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**U.S. SECURITIES AND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

 

**FORM 10-K**

 

**x****      ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2009**

 

**or**

 

**o****         TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**COMMISSION FILE NUMBER: 0-11933**

 

**AXCESS INTERNATIONAL INC.**

(Exact name of small business issuer asspecified in its charter)

 

| **Delaware**                                                   | ** ** | **85-0294536**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                     | ** ** | ** **                           |
| **16650 Westgrove Drive, Suite 600  Addison, Texas**      | ** ** | **75001**                            |
| (Address of principal executive offices)                       |       | (Zip Code)                           |
|                                                           |       |                                 |
| **(972) 407-6080**                                             |       |                                 |
| (Issuer’s Telephone Number)                               |       |                                 |

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act: **NONE**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:

 

**Common Stock, par value $0.01 per share**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, or a smaller reporting company. See the definitions oflarge accelerated filer,” “accelerated filer, and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer o                                             | Accelerated  filer o         |
|-----------------------------------------------------------------------------|-----------------------------------|
|                                                                        |                              |
| Non-accelerated  filer o(Do not check if a  smaller reporting company) | Smaller  reporting company x |

 

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

 

On March 31, 2010, we had a total of 33,642,593shares of our common stock issued and outstanding.  The aggregate market value of voting commonequity held by non-affiliates of the registrant was approximately $7,365,233.This amount was calculated by reducing the total number of shares of theregistrant’s common stock outstanding by the total number of shares of commonstock held by officers and directors, and stockholders owning in excess of 5%of the registrant’s common stock, and multiplying the remainder by the averageof the bid and asked price for the registrant’s common stock on March 31,2010, as reported on the Over-The-Counter Bulletin Board Market. Theinformation provided shall in no way be construed as an admission that anyofficer, director or more than 5% stockholder of the issuer may be deemed anaffiliate of the issuer or that such person is the beneficial owner of sharesreported as being held by such person, and any such inference is herebydisclaimed

 

The issuer’s revenues for the fiscal year ended December 31,2009 were $4,797,711.

 

Documents Incorporated by Reference: **None**.

 

 

 

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**AXCESS INTERNATIONAL INC.**

**INDEX**

 
| **Part I**   | ** **                                                                                                             | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------|------------|
| **Item 1.**       | **Description of  Business**                                                                                           | **3**      |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 1A.**      | **Risk Factors**                                                                                                       | **9**      |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 1B.**      | **Unresolved  Staff Comments**                                                                                         | **12**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 2.**       | **Description of  Properties**                                                                                         | **12**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 3.**       | **Legal Proceedings**                                                                                                  | **12**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 4.**       | **Reserved**                                                                                                           | ** ** |
| ** **        | ** **                                                                                                             | ** ** |
| **Part II**  | ** **                                                                                                             | ** ** |
| **Item 5.**       | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase  of Equity Securities** | **12**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 6.**       | **Selected  Financial Data**                                                                                           | **14**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 7.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                        | **14**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 7A.**      | **Quantitative  and Qualitative Disclosures about Market Risk**                                                        | **17**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 8.**       | **Financial  Statements and Supplemental Data**                                                                        | **17**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 9.**       | **Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure**                              | **17**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 9A(T).**   | **Controls and  Procedures**                                                                                           | **17**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 9B.**      | **Other Information**                                                                                                  | **18**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Part III** | ** **                                                                                                             | ** ** |
| **Item 10.**      | **Directors,  Executive Officers and Corporate Governance**                                                            | **18**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 11.**      | **Executive  Compensation**                                                                                            | **20**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 12.**      | **Security  Ownership and Certain Beneficial Owners and Management and Related  Stockholder Matters**                  | **24**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 13.**      | **Certain  Relationships and Related Transactions and Director Independence**                                          | **26**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Item 14.**      | **Principal  Accounting Fees and Services**                                                                            | **27**     |
| ** **        | ** **                                                                                                             | ** ** |
| **Part IV**  | ** **                                                                                                             | ** ** |
| **Item 15.**      | **Exhibits and  Financial Statement Schedules**                                                                        | **28**     |
| ** **        | **Report of  independent registered public accounting firm**                                                           | **F-1**    |
| ** **        | **Consolidated Balance  Sheets**                                                                                       | **F-2**    |
| ** **        | **Consolidated  Statements of Operations**                                                                             | **F-3**    |
| ** **        | **Consolidated  Statements of Stockholders’ Deficit**                                                             | **F-4**    |
| ** **        | **Consolidated  Statements of Cash Flows**                                                                             | **F-5**    |
| ** **        | **Notes to  Consolidated Financial Statements**                                                                        | **F-6**    |
| ** **        | ** **                                                                                                             | ** ** |
| **Signatures**    | ** **                                                                                                             | ** ** |
| ** **        | ** **                                                                                                             | ** ** |
| **Certificates**  | ** **                                                                                                             | ** ** |

 

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**PART I**

##### ** **

##### **Forward Looking Statements**

 

This annual report on Form 10-K includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), which can be identifiedby the use of forward-looking terminology such as “may,” “can,” “believe,” “expect,”“intend,” “plan,” “seek,” “anticipate,” “estimate,” “will,” or “continue” orthe negative thereof or other variations thereon or comparableterminology.  All statements other thanstatements of historical fact included in this annual report on Form 10-K,including without limitation, the statements under “Item 1. Description ofBusiness” and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” andlocated elsewhere herein regarding the financial position and liquidity of theCompany (defined below) are forward-looking statements.  Although the Company believes that theexpectations reflected in such forward-looking statements are reasonable, itcan give no assurance that such expectations will prove to have been correct.Important factors with respect to any such forward-looking statements,including certain risks and uncertainties that could cause actual results todiffer materially from the Company’s expectations (“Cautionary Statements”),are disclosed in this annual report on Form 10-K, including, withoutlimitation, in conjunction with the forward-looking statements and under thecaption “Risk Factors.” In addition, important factors that could cause actualresults to differ materially from those in the forward-looking statementsincluded herein include, but are not limited to, inability to continue as agoing concern, limited working capital, limited access to capital, changes fromanticipated levels of sales, future national or regional economic andcompetitive conditions, changes in relationships with customers, access tocapital, difficulties in developing and marketing new products, marketingexisting products, customer acceptance of existing and new products, validityof patents, technological change, dependence on key personnel, availability ofkey component parts, dependence on third party manufacturers, vendors,contractors, product liability, casualty to or other disruption of theproduction facilities, delays and disruptions in the shipment of the Company’sproducts, and the ability of the Company to meet its stated business goals. Allsubsequent written and oral forward-looking statements attributable to theCompany or persons acting on its behalf are expressly qualified in theirentirety by the Cautionary Statements.  We do not undertake to update anyforward-looking statements.

 

We make available free of charge on our internet website(http://www.axcessinc.com) our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments tothese reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 as soon as reasonably practicable after wefile such material with, or furnish it to, the Securities and ExchangeCommission.  The content of our websiteis available for informational purposes only. It should not be relied upon for investment purposes, nor is itincorporated by reference in to this Form 10-K.

 

As used herein, references to the “Company” are toAxcess International, Inc., a Delaware corporation (“Axcess”) and itssubsidiaries.

##### ** **

##### **Item 1. DESCRIPTION OF BUSINESS**

##### ** **

##### **RecentDevelopments: Going Concern and Liquidity Problems**

 

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

 

Our auditors have included an explanatoryparagraph in their audit opinion with respect to our consolidated financialstatements at December 31, 2009. The paragraph states that our recurringlosses from operations and resulting continued dependence on access to externalfinancing raise substantial doubts about our ability to continue as a goingconcern. Furthermore, the factors leading to and the existence of theexplanatory paragraph may adversely affect our relationship with customers andsuppliers and have an adverse effect on our ability to obtain financing.

 

See “Risk Factors” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

##### ** **

##### **The Company**

 

Axcess International, Inc.(“Axcess” or “Company”) provides wireless automatic identification and sensingsolutions for real-time business activity automation. When embedded intovehicle passes, property tags, personnel badges and sensors, its revolutionary

 

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and patentedMicro-Wireless technology enables automatic local-area wireless data collectionand control applications. The systems improve productivity, security and safetyand enable personalized education and entertainment. Typical applicationsinclude: “hands-free” access control, automatic advanced workforce management,immersive entertainment, workflow management, asset monitoring and distributedsensing.  Our principal offices are located at 16650 Westgrove Drive, Suite 600,Addison, Texas, 75001, and our telephone number is 972-407-6080.

##### ** **

##### **Company Evolution**

 

Axcess was formed in November 1982 as Lasertechnics, Inc. Priorto 1999, Axcess, through two subsidiaries, sold high-end dye-sublimation cardprinters and high-speed laser marking equipment. During 1998, we determinedthat it could not be consistently profitable selling these products.Accordingly, in October 1998, we discontinued the operations of our 96%owned subsidiary, Sandia Imaging Systems Corporation, which was engaged indistributing and reselling high-end dye-sublimation card printers andconsumables. We sold this business in December 1998. A second subsidiary,Lasertechnics Marking Corporation, was engaged in fabricating, distributing andselling high-speed laser marking equipment. In April 1999, we soldLasertechnics Marking Corporation to affiliates of Amphion Ventures, LP, amajor stockholder of ours. See also “Item 13. Certain Relationships and RelatedTransactions, and Director Independence.”

 

Axcess then made a concerted effort to enter into the high technologysecurity products marketplace, and identified RFID as its initial target. In September 1998,we consummated the acquisition of the RFID based intellectual property assetsof ASGI, Inc. and Nauta, Inc., unaffiliated entities to Axcess. Theintellectual property assets included a patent, trade secret rights, software,hardware, product designs and all other technical information necessary for usto manufacture and market RFID products to the access control and assetmanagement markets.

 

In July 1999, Axcess acquired another company in the securitytechnology marketplace in the digital video or CCTV area. We acquiredsubstantially all of the assets, including the network video technology, ofPrism Video, Inc. Prism Video, Inc. was engaged in the development,design, manufacture and marketing of video security technology and videostorage products. Axcess then hired new senior management experienced in thepackaging, sales, and marketing of high technology security products.

 

Axcess further developed the RFID and network-based streaming videotechnologies throughout 2002 and 2003. It also secured key reference accountsand established branding for its product lines during that period. In November 2001,we acquired all of the assets of IVEX Corporation which primarily consisted ofcertain patents related to video and audio processing.  The video patent portfolio was sold in early2006 and the video portion of Axcess’ business minimized.  We retain a royalty free perpetual license touse these patents in our products.

 

In April 2003, we changed our name from Axcess Inc. to AxcessInternational, Inc.

 

From 2002 through 2007, we used our reference customers and our brandawareness to secure key marketing channel partners. These partners areimportant to the future revenue growth of Axcess’ business due to their marketpresence. We believe that by integrating our systems into the systems of thesechannel partners or by selling through them, adoption of our technologies andproducts will be accelerated. Axcess has completed the integration efforts withcertain channel partners and is in the process of integrating others.

 

On November 6, 2007 we announced the availability of ourMicro-Wireless technology platform called DotTM, **operatingin what we believe to be the combined technology and economic “sweet spot” forproviding the most feature rich and most cost effective wireless solutions forlocal area automated tracking and sensing**.

##### ** **

##### **Sales Channels**

 

Axcess utilizesboth indirect and direct sales models. Axcess has three sales people who support direct individual sales as needed.The indirect sales effort is focused primarily on building and supportingsystem integrators as marketing channel partners capable of selling, installingand servicing automatic identification solutions, and access control and assetmanagement applications. Other indirect outlets include distributors, specialtydealers, catalog sales organizations, and OEMs (original equipmentmanufacturers). The system integrators and dealers are responsible for theinstallation in almost all cases. Using established channels to gain widespreadexposure and sales leverage is a well-utilized model in the industry.  The indirect model also enables the companyto sell its products worldwide with minimal direct selling expense.

 

The indirect salesmodel allows us to address multiple industry segments generically, includingmanufacturing, wholesale / distribution, retail, services, government,education and finance. The indirect sales model fits the characteristics of ourproduct portfolio with other products, which become system solutions thatrequire custom site planning and installation. Sales generally have

 

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multiple locations withthe average revenue per system location in the tens of thousands, and are basedon a new technology and its application to traditional industry problems. Byworking directly with established marketing channel partners, this indirectmodel also gives us the flexibility to introduce new products and applicationsas they are developed.

 

We also workdirectly with the end user for certain focused large system salesopportunities. This direct selling approach enables us to prospect directly forselected larger transactions and reference accounts in a prudent, “opportunitydriven” fashion. The eventual installation is still accomplished through anestablished channel partner.

 

In 2004, we beganto pursue the enterprise supply chain/logistics market for RFID solutions whichin 2006 resulted in a co-development and business sharing arrangement withStemco, a division of Enpro Inc.  WithStemco, the Company will provide automated vehicle access control and wirelessdata collection systems for large fleets. We also announced a recent example where a customer implemented avehicle access control solution, which automatically tied the vehicle to theinventory it was carrying. In 2004 we announced the Onlinesupervisor middlewareand software platform and its ability to operate when needed in a compatiblefashion with the Global Electronic Product Code (EPC) RFID tagging standards.

 

In 2005, weannounced our system was now able to be used on a wireless local area network(LAN) and the release of our comprehensive physical asset managementsolution.  We also announced severaladditional reference customers using our system in the gaming industry, forhomeland security and for attendance in a college environment.

 

In 2006, weannounced the strengthening of our channel partner relationship with Tyco’s ADTand SoftwareHouse divisions.  We alsoannounced a successful asset management solution for PriceWaterhouseCoopersdesigned to protect against the loss of customer privacy data on laptopcomputers.  We implemented and announceda workforce management solution for Occidental Petroleum to automaticallyaccount for personnel time and attendance, location monitoring and reporting,and emergency evacuation.

 

In late 2006, weannounced the invention and development of the Enterprise DotTM which becameavailable in late 2007.  We believe Dotis the world’s smallest single system-on-a-chip microcomputer with an embedded,software definable wireless capability of its type.  The Dot is compatible with the our existingsystems for access control, asset management and sensing as well as theexisting infrastructures for proximity access control systems and ElectronicProduct Code version C1G2 passive supply chain inventory systems.

 

Axcess has signedpartnering agreements with several integrators. In general, these agreementsprovide for the integrators to: sell and market Axcess’ products, favorablyprice Axcess’ products based on the volume of our products sold, providecustomer service support for our products sold by the integrators, and integrateAxcess products into the integrator’s system. We believe this integrationstrategy has advantages over its prior partnership arrangements and will offeran increased opportunity for rapid sales growth.

* *

*SoftwareHouse, Sensormatic, KanTech, and ADT (Tyco)*.    Axcess has been selected bySoftware House as the preferred provider of RFID solutions for assetmanagement. Since then, Axcess’ ActiveTagTM products have been integrated intoTyco’s C-Cure 800 access control system which is utilized by Tyco entitiesSensormatic, KanTech and ADT.  During2004, ADT group delivered a new product release to its organization announcingthe Axcess ActiveTagTM product line would be now available for saleby ADT..

##### ** **

##### **Products and Technology**

 

Micro-Wirelesscommunications represents the technological sweet spot where autonomouswireless identification and data transfer are enabled in very small, low costbattery-powered autonomous devices such as in access credentials, IDs, propertytags, and vehicle parking tags.  The tags operate in their own wirelessfrequency characterized by the FCC as remote control devices yet recognized asa standard frequency worldwide.  Their message formats, air datatransmission protocol, and receiver infrastructure are designed specifically forthe unique need, independent from interference and unobtrusive to backbonenetworks.  Once collected locally, data is transmitted via the standardbackbone network to tailored applications including legacy security systemswhere productivity is improved, security resources are leveraged, and businessintelligence is generated.

 

Axcess supplies what iscommonly called “active” RFID system solutions that connect directly intostandard security systems or utilize the enterprise networks or the Internet.ActiveTagTM is a multi-use, single-system solution scalable for small, medium,and large enterprises. This versatile technology has four patents awarded withapplications for four additional patents pending. The system supports a varietyof automatic monitoring and tracking applications, including electronic assetprotection and asset management, automatic personnel and vehicle accesscontrol, and wireless sensing.

 

ActiveTagTM uses small,battery-powered tags that, when automatically activated at control points throughouta facility, transmit a wireless message to palm-size receivers networked on anexisting corporate local area network (commonly referred to as a LAN). Tagidentification and location information are instantly forwarded to a localsecurity control panel or transmitted over the network to

 

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a host computer.ActiveTracTM is an application software program that logs and displays theinformation from the tag to provide a comprehensive picture of the person,asset or vehicle being tracked. In addition, Axcess is continuing to developOnlineSupervisorTM software, which has a browser-based display and providesreal-time management solutions through reporting, display, and decision andcontrol functions.

 

ActiveTagTM tracks assetsas the assets enter, exit and move within a facility to monitor their whereabouts,detect theft and prevent loss. ActiveTagTM software can link assets andpersonnel together to provide a non-invasive, hands-free access control andasset protection solution at perimeter doors and other controlled entry andexit points. Personnel tags include a panic button for increased personalsafety and peace of mind. This software can track vehicle and equipmentmovements to provide real-time, paperless logistics data and automated gatecontrol. Not only can pallets, containers or boxes be tracked in real-time, butalso a beaconing feature (where the tag transmits on a fixed time interval)allows the user to automatically count and monitor all inventory, even whilestationary. One version of the RFID tag includes an embedded temperature sensorinside to monitor and transmit measurement of ambient temperature or to signalwhen the temperature moves outside of a defined range. Another version of theRFID tag has external contacts so the tag can act as a low-cost wirelesstransmitter for external digital sensors.

 

The OnlinesupervisorTMsoftware integrates the presentation of RFID data to a standard web browser.Through a display customized to each end user, real-time status is integratedwith live and recorded digital video. Events that can be shown involve premisessecurity, physical asset protection, personnel staffing, and operationsperformance. Up to the minute personnel and asset inventory counts can beprovided. Each monitored event is linked to the database of recorded videofiles to enable the viewing of tagged events such as personnel activity at doorentrances and exits, access to controlled areas, and asset movements. Thesystem is available as a stand alone enterprise solution or as a portal-basedsolution hosted by Axcess. We believe that the system is unique in its abilityto link information from various tag reads and integrate the reads with videoclips and pictures from the environment surrounding the tags.

 

Typical applications forour products include:

* *

*Automated Workforce Management Solutions**.*  “Hands-free”automatic personnel identification and access control enables high speed facility entry and exit. Doors can beautomatically opened as the accredited employee approaches the door, enablingrapid and easy entrance without presenting a card to be swiped. Multiplelogical control zones can be set up within a facility, making key areasautomatically more secure as non-authorized people are quickly identified.Personnel dwell times can be automatically calculated for improved workforceoptimization.  Automatic locationmonitoring provides immediate location visibility and accounting for governmentregulations such as OSHA compliance.  Inthe event of a catastrophe, emergency evacuation tallies can be automaticallygathered.  The personnel identificationcan be linked to tagged assets to improve asset management accountability.

* *

*Automated Fleet Access Control and Data CaptureSolutions.*“Hands-free”automatic vehicle identification and access control enables high speed facility entry and exit. Vehicles automaticallyenter into controlled or gated areas without stopping using a validated tagplaced on or inside the vehicle. The tag is recognized as it approaches thegate, allowing “rolling access” and facilitating a higher entrance and exitspeed to reduce bottlenecks and security threats. For industrial applications,driver, truck, trailer and payload tags can all be matched to ensure theintegrity of the shipment and provide automated data capture andrecording.  Logged sensor data on thecondition of vehicles or goods can be automatically off-loaded to improve theturn-around time of fleet vehicles plus more accurate and less costly datarecording.

* *

*Electronic**Asset Protection**and**Tracking*. Assets, such as computers are automatically trackedas they move throughout the facility and protected if they approach a perimeterdoor without authorization. Linking to custodian tags provides accountabilityand instant authorized movement. Static assets such as desktop computers arealso tagged and automatically inventoried at periodic intervals or at specificcontrol points. Should the assets be moved, their location is identified andautomatically tracked.

* *

*Electronic**Inventory Control**and**Tracking*. Inventory items, such as pallets,crates, barrels and vessels, can be automatically located, identified, andtracked as they move, and protected against unauthorized removal.

* *

*Automatic Personnel Identification*. Low cost, long range credentials whichprovide automatic identification are playing an important role in customerloyalty systems, trade show attendee management and booth marketing, as well asin interactive amusement experiences.  Inthe trade show market, auto ID can automatically account for hall and seminarattendance as well as enhancing the trade booth presentation by enabling customcontent delivery.

 

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##### **Markets**

 

Axcess operates in the electronic security andautomatic identification systems markets. Its products have been designed,built and introduced with general purpose, enterprise improving broadapplications in mind, cutting across many industries. Some examples of productsolutions in selected markets are provided below.

* *

*Corporate Access Control and Asset Management*. Employeesmay gain access to company premises using automatic hands-free personnel RFIDtags that may also be placed on corporate assets, such as laptops, to trackmovements and prevent loss. Axcess, through its control-point architecture,believes that it has a unique solution to address this market by tagginglaptops and implementing control zones.

* *

*Airport and Port Security Infrastructure Homeland Defense*. Axcess can provide hands-free premiseaccess control to employees and authorized vehicles needing easy, secure accessto the container terminal and airport tarmac. Our products can providecontrolled access for fuel trucks at the fuel depot. Courtesy vehicles can useaccess control for added gate security. Personnel are automatically identified,tracked, and traced through a grid of security control zones. Wireless sensorsprovide detection of potentially harmful chemicals and/or weapons of massdestruction (WMDs).  The integratedsoftware platform adds substantially greater security coverage viaautomating surveillance.  Networked videoand recording may be added to the network infrastructure to extend securityvisibility throughout the terminal and grounds.

 

*Civil and Military Government.* The governmenttagging of assets targets the prevention of lost citizen data on mobile assetssuch as laptops. Data center data tapes management provides integrity in dataarchival tracking and tracing.  Personneland vehicle access control provides both security and accountability.  Government contractor activity isautomatically collected for accounting and regulatory compliance purposes.  Documents have been successfully tagged toprevent their loss from secure rooms.

* *

*Education*. Various schools and universities areimplementing tagging to protect data center assets; schools and universitiesare also using networked video for life safety reasons. Many schools anduniversities already have built-out networks, so RFID tagging and networkedvideo may be added for the incremental cost of this equipment. Built-outnetworks also offer additional flexibility to move video remotely and sharevideo data with school administrators and authorities.

* *

*Inventory and Transportation Management*. Cartons,pallets, containers and even missiles may be tagged so they can be located,tracked and monitored to facilitate movement, rapid order picking and inventoryverification. Bar coding is common in source product labeling at the start ofthe supply chain. Once products are packaged in larger containers for shippingand warehousing, RFID tagging complements bar coding and the warehouse systemby enabling automatic long-range identification and location of products. Inproduction applications, the tag can be a wireless sensor for a productionline, transmit information about the build specifications for a product, andsend notifications from the finished goods area after production is completed.

