's Registration Statement on Form
                  S-1 (Registration No. 2-80946).

         3.3      --First Amendment to Certificate of Incorporation of the
                  company dated June 6, 1986. Incorporated herein by reference
                  to Exhibit 3.3 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1987.

         3.4      --Second Amendment to Certificate of Incorporation of the
                  company dated May 27, 1987. Incorporated herein by reference
                  to Exhibit 3.4 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1987.

         3.5      --Third Amendment to Certificate of Incorporation of the
                  company dated November 11, 1994. Incorporated herein by
                  reference to Exhibit 4.4 to the company's Registration
                  Statement on Form S-3 (Registration No. 333-10665).

         3.6      --Fourth Amendment to Certificate of Incorporation of the
                  company dated July 28, 1995. Incorporated herein by reference
                  to Exhibit 4.5 to the company's Registration Statement on
                  Form S-3 (Registration No. 333-10665).

         3.7      --Fifth Amendment to Certificate of Incorporation of the
                  company, dated June 17, 1997. Incorporated herein by
                  reference to Exhibit 4.6 to the company's Registration
                  Statement on Form S-3 (Registration No. 333-10665).

         3.8      --Sixth Amendment to Certificate of Incorporation of the
                  company dated March 31, 1998. Incorporated herein by
                  reference to Exhibit 99.1 to the company's Report on Form 8-K
                  dated April 13, 1998.

         3.9      --Seventh Amendment to Certificate of Incorporation of the
                  company dated March 31, 1998. Incorporated herein by
                  reference to Exhibit 99.2 to the company's Report on Form 8-K
                  dated April 13, 1998.

         3.10     --Eighth Amendment to Certificate of Incorporation of the
                  company dated April 9, 1998. Incorporated herein by reference
                  to Exhibit 99.3 to the company's Report on Form 8-K dated
                  April 13, 1998.

         4.1      --Certificate of Designation of the company's Series A, B and
                  C Preferred Stock, dated December 27, 1995. Incorporated
                  herein by reference to Exhibit 4.7 to the company's
                  Registration Statement on Form S-3 (Registration No.
                  333-10665).

         4.2      --Certificate of Designation of the company's Series I
                  Preferred Stock.*
</TABLE>


<PAGE>   49




<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                              EXHIBIT
       ------                              -------

<S>                  <C>                                         
         4.3      --Certificate of Designation of the company's Series J
                  Preferred Stock.*

         10.1     --1991 Incentive Stock Option Plan, dated August 14, 1991.
                  Incorporated herein by reference to Exhibit 10.10 to
                  Lasertechnics' Annual Report on Form 10-KSB for the year
                  ended December 31, 1991.

         10.2     --Purchase of common stock and Convertible Note Agreement
                  between the company and J.P. Morgan Investment Corporation,
                  dated July 8, 1994. Incorporated herein by reference to
                  Exhibit 10.19 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1994.

         10.3     --Amendment to the OEM License Agreement between the company
                  and Xerox Corporation, dated December 27, 1997. Incorporated
                  by reference to Exhibit 10.12 to the company's Annual Report
                  on Form 10-KSB for the year ended December 31, 1997.

         10.4     --Note Purchase Agreement dated June 25, 1997, by and among
                  the company, J.P. Morgan Investment Corporation and
                  Wolfensohn Associates L.P. Incorporated by reference to
                  Exhibit 10.15 to the company's Quarterly Report on Form
                  10-QSB for the period ended September 30, 1997.

         10.5     --Intellectual Property Transfer Agreement dated January 8,
                  1998, by and between XL Vision, Inc. and the company.
                  Incorporated herein by reference to Exhibit 10.15 to the
                  company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1997.

         10.6     --Amendment to Notes and Note Purchase Agreement dated
                  December 31, 1997, by and among the company, Antiope Partners
                  L.L.C. and J.P. Morgan Investment Corporation. Incorporated
                  herein by reference to Exhibit 10.16 to Amendment No. 1 to
                  the company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1997.

         10.7     --Series H Preferred Stock Purchase Agreement dated December
                  29, 1997, by and among the company and Amphion Ventures L.P.
                  Incorporated herein by reference to Exhibit 10.17 to
                  Amendment No. 1 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1997.

         10.8     --Preferred Stock Purchase Agreement dated October 21, 1998
                  by and between the company and Amphion Ventures L.P.*

         10.9     --Pledge Agreement dated August 18, 1997, by and among the
                  company, Antiope Partners L.L.C. and J.P. Morgan Investment
                  Corporation. Incorporated herein by reference to Exhibit
                  10.18 to Amendment No. 1 to the company's Annual Report on
                  Form 10-KSB for the year ended December 31, 1997.
</TABLE>



<PAGE>   50




        EXHIBIT
        NUMBER                              EXHIBIT
        -------                             -------
         10.10    --Form of Warrant to purchase shares of the company's common
                  stock issued to Antiope Partners L.L.C. and Amphion Ventures
                  L.P. Incorporated herein by reference to Exhibit 10.20 to
                  Amendment No. 1 to the company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1997.

         10.11    --Settlement Agreement dated as of April 21, 1998, by and
                  between the company and Xerox Corporation. Incorporated
                  herein by reference to Exhibit 10.21 to Amendment No. 1 to
                  the company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1997.

         10.12    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and Amphion Ventures L.P.*

         10.13    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and Antiope Partners L.L.C.*

         10.14    --Note Payable Conversion Agreement dated December 31, 1998,
                  by and between the company and J.P. Morgan Investment
                  Corporation.*

         10.15    --Stock and Asset Purchase Agreement dated March 30, 1999, by
                  and between the company and Amphion Ventures L.P.*

         21       --Subsidiaries of the company.*

         23       --Consent of KPMG LLP.*

         27.1     --Financial Data Schedule.*

         27.2     --1997 Restated Financial Data Schedule*

         27.3     --1996 Restated Financial Data Schedule*


         --------------
         *Filed herewith.