##### ** **

##### **Patents and Proprietary Technology**

 

Axcess relies on a combination of patents, tradesecrets, technology licenses, and other intellectual property rights.Historically, we have received nineteen U.S. patents. During 2006, we soldeleven of our video patents but retain a royalty free perpetual license to usethe patents in our products.  During2009, we were granted one additional patent for a total of eight patentsrelating to our RFID technology and we have seven additional patents in variousstages of prosecution and eighteen more at the early stage of the applicationprocess. The period covered by our issued patents ranges from four to twentyyears. We intend to protect and enforce our intellectual property rights and topreserve our rights relating to our key product technologies to the extentcommercially reasonable. We have applied for registration of a number of tradeand service marks, including Axcess Inc.TM the Axcess Inc. (logo)TM, ActiveTagTM,Onlinesupervisor.comTM,  AccessabilityTM,AccessPlugTM, Asset ActivatorTM and Enterprise DotTM.

##### ** **

##### **Engineering and Development**

 

In November 2007, weannounced the availability of a new, revolutionary wireless tracking andsensing technology called The Enterprise DotTM. Based on a System-on-a-Chip (SoC) design, the patents-pending technologymanagement believes yields the world’s lowest cost and smallest multifunctionalwireless sub-micro device (or tag) for delivering visibility oriented dataabout the assets operating in and around the enterprise.  The DotTM technology has the flexibility to reside onmultiple microprocessor and radio platforms. Tags or DotTM comein multiple form factors to meet the specific need of the customer.  DotTM facilitates the capture, processing anddelivery of previously unavailable real time information for dramaticimprovements in supply chain visibility, mobile asset management, physicalasset security and access control, and industrial condition monitoring.

 

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The low cost andflexibility to use existing supply chain infrastructure results in a very lowtotal cost of ownership, yielding short term return on investments forcustomers. The first product we delivered using the new technology was asoftware definable, battery-powered Dot-OEM module for product manufacturers,small enough to be embedded into a variety of devices such as computers, testequipment, medical equipment, credential cards, pallets, and cartons.  Devices built on the DotTM platform enablewidespread and reliable automatic identification, locating, tracking,protecting and monitoring of personnel, physical assets, and vehicles.  Bringing together the new functions of theDotTM and building on the current Axcess wireless infrastructure for enterprisemanagement creates an open architecture for multiple sources of data to beacquired to deliver previously inaccessible business intelligence.

 

OnlinesupervisorTM is a highly versatile combined middleware andsoftware product which is able to capture tag ID’s and data, process them, andpresent an actionable information alert to a desktop or wireless device forexception management.  It relies on theAccessibility middleware platform where with an open standard database engineand programmable rule bases, radio frequency identification (RFID) tagtransmissions are received from readers over the network, then filtered againstthe various criteria needed for managing a business most productively.  The middleware enables virtually any dataformat to be received, translated into another, and transmitted to thedestination system. The browser-based viewing dashboard of OnlinesupervisorTM iscustomizable by type of user which allows customized event alerting. Alerts canbe linked automatically to a digital video clip of the transaction if neededfor supervisory review. OnlinesupervisorTM development continues to add additional data sourcesthat can be delivered over the same platform, making the product expandablebeyond RFID data on an industry specific basis to support all application areassuch as workforce management, asset management, and automatic identification.

##### ** **

##### **Competition**

 

The market for our products and services is intenselycompetitive and is characterized by rapidly changing technology, evolvingperceived user needs and the frequent introduction of new products.

 

A number of our competitors are more established,benefit from greater name recognition and have substantially greater financial,technical and marketing resources. We believe that the principal factorsaffecting competition in our markets include product functionality,performance, flexibility and features, use of open standards technology,quality of service and support, company reputation, price and overall costs ofownership. In order to compete, we seek to provide products that aretechnologically superior and that deliver better value. We believe that thefollowing factors help distinguish our products from those of competitors.

 

The Micro-Wireless automaticidentification system benefits from low cost, long-range tag activation andtransmission, which have a small form factor, long-term battery life, and alsoa platform for adding sensor capabilities. The activation of tags occurs at aseparate low frequency, a patented approach, which we believe, gives Axcess anadvantage among active RFID companies in the ability to establish physicalcontrol points, such as doorways, and virtual control points, such as hallways.The receiver system is designed as a low cost infrastructure that connectsdirectly into legacy systems and also runs on a standard Ethernet networkbackbone. The system is flexible enough to support multiple applications forpeople, physical assets, and vehicles. Finally, the tag data is integrated on amulti-user browser display platform for both casual viewing and industrialrequirements.

 

Flexibility comes from the use of dual frequencies forwake-up and transmission; low frequency on wake-up and UHF for transmission.Tag transmission at UHF penetrates all materials except metal, enablingreliable tag transmission. This also enables long range tag reads usingomni-directional antennas so that no line of sight is required. A simpletransmission protocol allows multiple tags to be read simultaneously. Theadvanced battery management design provides battery life of three to five yearsunder normal operating conditions, and five to seven years with an enhancedbattery. Control point activation, combined with the ability for tags totransmit on set time intervals or be queried individually enables theActiveTagTM line to meet the major user requirements, including dynamictracking, static tracking, multiple simultaneous tag reads, “authorized”movement of tagged assets, and a long read range for tag transmission, which webelieve gives us an advantage. We also believe that these features enable thesystem to outperform passive systems, relative location positioning systems,and infrared and combo infrared / RFID systems from competitors.

 

Current RFID, RTLS, and wireless sensing technologiesface prominent barriers that prevent them from addressing the majority of today’sapplication needs.  These barriers include: cost, interoperability, size,and reliability.  While existing wireless tags and sensing nodes meetcertain needs, the Enterprise DotTM has been developed to surpass these barriersand solve the reliability issues of passive RFID, the connectivity problems ofsensors, provide interoperability between standards, enable a store and forwardcapability for monitored data, and reduce the cost and tag size of activeRFID/RTLS, while opening up dramatic new applications. The DotTM technology will extend Axcess’ advantagesincluding: its more complete product functionality; the better cost-to-functionratio, its robust and complete end-to-end system offering, and its existingtime to market benefit. It further eclipses competing architectures such asWi-Fi based and battery-assisted passive RFID where size, cost, signalrobustness and power management are problematic.

 

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##### **Manufacturing and Suppliers**

 

We outsource the manufacturing of our products andconsequently depend on outside manufacturers to supply finished product. Alarge number of manufacturers in the U.S. have the capability to produce ourproducts. We periodically seek bids for manufacturing and have multiplemanufacturing sources for each of our products.

 

Although we depend on a number of outside suppliersfor components of our products, we have designed our current line of productsso that we are not dependent on a single source for any of our products’components. Most of the components we use are “off the shelf” and are readilyavailable. Although we have generally been able to secure adequate suppliers,the inability of the Company in the future to obtain sufficient suppliers ofcomponent parts could have a material adverse effect on our results of operations.

 

There are currently no long-term agreements between usand our manufacturers or suppliers.

##### ** **

##### **Research and Development**

 

If we can generate sufficient working capital, we planto continually develop new products utilizing our existing technology and weplan to bring new products to market as they become available throughout 2010.New products in RFID will be built upon the core platforms now in place. Webelieve that our next generation platform offers more functionality and coversmore of the market place that our research shows is there. There can be noassurance that we will have sufficient working capital to undertake theseactivities.

 

During 2009 and 2008, we spent $1,077,208 and$2,229,590, respectively, for research and development and plan to maintain asufficient level of spending in fiscal year 2010 to develop our next generationRFID product to support our continued revenue growth. However, any suchspending will be dependent upon our ability to raise additional capital, as wedo not have sufficient revenues to support such an activity using our ownresources.

##### ** **

##### **Employees**

 

As of December 31, 2009, we had twelve full-timeemployees and one part-time employee.

##### ** **

##### **GovernmentRegulation**

 

Government regulations have not had, nor are theyexpected to have, a material effect on Axcess’ financial condition, results ofoperations or competitive position. FCC approval is required for some of ourprincipal products.

##### ** **

##### **EnvironmentalFactors**

 

There has been, and it is anticipated that there willcontinue to be, no material effect upon Axcess’ 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 otherwiserelating to the protection of, the environment.

##### ** **

##### **Item 1A. RISK FACTORS**

 

We operate in a changing environment that involvesnumerous risks, some of which are beyond our control. As a smaller reportingcompany we are not required to report these risk factors; however the followinghighlights some of these risks.

** **

**We may not be able to continue as a goingconcern or fund our existing capital needs.**

 

Our auditors have included an explanatory paragraph intheir audit opinion with respect to our consolidated financial statements forthe fiscal year ended December 31, 2009. The paragraph states that ourrecurring losses from operations and resulting continued dependence on externalfinancing raise substantial doubts about our ability to continue as a goingconcern. Our existing and anticipated capital needs are significant. We believeour existing financing arrangements and estimated operating cash flows will notbe sufficient to fund our operations and working capital needs for the nexttwelve months and there can be no assurance that we will be able to fund ourexisting capital needs under our existing credit facilities or otherwise secureadditional funding, if necessary. In addition, changes in our operating plans,the acceleration or modification of our existing expansion plans, lower than anticipatedrevenues, increased expenses, potential acquisitions, or other events may causeus to seek additional financing sooner than anticipated, prevent us fromachieving the goals of our business plan or expansion strategy, or prevent ournewly acquired businesses, if any, from operating profitably. If we are unableto fund our existing capital needs under our existing credit facilities, or areotherwise unable to secure additional equity financing, if necessary, ourbusiness could be materially adversely affected. *See* Management’s Discussion and Analysis of FinancialCondition and Results of Operation—Liquidity and Capital Resources.

 

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**We have a history of losses and expectationof future losses; uncertainty of future profitability; and limits onoperations.**

 

From our incorporation in 1982 through December 31,2009, we have incurred an accumulated loss of approximately $173.5 million andhave been profitable in only one fiscal year during that time. There can be noassurance that we will generate sufficient revenues to achieve profitability inthe future. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future net flows expected to be generatedby the asset. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theasset exceeds the fair value of the asset. Our continued slow revenue growthand operating losses may indicate circumstances requiring an impairment to berecorded.

 

If our losses continue, we will have to obtain fundsto meet our cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or we may be required to curtail our operations, seek amerger partner, or seek protection under federal bankruptcy laws. Any of theforegoing may be on terms that are unfavorable to us or disadvantageous toexisting stockholders. In addition, no assurance may be given that we will besuccessful in raising additional funds or entering into business alliances. *See* Management’s Discussion and Analysisof Financial Condition and Results of Operation—Liquidity and CapitalResources.

** **

**We are dependent upon our proprietarytechnology and its marketability as state of the art.**

 

The technology we use may become obsolete or limit ourability to compete effectively within the wireless, automatic identificationand multi-media applicable industries. These industries are characterized byrapidly changing technology, evolving industry standards and frequent newproduct introductions. The introduction of products embodying new technologiesor the emergence of industry standards can render existing products obsoleteand unmarketable. Our success will depend on our ability to enhance ourexisting products. Our success will also depend on our ability to develop andintroduce, on a timely and cost-effective basis, new products that keep pacewith technological developments and emerging industry standards and thataddress increasingly sophisticated customer requirements.

 

Our business would be adversely affected if we were toincur difficulties or delays in developing new products or enhancements or ifthose products or enhancements did not gain market acceptance. Specifically:

 

·                  we may not be successful in identifying, developing and marketingproduct enhancements or new products that respond to technological change orevolving industry standards;

 

·                  we may experience difficulties that could delay or prevent thesuccessful development, introduction and marketing of these products; and

 

·                  we may experience difficulties that could delay or prevent thesuccessful development, introduction and marketing of these products; and

 

·                  our new products and enhanced products may not adequately meet therequirements of the marketplace and achieve market acceptance or may not keeppace with advances made by our competitors.

 

We currently hold eightU.S. patents. We have seven patents in various stages of prosecution andeighteen more in early stages of the application process. The time periodcovered by our patents ranges from four to twenty years; however, there can beno assurance that our technologies will be accepted in the marketplace. Inaddition, different technologies owned by others could arise that would besuperior or more marketable than ours. *See*Description of Business—Patents and Proprietary Technology.

** **

**The loss of one or more members ofmanagement or key personnel could adversely affect our operations and couldlead to loss of clients and proprietary information.**

 

Our business, success, growth, operating results, andprofitability are dependent upon the skills, experience, efforts, performance,and abilities of members of management and other key personnel. We depend uponmembers of management and key personnel, including key sales personnel, togenerate new business and to service new and existing clients. If any membersof management or key personnel were to leave us, our business, success, growth,operating results and profitability could suffer. If we lose any key personnel,we may also be unable to prevent the unauthorized disclosure or use of ourtechnical knowledge, practices, procedures, or client lists by the formerpersonnel. Disclosure or use of this information could harm our business.

** **

**We may face substantial competition inattracting and retaining qualified personnel, and may be unable to grow ourbusiness if we cannot attract and retain qualified personnel.**

 

Our success will depend to a significant degree uponour ability to attract and retain highly qualified and experienced personnelwho possess the skills and experience necessary to satisfy our business andclient service needs. These personnel may be in great demand, particularly incertain geographic areas, and are likely to remain a limited resource for theforeseeable future. Our ability to attract and retain employees with therequisite experience and skill depends on several factors, including ourability to offer competitive wages, benefits, and professional growth opportunities.To attract and retain these individuals, we will be required to invest asignificant amount of time and money. Many of the companies with which we willcompete for experienced personnel have greater financial resources and namerecognition than we do. In addition, an important component of overallcompensation for our

 

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personnelwill be equity. If our stock price does not increase over time, it may be moredifficult to retain personnel who have been compensated with stock awards oroptions. The inability to attract, train, and retain experienced personnelcould have a material adverse effect on our business.

 

**Because we are significantly smaller andless established than a majority of our competitors, we may lack the financialresources necessary to compete effectively and sustain profitability.**

 

We operate in competitive, fragmented industries andcompete for clients with a variety of larger and smaller companies that offersimilar products and services. These industries are subject to rapid technologychanges and are significantly affected by new products and services and themarketing activities of industry participants, which may often be beyond ourcontrol. Due to the nature of our business, we compete with companies in the securityproducts, security consulting and defense industries. Although we primarilycompete directly with firms who offer similar security products, we alsocompete directly and indirectly with a number of other companies, which provideand install large security systems as a single contractor. Many of thesecompetitors are more established, offer more products, services and features,have a greater number of clients, locations, and employees, and also havesignificantly greater financial (based on total assets and annual revenues),technical, marketing, public relations, name recognition, and other resourcesthan we have.

 

We also expect to experience increased competitionfrom new entrants into the market. We may be unable to compete with largemulti-product security companies, including the security divisions of largeinternational firms. This increased competition may result in pricingpressures, loss of market share or loss of clients, any of which could have anadverse effect on our business, financial condition, operating results and cashflows. *See* Description ofBusiness—Competition.

 

**We are dependent upon third partymanufacturers and suppliers to produce our products.**

 

As a cost efficiency measure, we do not manufactureour own parts and product line but contract such supply and manufacture tothird parties. The failure by any of our vendors, suppliers or contractors tofulfill their contractual obligations to us could adversely affect ouroperations. If we are unable to obtain sufficient components and manufacturersfor our products, or develop alternative sources, delays in productintroductions or shipments could occur and could have a material adverse effecton our results of operations. *See*Description of Business—Manufacturing.

 

**The voting control of Axcess is held byAmphion Group, and other stockholders are unlikely to have any ability toinfluence the governance or policies of our company.**

 

As of December 31, 2009, Amphion Ventures LP andaffiliates of Amphion Ventures LP, including Amphion Partners, AmphionInvestments, Antiope Partners, Amphion Capital Partners, Amphion CapitalManagement LLC, Amphion Innovations plc, Amphion Innovations US and VennWorksLLC (collectively, the “Amphion Group”) owns approximately 52% of ouroutstanding common stock. This level of ownership provides the Amphion Groupwith the power to determine the outcome of almost any matter submitted for thevote or consent of our stockholders. Additionally, two of our five directorsare affiliates of the Amphion Group. *See*Security Ownership of Certain Beneficial Owners and Management.

 

**The price of our common stock has beenhighly volatile and may continue to be highly volatile, which may adverselyaffect your ability to sell your shares and our ability to raise additional capital.**

 

The price of our common stock has been highly volatileand may continue to be highly volatile. For instance, from November 1,2002 through December 31, 2009, our common stock traded from a low of$.021 to a high of $3.60 per share. The price of our common stock hasexperienced, and may continue to experience, significant volatility in responseto many factors, some of which are beyond our control and may not even bedirectly related to us, including:

 

·                  changes in financial estimates or recommendations bysecurities analysts regarding us or our common stock;

 

·                  our performance and the performance of our competitorsand other companies in the technology or marketing sectors;

 

·                  quarterly fluctuations in our operating results or theoperating results of other companies in the technology or marketing sectors;

 

·                  additions or departures of key personnel;

 

·                  the trading volume of our common stock;

 

·                  general economic conditions and their effect on thetechnology or advertising and marketing sectors, in general; and

 

·                  Competition, natural disasters, acts of war orterrorism or other developments affecting us or our competitors.

 

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In addition, in recent years, the stock market hasexperienced extreme price and volume fluctuations, which have often beenunrelated or disproportionate to the operating performance of particularcompanies. This volatility has significantly affected and may continue toaffect, the price of our common stock and may adversely affect your ability tosell your shares and our ability to raise additional capital. *See* Market and Common Equity and RelatedStockholder Matters.

 

**Our common stock may be subject to pennystock rules and regulations.**

 

Federal rules and regulations under the ExchangeAct regulate the trading of so-called penny stocks, which generally refers tolow-priced (below $5.00), speculative securities of very small companies tradedon the OTC Bulletin Board or in the Pink Sheets. Trading, if any, in shares ofour common stock may be subject to the full range of penny stock rules. Beforea broker/dealer can sell a penny stock, these rules require thebroker/dealer to first approve the investor for the transaction and obtain fromthe investor a written agreement regarding the transaction. The broker/dealermust also furnish the investor with a document describing the risks ofinvesting in penny stocks. The broker/dealer must also tell the investor thecurrent market quotation, if any, for the penny stock and the compensation thebroker/dealer will receive for the trade. Finally, the broker/dealer must sendmonthly account statements showing the market value of each penny stock held inthe investor’s account. If these rules are not followed by thebroker/dealer, the investor may have no obligation to purchase the shares.Accordingly, these rules and regulations may make it more expensive anddifficult for broker/dealers to sell shares of our common stock, and purchasersof our common stock may experience difficulty in selling such shares insecondary trading markets.

 

**Item 1B. UNRESOLVED STAFFCOMMENTS.**

** **

**There are no unresolved comments from the staff ofthe Securities and Exchange Commission**

** **

**Item 2. DESCRIPTION OFPROPERTIES.**

** **

Axcess leases a 10,013square foot facility in Addison, Texas, which is used for administrative,engineering and sales offices. This facility is rented through August 2013.Our annual rental costs for this space is approximately $110,000. We alsoleased 1,500 square feet in Costa Mesa, California, which was used for softwareengineering space, through January 2009 and the monthly rent was $2,025.We consolidated the software engineering function in to the Addison location.  We believe this facility is suitable andadequate to accommodate our operations. We consider the facility to be in goodcondition and it is our opinion that the facilities are adequately covered byinsurance.

 

**Item 3. LEGAL PROCEEDINGS.**

** **

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $63,999. We are currentlydefending or seeking to settle each of the vendor’s and customer claims.  At December 31, 2009, we had accrued$46,999, which represents the delinquent amounts we expect to be liable for.

 

**PART II**

 

**Item 5. MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITYSECURITIES.**

 

Axcess’ common shares trade on the over-the-counterbulletin board under the symbol AXSI.OB. The table below sets forth high andlow closing prices for our common stock during each of the periods indicated,as reported the over-the-counter bulletin board by NASDAQ. Such pricequotations represent inter-dealer prices without retail markup, markdown orcommission and may not necessarily represent actual transactions.

 
| ** **        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| **QUARTER ENDED** | ** ** | **LOW**  | ** ** | **HIGH** | ** ** | **LOW** | ** ** | **HIGH** | ** ** |
| March 31     |       | $        | 0.21       |     | $          | 0.72 |   | $ | 1.04 |   | $ | 1.55 |   |
| June 30      |       | 0.37     |       | 0.65     |       | 0.86 |   | 1.35 |   |
| September 30 |       | 0.35     |       | 0.60     |       | 0.75 |   | 1.20 |   |
| December 31  |       | 0.31     |       | 0.70     |       | 0.22 |   | 0.80 |   |
|                   |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

As of December 31, 2009, we had approximately 658holders of record of voting common stock.

 

Axcess has not paid dividends on our common stock anddoes not anticipate the payment of cash dividends in the foreseeable future, aswe contemplate retaining all earnings to finance the continued growth of ourbusiness.

 

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##### **EquityCompensation Plans**

##### ** **

##### **Informationconcerning the 2005 Equity Incentive Plan, 2001 Equity Incentive Plan and the1998 Directors Compensation Plan is presented in the table that follows.  See “***Note 11.  Stock Options and Warrants*” in the notes to the financialstatements.

 
| **Plan  Category**                                          | ** ** | **Number of securities to be  issued upon exercise of outstanding options,   warrants and rights** | ** ** | **Weighted-average  exercise price of   outstanding options,   warrants and rights** | ** ** | **Number of securities  remaining available   for future issuance   under equity   compensation plans** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders     |       | 6,361,417                                                                                          |       | $                                                                                    | 1.38       |                                                                                                    | 1,091,000  |   |
| Equity compensation plans not approved by security  holders |       | —                                                                                             |       | —                                                                               |       | —                                                                                                  |       |
| Total                                                       |       | 6,361,417                                                                                          |       | $                                                                                    | 1.38       |                                                                                                    | 1,091,000  |   |

 

##### **Recent Sale ofUnregistered Securities**

##### ** **

During 2009, weissued unregistered securities in connection with each of the transactionsdescribed below. The issuance of the Preferred Stock, common stock and promissorynotes were exempt from the registration requirements of the Securities Act byvirtue of Sections 4(2) and 4(6) thereof as a transaction notinvolving a public offering and made solely to accredited investors.  An appropriate restrictive legend was affixedto the stock certificates and warrants.

 

##### **Common Stock**

##### ** **

On May 1, 2009, the Board elected to convert$342,230 of accrued and unpaid dividends for the current holders of the 2003BPreferred shares into 855,577 shares of Axcess common stock.

 

During 2009, one holder of the 2003B Preferred Sharedelected to convert his 10,000 preferred shares into 10,000 Axcess commonshares.  These shares had been previously registered under anSB-2 registration statement.  In addition he elected to convert $1,912 ofaccrued and unpaid dividends into 7,085 shares of Axcess common stock.

 

On July 1, 2009, asa result of the profitable quarter ended June 30,2009, all the 2003B Preferred Stock was converted to common stock, whichresulted in the issuance of 1,565,000 common shares to the former 2003Bpreferred stock holders. These shares had been previously registered under an SB-2 registrationstatement.

 

**2003B Preferred Equity Offering**

 

In November 2003, Axcess raised a net ofapproximately $2,500,000 of additional working capital through an exempt Section 4(6) anda Section 4(2) private offering of Preferred Stock toaccredited institutional investors.  The Preferred Stock is designated as 2003BPreferred and each $70,000 unit consists of 40,000 shares of Preferred Stock bearinga 7% dividend, 2,000 shares of common stock and 40,000 warrants to purchaseAxcess’ common stock exercisable for two years at $2.75 per share. Each share of Series 2003B PreferredStock is automatically convertible into voting common stock on a share-for-sharebasis (i) when Axcess achieves a full quarter of positive earnings beforeinterest, taxes depreciation and amortization or (ii) when the share pricesurpasses $3.75 based on the average closing per share price for the 20 tradingdays preceding. In connection with the 2003B Preferred Stockoffering including commissions, Axcess issued 1,570,000 shares of the 2003BPreferred Stock, 157,000 shares of common stock and 1,695,000 warrants.

 

In December 2003, Axcess raised a net ofapproximately $362,250 of additional working capital through a second closingof the 2003B Preferred.  In connectionwith the second close of the 2003B Preferred Stock offering includingcommissions; Axcess issued 220,000 shares of 2003B Preferred and 240,000warrants.

 

On July 1, 2009, asa result of the profitable quarter ended June 30,2009, all the 2003B Preferred Stock was converted to common stock, whichresulted in the issuance of 1,565,000 common shares to the former 2003Bpreferred stock holders. These shares had been previously registered under an SB-2 registrationstatement.

 

**Warrant Issued and Expired**

 

During 2009 theCompany issued an additional 1,873,570 warrants in conjunction with variousdebt offerings.  The warrant price rangedfrom $0.22 to $0.75 and they expire between January 14, 2014 and December 31,2014.

 

**Stock Options Issued andExpired**

 

On October 26, 2009 the Company issued1,907,000 stock options to employees and board members.  The options are priced at $0.65 and expire onOctober 26, 2019.  During 2009, theCompany had 463,181 options forfeited and an additional 475,375 expire.  Of those that expired or were forfeited407,297 of them had been issued from the 2005 Equity Plan and are eligible tobe reissued.  

 

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The other 531,259 options were issued as part ofthe Directors Plan, the 2001 Equity Plan or as an inducement to hire and arenot eligible to be reissued.

 

##### **Other Mattersrelating to future amortizable charges**

##### ** **

Asof December 31, 2009 we have $12,500 of deferred debt issuance costs onour balance sheet, which will be amortized using the effective interest rateover lives of the related debt.

 

Asof December 31, 2009 we have $682,477 of debt discount that will beamortized over the life of the warrant that was issued with the debt.

 

**Item 6. SELECTED FINANCIALDATA.**

** **

**As a smaller reporting company,we are not required to include this item.**

** **

**Item 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

** **

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

##### ** **

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

 

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

 

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

##### ** **

Since inception, we have utilized the proceeds from anumber of public and private sales of our equity securities, the exercise ofoptions, convertible debt, and short-term bridge loans from stockholders tomeet our working capital requirements. At December 31, 2009, we hadworking capital deficit of $2,275,286.

 

Our operations generated losses in 2009. Our cashincreased $14,142 during the year with operating activities using $412,459 ofcash. We funded operations with cash from convertible notes.  No assurance can be given that such activitieswill continue to be available to provide funding to us.  Our business plan for 2010 is predicatedprincipally upon the successful marketing of our RFID products. We anticipatethat our existing working capital resources and revenues from operations willnot be adequate to satisfy our funding requirements throughout 2010.

 

Our working capital requirements will depend upon manyfactors, including the extent and timing of our product sales, our operatingresults, the status of competitive products, and actual expenditures andrevenues compared to our business plan. We are currently experiencing decliningliquidity, losses from operations and negative cash flows, which make itdifficult for us to meet our current cash requirements, including payments tovendors, and may jeopardize our ability to continue as a going concern. Weintend to address our liquidity problems by controlling costs, seekingadditional funding (through capital raising transactions and businessalliances) and maintaining focus on revenues and collections.

 

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

 

##### **2009 Convertible Notes**

##### ** **

OnOctober 29, 2009, Axcess entered into certain convertible notes withseveral institutional or otherwise accredited investors including AmphionInnovations plc, an affiliate of the Amphion Group, our majorityshareholder.  The aggregate principal ofthe notes is $1,552,426 and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent perannum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into3,104,852 common shares of Axcess at the option of each of the holders.  As part of the consideration for theConvertible Notes, Axcess also issued to the note 

 

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holderswarrants to purchase an aggregate of 1,552,426 common shares with an exerciseprice of $0.75. The warrants expire on December 31, 2014.

 

Aportion of the new Convertible Notes was issued for the conversion andretirement of older convertible notes currently held by Amphion Innovationsplc. The principal of the notes converted was $1,038,273 and had accruedinterest of $79,153.  Of the $835,000 netnew cash, $435,000 has been advanced and Amphion has not funded the remainingportion.

 

##### **Results ofOperations**

##### ** **

*Sales and Gross Profit.* Sales for the year ending December 31, 2009 and 2008 were$4,797,711 and $1,504,924, respectively. We realized gross profits of 61% or$2,931,626 in 2009 and 47% or $708,919 in 2008. One customer accounted for 76%of total revenue in 2009 and two customers accounted for more than 32% of thetotal revenue in 2008.  Cost ofsales for the year ended December 31, 2009 and 2008 were $1,866,085 and$790,384, respectively.  We also recordeda charge of $12,421 and $3,622 for inventory impairment during the year ended December 31,2009 and 2008, respectively.  Theimpairment was as a result of the change in strategy from self-manufacturing tocontract manufacturing and the change from video products to RFIDproducts.  The amount reflects items thathave not been able to be used by our contract manufacturers in the building ofadditional products and is no longer required for warranty repairs.  The majority of the increase in sales is aresult of the Caribbean Port Security Initiative and the Port of Trinidadcontract, a large single order, awarded in January 2009.  The increase in gross margin was partly dueto the increased scope of the system installation with the Trinidad contractand we continue to expect our margin will continue to be stable in the 40% to50% range.

 

*Operating Expenses.* Operating expenses were $3,850,961 and $4,956,096 in 2009 and 2008,respectively. The majority of the decrease relates to lowerdevelopment cost during 2009.

 

Research and development expenses were $1,077,208 in 2009 and$2,229,590 in 2008.  The largest portionof the decrease relates to the lower development cost and lower salary andrelated expenses due to the closing of the California office and the reductionof that staff during 2009.

 

Corporate general and administrative expenses were $1,475,135 and$1,507,703 in 2009 and 2008, respectively. Thedecrease was mainly related to reduced investor relation activity, lower stockcompensation expense and salary expense. However, some of that savings was offset by an increase in legal andlease expense.

 

Sellingand marketing expenses were $1,277,620 and $1,192,261 in 2009 and 2008, respectively. The majority of the increase relates to increased selling expenserelating to the Trinidad contract, offset by decreased salary expenses due to lower headcount, loweradvertising expenses and reduced travel expenses.

 

Depreciation and amortization expenses were $20,998 for 2009 comparedto $26,542 for 2008.  The decrease isrelated to the age of our equipment.

 

*Other expenses, net*. Other expenses, net, were$224,033 for 2009 and $527,764 for 2008. Interest expense was $174,188 lowerduring 2009, compared to 2008, reflecting lower expense associated with thevalue of warrants that were issued with the convertible debt.  We also recognized $87,032 during 2009relating to the gain on vendor settlements, statuary write-off and other itemscompared to $489 during the same period of 2008.  We also recorded an additional $43,000 for apotential judgment relating to a customer from 2001.

 

*Net Loss*. Net loss was $1,143,368 and $4,774,941 in 2009 and2008, respectively.  The decrease in netloss relates to lower research and development fees and higher gross margincontribution from the Trinidad contract.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were $95,263 for 2009 and$991,494 for 2008. During 2008, we expensed $558,686 related to the 2008Preferred equity offering and $187,501 related to the 2008B Preferred equityoffering.  Recurring preferred Stockdividend requirements were $95,263 in 2009 and $245,307 in 2008.  The majority of the decrease relates to theconversion of our 2003B preferred stock that was converted in July 2009.

 

##### **Other Mattersrelating to future amortizable charges**

##### ** **

As of December 31, 2009we have $682,478 of debt discount and $12,500 deferred debt issuance costs onour balance sheet, which will be amortized using the effective interest rateover lives of the related debt.

 

##### **RecentAccounting Pronouncements**

##### ** **

In June 2003, theSecurities and Exchange Commission (“SEC”) adopted final rules under Section 404of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SECRelease No. 33-9072 on October 19, 2009.  Commencing with its annual report for theyear ending June 30, 2010, the Company will be required to include areport of management on its internal control over financial reporting. Theinternal control report must include a statement: A) of management’sresponsibility for establishing and maintaining adequate internal control overits financial reporting;  B) ofmanagement’s assessment of the effectiveness of its internal control overfinancial reporting as of year end; and C) of the framework used by managementto evaluate the effectiveness of the Company’s 

 

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internal control overfinancial reporting.  Furthermore, it isrequired to file the auditor’s attestation report separately on the Company’sinternal control over financial reporting on whether it believes that theCompany has maintained, in all material respects, effective internal controlover financial reporting.

 

In May 2009, theFASB issued ASC Topic 855, “Subsequent Events” (formerly SFAS 165). The statementestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but prior to the issuance of financialstatements. The standard is based on the same principles as those thatcurrently exist in the auditing standards. ASC Topic 855 is effective forinterim or annual reporting periods after June 15, 2009. The statementrequires the disclosure of the financial statements through the date thefinancial statements were issued. This statement became effective for theCompany’s financial statements as of June 30, 2009.  The adoption did not have a significant impacton the Company’s financial statements. See Note 7 “Subsequent Events.”

 

In June 2009, theFASB issued ASC Topic 105 “Accounting Standards Codification” (formerlySFAS 168). ASC became the source of authoritative U.S. generally acceptedaccounting principles (GAAP) recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of theSecurities and Exchange Commission (SEC) under authority of federalsecurities laws are also sources of authoritative GAAP for SEC registrants. Onthe effective date of this Statement, the Codification superseded allthen-existing non-SEC accounting and reporting standards. All othernon-grandfathered non-SEC accounting literature not included in theCodification became non-authoritative. This Statement is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Company adopted the codification with the third quarter of 2009. Theimplementation of this standard did not have a material impact on ourconsolidated financial statements.

 

In October 2009, theFASB issued ASC Topic 605, “*Multiple ElementAdjustments”* (formerly ASU No. 2009-13)*,*which modifies accounting for multipleelement arrangements by requiring that the separation of the arrangements bebased on estimated selling prices based on entity specific assumptions ratherthan fair value, eliminating the residual method of allocation and requiringadditional disclosures related to such arrangements. The standard is effectiveprospectively for arrangements entered into or materially modified in fiscalyears beginning on or after June 15, 2010. The Company is currentlyevaluating the impact of adopting ASC Topic 605.

 

Also in October 2009,the FASB issued ASC Topic 985, “*CertainRevenue Arrangements That Include Software Elements”,*(formerly ASU2009-14), which amends software revenue recognition guidance to eliminate fromits scope tangible products containing software components that functiontogether to deliver the tangible product’s essential functionality and toprovide guidance on how to allocate arrangement consideration to deliverablesin an arrangement that contain both tangible products and software. Thestandard is effective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. The Companyis currently evaluating the impact of adopting ASC Topic 985.

 

##### **CriticalAccounting Policies**

##### ** **

In preparing our consolidated financial statements inconformity with accounting principles generally accepted in the United States,we must make a variety of estimates that affect the reported amounts andrelated disclosures. The following accounting policies are currently consideredmost critical to the preparation of our financial statements. If actual resultsdiffer significantly from our estimates and projections, there could be amaterial effect on our financial statements.

 

**Allowance for Doubtful Accounts**

** **

We continually evaluate the creditworthiness of ourcustomers’ financial condition and generally do not require collateral. Weevaluate the collectability of our accounts based on a combination of factors.In circumstances where we are aware of a specific customer’s inability to meetits financial obligations to us, we record a specific reserve for bad debtsagainst amounts due. We have not experienced significant losses onuncollectible accounts receivable.

 

**Inventory Valuation**

** **

Inventories are stated at the lower of standard cost,which approximates actual cost determined on a first-in, first-out basis, orestimated realized value. Adjustments to reduce inventories to estimatedrealizable value, including allowances for excess and obsolete inventories, aredetermined quarterly by comparing inventory levels of individual materials andparts to historical usage rates, current backlog and estimated future sales.Actual amounts realized upon the sale of inventories may differ from estimatesused to determine inventory valuation allowances due to changes in customerdemand, technology changes and other factors.

 

**Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of**

** **

Long-lived assets and identifiable intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future net cash flows expected to be generated by the asset. Ifsuch assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the asset 

 

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exceeds the fair value of the assets based on estimatedfuture cash flows. Assets to be disposed of are reported at the lower of thecarrying amount or fair value less costs to sell. Revenues from the sale ofproducts utilizing our purchased technologies have grown slowly. We believethat assumptions made in projecting future cash flows for this evaluation arereasonable. However, if future actual results do not meet our expectation, wemay be required to record an additional impairment charge, the amount of whichcould be material to the results of its operations and financial position.

 

**Revenue Recognition and Warranty Costs**

** **

We recognize revenue on sales of our products when theproducts are shipped from our facility in Addison, Texas. Our policy does notallow customers to return products for credit. We currently provide a one-yearwarranty on all products. Provision is made at the time the related revenue isrecognized for estimated product repair costs.

 

**Deferred Tax Valuation Allowance**

** **

Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatements carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Valuationallowances are established when necessary to reduce deferred tax assets to theamount more likely than not to be realized. Income tax expense is the total oftax payable for the period and the change during the period in deferred taxassets and liabilities.

 

**Stock-Based Compensation Expense**

 

We account for employee stock-based compensation costsin accordance with ASC Topic 718, Compensation — Stock Compensation. We utilizethe Black-Scholes option pricing model to estimate the fair value of employeestock based compensation at the date of grant, which requires the input ofhighly subjective assumptions, including expected volatility and expected life.Changes in these inputs and assumptions can materially affect the measure ofestimated fair value of our share-based compensation.

 

##### **Other**

##### ** **

*Inflation.* Inflation has not had and is not expected to have a material impact onthe operations and financial condition of Axcess.

 

*Seasonality.* Seasonality has not had and is not expected to have a material impact onthe operations and financial condition of Axcess.

 

**Item 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

** **

As a smaller reportingcompany, we are not required to complete this item.

 

**Item 8. FINANCIAL STATEMENTSAND SUPPLEMENTAL DATA.**

 
| ** **                                                                                                  | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of  Hein & Associates LLP, Independent Registered Public Accounting Firm                    |       | F-1      |       |
|                                                                                                        |       |     |       |
| Consolidated Financial  Statements:                                                                         |       |     |       |
|                                                                                                        |       |     |       |
| Consolidated Balance  Sheets at December 31, 2009 and 2008                                             |       | F-2      |       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2009 and 2008                  |       | F-3      |       |
| Consolidated  Statements of Stockholders’ Deficit for the Years Ended December 31,  2009 and 2008 |       | F-4      |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2009 and 2008                  |       | F-5      |       |
| Notes to  Financial Statements                                                                              |       | F-6      |       |

** **

**Item 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

** **

There were no reportable events of the type described in Item 304(b) ofRegulation S-K.

 

**Item9A(T). CONTROLS AND PROCEDURES.**

 

Under thesupervision and with the participation of our management, including ourprincipal executive officer and the principal financial officer, we conductedan evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as of the end of theperiod covered by this report (the “Evaluation Date”). Based on thisevaluation, our principal executive officer and principal financial officerconcluded as of the Evaluation Date, that our disclosure controls andprocedures were not effective.

 

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MANAGEMENTS’ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting of the Company. Internal control over financial reportingis a process designed by, or under the supervision of, our chief executive andchief financial officers and effected by our board of directors, management andother personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principals.

 

Management, withthe participation of our principal executive officer and principal financialofficer, has evaluated the effectiveness of our internal control over financialreporting as of December 31, 2009 based on criteria established under theCOSO framework, an integrated framework for evaluation of internal controlsissued to identify the risks and control objectives related to the evaluationof the control environment by the Committee of Sponsoring Organizations of theTreadway Commission.

 

Based on ourevaluation described above, management has concluded that our internal controlover financial reporting was not effective as of December 31, 2009.Management has determined that (i) we are unable to maintain the propersegregation of various accounting and finance duties because of our small sizeand limited resources, (ii) much of the financial closing process is doneoff-line on electronic spreadsheets that are maintained on individual computersand are not backed up and (iii) based on our staffing we rely on our ChiefFinancial Officer to provide a significant number of our compensating controls.

 

We intended toremediate these material weaknesses during 2009 however; liquidity issuesprevented us from making changes. Assuming resources are available, we intend to address theses materialweaknesses during 2010.  Notwithstandingthese material weaknesses, we believe that our financial conditions, results ofoperations and cash flows presented in this report of Form 10-K are fairlypresented in all material respects.

 

This annual reportdoes not include an attestation report of the Company’s registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation requirements by our registered publicaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit the Company to provide only management’s report in thisannual report.

 

CHANGES ONINTERNAL CONTROL OVER FINANCIAL REPORTING

 

There were nochanges in our internal control over financial reporting that occurred duringour most recent fiscal year that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**Item9B. OTHER INFORMATION.**

 

Not applicable.

 

**PART III**

 

**Item 10. DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE.**

** **

**Management of Axcess**

 

The Board elects executive officers annually at itsfirst meeting following the annual meeting of stockholders. The following tablesets forth, as of January 25, 2010, Axcess’ directors, executive officersand significant employees, their ages, and their positions within Axcess.

 
| **Name**                   | ** ** | **Age** | ** ** | **Position**                                           | ** ** | **Committee**         | ** ** | **Independent (1)** |
|----------------------------|------------|---------|------------|--------------------------------------------------------|------------|-----------------------|------------|---------------------|
| Richard  C.E. Morgan       |       | 65      |       | Chairman  of the Board of Directors                    |       | (2*) (4*) (5)         |       |                |
| Allan  Griebenow           |       | 57      |       | Director,  President and Chief Executive Officer       |       | (2) (5)          |       |                |
| Allan  L. Frank            |       | 46      |       | Vice  President, Secretary and Chief Financial Officer |       |                  |       |                |
| Robert  J. Bertoldi        |       | 55      |       | Directors                                              |       | (3) (5)          |       |                |
| Paul  J. Coleman, Jr. |       | 78      |       | Director                                               |       | (3*) (5)              |       | X                   |
| Robert  F. Hussey          |       | 60      |       | Director                                               |       | (3) (4) (5) |       | X                   |
| Raj  Bridgelall            |       | 43      |       | Vice  President of Engineering                         |       |                  |       |                |
| Ray  Cavanagh              |       | 59      |       | Vice  President of Sales                               |       |                  |       |                |
| Benjamin  Donohue          |       | 59      |       | Vice  President of Business Development                |       |                  |       |                |

 

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| (1) |   | Indicates  the board member is “Independent” as such term is defined by Item 407 of  Regulation S-K and the rules on the Nasdaq Stock Market. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Executive Committee                                                                                                                                          |
| (3) |   | Audit Committee                                                                                                                                              |
| (4) |   | Compensation Committee                                                                                                                                       |
| (5) |   | Nominating and  Governance Committee                                                                                                                         |
| *   |   | Indicates Chairman of  the Committee                                                                                                                         |

 

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**Richard C. E. Morgan** has servedas a director and Chairman of the Board of the company since 1985. Since 2003 Mr. Morganhas been Chief Executive Officer and is a director of Amphion Innovations plc,the successor to Amphion Capital Partners LLC a private equity and venture firmthat he co-founded, of which he was Chairman and CEO.  In November 1999,Mr. Morgan co-founded VennWorks LLC, a venture capital company and sincethen has served as its Chairman and Chief Executive Officer. In 1995, Mr. Morganco-founded Amphion Capital Management, LLC, a private equity and venturecapital firm, and since then has served as one of its Managing Members. From 1986 Mr. Morgan has been a Managing Member of Wolfensohn Partners,LP, (now known as Amphion Partners LLC), the General Partner of WolfensohnAssociates LP (known as Amphion Ventures LP) a technology and life sciencefund.  Mr. Morgan is also a director of several private companies andis also a director of Orbis International, Inc., a non-profit organizationdedicated to fighting blindness worldwide.

 

**Allan Griebenow** has served as a director,President and Chief Executive Officer of the Company since July 1999. He founded Prism Video, Inc. in 1993 and was Chief Executive Officer ofPrism Video, Inc. from 1994 to July 1999.  From 1989 to 1992, Mr. Griebenowwas President, CEO and a Director of Vortech Data Inc., a pioneer in themedical imaging networking (PACS) space which was sold to Eastman Kodak andbecame Kodak Health Imaging Systems.  Earlier he was with SatelliteSystems Engineering, Ford Aerospace, and Satellite Business Systems.  Mr. Griebenowhas spent the past thirty years in telecommunications-based advanced applications. He started his career in 1979 as a Presidential Management Intern with NASA’sOffice of Aeronautics and Space Technology.  He holds a B.S. in BusinessAdministration from the University of Maryland and an MBA from San FranciscoState University.

 

**Allan L. Frank** has servedas Vice President, Secretary and Chief Financial Officer of the Company since March 2002.From July 1999 through June 2001, Mr. Frank was Vice President,Chief Financial Officer and Secretary for Vast Solutions, Inc., a spin-offfrom Paging Network, Inc. (“PageNet”). Vast Solutions, Inc. filed forbankruptcy in April 2001. From September 1993 through July 1999,Mr. Frank served in numerous positions at PageNet, including as VicePresident of Corporate Development and Director of Financial Analysis, and asDirector of International Finance for Paging Network International, asubsidiary of PageNet. Prior to PageNet, Mr. Frank worked at FoxMeyerCorporation, OrNda HealthCare and Dalfort Aviation Services. Mr. Frankholds a B.S. in Business Administration from The Ohio State University and anMBA from the University of North Texas.

 

**Robert J. Bertoldi** has been a director of the Companysince June 2000. Since 2005 he has been the President and Chief FinancialOfficer of Amphion Innovations plc (AMP), a company listed on the AIM on theLondon Stock Exchange. Amphion develops and operates companies in the lifesciences and medical technology sectors. Since 2003, Mr. Bertoldi has beenthe President of Amphion Capital Partners LLC, since 2000 Mr. Bertoldi hasbeen the President of  VennWorks, LLC,  since 1995, Mr. Bertoldihas been a Managing Member of Amphion Capital Management, LLC, and of AmphionPartners LLC, the General Partner of Amphion Ventures LP.  Prior to 1995 Mr. Bertoldiserved as the Chief Financial Officer of James D. Wolfensohn Inc. and HambroAmerica Inc. In addition to being a member of the Board of Director for Axcess,Mr. Bertoldi is the Chairman of the Board of m2m Inc, and is on the Boardof WellGen Inc., DataTern, Inc. and MSA Holding B.S.C.  Mr. Bertoldi received his B.A. inAccounting and Economic from Queens College in 1976 and became a CertifiedPublic Accountant in 1978. He is a member of the New York State Society ofCertified Public Accountants and the American Institute of Certified PublicAccountants.

 

**Paul J. Coleman, Jr.** has servedas a director of the Company since 1982. He is President and Chief ExecutiveOfficer of the Girvan Institute of Technology, a non-profit, public benefitcorporation engaged in research, technology development, and education relatedto high-technology enterprise. Dr. Coleman is an emeritus professor ofspace physics at the University of California at Los Angeles (“UCLA”). Hecurrently serves as a director of Knowledge Vector, Inc., MicrotechnologiesLtd and the Girvan Institute. He is a former director of CACI International,Fairchild Space and Defense Corporation, the Universities Space ResearchAssociation (USRA) and others. He has held positions asassistant (managing) director of the Los Alamos National Laboratory;president and chief executive officer of USRA, (managing) director of theInstitute of Geophysics and Planetary Physics at UCLA; and (managing) directorof the National Institute for Global Environmental Change of the U.S.Department of Energy.

 

**Robert F. Hussey**has served on the Board since September 2002. Mr. Hussey is aprivate equity investor.  Mr. Husseycurrently serves as a Director of Digital Lightwave, Inc.  Mr. Hussey also serves on the board ofHC Wainwright & Co, World Racing Group, Inc. and on the board ofadvisors for Argentum Capital Partners. From 1991 through 1996, Mr. Hussey served as President, CEO andDirector of MetroVision of North America. From 1984 through 1991, Mr. Husseywas Founder, President, CEO and Director of POP Radio Corp. Prior to POP Radio,Mr. Hussey worked at Grey Advertising, Inc., E.F. Hutton and AmericanHome Products, Inc. Mr. Hussey received a B.S. in BusinessAdministration from Georgetown University and an MBA in International Businessfrom George Washington University**.**

 

**Raj Bridgelall** has servedas Vice President of Engineering of the Company since September 2006. FromAugust 2004 through August 2006, Mr. Bridgelall was VicePresident, R&D / Advanced Product Development for Alien Technology, Inc.From December 1990 through July 2004, Mr. Bridgelall served innumerous positions at Symbol Technologies, including as Chief Technologist andAdvanced Product Development, RFID. Prior to Symbol Technologies, Mr. Bridgelall worked as a 

 

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CommunicationsSpecialists in the United States Coast Guard. Mr. Bridgelall holds a Bachelors and a Masters degree in ElectricalEngineering from Stony Brook University.

 

**Ray Cavanagh**has served as Vice President of Sales of the Company since May 2006.From May 2004 through January 2006, Mr. Cavanagh was Senior VicePresident, Worldwide Sales Operations for OpenService, Inc. From April 2002through May 2004, Mr. Cavanagh served as Vice President, WorldwideSales, Marketing and Business Development for Entegrity Solutions.  From November 2000 through April 2002,Mr. Cavanagh served as Vice President of Worldwide Sales for First VirtualCommunications, Inc.  Prior to FirstVirtual Communications, Mr. Cavanagh ran Sales Operations at Aprisma Inc.,Newpoint Technologies, Inc., PictureTel Corporation, Interleaf, Inc.and Wang Laboratories. Mr. Cavanagh holds an MBA from NortheasternUniversity where he also completed his undergraduate studies.

 

**Ben Donohue**has served as Vice President of Business Developmentof Axcess International. He came to Axcess in 1999 when it acquired Prism Videowhere he was Director of Products since 1994. During his tenure with PrismVideo, he managed the team that developed and marketed patented proprietaryvideo compression technology in commercial products. In his current position,Donohue maintains strategic major accounts such as Honeywell, Tyco, ADT andSonitrol.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Under Section 16(a) of the Exchange Act,directors, certain officers and beneficial owners of 10% or more of the Company’sVoting Common Stock are required from time to time to file with the Securitiesand Exchange Commission reports on Forms 3, 4 or 5, relating principally totransactions in Company securities by such persons.  Based solely upon a review of Forms 3, 4 and5 submitted to Axcess during and with respect to 2009, all of these individualsor entities timely filed their respective Forms 3, 4 or 5 required by Section 16(a) ofthe Exchange Act during 2009.

 

**Code ofEthics**

 

We have adoptedour Code of Ethics for the Chief Executive Officer, Chief FinancialOfficer, and any Principal Accounting Officer or Controller (“Senior FinancialOfficers”) of Axcess International, Inc. (the “Company”).  Its purpose is to promote honest and ethicalconduct and compliance with the law, particularly as related to the maintenanceof the Company’s financial records and the preparation of financial statementsfiled with the Securities and Exchange Commission (the “SEC”).  A copy of such code is attached as an exhibit 14.1 toour annual report on Form 10-K for the period ended December 31,2009.

 

**Item 11. EXECUTIVECOMPENSATION**

** **

The Company’s Board ofDirectors is responsible to oversee all of the executive compensation andequity plans and programs to ensure that its officers and senior staff arecompensated in a manner that is consistent with its competitively based annualand long term performance goals.

 

**CompensationPhilosophy and Objectives**

 

The Company’scompensation programs are designed to attract, motivate, and retain talentedexecutives while maintaining competitiveness within our industry. We facecompetition in the market for talented executives and employees and understandthe need to offer competitive employment packages. Our compensation programsare designed to achieve this in a manner that still furthers the financial interestof its shareholders. The objectives of the compensation programs are:

 
| · | to provide levels of  compensation that integrate with annual and long term performance goals for  the Company                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------|
| · | to attract and retain  top level executives                                                                                      |
| · | to reflect individual  job responsibilities and reward previous and expected future contributions to  the Company                |
| · | to  remain competitive with compensation programs offered in the market while  allowing us to maintain competitive pricing  |
| · | to limit the use of  perquisites to those that assist the executive officers in efficiently  carrying out their responsibilities |

 

**CompensationProcess and Components**

 

The Board of Directors,acting as a whole, has primary responsibility for the determination of officers’salaries. Compensation for officers consists of base salaries plus bonusesdesigned to reward officers for achieving certain financial and businessobjectives. We generally establish the salaries for its officers in a rangethat is competitive within our industry.

 

**Base Salaries**

 

Salaries for the Company’sofficers (including the CEO) are determined by evaluating the officer’sindividual performance and contributions to the performance of the Company, theofficer’s responsibilities, experience, and any other data which may be availableregarding competitive practices. Officers’ salaries and merit adjustments areapproved annually by the Board of Directors in January for the next 12months. Based on this process, the Company’s officers were not provided anincrease for fiscal year 2009.  However,they were provided a 6.6% increase for fiscal year 2007, for the first timesince 2001.

 

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**Bonus / Pay for Performance**

 

The Company utilizes aperformance based compensation plan covering senior technical and managementpersonnel called the Management Incentive Performance Plan (MIPP). TheMIPP includes as participants all of the Company’s officers. A bonus poolis established by the Board of Directors for the MIPP on an annual basis whichis dependent upon several targets both financial (revenue, cash flow, margin)and non financial (patents, delivery schedules).  The bonus pool amounthas upward and downward adjustments if the specific goal is exceeded or notachieved, respectively. The bonus is paid using a combination of cash andthe Company’s common stock from the Company’s 2005 Stock Award Plan. TheBoard of Directors determines the allocation between cash and stockawards. We established the MIPP program during 2007 and since theinception there has been no cash or stock issued. The allocation of theMIPP bonus pool is determined by the Board of Directors.

 

**Retirement and Other Benefits**

 

All officers andemployees are entitled to participate in our fringe benefit programs, includingthe Company’s 401(k) Plan, which is an IRS qualified plan, available toall eligible employees. The 401(k) Plan is a non employercontributory plan and the only contributions are employee 401(k) electivedeferrals.

 

**Perquisites and Other Personal Compensation**

 

The Company believes thatcompensation for its executive officers and directors should be reasonablecompared to the total staff. In keeping with this philosophy, the Company doesnot currently offer special benefits to its officers and directors, other thanthose available to the general staff. The Company has not entered into anyemployment agreement, other than with Allan Griebenow, and there is no specialbenefit or compensation paid to any of the named executive officers in theevent of their termination (without cause or by death) or retirement that isnot available to the general staff.

 

**Summary Compensation Table**

 

The following table summarizes the compensation earnedby Axcess’ Chief Executive Officer and Axcess’ four other most highlycompensated executive officers (whose annualized compensation exceeded$100,000) (collectively called the “named executive officers”), for servicesrendered in all capacities to Axcess during the fiscal years ended December 31,2009 through 2007.

 

**Summary Compensation Table**

 
| ** **                                             | ** ** | ** ** | ** ** | ** **       | ** ** | ** **     | ** ** | **Stock**      | ** ** | **Option**     | ** ** | **All Other**    | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------------|------------|----------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| **Name**                                               | ** ** | **Year**   | ** ** | **Salary**       | ** ** | **Bonus**      | ** ** | **Awards**     | ** ** | **Awards**     | ** ** | **Compensation** | ** ** | **Total**        | ** ** |
| **Principal Positions**                                | ** ** | **Ended**  | ** ** | **($)**          | ** ** | **($)**        | ** ** | **($)**        | ** ** | **($) (A)**    | ** ** | **($) (B)**      | ** ** | **($)**          | ** ** |
| Allan Griebenow                                        |       | 2009       |       | 246,616          |       | —         |       | —         |       | 105,593        |       | —           |       | 352,209          |       |
| President and Chief Executive Officer                  |       | 2008       |       | 246,100          |       | —         |       | —         |       | —         |       | —           |       | 246,100          |       |
|                                                   |       | 2007       |       | 235,363          |       | —         |       | —         |       | 50,400         | (C)        | —           |       | 285,763          |       |
|                                                   |       |       |       |             |       |           |       |           |       |           |       |             |       |             |       |
| Allan L. Frank                                         |       | 2009       |       | 192,780          |       | —         |       | —         |       | 81,225         |       | —           |       | 274,005          |       |
| Vice President, Secretary and Chief Financial  Officer |       | 2008

2007 |       | 192,600

183,810 |       | —

— |       | —

— |       | —

35,400 | (C)        | —

—   |       | 192,600

219,210 |       |
|                                                   |       |       |       |             |       |           |       |           |       |           |       |             |       |             |       |
| Raj Bridgelall                                         |       | 2009       |       | 178,620          |       | —         |       | —         |       | 81,225         |       | —           |       | 259,845          |       |
| Vice President, Engineering                            |       | 2008       |       | 178,500          |       | —         |       | —         |       | —         |       | —           |       | 178,500          |       |
|                                                   |       | 2007       |       | 172,599          |       | —         |       | —         |       | 60,000         | (C)        | 12,021           |       | 244,620          |       |
|                                                   |       |       |       |             |       |           |       |           |       |           |       |             |       |             |       |
| Ben Donohue                                            |       | 2009       |       | 126,637          |       | —         |       | —         |       | 81,225         |       | —           |       | 207,862          |       |
| Vice President, Business Development                   |       | 2008       |       | 125,387          |       | —         |       | —         |       | —         |       | —           |       | 125,387          |       |
|                                                   |       | 2007       |       | 116,315          |       | 10,000         |       | —         |       | 24,000         | (C)        | —           |       | 150,315          |       |
|                                                   |       |       |       |             |       |           |       |           |       |           |       |             |       |             |       |
| Ray Cavanagh                                           |       | 2009       |       | 154,266          |       | —         |       | —         |       | 48,735         |       | —           |       | 203,001          |       |
| Vice President, Sales                                  |       | 2008       |       | 153,750          |       | —         |       | —         |       | —         |       | —           |       | 153,750          |       |
|                                                   |       | 2007       |       | 151,610          |       | —         |       | —         |       | 24,000         | (C)        | —           |       | 175,610          |       |

 

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(A)          Reflects the grant date fair value calculated inaccordance Accounting Standards Codification (“ASC”) Topic No. 718, *Compensation — Stock Compensation*.  See “Notes to Financial Statements — Summaryof Significant Accounting Policies - Stock-Based Compensation for a discussionof the relevant assumptions used in calculating the grant date fair value.

(B)           Mr. Bridgelall “All Other Compensation” consistsof reimbursement for moving expenses.

(C)           Option awarded during 2007 have additional vestingrequirements and the compensation expense is not defined until the criteria aredetermined; therefore, only the shares where the criteria are defined are shownas expense.

 

**Stock Option Grants in 2009 to Named Executive Officers**

 

During2009, we granted options to purchase 1,225,000 shares of Axcess with a strikeprice of $0.65 to our CEO, CFO and other named executive officers pursuant toour 2005 Equity Incentive Plan.

 

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**Outstanding Equity Awards at Fiscal Year End**

 

The following table summarizes equity awards grantedto our CEO, CFO and other named executive officers that were outstanding as of December 31,2009.

 
| ** **          | ** ** | **Option Awards**                                              | ** ** | **Stock Awards**                                                              | ** ** |
|---------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Number of  Securities  Underlying  Options(#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options(#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options(#)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of  Shares  or Units  of  Stock  That  Have  Not  Vested  (#)** | ** ** | **Market  Value  of  Shares  or  Units  of  Stock  That  Have  Not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market  or Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested   ($)** | ** ** |
| Allan Griebenow (1) |       | 1,440,072                                                      |       | 409,000                                                                       |       | — |   | $ | 1.76 |   | 10 years from Grant |   | — |   | — |   | — |   | — |   |
| Allan Frank (2)     |       | 1,115,968                                                      |       | 309,000                                                                       |       | — |   | $ | 1.47 |   | 10 years from Grant |   | — |   | — |   | — |   | — |   |
| Raj Bridgelall (3)  |       | 600,000                                                        |       | 387,500                                                                       |       | — |   | $ | 1.00 |   | 10 years from Grant |   | — |   | — |   | — |   | — |   |
| Ben  Donohue (4)    |       | 530,717                                                        |       | 383,650                                                                       |       | — |   | $ | 1.04 |   | 10 years from Grant |   | — |   | — |   | — |   | — |   |
| Ray Cavanagh (5)    |       | 380,000                                                        |       | 227,500                                                                       |       | — |   | $ | 1.01 |   | 10 years from Grant |   | — |   | — |   | — |   | — |   |

 

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| (1)    |   | Includes a grant made  on February 2, 2000 for 124,112 options with a strike price of $5.50; a  grant made on January 10, 2001 for 150,392 option at a strike price of  $3.88; a grant made on June 5, 2002 for 85,000 options at a strike price  of $1.70; a grant made on January 17, 2003 for 163,000 options at a  strike price of $0.40; a grant made on March 16, 2004 for 156,568  options at a strike price of $2.00, a grant made on February 15, 2006  for 268,000 options with a strike price of $1.04; a grant made September 21,  2007 for 168,000 options at a strike price of $1.50 and a grant made  October 26, 2009 for 325,000 options at a strike price of $0.65.                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Includes a grant made  on March 20, 2002 for 200,000 option at a strike price of $3.00; a grant  made on June 5, 2002 for 85,000 options at a strike price of $1.70; a  grant made on January 17, 2003 for 100,000 options at a strike price of  $0.40; a grant made on March 16, 2004 for 147,968 options at a strike  price of $2.00, a grant made on February 15, 2006 for 215,000 options  with a strike price of $1.04; a grant made September 21, 2007 for  118,000 options at a strike price of $1.50 and a grant made October 26,  2009 for 250,000 options at a strike price of $0.65.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | Includes a grant made  on October 1, 2006 for 150,000 options at a strike price of $0.93; a  grant made September 21, 2007 for 200,000 options at a strike price of  $1.50 and a grant made October 26, 2009 for 250,000 options at a strike  price of $0.65.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    |   | Includes a grant made  on September 29, 1999 for 12,000 options at a strike price of $2.69  (4,000 have been exercised); a grant made on February 2, 2000 for 3,308  options with a strike price of $5.50; a grant made on January 10, 2001  for 6,000 option at a strike price of $3.88; a grant made on June 5,  2002 for 65,000 options at a strike price of $1.70 (16,250 have been  exercised); a grant made on January 17, 2003 for 78,000 options at a  strike price of $0.40 (77,400 have been exercised); a grant made on  March 16, 2004 for 35,059 options at a strike price of $2.00; a grant  made on February 15, 2006 for 107,000 options with a strike price of  $1.04; a grant made September 21, 2007 |

 

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|   |   | for 80,000 options at a  strike price of $1.50 and a grant made October 26, 2009 for 250,000  options at a strike price of $0.65.                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                     |
| (5)    |   | Includes a grant made  on May 16, 2006 for 150,000 options at a strike price of $1.10; a grant  made September 21, 2007 for 80,000 options at a strike price of $1.50  and a grant made October 26, 2009 for 250,000 options at a strike price  of $0.65. |

 

**Aggregate Option Exercises in 2009 by Executive Officers**

 

The following table provides information as to optionsexercised, if any, by each of the named executive officers in 2009 and thevalue of options held by those officers at year-end measured in terms of thelast reported sale price for the shares of our Voting Common Stock on December 31,2009 ($0.22 as reported on the Over-The-Counter Bulletin Board).

 
| ** **      | ** ** | **Shares  Acquired  On** | ** ** | **Value**    | ** ** | **Number of Securities  Underlying Unexercised  Options at December 31, 2009** | ** ** | **Value of Unexercised  In-the-Money Options at  December 31, 2009** | ** ** |
|-----------------|------------|--------------------------|------------|--------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Name**        | ** ** | **Exercise**             | ** ** | **Realized** | ** ** | **Exercisable**                                                                     | ** ** | **Unexercisable**                                                         | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Allan Griebenow |       | —                   |       | $            | —     |                                                                                | 1,031,072  |                                                                      | 409,000    |   | $ | 97,800 |   | $ | 113,750 |   |
| Allan L. Frank  |       | —                   |       | $            | —     |                                                                                | 806,968    |                                                                      | 309,000    |   | $ | 60,000 |   | $ | 87,500 |   |
| Raj Bridgelall  |       | —                   |       | $            | —     |                                                                                | 212,500    |                                                                      | 387,500    |   | $ | 7,875 |   | $ | 87,500 |   |
| Ben Donohue     |       | —                   |       | $            | —     |                                                                                | 240,717    |                                                                      | 306,250    |   | $ | 360 |   | $ | 87,500 |   |
| Ray Cavanagh    |       | —                   |       | $            | —     |                                                                                | 152,500    |                                                                      | 227,500    |   | $ | — |   | $ | 52,500 |   |

 

**Compensation of the Company’s Directors**

 

Starting in 2006, we pay cash compensation to eachdirector who is not employed by us and who does not beneficially own more thanfive percent of the shares of common stock outstanding.  We will pay five thousand dollars per quarterto each independent director and an additional twenty-five hundred dollars perquarter for an independent chairman of the audit or compensationcommittee.  We will also pay one thousanddollars to each independent director for each meeting attended and five hundreddollars for each telephonic board meeting. The cash compensation is automatically suspended in the event that ourcash balance is below $500,000 on the first day of the quarter.  In addition to the compensation set forthabove, each director shall receive an annual grant of options to acquire commonstock at an exercise price equal to the fair market value per share of thecommon stock at the time the option is granted. The annual grant customarilytakes place shortly after each annual meeting of our stockholders. All newboard members receive 50,000 options to acquire common stock at an exerciseprice equal to the fair market value per share of the common stock on the datethe board member is elected by our stockholders. All new board members willalso be eligible to receive the annual grant. We also pay ordinary andnecessary out-of-pocket expenses for directors to attend board and committeemeetings. Directors who are officers or employees of Axcess receive no fees forservice on the board or committees thereof.

 

The following table summarizes compensation paid toall of our non-employee directors:

 
| ** **        | ** ** | **Fees   Earned or   Paid in  Cash** | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-------------------|------------|--------------------------------------|------------|-------------------|------------|--------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------|------------|
| **Name**          | ** ** | **($)**                              | ** ** | **($)**           | ** ** | **($)**            | ** ** | **($)**                                      | ** ** | **($)**                                                                           | ** ** | **($)**                     | ** ** | **($)**   | ** ** |
| Richard CE Morgan |       | $                                    | —     |              | $          | —             |       | $                                            | —     |                                                                              | $          | —                      |       | $         | —     |   | $ | — |   | $ | — |   |
| Robert Bertoldi   |       | —                               |       | —            |       | —             |       | —                                       |       | —                                                                            |       | —                      |       | —    |       |
| Robert Hussey     |       | —                               |       | —            |       | —             |       | —                                       |       | —                                                                            |       | —                      |       | —    |       |
| Paul Coleman      |       | —                               |       | —            |       | —             |       | —                                       |       | —                                                                            |       | —                      |       | —    |       |
|                   |            |                                      |            |                   |            |                    |            |                                              |            |                                                                                   |            |                             |            |           |            |  |  |  |  |  |  |  |

 

**Employment Agreement with Mr. Griebenow**

 

On July 16, 1999, the Company entered into anagreement with Allan Griebenow, under which Mr. Griebenow agreed to be theCompany’s president and chief executive officer. The agreement provides that Mr. Griebenowwill receive a salary equal to $17,917 per month, a bonus payable within 90days after the end of the Company’s fiscal year of up to 30% of his basesalary, and option grants to acquire 450,000 shares of our common stock. Mr. Griebenowis essentially an “at will” employee of the Company and may be terminated uponthirty days’ notice. If the Company terminates Mr. Griebenow’s employmentat any time without cause, as defined in the employment agreement, then Mr. Griebenowwill be entitled to continue to receive his then current salary for thesix-month period following his termination.

 

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** **

**Item 12. SECURITY OWNERSHIPAND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

** **

The following table sets forth the number of shares ofeach class of stock beneficially owned as of March 31, 2010, by eachperson known by Axcess to be the beneficial owner of more than five percent ofany class of our voting securities as of March 31, 2010. Except as notedbelow, to our knowledge, each stockholder listed below has sole voting andinvestment power with respect to all shares of stock shown beneficially ownedby the stockholder.

 
| **Name  and Address of****Beneficial Owner** | ** ** | **Title of Class**  | ** ** | **Amount and  Nature of********Beneficial   Owner** | ** ** | **Percentage********of Class** | ** ** | **Percentage of********Voting Power  (1)** | ** ** |
|----------------------------------------------|------------|---------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|
| Amphion Group (2)                            |       | Voting Common Stock |       | 23,117,209                                          | (3)        | 44.6                           | %          | 53.4                                       | %          |
| 330 Madison Avenue                           |       | Series 2005    |       | 1,770,024                                           |       | 66.8                           | %          | 4.1                                        | %          |
| New York, NY 10017                           |       | Series 2006B   |       | 450,000                                             |       | 64.3                           | %          | 1.0                                        | %          |
|                                         |       | Series 2007    |       | 250,000                                             | (4)        | 13.5                           | %          | 0.6                                        | %          |
|                                         |       | Series 2008B   |       | 666,667                                             | (5)        | 83.3                           | %          | 1.5                                        | %          |

 

----

(1)           Includes outstanding common and preferred sharesoutstanding.  Excludes stock options andwarrants.

 

(2)           See the following table regarding the beneficialownership of the Amphion Group.

 

(3)           Includes 5,578,882 shares that the AmphionGroup has the right to acquire pursuant to warrants and options that areexercisable within 60 days.

 

(4)           25 preferred shares that convert ten thousand to one.

 

(5)           66 and 2/3 preferred shares that convert ten thousandto one.

 

The following table sets forth the number of sharesbeneficially owned by the Amphion Group, which is defined to include Mr. RichardC.E. Morgan, a British citizen and Chairman of the Board of Directors of theCompany (“Mr. Morgan”), Mrs. Anna Morgan, a British citizen and wifeof Richard C.E. Morgan (“Mrs. Morgan”), Robert J. Bertoldi, a U.S. citizenand Director of the Company (“Mr. Bertoldi”), Amphion Ventures, LP, aDelaware limited partnership (“Amphion Ventures”), Amphion Partners, LLC, aDelaware limited liability company (“Amphion Partners”), Amphion Investments,LLC, a Delaware limited liability company (“Amphion Investments”), AntiopePartners, LLC, a Delaware limited liability company (“Antiope Partners”),Amphion Capital Management, LLC, a Delaware limited liability company (“ACM”),NVW,LLC a Delaware limited liability company (NVW”), Amphion Innovations plc,an Isle of Man company (Innovations) and VennWorks, LLC, a Delaware limitedliability company formerly known as incuVest, LLC, (“VennWorks”).

 

 The Amphion Group disclaims in its filings with theSecurities and Exchange Commission that it holds any securities of the Companyas a group, within the meaning of any applicable securities law or regulation.Amphion Partners is the sole general partner of Amphion Ventures. Messrs. Morganand Bertoldi are the managing members of Amphion Partners, Antiope Partners andAmphion Investments. Mr. Morgan is the Chairman of the Board of Directorsand Chief Executive Officer of VennWorks. Mr. Bertoldi is the President ofVennWorks.

 

Based on amended Schedule 13D filed by certain members of theAmphion Group with the SEC on February 10, 2000, Amphion Ventures, AmphionPartners and Mr. Morgan share voting power with respect to certain of theshares owned by them. Also, based on the Schedule 13D, Mr. Morgan sharesvoting power for the shares held by Amphion Investments, Antiope Partners andcertain other shares held by Amphion Partners. Mr. Morgan disclaimsbeneficial ownership of the shares held by each of the Amphion Group.

 
| ** **                     | ** ** | **Voting  Common** | ** ** | **Series  2005  Preferred** | ** ** | **Series  2006B  Preferred** | ** ** | **Series  2007  Preferred** | ** ** | **Series  2008B  Preferred** | ** ** | **Warrants** | ** ** | **Options** | ** ** | **Total**  | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------|------------|-------------|------------|------------|------------|
| Amphion Ventures LP            |       | 9,219,305          |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 9,219,305  |       |
| VennWorks LLC                  |       | 5,677,006          |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 5,677,006  |       |
| Amphion Innovations plc        |       | 670,000            |       | 1,475,906                   |       | 150,000                      |       | —                      |       | —                       |       | 3,818,845    | (1)        |        |       | 6,114,751  |       |
| Mr. Morgan                |       | 774,009            | (2)        | 294,118                     |       | 300,000                      |       | 250,000                     | (3)        | 666,667                      | (4)        | 1,252,451    | (5)        | 186,293     | (6)        | 3,723,538  |       |
| Antiope Partners LLC           |       | 1,109,182          |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 1,109,182  |       |
| Mr. Bertoldi              |       | —             |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | 321,293     | (7)        | 321,293    |       |
| Amphion Investments LLC        |       | 44,000             |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 44,000     |       |
| Amphion Partners LLC           |       | 28,125             |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 28,125     |       |
| Amphion Capital Management LLC |       | 16,700             |       | —                      |       | —                       |       | —                      |       | —                       |       | —       |       | —      |       | 16,700     |       |
| Total of Amphion Group         |       | 17,538,327         |       | 1,770,024                   |       | 450,000                      |       | 250,000                     |       | 666,667                      |       | 5,071,296    |       | 507,586     |       | 26,253,900 |       |

 

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(1)           Includes seventy-two different grants ranging in price($0.22 to $2.00) and expiration dates (January 28, 2010 to December 31,2014).

(2)           Includes 252,715 shares of common stock issued to Mrs. Morgan,the wife of Mr. Morgan.

(3)           25 preferred shares that convert ten thousand to one

(4)           66 and 2/3 preferred shares that convert ten thousandto one

(5)           Includes four different grants ranging in price ($0.75to $2.00) and expiration dates (January 28, 2010 to December 31,2014).

(6)           Options to purchase 186,293 shares of common stock thatare exercisable within 60 days.

(7)           Options to purchase 321,293 shares ofcommon stock that are exercisable within 60 days. .

 

The following table sets forth the number of shares of eachclass of stock beneficially owned as of March 31, 2010, by each directorwho beneficially owns equity securities and the executive officers of Axcess,and all of our directors and executive officers as a group. The businessaddress of each director and executive officer is c/o Axcess International, Inc.,16650 Westgrove Drive, Suite 600, Addison, Texas 75001. To Axcess’knowledge, each stockholder listed below has sole voting and investment powerwith respect to all shares of stock shown beneficially owned by thestockholder, except for Mr. Morgan’s beneficial ownership, which isdiscussed in the introduction to the previous table above.

 
| **Name of********Beneficial Owner** | ** ** | **Title of Class**              | ** ** | **Amount and  Nature of  Beneficial  Owner** | ** ** | **Percentage********of********Class** | ** ** | **Percentage  of Common****Voting Power** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| Richard C.E. Morgan                 |       | Voting Common Stock (1)         |       | 17,538,327                                   |       | 52.1                                  | %          | 40.4                                      | %          |
|                                |       | Series 2005 Preferred (2)  |       | 1,770,024                                    |       | 66.8                                  | %          | 4.1                                       | %          |
|                                |       | Series 2006B Preferred (3) |       | 450,000                                      |       | 64.3                                  | %          | 1.0                                       | %          |
|                                |       | Series 2007 Preferred      |       | 25                                           |       | 13.5                                  | %          | *                                         |       |
|                                |       | Series 2008B Preferred     |       | 66 2/3                                       |       | 83.3                                  | %          | 1.5                                       | %          |
|                                |       |                            |       |                                         |       |                                  |       |                                      |       |
| Robert J. Bertoldi                  |       | Voting Common Stock (4)         |       | 16,764,318                                   |       | 49.8                                  | %          | 38.6                                      | %          |
|                                |       | Series 2005 Preferred      |       | 1,475,906                                    |       | 55.7                                  | %          | 3.4                                       | %          |
|                                |       | Series 2006B Preferred     |       | 150,000                                      |       | 21.4                                  | %          | *                                         |       |
|                                |       |                            |       |                                         |       |                                  |       |                                      |       |
| Allan Griebenow                     |       | Voting Common Stock (5)         |       | 14,860                                       |       | *                                     |       | *                                         |       |
| Paul J. Coleman, Jr.           |       | Voting Common Stock (6)         |       | 80                                           |       | *                                     |       | *                                         |       |
| Allan L. Frank                      |       | Voting Common Stock (7)         |       | —                                       |       | *                                     |       | *                                         |       |
| Robert F. Hussey                    |       | Voting Common Stock (8)         |       | —                                       |       | *                                     |       | *                                         |       |
| Raj Bridgelall                      |       | Voting Common Stock (9)         |       | —                                       |       | *                                     |       | *                                         |       |
| Raymond Cavanagh                    |       | Voting Common Stock (10)        |       | —                                       |       | *                                     |       | *                                         |       |
| Benjamin Donohue                    |       | Voting Common Stock (11)        |       | —                                       |       | *                                     |       | *                                         |       |
|                                |       |                            |       |                                         |       |                                  |       |                                      |       |
| All Directors, Director             |       | Voting Common Stock             |       | 17,553,267                                   |       | 52.2                                  | %          | 40.4                                      | %          |
| Nominees and                        |       | Series 2005 Preferred      |       | 1,770,024                                    |       | 66.8                                  | %          | 4.1                                       | %          |
| Executive Officers as               |       | Series 2006B Preferred     |       | 450,000                                      |       | 64.3                                  | %          | 1.0                                       | %          |
| a group (10 individuals)            |       | Series 2007 Preferred      |       | 25                                           |       | 13.2                                  | %          | *                                         |       |
|                                |       | Series 2008B Preferred     |       | 66 2/3                                       |       | 83.3                                  | %          | 1.5                                       | %          |

 

----

*             Less than 1%.

 

(1)           The number of shares of voting common stock includes521,294 shares held directly, 16,764,318 shares held by other entities withinthe Amphion Group (defined in Note 1 to the immediately preceding table above),252,715 shares owned by Mr. Morgan’s wife. However, the number of shares of voting common stock excludes 1,252,451shares that Mr. Morgan has the right to acquire pursuant to option andwarrant agreements that are exercisable within 60 days, 3,818,845 shares thatentities within the Amphion Group have the right to acquire pursuant to warrantagreements that are exercisable within 60 days. As detailed in Note 1 to theimmediately preceding table above, Mr. Morgan disclaims beneficialownership of all shares beneficially owned by entities within the AmphionGroup.

 

(2)           The number of shares of Series 2005 Preferredstock includes 294,118 shares held directly and 1,475,906 shares held by otherentities within the Amphion Group (defined in Note 1 to the immediatelypreceding table above).

 

(3)           The number of shares of Series 2006B Preferredstock includes 300,000 shares held directly and 150,000 shares held by otherentities within the Amphion Group (defined in Note 1 to the immediatelypreceding table above).

 

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(4)            Includes 16,764,318 shares held by other entitieswithin the Amphion Group (defined in Note 1 to the immediately preceding tableabove).  However, excludes 321,293 shares that Mr. Bertoldi has theright to acquire pursuant to option and warrant agreements  that are exercisable within 60 days and3,818,845 shares that entities within the Amphion Group have the right toacquire pursuant to option and warrant agreements that are exercisable within60 days. As detailed in Note 1 to the immediately preceding table above, Mr. Bertoldidisclaims beneficial ownership of all shares beneficially owned by entitieswithin the Amphion Group.

 

(5)            Includes 14,580 shares of common stock held directlyby Mr. Griebenow and 280 shares owned jointly with his wife.  Excludes 1,031,072 shares that Mr. Griebenowhas the right to acquire pursuant to option agreements that are exercisablewithin 60 days.

 

(6)            Includes 80 shares of common stock held directly by Mr. Colemanand excludes 236.293 shares that Mr. Coleman has the right to acquirepursuant to option agreements that are exercisable within 60 days.

 

(7)            Excludes 806,968 shares that Mr. Frank has theright to acquire pursuant to options that are exercisable within 60 days.

 

(8)            Excludes 226,293 shares that Mr. Hussey has theright to acquire pursuant to options that are exercisable within 60 days.

 

(9)            Excludes 212,500 shares that Mr. Bridgelall hasthe right to acquire pursuant to options that are exercisable within 60 days.

 

(10)          Excludes 152,500 shares that Mr. Cavanagh has theright to acquire pursuant to options that are exercisable within 60 days.

 

(11)           Excludes 240,717 shares that Mr. Donohuehas the right to acquire pursuant to options that are exercisable within 60days.

 

**Item 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.**

** **

**Amphion Investment LLC**

 

Axcess entered into a6.75% demand note with Amphion Investments, LLC, dated January 25, 2002.The borrowings are unsecured.  Thenote was due December 31, 2007, Axcessreached an Agreement with Amphion Investments LLC to extend the maturity of thenote to December 31, 2011.  Axcessagreed to increase the interest rate from 5.0% to 5.5%. During 2009 and2008, there were $21,658 and $21,718 of interest expensed for the AmphionInvestment LLC note, respectively. Accrued interest for the Amphion Investment note were $123,859 and$102,201 at December 31, 2009 and 2008, respectively.  As of December 31,2009 the outstanding amount is $393,787.

 

**PV Proceeds Holdings Inc.**

 

Axcessreached an Agreement to Amend Purchase Note and Payment Term with PV ProceedsHoldings, Inc. the holders of a $4.0 million of non-interest bearing notethat was due December 31, 2002 and was in default.  PV Proceeds consented to a five-yearextension of the note with an interest rate of 5% per annum from January 1,2003 payable in full at maturity of December 31, 2007.  As further consideration for entering intothe agreement Axcess granted to PV Proceeds Holdings, Inc. a warrant topurchase up to 500,000 shares of common stock of Axcess.  The warrants had an exercise price of twodollars ($2.00) per share and expired on February 14, 2008.  Axcesshas also agreed to certain provisions that would further reduce the principalamount over time.

 

PVProceeds consented to a five-year extension of the note with an interest rateof 5.5% per annum from January 1, 2008 payable in full at maturity of December 31,2011.  During 2009 and 2008, there were$135,551 and $136,128 of interest expensed for the PV Proceeds Holdings note,respectively.  Accrued interest for thePV Proceeds Holdings note were $1,110,710 and $975,159 at December 31,2009 and 2008, respectively.  The balanceas of December 31, 2009 was $2,464,559.

 

**AmphionInnovations plc**

 

On December 17, 2007and through March 9, 2009, Axcess has entered into multiple convertiblenotes with Amphion Innovations plc.  Ifwithin a specific time period Axcess completes an offering of any of itssecurities, and the aggregate proceeds to Axcess are at least $1,000,000 (“Transaction”)then Amphion would have had the option to convert these notes on the same termsas the completed offering.  If the loansare not repaid or converted prior to their maturity date then Axcess shallissue to Amphion a warrant to purchase Axcess Common Shares at the closingprice on the given date equivalent to ten percent (10%) of the outstandingamount (i.e. amount outstanding divided by closing stock price times 10%).  If the amount is not repaid or convertedprior to the next thirty days then Axcess will issue another warrant equal toan additional 10% and that will continue every thirty (30) days until Axcesshas issued five warrants.  These noteshave been accounted for in accordance with generally accepted accountingprincipals. On October 28, 2009 Amphion elected to convert the entireoutstanding balance of $1,038,273 and accrued unpaid interest of $79,153 intothe 2009 Convertible Note.  As of December 31,2009 the outstanding principal balance on all of the outstanding notes is $0. During 2009,there were $43,652 of interest expensed for the Amphion Innovation notes.  Accrued interest for the Amphion Innovationnotes were $0 and $35,501 at December 31, 2009 and 2008, respectively.

 

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The Company issued877,377 (321,144 during the 12 months ended December 31, 2009) warrantswith strike prices that range from $0.22 to $0.51 with a weighted average of$0.26 during the twelve months ended December 31, 2009.  TheCompany estimates the fair market value of the warrant using Black-ScholesValuation Model.  Key assumptions used toestimate the fair market value of the warrants include the exercise price(ranging from $0.22 to $1.43), the expected term (five years), the expectedvolatility of the Company’s stock over the warrants expected term (ranging from67% to 78%) and risk free interest rate (ranging from 2.11% to 4.27%).

 

**Amphion Capital Partners LLC**

 

In 2005, Axcess entered into a one year BorrowedEmployees and Advisory Agreement with Amphion Capital Partners LLC (“ACP”), toassist us in a variety of areas relating to investor relations and technologyresearch.  ACP will provide Axcess withthe use of employees who will be dedicated, on a part-time basis, to providethese services, in addition to the services of Robert Bertoldi and RichardMorgan.  ACP will provide Axcess thefollowing: (i) Identification, evaluation and advice on a variety of optionsthe Axcess to undertake to enhance its current technology offering, includingsources of complementary technology and technology partnering; (ii) Investorrelations services, including becoming the initial point of contact for thePreferred Equity Investors, providing both materials and information tointerested parties; (iii) Advice and assistance with strategies relatingto asset enhancement and maximization of asset utilization, including thoseassociated with and intellectual property assets.  In return Axcess has agreed to pay ACP $7,500per month in advance.  During 2006,Axcess elected to renew the contract and the payment was raised to $10,000 permonth in advance.  Axcess paid $0 totalfor 2009 and $20,000 total for 2008.

 

**Other Matters**

 

Richard C.E. Morgan, the Chairman of Axcess’ Board ofDirectors, is the owner of 100.00% of Antiope Partners, LLC, 60.01% of AmphionPartners, LLC, 60.00% of Amphion Investments, LLC, 0.49% of Amphion VenturesLP, 60.00% of Amphion Capital Management LLC, 16.90% of Amphion Innovations PLCand 9.80% of VennWorks, LLC.  Mr. Morgandisclaims beneficial ownership of all of Axcess shares held by these entities.

 

Robert J. Bertoldi, a director of Axcess, is the ownerof 4.54% of Amphion Innovations PLC, 33.98% of Amphion Partners, LLC, 40.00% ofAmphion Investments, LLC, 40.00% of Amphion Capital Management LLC, 0.07% ofAmphion Ventures LP, and 4.71% of VennWorks, LLC.  Mr. Bertoldi disclaims beneficialownership of all of Axcess shares held by these entities.

 

**Audit Committee**.

 

The Audit Committee is composed of Robert J. Bertoldi,Paul J. Coleman, Jr. and Robert F. Hussey. The audit committee held fourmeetings during our 2009 Fiscal Year.

 

Our audit committee assists our board of directors infulfilling its responsibilities for oversight and supervision of financial andaccounting matters. The chairman of the audit committee is Robert F. Hussey.Our audit committee’s responsibilities include, among others (i) recommendingto the board of directors the engagement of the external auditor and the termsof the external auditor’s engagement; (ii) overseeing the work of theexternal auditor, including dispute resolution between management and theexternal auditor, if required; (iii) pre-approving all non-audit serviceto be provided to us by our external auditor; (iv) reviewing our financialstatements, management’s discussion and analysis and annual and interimearnings press releases before this information is publicly disclosed; (v) assessingthe adequacy of procedures for our public disclosure of financial information;and (vi) establishing procedures to deal with complaints received by usrelating to our accounting and auditing matters. We have adopted, along withour audit committee, a written charter of the audit committee setting out themandate and responsibilities of the audit committee.

 

Accordingly, the Audit Committee discusses with Hein &Associates, LLP, our auditors, our audited financial statements, including,among other things the quality of our accounting principles, the methodologiesand accounting principles applied to significant transactions, the underlyingprocesses and estimates used by our management in our financial statements andthe basis for the auditor’s conclusions regarding the reasonableness of thoseestimates, in addition to the auditor’s independence.

 

**Audit Committee Financial Expert**

 

Robert F Hussey and Robert J. Bertoldi serve as ouraudit committee financial experts. Mr. Bertoldi is not an “independentdirector”, as defined in the rules on Nasdaq Stock Market.

 

**Item 14. PRINCIPAL ACCOUNTINGFEES AND SERVICES.**

 

The following table presents fees for professionalaudit services rendered by Hein & Associates LLP for the audit ofAxcess International Inc.’s annual consolidated financial statements for theyears ended December 31, 2008 and December 31, 2007 and fees billedfor other services rendered by Hein & Associates LLP during thoseperiods.

 

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| ** **             | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Audit fees (1)         |       | $                           | 74,825     |                        | $          | 82,217 |   |
| Audit related fees (2) |       | —                      |       | —                      |       |
| Tax fees (3)           |       | 12,100                      |       | 18,375                      |       |
| All other fees (4)     |       | —                      |       | —                      |       |
| Total                  |       | $                           | 86,925     |                        | $          | 100,592 |   |

 

----

(1)  Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Hein & Associates LLP in connection with statutory and regulatory filings or engagements.

 

(2)  Audit-Related Fees would normally consist offees billed for assurance and related services that are reasonably related tothe performance of the audit or review of the Company’s consolidated financialstatements and are not reported under “Audit Fees.”

 

(3)  Tax Fees consist of fees billed forprofessional services rendered for federal and state tax compliance, tax adviceand tax planning.

 

(4)  All Other Fees would normally consist of feesfor services other than the services reported above.

 

AxcessInternational, Inc.’s Audit Committee approves the engagement of anaccountant to render  all  audit and  non-audit  services prior  to  the engagement  of the accountant  based upon a proposal by the  accountant of estimated fees and scope of theengagement.  Axcess International, Inc.’sAudit Committee has received the written disclosure and the letter from Hein &Associates LLP required by Independence Standards Board Standard No. 1, ascurrently in effect, and has discussed with Hein & Associates LLPtheir independence.

 

**Item 15. EXHIBITS AND FINANCIALSTATEMENT SCHEDULES.**

 
| ** **                                                                                                  | **Page** |
|-------------------------------------------------------------------------------------------------------------|----------|
| Report of  Hein & Associates LLP, Independent Registered Public Accounting Firm                    | F-1      |
|                                                                                                        |     |
| Consolidated Financial Statements:                                                                          |     |
|                                                                                                        |     |
| Consolidated Balance  Sheets at December 31, 2009 and 2008                                             | F-2      |
| Consolidated  Statements of Operations for the Years Ended December 31, 2009 and 2008                  | F-3      |
| Consolidated  Statements of Stockholders’ Deficit for the Years Ended December 31,  2009 and 2008 | F-4      |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2009 and 2008                  | F-5      |
| Notes to  Financial Statements                                                                              | F-6      |

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Amended  and Restated Certificate of Incorporation of the Company. Incorporated herein  by reference to Exhibit A to the Company’s 2005 Definitive Proxy  Statement filed June 2, 2006.                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2                  |       | By-laws  of the Company. Incorporated herein by reference to Exhibit 3.2 to the  Company’s Registration Statement on Form S-1 (Registration  No. 2-80946).                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.3                  |       | Certificate of Designations, Preferences, Powers and  Rights of Series 2003B Preferred Stock, Series 2004 Preferred Stock  and Series 2005 Preferred Stock of the Company. Incorporated  herein by reference to Exhibit 3.3 to the Company’s Annual Report on  Form 10-K for the period ended December 31, 2008 filed on  March 31, 2009.                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.4                  |       | Certificate of Designations, Preferences, Powers and  Rights of Series 2006 Preferred Stock. Incorporated herein by reference  to Exhibit B to the Company’s 2005 Definitive Proxy Statement filed  June 2, 2006. Incorporated herein by reference to Exhibit 3.4  to the Company’s Annual Report on Form 10-K for the period ended  December 31, 2008 filed on March 31, 2009. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.5                  |       | Certificate of Designations, Preferences, Powers and  Rights of Series 2006B Preferred Stock. Incorporated herein by  reference to Exhibit 3.5 to the Company’s Annual Report on  Form 10-K for the period ended December 31, 2008 filed on  March 31, 2009.                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.6                  |       | Certificate of Designations, Preferences, Powers and  Rights of Series 2006C Preferred Stock. Incorporated herein                                                                                                                                                                                                                                                                                                       |

 

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|   |   | by  reference to Exhibit 3.6 to the Company’s Annual Report on  Form 10-K for the period ended December 31, 2008 filed on  March 31, 2009.                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                      |
| 3.7    |   | Certificate of Designations, Preferences, Powers and  Rights of Series 2007 Preferred Stock. Incorporated herein by  reference to Exhibit 3.7 to the Company’s Annual Report on  Form 10-K for the period ended December 31, 2008 filed on  March 31, 2009. |
|   |   |                                                                                                                                                                                                                                                                                      |
| 3.8    |   | Certificate of Designations, Preferences, Powers and  Rights of Series 2008 Preferred Stock. Incorporated herein by  reference to Exhibit 3.8 to the Company’s Annual Report on  Form 10-K for the period ended December 31, 2008 filed on  March 31, 2009. |
|   |   |                                                                                                                                                                                                                                                                                      |
| 3.9    |   | Certificate of Designations, Preferences, Powers and  Rights of Series 2008B Preferred Stock. Incorporated herein by  reference to Exhibit 3.02 and 9.01 to Form 8-K filed  October 28, 2008.                                                                         |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.1 + |   | Employment Agreement dated July 16, 1999, by and  between the Company and Allan Griebenow. Incorporated herein by reference to  Exhibit 10.19 to the Company’s Annual Report on Form 10-KSB for the  year ended December 31, 1999.                               |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.2 + |   | Axcess International Inc. 2005 Equity Incentive Plan.  Incorporated herein by reference to Exhibit A to the Company’s 2005  Definitive Proxy Statement filed June 1, 2005.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Agreement to amend purchase note and payment terms as  of December 12, 2003, executed by Axcess and PV Proceeds  holdings, Inc. Incorporated herein by reference to Exhibit 10.1 on  Form 8-K filed on December 16, 2003.                                        |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.4   |   | Amended demand note dated as of November 30,  2003, executed by Axcess payable to Amphion Investment LLC in the principal  amount of $393,787. Incorporated herein by reference to Exhibit 10.4 on  Form 8-K filed on December 16, 2003.                              |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.5   |   | Form of  Stock Purchase agreement for the 2004 Preferred Equity Offering. Incorporated  herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-QSB for the period ended March 31, 2004 filed on  May 14, 2004.                   |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.6   |   | Form of  Stock Purchase agreement for the 2005 Preferred Equity Offering. Incorporated  herein by reference to Exhibit 10.10 to the Company’s Quarterly Report  on Form 10-KSB for the period ended December 31, 2005 filed on  March 31, 2005.             |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.7   |   | Form of  Stock Purchase agreement for the 2006 Preferred Equity Offering. Incorporated  herein by reference to Exhibit 10.1 on Form 10-QSB filed on  August 11, 2006.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.8   |   | Form of  Stock Purchase agreement for the 2006B Preferred Equity Offering.  Incorporated herein by reference to Exhibit 10.1 on Form 8-K filed  on December 4, 2006.                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.9   |   | Form of  Stock Purchase agreement for the 2006C Preferred Equity Offering.  Incorporated herein by reference to Exhibit 10.10 on Form 10-KSB  filed on March 2, 2007.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.10  |   | Form of  Stock Purchase agreement for the 2007 Preferred Equity Offering. Incorporated  herein by reference to Exhibit 10.13 on Form SB-2 filed on  November 21, 2007.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.11  |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2005 Preferred Stock Offering. Incorporated herein by  reference to Exhibit 10.11 on Form 10-KSB filed on March 2,  2007.                                      |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.12  |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2006 Preferred Stock Offering. Incorporated herein by  reference to Exhibit 10.12 on Form 10-KSB filed on March 2,  2007.                                      |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.13  |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2006B Preferred Stock Offering. Incorporated herein  by reference to Exhibit 10.13 on Form 10-KSB filed on March 2,  2007.                                     |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.14  |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2006C Preferred Stock Offering. Incorporated herein  by reference to Exhibit 10.14 on Form 10-KSB filed on March 2,  2007.                                     |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.15  |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2007 Preferred Stock Offering. Incorporated herein by  reference to Exhibit 10.12 on Form 10-KSB filed on March 2,  2007.                                      |
|   |   |                                                                                                                                                                                                                                                                                      |
| 10.16  |   | Borrowed Employees and Advisory agreement between  Amphion Innovations US Inc. and Axcess. Incorporated herein by  reference to Exhibit 10.9 on Form 10-KSB for the period ended  December 31, 2006 filed on March 2, 2007.                                           |

 

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| 10.17   |   | Form of Convertible Notes executed by Axcess  payable to Amphion Innovations plc.                                                                                                                                                                 |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                   |
| 10.18   |   | Form of  Stock Purchase agreement for the 2008B Preferred Equity Offering. Incorporated  herein by reference to Exhibit 10.1 on Form 10-Q filed on  November 15, 2008.                                                             |
|    |   |                                                                                                                                                                                                                                                   |
| 10.19   |   | Form of  Voting Common Stock Purchase Warrant between the Company and certain  investors of the exempt 2008B Preferred Stock Offering. Incorporated herein  by reference to Exhibit 10.2 on Form 10-Q filed on  November 14, 2008. |
|    |   |                                                                                                                                                                                                                                                   |
| 10.20 * |   | Form of Convertible Notes between the Company and  certain investors.                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                   |
| 14.1 *  |   | Code  of Ethics for Senior Financial Officers dated and approved by the Board of  Directors on March 26, 2004. *                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                   |
| 21.1 *  |   | Subsidiaries  of the Company. *                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                   |
| 31.1 *  |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                 |
|    |   |                                                                                                                                                                                                                                                   |
| 31.2 *  |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 302 of the  Sarbanes-Oxley Act of 2002. *                                                                 |
|    |   |                                                                                                                                                                                                                                                   |
| 32.1 *  |   | Certification  of our President, Chief Executive Officer and Principal Executive Officer,  under Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                 |
|    |   |                                                                                                                                                                                                                                                   |
| 32.2 *  |   | Certification  of our Vice President, Chief Financial Officer, Secretary and Principal  Accounting and Financial Officer, under Section 906 of the  Sarbanes-Oxley Act of 2002. *                                                                 |
|    |   |                                                                                                                                                                                                                                                   |
| 99.1 *  |   | Audit  Committee charter. *                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                   |
| 99.2 *  |   | Nominating  and Governance Committee charter. *                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                   |
| 99.3 *  |   | Whistleblower  Policy. *                                                                                                                                                                                                                               |

 

----

*           Filed herewith

+           Denotes management contract or compensatory plan.

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theExchange Act, the registrant has caused this report to be signed on its behalfby the undersigned, thereunto duly authorized, on the 14th  day of April 2010.

 

 
|   | AXCESS INTERNATIONAL INC. |
|--------|---------------------------|
|   |                      |
|   |                      |   |
|   | By:                       | /s/ Richard C.E. Morgan |
|   |                      | Richard C.E. Morgan, Chairman of the Board |

 

In accordance with the Exchange Act, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities indicated, on the 14th  day of April 2010.

 

 
| **Signature**                  | ** ** | **Capacity**                                    |
|--------------------------------|------------|-------------------------------------------------|
|                           |       |                                            |
| /s/ Richard C.E. Morgan        |       | Chairman of the Board                           |
| Richard C.E. Morgan            |       |                                            |
|                           |       |                                            |
| /s/ Allan Griebenow            |       | Director, President and Chief Executive Officer |
| Allan Griebenow                |       | (Principal Executive Officer)                   |
|                           |       |                                            |
| /s/ Allan L. Frank             |       | Chief Financial Officer                         |
| Allan L. Frank                 |       | (Principal Accounting and Financial Officer)    |
|                           |       |                                            |
| /s/ Paul J.  Coleman, Jr. |       | Director                                        |
| Paul J. Coleman, Jr.      |       |                                            |
|                           |       |                                            |
| /s/ Robert J. Bertoldi         |       | Director                                        |
| Robert J. Bertoldi             |       |                                            |
|                           |       |                                            |
| /s/ Robert F. Hussey           |       | Director                                        |
| Robert F. Hussey               |       |                                            |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders of Axcess International, Inc.

 

We have audited the consolidated balance sheets ofAxcess International, Inc. as of December 31, 2009 and 2008, and therelated consolidated statements of operations, stockholders’ deficit, and cashflows for each of the two years in the period ended December 31,2009.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Axcess International, Inc. as of December 31, 2009 and2008, and the results of its operations and its cash flows for each of the twoyears in the period ended December 31, 2009, in conformity with U.S.generally accepted accounting principles.

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.As discussed in Note 2 to the consolidated financial statements, the Company’srecurring losses from operations and resulting continued dependence upon accessto additional external financing raise substantial doubt about its ability tocontinue as a going concern. If the Company is unable to generate profitableoperations or raise additional capital it may be forced to seek protectionunder federal bankruptcy laws. Management’s plans in regard to these mattersare also described in Note 2. The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

We were not engaged to examine management’s assertionabout the effectiveness of Axcess International, Inc.’s internal controlover financial reporting as of December 31, 2009 included in theaccompanying Management Report on Internal Controls over Financial Reportingand, accordingly, we do not express an opinion thereon.

 

 

/s/HEIN & ASSOCIATES LLP

 

 

April 14,2010

Dallas,Texas

 

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Table of Contents

 

**AXCESSINTERNATIONAL INC.**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER31, 2009 and 2008**

 
| ** **                                                                                                                                                                                                            | ** ** | **2009**     | ** ** | **2008**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ASSETS                                                                                                                                                                                                                | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Current assets:                                                                                                                                                                                                       |       |         |       |         |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $            | 65,534     |         | $          | 51,392 |   |
| Accounts receivable - trade, net of allowance for  doubtful accounts of $24,715 and $27,424 for 2009 and 2008, respectively.                                                                                          |       | 142,213      |       | 92,844       |       |
| Inventory, net                                                                                                                                                                                                        |       | 83,387       |       | 142,782      |       |
| Prepaid expenses and other                                                                                                                                                                                            |       | 46,631       |       | 43,100       |       |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Total current assets                                                                                                                                                                                                  |       | 337,765      |       | 330,118      |       |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Property, plant and equipment, net                                                                                                                                                                                    |       | 16,727       |       | 18,969       |       |
| Deferred debt issuance costs                                                                                                                                                                                          |       | 12,500       |       | 18,750       |       |
| Other assets                                                                                                                                                                                                          |       | 40,213       |       | 53,062       |       |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Total assets                                                                                                                                                                                                          |       | $            | 407,205    |         | $          | 420,899 |   |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                            | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Current liabilities:                                                                                                                                                                                                  |       |         |       |         |       |
| Accounts  payable (includes $15,253 and $18,645 with related party in 2009 and 2008, respectively)                                                                                                                    |       | $            | 831,484    |         | $          | 905,354 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 331,899      |       | 502,566      |       |
| Accrued interest                                                                                                                                                                                                      |       | 1,246,812    |       | 1,112,862    |       |
| Deferred revenue                                                                                                                                                                                                      |       | 9,342        |       | 22,222       |       |
| Notes payable (includes $0 and $1,038,273 with a  related party in 2009 and 2008, respectively)                                                                                                                       |       | 162,000      |       | 1,200,273    |       |
| Dividends payable                                                                                                                                                                                                     |       | 31,514       |       | 280,394      |       |
| Total current liabilities                                                                                                                                                                                             |       | 2,613,051    |       | 4,023,671    |       |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Notes payable to stockholders (includes $1,791,213  and $393,787 with a related party in 2009 and 2008, respectively)                                                                                                 |       | 4,248,772    |       | 2,696,346    |       |
| Debt discount                                                                                                                                                                                                         |       | (682,478     | )          | (13,092      | )          |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Total liabilities                                                                                                                                                                                                     |       | 6,179,345    |       | 6,706,925    |       |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Commitments and contingencies  (Notes 2, 7 and 12)                                                                                                                                                                    |       |         |       |         |       |
| Stockholders’ deficit:                                                                                                                                                                                           |       |         |       |         |       |
| Convertible preferred stock, 10,000,000 shares  authorized in 2009 and 2008. Without liquidation preferences; $0.01 par  value, 4,550,211 and 6,125,211 shares issued and outstanding in 2009 and  2008, respectively |       | 45,502       |       | 61,252       |       |
| Common stock, $.01 par value, 70,000,000 shares  authorized in 2009 and 2008; 33,642,593 and 31,204,931 shares issued and  outstanding in 2009 and 2008, respectively.                                                |       | 336,426      |       | 312,050      |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 167,385,813  |       | 165,641,922  |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (173,539,881 | )          | (172,301,250 | )          |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Total stockholders’ deficit                                                                                                                                                                                      |       | (5,772,140   | )          | (6,286,026   | )          |
|                                                                                                                                                                                                                  |       |         |       |         |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                                      |       | $            | 407,205    |         | $          | 420,899 |   |

 

Seeaccompanying notes.

 

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**AXCESSINTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2009 and 2008**

 
| ** **                                                              | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Sales                                                                   |       | $          | 4,797,711  |       | $          | 1,504,924 |   |
| Cost  of sales                                                          |       | 1,866,085  |       | 796,005    |       |
|                                                                    |       |       |       |       |       |
| Gross  profit                                                           |       | 2,931,626  |       | 708,919    |       |
|                                                                    |       |       |       |       |       |
| Expenses:                                                               |       |       |       |       |       |
| Research  and development                                               |       | 1,077,208  |       | 2,229,590  |       |
| General  and administrative                                             |       | 1,475,135  |       | 1,507,703  |       |
| Selling  and marketing                                                  |       | 1,277,620  |       | 1,192,261  |       |
| Depreciation  and amortization                                          |       | 20,998     |       | 26,542     |       |
|                                                                    |       |       |       |       |       |
| Operating  expenses                                                     |       | 3,850,961  |       | 4,956,096  |       |
|                                                                    |       |       |       |       |       |
| Loss  from operations                                                   |       | (919,335   | )          | (4,247,177 | )          |
|                                                                    |       |       |       |       |       |
| Other  income (expense):                                                |       |       |       |       |       |
| Interest  expense                                                       |       | (311,065   | )          | (485,253   | )          |
| Gain (loss) on vendor  settlements, statuary write-off and other        |       | 87,032     |       | (42,511    | )          |
|                                                                    |       |       |       |       |       |
| Other  income (expense), net                                            |       | (224,033   | )          | (527,764   | )          |
|                                                                    |       |       |       |       |       |
| Net  loss                                                               |       | (1,143,368 | )          | (4,774,941 | )          |
|                                                                    |       |       |       |       |       |
| Preferred  stock dividend requirements                                  |       |       |       |       |       |
| Recurring                                                               |       | (95,263    | )          | (245,307   | )          |
| 2008 Preferred equity offering                                          |       | —     |       | (558,686   | )          |
| 2008B Preferred equity offering                                         |       | —     |       | (187,501   | )          |
|                                                                    |       |       |       |       |       |
| Preferred stock dividend  requirements                                  |       | (95,263    | )          | (991,494   | )          |
|                                                                    |       |       |       |       |       |
| Net  loss applicable to common stock                                    |       | $          | (1,238,631 | )          | $          | (5,766,435 | ) |
|                                                                    |       |       |       |       |       |
| Basic  and diluted net loss per share                                   |       | $          | (0.04      | )          | $          | (0.19 | ) |
|                                                                    |       |       |       |       |       |
| Weighted  average shares of common stock outstanding, basic and diluted |       | 32,573,548 |       | 30,252,074 |       |

 

Seeaccompanying notes.

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICIT**

**YEARS ENDED DECEMBER 31, 2008 and2007**

 
| ** **                                                        | ** ** | **CONVERTIBLE  PREFERRED STOCK** | ** ** | **COMMON STOCK** | ** ** | ** **             | ** ** | ** **     | ** ** | ** **                       | ** ** | ** **                  | ** **  |
|-------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------------|------------|----------------|------------|----------------------------------|------------|-----------------------------|-------------|
| ** **                                                        | ** ** | **NUMBER  OF  SHARES**           | ** ** | **PAR  VALUE**   | ** ** | **NUMBER  OF  SHARES** | ** ** | **PAR  VALUE** | ** ** | **ADDITIONAL  PAID-IN  CAPITAL** | ** ** | **COMMON  STOCK  ISSUABLE** | ** **  | **ACCUMULATED  DEFICIT** | ** ** | **TOTAL  STOCKHOLDERS’  DEFICIT** | ** ** |
| Balance at December 31,  2007                                |       | 6,860,116                        |       | $                | 68,601     |                   | 29,304,927 |           | $          | 293,050                          |       | $                           | 162,947,266 |   | $ | 250 |   | $ | (167,281,002 | ) | $ | (3,971,835 | ) |
|                                                              |       |                             |       |             |       |                   |       |           |       |                             |       |                        |        |   |   |   |   |
| Conversion of 2003B convertible preferred shares                  |       | (110,000                         | )          | (1,100           | )          | 110,000                |       | 1,100          |       | —                           |       | —                      |        | — |   | — |   |
| Conversion of 2004 convertible preferred shares                   |       | (625,000                         | )          | (6,250           | )          | 625,000                |       | 6,250          |       | —                           |       | —                      |        | — |   | — |   |
| Conversion of 2006C convertible preferred shares                  |       | (100                             | )          | (1               | )          | 1,000,000              |       | 10,000         |       | (9,999                           | )          | —                      |        | — |   | — |   |
| Conversion of 2007 convertible preferred shares                   |       | (5                               | )          | —           |       | 75,000                 |       | 750            |       | (500                             | )          | (250                        | )           | — |   | — |   |
| Shares issued in conjunction with 2008 Preferred stock  offering  |       | 120                              |       | 1                |       | —                 |       | —         |       | 1,019,999                        |       | —                      |        | — |   | 1,020,000 |   |
| Shares issued in conjunction with 2008B Preferred  stock offering |       | 80                               |       | 1                |       | —                 |       | —         |       | 599,999                          |       | —                      |        | — |   | 600,000 |   |
| Conversion of accrued dividends                                   |       | —                           |       | —           |       | 90,004                 |       | 900            |       | 90,004                           |       | —                      |        | — |   | 90,904 |   |
| Warrants issued in conjunction with debt                          |       | —                           |       | —           |       | —                 |       | —         |       | 293,615                          |       | —                      |        | — |   | 293,615 |   |
| Warrants issued for services rendered                             |       | —                           |       | —           |       | —                 |       | —         |       | (7,612                           | )          | —                      |        | — |   | (7,612 | ) |
| Stock based compensation expense                                  |       | —                           |       | —           |       | —                 |       | —         |       | 709,150                          |       | —                      |        | — |   | 709,150 |   |
| Preferred stock dividends                                         |       | —                           |       | —           |       | —                 |       | —         |       | —                           |       | —                      |        | (245,307 | ) | (245,307 | ) |
| Net Loss                                                          |       | —                           |       | —           |       | —                 |       | —         |       | —                           |       | —                      |        | (4,774,941 | ) | (4,774,941 | ) |
|                                                              |       |                             |       |             |       |                   |       |           |       |                             |       |                        |        |   |   |   |   |
| Balance at December 31,  2008                                |       | 6,125,211                        |       | $                | 61,252     |                   | 31,204,931 |           | $          | 312,050                          |       | $                           | 165,641,922 |   | $ | — |   | $ | (172,301,250 | ) | $ | (6,286,026 | ) |
|                                                              |       |                             |       |             |       |                   |       |           |       |                             |       |                        |        |   |   |   |   |
| Conversion of 2003B convertible preferred shares                  |       | (1,575,000                       | )          | (15,750          | )          | 1,575,000              |       | 15,750         |       | —                           |       | —                      |        | — |   | — |   |
| Conversion of accrued dividends                                   |       | —                           |       | —           |       | 862,662                |       | 8,626          |       | 335,516                          |       | —                      |        | — |   | 344,142 |   |
| Warrants issued in conjunction with debt                          |       | —                           |       | —           |       | —                 |       | —         |       | 761,098                          |       | —                      |        | — |   | 761,098 |   |
| Stock based compensation expense                                  |       | —                           |       | —           |       | —                 |       | —         |       | 647,277                          |       | —                      |        | — |   | 647,277 |   |
| Preferred stock dividends                                         |       | —                           |       | —           |       | —                 |       | —         |       | —                           |       | —                      |        | (95,263 | ) | (95,263 | ) |
| Net Loss                                                          |       | —                           |       | —           |       | —                 |       | —         |       | —                           |       | —                      |        | (1,143,368 | ) | (1,143,368 | ) |
|                                                              |       |                             |       |             |       |                   |       |           |       |                             |       |                        |        |   |   |   |   |
| Balance at December 31,  2009                                |       | 4,550,211                        |       | $                | 45,502     |                   | 33,642,593 |           | $          | 336,426                          |       | $                           | 167,385,813 |   | $ | — |   | $ | (173,539,881 | ) | $ | (5,772,140 | ) |

 

See accompanying notes

 

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**AXCESS INTERNATIONAL INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**YEARS ENDED DECEMBER 31, 2009 and2008**

 
| ** **                                                                   | ** ** | **2009** | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
|                                                                         |       |     |       |       |       |
| Cash  flows from operating activities:                                       |       |     |       |       |       |
| Net  loss                                                                    |       | $        | (1,143,368 | )          | $          | (4,774,941 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |     |       |       |       |
| Depreciation  and amortization                                               |       | 20,998   |       | 26,542     |       |
| Gain  on vendor settlements and statutory write-off of payables              |       | 86,908   |       | —     |       |
| Amortization  of financing discount and issuance costs                       |       | (663,135 | )          | (1,421     | )          |
| Stock  based compensation expense                                            |       | 647,277  |       | 709,150    |       |
| Warrants  issued for services                                                |       | —   |       | (7,611     | )          |
| Inventory  impairment                                                        |       | 12,421   |       | 3,362      |       |
| Changes  in operating assets and liabilities:                                |       |     |       |       |       |
| Accounts  receivable                                                         |       | (49,369  | )          | 165,113    |       |
| Inventory                                                                    |       | 46,974   |       | 47,261     |       |
| Prepaid  expenses and other                                                  |       | (3,531   | )          | 34,406     |       |
| Other  assets                                                                |       | 2,492    |       | (9,571     | )          |
| Accounts  payable and accrued liabilities                                    |       | 629,874  |       | 1,312,302  |       |
| Net  cash used by operating activities                                       |       | (412,459 | )          | (2,495,408 | )          |
|                                                                         |       |     |       |       |       |
| Cash  flow from investing activities:                                        |       |     |       |       |       |
| Capital  expenditures                                                        |       | (8,399   | )          | (20,561    | )          |
| Net  cash used by investing activities                                       |       | (8,399   | )          | (20,561    | )          |
|                                                                         |       |     |       |       |       |
| Cash  flow from financing activities:                                        |       |     |       |       |       |
| Principal  payments on financing agreements                                  |       | (160,000 | )          | (100,000   | )          |
| Borrowings  from financing agreements                                        |       | 595,000  |       | 988,273    |       |
| Net  proceeds from issuance of common and preferred stock                    |       | —   |       | 1,619,999  |       |
| Net  cash provided by financing activities                                   |       | 435,000  |       | 2,508,272  |       |
|                                                                         |       |     |       |       |       |
| Net  increase / (decrease) in cash and cash equivalents                      |       | 14,142   |       | (7,697     | )          |
| Cash  and cash equivalents, beginning of year                                |       | 51,392   |       | 59,089     |       |
| Cash  and cash equivalents, end of year                                      |       | $        | 65,534     |       | $          | 51,392 |   |
|                                                                         |       |     |       |       |       |
| Supplemental  information:                                                   |       |     |       |       |       |
| Cash  paid during the year for interest                                      |       | $        | —     |       | $          | — |   |
|                                                                         |       |     |       |       |       |
| Supplemental disclosure of non-cash investing and  financing activities:     |       |     |       |       |       |
| Warrants issued with debt                                                    |       | $        | 761,098    |       | $          | 293,615 |   |
| Conversions of accrued dividends into common stock                           |       | 344,142  |       | 90,904     |       |
| Preferred stock dividends accrued                                            |       | 95,263   |       | 245,307    |       |
| Conversion of accrued interest into convertible  debt                        |       | 79,153   |       | —     |       |
| Conversion of preferred stock into common stock                              |       | 15,750   |       | 7,351      |       |

 

Seeaccompanying notes

 

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**AXCESS INTERNATIONAL, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**(1) Summaryof Significant Accounting Policies**

 

**(a) **          **Description of Business**

 

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

 

**(b) **          **CompanyOrganization and Basis of Presentation**

 

The accompanying consolidated financial statements includethe accounts of the Company and its majority-owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

The Company has received working capital in various formsfrom Amphion Ventures, L. P. and affiliates of Amphion Ventures, L. P.including Amphion Partners, Amphion Investments LLC, Antiope Partners LLC,VennWorks LLC, Amphion Capital Management LLC, and Amphion Innovations plc, NVW,LLC (collectively, the “Amphion Group”). The Amphion Group owns approximately52% of the outstanding voting common stock of the Company.

 

**(c) **          **Use of Estimates**

 

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that effect the amounts reportedin the financial statements and accompanying notes. As discussed below, theCompany makes significant assumptions in recording its allowance for doubtfulaccounts, inventory valuation, impairment of long-lived assets, warranty costs,the valuation allowance for deferred tax assets and the value of the componentsof equity and debt instruments. Actual results could differ from thoseestimates, and the differences may be significant.

 

**(d) **          **Cash and Cash Equivalents**

 

The Company considers all highly liquid debt instruments withoriginal maturities of three months or less to be cash equivalents.

 

**(e) **          **Inventory**

 

Inventory is valued at the lower of cost or market using thefirst-in, first-out method. Inventory, net of valuation allowance of $8,392 and$5,580 at December 31, 2009 and 2008, comprised of the following:

 
| ** **      | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------|------------|-----------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                           | 37,838     |                        | $          | 24,275 |   |
| Work-in-process |       | 104                         |       | 104                         |       |
| Finished goods  |       | 45,445                      |       | 118,403                     |       |
|            |       | $                           | 83,387     |                        | $          | 142,782 |   |

 

TheCompany recorded charges of $12,421 and $3,362 for inventory impairment duringthe year ended December 31, 2009 and 2008, respectively.  The amounts reflect items that are no longerused in the current production of our products and are no longer required forwarranty repairs.

 

The components of cost of sales are summarized as follows:

 
| ** **           | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Product Cost         |       | $                           | 1,842,305  |                        | $          | 757,371 |   |
| Warranty Expense     |       | 11,359                      |       | 35,272                      |       |
| Inventory Impairment |       | 12,421                      |       | 3,362                       |       |
| Cost of Sales        |       | $                           | 1,866,085  |                        | $          | 796,005 |   |

 

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**(f)            Warranty Reserve**

 

The Company has established a warranty reserve for warrantycosts.  Reserves are estimated based onhistorical experience, current products being sold and management’sestimates.  The Company provides astandard one year warranty program for its products.  The warranty reserve for warranty costsrelated to continuing operations was $29,729 and $30,190 at December 31,2009 and 2008, respectively.  Thewarranty reserve represents a significant estimate and actual results coulddiffer from the estimates.  The followingtable provides the activity through the warranty accounts as recorded andcharged against the reserve for the years ended December 31, 2009 and2008.

 
| ** **                | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Beginning accrued balance |       | $                           | 30,190     |                        | $          | 30,213 |   |
| Provision                 |       | 11,359                      |       | 35,466                      |       |
| Claims incurred           |       | (11,820                     | )          | (35,489                     | )          |
| Ending  accrued balance   |       | $                           | 29,729     |                        | $          | 30,190 |   |

 

**(g)           Advertising expense**

 

Advertising expenses consists of the following for the yearsended December 31, 2008 and 2007.

 
| ** **                           | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Advertising and public relation fees |       | $                           | 41,500     |                        | $          | 90,000 |   |
| Trade shows and media events         |       | 18,558                      |       | 66,479                      |       |
| Newswire  costs                      |       | 17,220                      |       | 24,719                      |       |
| E-mail and marketing lists           |       | —                      |       | 23,863                      |       |
| Website and advertising design fees  |       | 5,390                       |       | 9,800                       |       |
| Joint marketing fees                 |       | 1,219                       |       | 8,410                       |       |
| Other                                |       | —                      |       | 4,817                       |       |
| Total                                |       | $                           | 83,887     |                        | $          | 228,088 |   |

 

**(h) **          **Property and Equipment**

 

Property and equipment are recorded at cost and depreciatedusing the straight-line method over the estimated useful lives of the assets. TheCompany capitalizes costs associated with software developed or obtained forinternal use when both the preliminary project stage is completed andmanagement has authorized further funding for the project, which it deemscompletion to be probable, and that the project will be used to perform thefunction intended. Capitalization of such costs ceases no later than the pointat which the project is substantially complete and ready for its intended use.The Company currently has no capitalized software development on its books.

 

**(i) **          **Impairment of Long-Lived Assets-and Long-Lived Assets to BeDisposed Of**

 

Long-lived assets and identifiable intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future net cash flows expected to be generated-by the asset. Ifsuch assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the asset exceeds thefair value of the assets based on estimated future cash flows. Assets to bedisposed of are reported at the lower of-the carrying amount or fair value lesscosts to sell. Revenues from the sale of products utilizing the Company’spurchased technologies have not grown according to expectations and the Companyhas experienced operating losses since the respective dates ofacquisition.  The Company believes thatassumptions made in projecting future cash flows for this evaluation arereasonable. However, if future actual results do not meet expectations, theCompany may be required to record an additional impairment charge, the amountof which could be material to the results of its operations and financialposition. During the years ended December 31, 2009 and 2008 the Companyrecorded no impairment charges for its long-lived assets.

 

**(j) **           **Financial Instruments**

 

Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of trade accounts receivable.Products are sold to customers, including distributors and integrators, 

 

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locatedprincipally in the United States. The Company continually evaluates thecreditworthiness of its customers’ financial condition and generally does notrequire collateral. The Company evaluates the collectability of its accountsreceivable based on a combination of factors. In circumstances where theCompany is aware of a specific customer’s inability to meet its financialobligations to us, the Company records a specific reserve for bad debts againstamounts due. The Company has not experienced significant losses onuncollectible accounts receivable.

 

The carrying amounts of cash equivalents, accountsreceivable, accounts payable, accrued liabilities and notes payable approximatefair value because of the short-term maturity of these instruments.

 

**(k) **          **Revenue Recognition**

 

TheCompany’s revenue transactions consist predominately of sales of products tocustomers. The Company applies ASC Topic, 605, Revenue, (formerly known as, the Securitiesand Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104*Revenue Recognition* and Emerging IssuesTask Force (“EITF”) Issue 00-21*RevenueArrangements with Multiple Deliverables*.) Specifically, the Company recognizes revenuewhen persuasive evidence of an arrangement exists, title and risk of loss havepassed to the customer, generally upon shipment, the price is fixed ordeterminable and collect ability is reasonably assured. For those arrangementswith multiple elements, or in related arrangements with the same customer, thearrangement is divided into separate units of accounting if certain criteriaare met, including whether the delivered item has stand-alone value to thecustomer and whether there is objective and reliable evidence of the fair valueof the undelivered items. The consideration received is allocated among theseparate units of accounting based on their respective fair values, and theapplicable revenue recognition criteria are applied to each of the separateunits. In cases where there is objective and reliable evidence of the fairvalue of the undelivered item in an arrangement but no such evidence for thedelivered item, the residual method is used to allocate the arrangementconsideration. For units of accounting which include more than one deliverable,the Company generally recognizes all revenue and cost of revenue for the unitof accounting over the period in which the last undelivered item is delivered.

 

Atthe time revenue is recognized, the Company establishes an accrual forestimated warranty expenses associated with sales, recorded as a component ofcost of revenues. The Company’s customers and distributors generally do nothave return rights.

 

Wedefer revenue for sales where we have not completed the earnings process inaccordance with the applicable revenue recognition guidance.  These deferred amounts are reflected asliabilities in our consolidated financial statements as deferred revenue.  Deferred revenue was $9,342 as of December 31,2009 and $22,222 as of December 31, 2008.

 

**(l) **          **Research and Development Costs**

 

Research and development costs are expensed as incurred.

 

**(m) **        **Depreciation and Amortization**

 

Depreciation of property and equipment is recorded using thestraight-line method over the estimated useful lives of the respective assets.Internally developed software and purchased technologies are amortized over theestimated useful lives of the respective technology.

 

**(n) **          **Stock-Based Compensation**

 

ASC Topic 718, *Compensation— Stock Compensation*requires the cost of all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe consolidated financial statements based on the grant date fair value ofthose awards.  In accordance with ASC Topic 718, this cost is recognizedover the period for which an employee is required to provide service inexchange for the award.  Stock based compensation expense for 2009 and2008 was $647,277 and $709,150, respectively which was recorded in operatingexpenses.  This expense decreased netprofit per share by $0.020 and $0.023 for 2009 and 2008, respectively.  The Company did not recognize a tax benefitfrom the stock compensation expense because the Company considers it is morelikely than not the related deferred tax assets, which have been reduced by afull valuation allowance, will not be realized.

 

The Black-Scholes option-pricing model was used to estimatethe option fair value.  The optionpricing model requires a number of assumptions, of which the most significantare, expected stock price volatility, risk-free interest rate and the expectedoption term (the amount of time from the grant date until the options areexercised or expire).  Expectedvolatility was calculated based upon actual historical stock price 

 

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movementsover the most recent periods at the time of the grants equal to the expectedoption term, which is consistent with ASC Topic 718 (Securities and ExchangeCommission (SEC) Staff Accounting Bulletin (SAB) No. 107).    The chart below shows the weighted averageBlack-Scholes fair value assumptions used for the year ended December 31,2009.  There were no issuances during theyear ended December 31, 2008.

 
| **Weighted Average  Black-Scholes Fair Value Assumptions** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Risk  free interest rate                                   |       | 3.59      | %          | —   |       |
| Expected  life                                             |       | 10 years  |       | —   |       |
| Expected  volatility                                       |       | 110       | %          | —   |       |
| Expected  dividend yield                                   |       | 0.00      | %          | —   |       |
| Number  of options granted                                 |       | 1,907,000 |       | —   |       |
| Fair  value of options granted                             |       | $         | 709,595    |     | —     |   |
| Weighted  average fair value of options granted            |       | $         | 0.61       |     | —     |   |

 

The following table illustrates the effecton operating expenses:

 
| ** **                          | ** ** | **Twelve Months Ended   December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Research  and development expense   |       | $                                           | 220,416    |   | $ | 266,419 |   |
| General  and administrative expense |       | 306,165                                     |       | 322,864 |   |
| Selling  and marketing expense      |       | 120,696                                     |       | 119,867 |   |
| Total                               |       | $                                           | 647,277    |   | $ | 709,150 |   |

 

**(o) **          **Income Taxes**

 

Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Valuationallowances are established when necessary to reduce deferred tax assets to theamount more likely than not to be realized. Income tax expense is the total oftax payable for the period and the change during the period in deferred taxassets and liabilities.

 

**(p) **          **Net Loss Per Common Share**

 

Basic loss per share data is computed by dividing the netloss applicable to common stock by the weighted average number of common sharesoutstanding during the year. Diluted earnings per share, which includes thedilutive effect of the conversion of convertible preferred stock and theconvertible debt and exercise of options and warrants has not been presentedbecause, due to the net losses recorded by the Company for all periodspresented, their inclusion would be anti-dilutive. Conversion of convertiblepreferred stock, convertible debt and the exercise of options and warrantswould result in 64,052,854 and 57,525,586 common shares outstanding at December 31,2009 and 2008, respectively.

 
| **Earnings Per  Share**                                            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net loss                                                           |       | $          | (1,143,368 | )          | $          | (4,774,941 | ) |
| Dividends to preferred stockholders                                |       | (95,263    | )          | (991,494   | )          |
| Loss applicable to common stock (Numerator)                        |       | (1,238,631 | )          | (5,766,435 | )          |
|                                                               |       |       |       |       |       |
| Weighted average shares of common stock  outstanding (Denominator) |       | 32,573,548 |       | 30,252,074 |       |
| Basic and diluted net loss per common share                        |       | $          | (0.04      | )          | $          | (0.19 | ) |

 

**(q) **          **Significant Customers**

 

During the twelve months ended December 31, 2009, we hadone customer who accounted for 76% of our overall revenue.  During the twelve months ended December 31,2008, we had two customers who accounted for 32% of our overall revenue.

 

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**(r) **          **Recent Accounting Pronouncements**

 

In June 2003, theSecurities and Exchange Commission (“SEC”) adopted final rules under Section 404of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SECRelease No. 33-9072 on October 19, 2009.  Commencing with its annual report for theyear ending June 30, 2010, the Company will be required to include areport of management on its internal control over financial reporting. Theinternal control report must include a statement: A) of management’sresponsibility for establishing and maintaining adequate internal control overits financial reporting;  B) ofmanagement’s assessment of the effectiveness of its internal control overfinancial reporting as of year end; and C) of the framework used by managementto evaluate the effectiveness of the Company’s internal control over financialreporting.  Furthermore, it is requiredto file the auditor’s attestation report separately on the Company’s internalcontrol over financial reporting on whether it believes that the Company hasmaintained, in all material respects, effective internal control over financialreporting.

 

InMay 2009, the FASB issued ASC Topic 855 “*SubsequentEvents”*(formerly SFAS No. 165). The statement establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but prior to the issuance of financial statements. Thestandard is based on the same principles as those that currently exist in theauditing standards. ASC Topic 855 is effective for interim or annual reportingperiods after June 15, 2009. The statement requires the disclosure of thefinancial statements through the date the financial statements were issued.This statement became effective for the Company’s financial statements as of June 30,2009.  The adoption did not have asignificant impact on the Company’s financial statements; see Note 7 “SubsequentEvents.”

 

In June 2009, theFASB issued ASC Topic 105 “Accounting Standards Codification” (formerly SFAS168) ASC became the source of authoritative U.S. generally accepted accountingprinciples (GAAP) recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the Securities and ExchangeCommission (SEC) under authority of federal securities laws are alsosources of authoritative GAAP for SEC registrants. On the effective date ofthis Statement, the Codification will supersede all then-existing non-SEC accountingand reporting standards. All other non-grandfathered non-SEC accountingliterature not included in the Codification became non-authoritative. This Statement is effective for financialstatements issued for interim and annual periods ending after September 15,2009. The Company will adopt this statement during the third quarter of 2009.The implementation of this standard did not have a material impact on ourconsolidated financial statements.

 

 In October 2009,the FASB issued ASC Topic 605 “*MultipleElement Adjustments” (formerly ASU No. 2009-13),*which modifiesaccounting for multiple element arrangements by requiring that the separationof the arrangements be based on estimated selling prices based on entityspecific assumptions rather than fair value, eliminating the residual method ofallocation and requiring additional disclosures related to such arrangements.The standard is effective prospectively for arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.The Company is currently evaluating the impact of adopting ASC Topic 605.

 

Also in October 2009,the FASB issued ASC Topic 985 “*CertainRevenue Arrangements That Include Software Elements” (formerly ASU No. 2009-14),*which amends software revenue recognition guidance to eliminate fromits scope tangible products containing software components that functiontogether to deliver the tangible product’s essential functionality and toprovide guidance on how to allocate arrangement consideration to deliverablesin an arrangement that contain both tangible products and software. Thestandard is effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.The Company is currently evaluating the impact of adopting ASC 985.

 

**(s) ****         ****Accounting for Uncertainty inIncome Taxes**

 

The Company accounts forincome taxes under ASC Topic 740 (formerly SFAS 109),*Income Taxes*. Deferred income tax assets and liabilitiesare determined based upon differences between financial reporting and tax basesof assets and liabilities and are measured using the enacted tax rates and lawsthat will be in effect when the differences are expected to reverse. Avaluation allowance is recorded when it is more likely than not that someportion or all of a deferred tax asset will not be realized.

 

As a result of theimplementation of ASC Topic 740, we recognized no change in our recorded assetsor liabilities for unrecognized income tax benefits. Based on our analysis ofall material tax positions taken, management believes the technical merits ofthese positions are justified and expects that the full amount of thedeductions taken and associated tax benefits will be allowed.

 

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ASC Topic 740 requiresthe evaluation of a tax position as a two-step process. We must determinewhether it is more likely than not that a tax position will be sustained uponexamination, including the resolution of any related appeals or litigationprocesses, based on the technical merits of the position. If the tax positionmeets the “more likely than not” recognition threshold, then the tax benefit ismeasured and recorded at the largest amount that is greater than 50 percentlikely of being realized upon ultimate settlement. The re-assessment of our taxpositions in accordance with ASC Topic 740 did not result in any materialchange to our financial condition, results of operations or cash flows.

 

We have also assessed theclassification of interest and penalties, if any, related to income taxmatters. Pursuant to the application of ASC Topic 740, we have made anaccounting election to treat interest and penalties related to income taxmatters, if any, as a component of income tax expense rather than otheroperating expenses.

 

**(2) **          **Operations, Liquidity and GoingConcern**

 

Since inception, the Company has utilized the proceedsfrom a number of public and private sales of their equity securities, theexercise of options and warrants and more recently, convertible debt,short-term bridge loans from stockholders and preferred equity offerings tomeet their working capital requirements. At December 31, 2009, the Companyhad a working capital deficit of $2,275,286.

 

Our operations generatedlosses in 2009. Our cash increased to $65,534 at December 31, 2009 withoperating activities using $412,459 of cash. We funded operations through cashfrom convertible notes and gross margin from operations.  No assurance can be given that suchactivities will continue to be available to provide funding to us.  The Company’s business planfor 2010 is predicated principally upon the successful marketing of its RFIDproducts. During 2009, operating activities utilized approximately $0.4 millionof cash and approximately $2.5 million of cash during 2008. The Company raised$0.6 million of additional working capital during 2009 and $2.5 million ofadditional working capital during 2008 through Preferred Stock offerings andnotes payable. During 2009 we issued convertible notes to raise approximately$0.6 million and during 2008 we closed two preferred stock offerings to raisedapproximately $1.6 million and issued convertible notes to raise an additional$1.0 million.  The preferred shares aredesignated 2008 and 2008B.  The Companyissued 200 shares of Preferred Stock bearing no dividend and 1,600,000 warrantsto purchase the Company’s common stock exercisable for five years at $1.50 pershare.  In connection with theconvertible notes we issued 2,419,313 warrants to purchase the Company’s commonstock exercisable for five years with a strike price that ranged fro $0.22 to$1.31 per share  However, even with theadditional funding, the Company anticipates that its existing working capitalresources and revenues from operations will not be adequate to satisfy itsfunding requirements through 2010.

 

The Company working capitalrequirements will depend upon many factors, including the extent and timing oftheir product sales, their operating results, the status of competitiveproducts, and actual expenditures and revenues compared to their business plan.The Company is currently experiencing declining liquidity, losses from operationsand negative cash flows, which make it difficult for the Company to meet theircurrent cash requirements, including payments to vendors, and may jeopardizetheir ability to continue as a going concern. The Company intends to addresstheir liquidity problems by controlling costs, seeking additional funding(through capital raising transactions and business alliances) and maintainingfocus on revenues and collections.  TheCompany’s recurring losses from operations and resulting continued dependenceon access to external financing raises substantial doubts about the Company’sability to continue as a going concern.

 

If the Company lossescontinue, the Company will have to obtain funds to meet their cash requirementsthrough business alliances, such as strategic or financial transactions withthird parties, the sale of securities or other financing arrangements, or theCompany may be required to curtail their operations, seek a merger partner, orseek protection under federal bankruptcy laws. Any of the foregoing may be onterms that are unfavorable to the Company or disadvantageous to existingstockholders. In addition, no assurance may be given that the Company will besuccessful in raising additional funds or entering into business alliances, orthat the Company will continue as a going concern.

 

**(3)****          ****Prepaid Expenses and Other CurrentAssets**

 

Prepaid expenses and other consists of the following:

 
| ** **          | ** ** | **December 31,  2009** | ** ** | **December 31,   2008** | ** ** |
|---------------------|------------|-----------------------------|------------|------------------------------|------------|
| Prepaid insurance   |       | $                           | 19,165     |                         | $          | 19,415 |   |
| Prepaid trade shows |       | 12,410                      |       | —                       |       |
| Prepaid other       |       | 15,056                      |       | 23,685                       |       |
|                |       | $                           | 46,631     |                         | $          | 43,100 |   |

 

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**(4) **          **Property, Plant and Equipment**

 

Property, plant and equipment consist of the following:

 
| ** **                                 | ** ** | **December 31,    2009** | ** ** | **December 31,    2008** | ** ** | **Amortization/  Depreciation  Period** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|
| Leasehold  improvements                    |       | $                             | 66,435     |                          | $          | 66,435                                  |       | Lease  term |   |
| Machinery  and equipment                   |       | 1,834,501                     |       | 1,826,102                     |       | 5  years                                |       |
| Furniture  and fixtures                    |       | 133,175                       |       | 133,175                       |       | 5 to  10 years                          |       |
|                                       |       | 2,034,111                     |       | 2,025,712                     |       |                                    |       |
| Accumulated  depreciation and amortization |       | (2,017,384                    | )          | (2,006,743                    | )          |                                    |       |
| Property,  plant and equipment, net        |       | $                             | 16,727     |                          | $          | 18,969                                  |       |   |   |

 

As of December 31, 2009 and 2008, respectively, theCompany had $28,483 and $38,840 of additional equipment held at one theircontract manufacturers that is recorded in the other asset section of thebalance sheet. Total depreciation expense was $20,998 and $26,542 during 2009and 2008, respectively. The depreciation included $10,357 of depreciation forequipment held at contract manufactures during 2009 and $12,946 during 2008.

 

**(5)****          ****Gain (loss) on vendor settlements, statuary write-off and other**

 

The Company recognized $87,032 and ($42,511) during 2009 and2008, respectively, relating to the expiration of the statue of limitationsrelating to trade accounts payables. Gain (loss) on vendor settlements, statutory write-off, prior yearrefunds and other consists of the following:

 
| ** **                             | ** ** | **December 31,    2009** | ** ** | **December 31,    2008** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Expiration of statuette of limitations |       | $                             | 86,932     |                          | $          | — |   |
| Prior year refunds                     |       | 100                           |       | 4,463                         |       |
| Other                                  |       | —                        |       | (46,974                       | )          |
|                                   |       | $                             | 87,032     |                          | $          | (42,511 | ) |

 

**(6)****          ****Accrued Liabilities**

 

Accrued liabilities consist of the following:

 
| ** **                                                   | ** ** | **December 31,    2009** | ** ** | **December 31,    2008** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Accrued  vacation                                            |       | $                             | 153,398    |                          | $          | 211,332 |   |
| Accrued  professional fees, litigation settlements and other |       | 178,501                       |       | 291,234                       |       |
|                                                         |       | $                             | 331,899    |                          | $          | 502,566 |   |

 

**(7)****          ****Lease Obligations**

 

We lease our corporate headquarters in Addison, Texas underan operating lease with a five year term, which began in August 2008. Rentexpense is calculated using the straight-line method over the lease term. Wealso leased a software development facility in Costa Mesa, CA under anoperating lease with a one year term, which expired in January 2009.

 

The following table sets forth the future minimum leasepayments on operating leases for the fiscal years ended December 31:

 
| 2010                                |   | $       | 107,223 |   |
|-------------------------------------|--------|---------|---------|--------|
| 2011                                |   | 112,229 |    |
| 2012                                |   | 117,236 |    |
| 2013                                |   | 70,091  |    |
| Total future minimum lease payments |   | $       | 406,779 |   |

 

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Rent expense for theyears ended December 31, 2009 and 2008 was $112,074 and $115,082,respectively.

 

**(8) ****         ****Notes Payable to Stockholders (including convertible notes payable)**

 

Notes payable to Stockholders consist of the following:

 
| ** **                                                                          | ** ** | **December 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| 5.50%  PV Proceeds Holdings, Inc., due December 31, 2011                  |       | $                            | 2,464,559  |                         | $          | 2,464,559 |   |
| 5.00%  2009 Convertible notes, due December 31, 2014                           |       | 1,552,426                    |       | —                       |       |
| 5.50%  Amphion Investment LLC note, due December 31, 2011                      |       | 393,787                      |       | 393,787                      |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due January 15, 2008  |       | —                       |       | 50,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due February 15, 2008 |       | —                       |       | 150,000                      |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due March 31, 2008    |       | —                       |       | 150,000                      |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due March 31, 2008    |       | —                       |       | 60,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due April 15, 2008    |       | —                       |       | 63,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due April 30, 2008    |       | —                       |       | 55,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due May 1, 2008       |       | —                       |       | 85,273                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due May 15, 2008      |       | —                       |       | 22,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due May 31, 2008      |       | —                       |       | 110,000                      |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due August 31, 2008   |       | —                       |       | 50,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due November 30, 2008 |       | —                       |       | 100,000                      |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due December 31, 2008 |       | —                       |       | 31,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due January 31, 2009  |       | —                       |       | 62,000                       |       |
| 5.00%  Amphion Innovations plc Convertible note payable, due January 31, 2009  |       | —                       |       | 50,000                       |       |
| Debt  discount                                                                      |       | (682,478                     | )          | (13,092                      | )          |
|                                                                                |       | 3,728,294                    |       | 3,883,527                    |       |
| Less  current maturities                                                            |       |                         |       |                         |       |
| PV  Proceeds Holdings, Inc                                                          |       | (162,000                     | )          | (162,000                     | )          |
| Amphion  Innovations plc                                                            |       | —                       |       | (1,038,273                   | )          |
| Non-current  notes payable to stockholders                                          |       | $                            | 3,566,294  |                         | $          | 2,683,254 |   |

 

The following table sets forth the maturities for notespayable for the fiscal years ended December 31 exclusive of debt discount:

 
| 2010   |   | $         | 162,000   |   |
|--------|--------|-----------|-----------|--------|
| 2011   |   | 2,696,346 |      |
| 2012   |   | —    |      |
| 2013   |   | —    |      |
| 2014   |   | 1,552,426 |      |
|   |   | $         | 4,410,772 |   |

 

**PV Proceeds Holdings, Inc.**

 

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

 

Axcessreached an Agreement to Amend Purchase Note and Payment Term with PV ProceedsHoldings, Inc.  PV Proceedsconsented to a five-year extension of the note with an interest rate of 5% perannum from January 1, 2003 payable in full at maturity of December 31,2007.  As further consideration forentering into the agreement Axcess granted to PV Proceeds Holdings, Inc. awarrant to purchase up to 500,000 shares of common stock of Axcess.  The warrants had an exercise price of $2.00per share and expired on the earlier of February 14, 2008 or forty-fivedays after the principal and all accrued interest are paid.  Axcess has also agreed to reduce theprincipal amount due first for 10% of equity proceeds and second 20% ofproceeds from options exercised.  Axcess also recorded deferred debt issuancecosts of $689,932 for the value of the 

 

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warrants, which were amortized over the life of theloan.  The deferred debt issuance costswere fully amortized as of December 31, 2007.

 

Axcess reached an Agreement with PV Proceeds Holdings, Inc.to extend the maturity of the note from December 31, 2007 to December 31,2011.  Axcess agreed to pay a $25,000extension fee and to increase the interest rate from 5.0% to 5.5%. Theextension fee is reflected as deferred debt issuance cost and amortized asinterest expense over the life of the extension.  As of December 31, 2009 the balance is$12,500.  Axcess has also agreed toreduce the principal amount due by 10% of any equity proceeds and 20% of allproceeds from options and warrants exercised and as a result owe $162,000 at December 31,2009.  As of December 31, 2009 nopayment has been issued in connection with the Series 2008 or 2008BPreferred Equity offerings. During 2009 and 2008, there were $135,551 and$136,128 of interest expensed for the PV Proceeds Holdings note.  Accrued interest for the PV Proceeds Holdingsnote were $1,110,710 and $975,159 at December 31, 2009 and 2008,respectively.  The balance as of December 31,2009 was $2,464,559.

 

**Amphion Investment LLC**

 

Axcess entered into a6.75% demand note with Amphion Investments, LLC, dated January 25, 2002.The borrowings are unsecured.  Thenote was due December 31, 2007, Axcessreached an Agreement with Amphion Investments LLC to extend the maturity of thenote to December 31, 2011.  Axcessagreed to increase the interest rate from 5.0% to 5.5%.  During 2009 and 2008, there were$21,658 and $21,718 of interest expensed for the Amphion Investment LLCnote.  Accrued interest for the AmphionInvestment note were $123,859 and $102,201 at December 31, 2009 and 2008,respectively.  As of December 31, 2009 the outstanding amount is $393,787.

 

**Amphion Innovations Convertible Note**

 

On December 17, 2007and through March 9, 2009, Axcess has entered into multiple convertiblenotes with Amphion Innovations plc.  Ifwithin a specific time period Axcess completes an offering of any of itssecurities, and the aggregate proceeds to Axcess are at least $1,000,000 (“Transaction”)then Amphion would have had the option to convert these notes on the same termsas the completed offering.  If the loansare not repaid or converted prior to their maturity date then Axcess shallissue to Amphion a warrant to purchase Axcess Common Shares at the closingprice on the given date equivalent to ten percent (10%) of the outstandingamount (i.e. amount outstanding divided by closing stock price times 10%).  If the amount is not repaid or convertedprior to the next thirty days then Axcess will issue another warrant equal toan additional 10% and that will continue every thirty (30) days until Axcesshas issued five warrants.  These noteshave been accounted for in accordance with generally accepted accounting principals.On October 28, 2009 Amphion elected to convert the entire outstandingbalance of $1,038,273 and accrued unpaid interest of $79,153 into the 2009Convertible Note.  As of December 31,2009 the outstanding principal balance on all of the outstanding notes is $0. During 2009,there were $43,652 of interest expensed for the Amphion Innovation notes.  Accrued interest for the Amphion Innovationnotes were $0 and $35,501 at December 31, 2009 and 2008, respectively.

 

The Company issued877,377 (321,144 during the 12 months ended December 31, 2009) warrantswith strike prices that range from $0.22 to $0.51 with a weighted average of$0.26 during the twelve months ended December 31, 2009.  TheCompany estimates the fair market value of the warrant using Black-ScholesValuation Model.  Key assumptions used toestimate the fair market value of the warrants include the exercise price(ranging from $0.22 to $1.43), the expected term (five years), the expectedvolatility of the Company’s stock over the warrants expected term (ranging from67% to 78%) and risk free interest rate (ranging from 2.11% to 4.27%).

 

**2009 Convertible Note**

 

OnOctober 29, 2009, Axcess entered into certain convertible notes withseveral institutional or otherwise accredited investors including AmphionInnovations plc, an affiliate of the Amphion Group, our majorityshareholder.  The aggregate principal ofthe notes is $1,552,426 and is unsecured (the “Convertible Notes”).  The Convertible Notes have a five percent perannum simple interest rate and will become due on December 31, 2014.  The Convertible Notes are convertible into3,104,852 common shares of Axcess at the option of each of the holders.  As part of the consideration for theConvertible Notes, Axcess also issued to the note holders warrants to purchasean aggregate of 1,552,426 common shares with an exercise price of $0.75. Thewarrants expire on December 31, 2014.

 

Aportion of the new Convertible Notes was issued for the conversion andretirement of older convertible notes currently held by Amphion Innovationsplc. The principal of the notes converted was $1,038,273 and had accruedinterest of $79,153.  Of the $835,000 ofnet new cash, $435,000 has been advanced and Amphion has not funded theremaining amount.

 

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** **

**(9) ****         ****Preferred Stock**

 

TheCompany has authorized 10,000,000 shares of convertible preferred stock, ofwhich shares designated in seven series are currently outstanding. Informationwith respect to the series of preferred stock outstanding at each balance sheetdate is summarized below.

 
| ** **                                                              | ** ** | **Series  2003B**               | ** ** | **Series  2005**                | ** ** | **Series  2006**                | ** ** | **Series  2006B**               | ** ** | **Series  2006C**                    | ** ** | **Series  2007**                     | ** ** | **Series  2008**                     | ** ** | **Series  2008B**                    | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| Number of shares authorized                                             |       | 2,750,000                       |       | 2,750,000                       |       | 1,200,000                       |       | 750,000                         |       | 200                                  |       | 205                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Stated value                                                            |       | $                               | 0.01       |                            | $          | 0.01                            |       | $                               | 0.01       |                                 | $          | 0.01                                 |       | $                                    | 0.01       |                                 | $          | 0.01 |   | $ | 0.01 |   | $ | 0.01 |   |
|                                                                    |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Number of shares issued and outstanding                                 |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Dec. 31, 2008                                                      |       | 1,575,000                       |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 185                                  |       | 120                                  |       | 80                                   |       |
| Dec. 31, 2009                                                      |       | —                          |       | 2,649,726                       |       | 1,200,000                       |       | 700,000                         |       | 100                                  |       | 185                                  |       | 120                                  |       | 80                                   |       |
|                                                                    |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Conversion ratio (or conversion price) of  preferred shares into common |       | 1 to 1 into voting common stock |       | 1 to 1 into voting common stock |       | 1 to 1 into voting common stock |       | 1 to 1 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       | 1 to 10,000 into voting common stock |       |
|                                                                    |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Liquidation preference                                                  |       | None                            |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                    |       |                            |       |                            |       |                            |       |                            |       |                                 |       |                                 |       |                                 |       |                                 |       |
| Dividend rights                                                         |       | 7% per annum, cumulative        |       | None                            |       | None                            |       | None                            |       | None                                 |       | None                                 |       | None                                 |       | None                                 |       |
|                                                                         |            |                                 |            |                                 |            |                                 |            |                                 |            |                                      |            |                                      |            |                                      |            |                                      |            |  |  |  |  |  |  |  |  |

 

*(a)**         **Series 2003B PreferredStock*

 

TheCompany completed a $3,132,500 exempt Preferred Stock offeringunder the Securities Act of 1933 Section 4(6) private offering ofpreferred stock to accredited and institutional investors offeringduring the fourth quarter of 2003. The Preferred Stock is designated as 2003BPreferred and each $70,000 unit consisted of 40,000 shares of Preferred Stockbearing a 7% dividend, approximately 2,000 shares of common stock and 40,000warrants to purchase the Company’s common stock exercisable for two years at$2.75 per share. The offering also included an automatic conversion into CommonStock on a one for one basis if the closing twenty-day average stock price isover $3.75.

 

During2009, there were $95,263 of dividends expensed for Series 2003B PreferredStock.  Dividends payable for the Series 2003Bpreferred stock were $31,514 and $280,394 at December 31, 2009 and 2008,respectively.

 

On July 1, 2009, as a result of the profitablequarter ended June 30,2009, all the 2003B Preferred Stock was converted to common stock in accordancewith the 2003B Preferred Stock designation provisions.  The mandatory conversion resulted in theissuance of 1,565,000 common shares to the former 2003B preferred stockholders. As of December 31, 2009 and 2008, the Company had 0 and 1,575,000 shares of Series 2003B Preferredshares outstanding, respectively.

 

*(b)**         **Series 2005 PreferredStock*

 

On December 30,2005, the Company raised $813,021 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005Preferred and consists of 956,495 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $0.85.  In addition, the Company issued 956,495warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Eachwarrant will be callable by the Company if and when the Company’s common stockshare price exceeds $3.00 per share for at least twenty (20) consecutivetrading days.  The Company used theproceeds for general working capital.

 

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On March 14,2006, the Company raised an additional $1,489,245 of additional working capitalthrough an exempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2005Preferred and consists of 1,752,055 shares of Preferred Stock bearing nodividends.  However, the shares are convertibleinto common stock on a one to one basis at $0.85.  In addition, the Company issued 1,752,055warrants to purchase the Company’s common stock exercisable for five years at$1.50 per share. Eachwarrant will be callable by the Company if and when the Company’s common stockshare price exceeds $3.00 per share for at least twenty (20) consecutivetrading days.  The Company will use theproceeds for general working capital.

 

As of December 31, 2009 and 2008, the Company had2,649,726 shares of Series 2005 Preferred shares outstanding,respectively.

 

*(c)**          **Series 2006 Preferred Stock*

 

On May 31,2006, the Company raised $1,200,000 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006Preferred and consists of 1,200,000 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 600,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share. Each warrant will becallable by the Company if and when the Company’s common stock share priceexceeds $5.00 per share for at least twenty (20) consecutive trading days.  The Company used the proceeds for generalworking capital.

 

As of December 31, 2009 and 2008, the Company had1,200,000 shares of Series 2006 Preferred shares outstanding.

 

*(d)**         **Series 2006B Preferred Stock*

 

On December 1,2006, the Company raised $750,000 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006BPreferred and consists of 750,000 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a one to one basis at $1.00.  In addition, the Company issued 750,000warrants to purchase the Company’s common stock exercisable for five years at$2.00 per share.  The Company will use the proceeds for generalworking capital.

 

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

 

As of December 31, 2009 and 2008, the Company had700,000 shares of Series 2006B Preferred shares outstanding.

 

*(e)**          **Series 2006C Preferred Stock*

 

On January 29,2007, the Company raised $2,000,000 of additional working capital through anexempt Preferred Stock offering under the Securities Act of 1933 Section 4(6) privateoffering of preferred stock to accredited and institutional investors.  The Preferred Stock is designated as 2006CPreferred and consists of 200 shares of Preferred Stock bearing nodividends.  However, the shares areconvertible into common stock on a ten thousand (10,000) to one (1) basisat $1.00.  In addition, the Companyissued 1,000,000 warrants to purchase the Company’s common stock exercisablefor five years at $2.00 per share.  The Companywill use the proceeds for general working capital.

 

The Company also recorded an additional preferred stockdividend of $2,000,000 relating to the beneficial conversion feature and thewarrants that were issued in connection with the 2006C Preferred Stock Equityclosed during January 2007.

 

As of December 31, 2009 and 2008, the Company had 100shares of Series 2006C Preferred shares outstanding, respectively.

 

*(f)**           **Series 2007 Preferred Stock*

 

Duringthe third quarter of 2007, the Company raised $2,050,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors.  ThePreferred Stock is designated as 2007 Preferred and consists of 205 shares ofPreferred Stock bearing no dividends. However, the shares are convertible into 

 

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commonstock on a one to ten thousand basis at $1.00. In addition, the Company issued 1,025,000 warrants to purchase theCompany’s common stock exercisable for five years at $2.00 per share.  The Company used the proceeds from the sale of the 2007Preferred stock for general working capital.

 

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

 

The Company also recorded an additional preferred stockdividend of $2,050,000 relating to the beneficial conversion feature and thewarrants that were issued in connection with the 2007 Preferred Stock Equity.

 

As of December 31, 2009 and 2008, the Company had 185shares of Series 2007 Preferred shares outstanding, respectively.

 

*(g) Series 2008Preferred Stock*

 

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

 

The Company also recordedan additional preferred stock dividend of $558,686 relating to the beneficialconversion feature and the warrants that were issued in connection with the2008 Preferred Stock Equity.

 

As of December 31,2009 and 2008, the Company had 120 shares of Series 2008 Preferred sharesoutstanding.

 

*(h) Series 2008BPreferred Stock*

 

Beginning on September 30,2008 the Company authorized the raising of $600,000 of additional workingcapital through an exempt Preferred Stock offering under the Securities Act of1933 Section 4(6) private offering of preferred stock to accreditedand institutional investors. The Preferred Stock is designated as 2008BPreferred and consists of 80 shares of Preferred Stock bearing no dividends.However, the shares are convertible into common stock on a ten thousand(10,000) to one basis. In addition, the Company issued 400,000 warrants topurchase the Company’s common stock exercisable for five years at $1.50 pershare. Each warrant will be callable by the Company if and when the Company’scommon stock share price exceeds $3.00 per share for at least twenty(20) consecutive trading days. The Company used the proceeds for generalworking capital.

 

The Company also recordedan additional preferred stock dividend of $187,501 relating to the beneficialconversion feature and the warrants that were issued in connection with the2008B Preferred Stock Equity.

 

As of December 31,2009 and 2008, the Company had 80 shares of Series 2008B Preferred sharesoutstanding.

 

**(10) ****       ****Related Party Advisory Fees**

 

                In 2005,Axcess entered into a one year Borrowed Employees and Advisory Agreement withAmphion Capital Partners LLC (“ACP”), to assist us in a variety of areasrelating to investor relations and technology research.  ACP will provide Axcess with the use ofemployees who will be dedicated, on a part-time basis, to provide theseservices, in addition to the services of Robert Bertoldi and RichardMorgan.  ACP will provide Axcess the following:(i) Identification, evaluation and advice on a variety of options theAxcess to undertake to enhance its current technology offering, includingsources of complementary technology and technology partnering; (ii) Investorrelations services, including becoming the initial point of contact for thePreferred Equity Investors, providing both materials and information tointerested parties; (iii) Advice and assistance with strategies relatingto asset enhancement and maximization of asset utilization, including thoseassociated with and intellectual property assets.  In return Axcess has agreed to pay ACP $7,500per month in advance.  During 2006,Axcess elected to renew the contract and the payment was raised to $10,000 permonth in advance.  The total amount paidunder this agreement was $0 and $20,000 for the twelve months ended December 31,2009 and 2008, respectively.

 

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**(11) ****       ****Stock Options and Warrants**

 

Under the Company’s 2005 Equity Incentive Plan, the Companymay grant up to 5,000,000 shares of common stock to its employees. The exerciseprice of each option is not less than the market price of the Company’s stockon the date of grant and an option’s maximum term is ten years.  Options are generally granted each year andhave various vesting requirements. Options granted typically vest over afour-year period.  Shares issued uponstock options exercised are issued as new shares.  During 2009 the Company made grants of1,907,000 and during 2008 the Company made no grants under the stock optionplan.

 

With the shareholders approval of the 2005 Equity IncentivePlan, the Company will not issue anymore options under the Company’s 2001Equity Incentive Plan or the Directors Compensation Plan.

 

The 2001 Equity Incentive Plan allowed for grants up to2,000,000 shares of common stock to its employees. The exercise price of eachoption was not less than the market price of the Company’s stock on the date ofgrant and an option’s maximum term was ten years. The Company had issued stockoptions to various members of the Board of Directors and officers of theCompany under this plan. Options were generally granted each year and hadvarious vesting requirements. Options granted typically vest over a four-yearperiod.

 

In 1998, the Company adopted a director compensation planpursuant to which it paid each director who was not employed by the Company andwho did not beneficially own more than 5% of the shares of common stockoutstanding an annual grant of 5,000 options to acquire common stock of theCompany at an exercise price equal to the fair market value per share of thecommon stock at the time the option is granted (the “Annual Grant”). The AnnualGrant customarily occurs on the date of the Company’s annual meeting. Thedirector compensation plan also provided for a one-time initial grant of 15,000to each director of the Company as of July 21, 1998, the date the directorcompensation plan was approved by the Company’s stockholders (the “InitialGrant”). The Company has authorized 150,000 shares for issuance under thisplan.

 

Stock option transactions for the years ended December 31,2009 and 2008 are summarized below:

 
| ** **                                          | ** ** | **2009**    | ** ** | **2008**                               | ** ** |
|-----------------------------------------------------|------------|-------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **OPTIONS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **OPTIONS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Options  outstanding at beginning of year           |       | 5,392,973   |       | $                                      | 1.75       |   | 5,550,973 |   | $ | 1.75 |   |
| Options  granted                                    |       | 1,907,000   |       | 0.65                                   |       | — |   | — |   |
| Options  exercised                                  |       | —      |       | —                                 |       | — |   | — |   |
| Options  forfeited                                  |       | (938,556    | )          | 2.03                                   |       | (158,000 | ) | 1.82 |   |
| Options  outstanding at end of year                 |       | 6,361,417   |       | 1.38                                   |       | 5,392,973 |   | 1.75 |   |
|                                                |       |        |       |                                   |       |   |   |   |   |
| Options  exercisable at end of year                 |       | 3,634,917   |       | 1.78                                   |       | 3,872,723 |   | 1.94 |   |
|                                                |       |        |       |                                   |       |   |   |   |   |
| Options  available for grant at the end of the year |       | 1,091,000   |       |                                   |       | 2,802,000 |   |   |   |
|                                                |       |        |       |                                   |       |   |   |   |   |
| Fair  value of options granted during the year      |       | 709,595     |       |                                   |       | — |   |   |   |
|                                                     |            |             |            |                                        |            |  |  |  |  |  |  |

 

Asummary of stock options awards for the years ended December 31, 2009 and2008 is presented below:

 
| ** **                       | ** ** | **2009**               | ** ** | **2008**                                          | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **NUMBER OF  OPTIONS** | ** ** | **WEIGHTED  AVERAGE  FAIR VALUE  AT GRANT  DATE** | ** ** | **NUMBER OF  OPTIONS** | ** ** | **WEIGHTED  AVERAGE  FAIR VALUE  AT GRANT  DATE** | ** ** |
| Non-vested  at beginning of year |       | 1,520,250              |       | $                                                 | 1.28       |   | 2,450,252 |   | $ | 1.33 |   |
| Options  granted                 |       | 1,907,000              |       | 0.65                                              |       | — |   | — |   |
| Options  vested                  |       | (628,250               | )          | 1.23                                              |       | (793,002 | ) | 1.39 |   |
| Options  forfeited and unvested  |       | (72,500                | )          | 1.34                                              |       | (137,000 | ) | 1.53 |   |
| Non-vested  at end of year       |       | 2,726,500              |       | 0.85                                              |       | 1,520,250 |   | 1.28 |   |
|                                  |            |                        |            |                                                   |            |  |  |  |  |  |  |

 

Theoptions outstanding at December 31, 2009 have exercise prices as indicatedin the table below.

 

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| **Option Price**   | ** ** | **Number of  Options** | ** ** | **Weighted Average  Remaining Life** | ** ** | **Intrinsic Value of  Vested Unexercised  Options** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|
| $0.00 - $1.00      |       | 2,627,000              |       | 8.18                                 |       | $                                                   | 57,000     |   |
| $1.01 - $2.00      |       | 2,486,250              |       | 6.32                                 |       | —                                              |       |
| $2.01 – $3.00 |       | 830,711                |       | 3.73                                 |       | —                                              |       |
| $3.01 - $4.00      |       | 165,900                |       | 1.03                                 |       | —                                              |       |
| $4.01 - $5.00      |       | 20,000                 |       | 1.42                                 |       | —                                              |       |
| $5.01 - $6.25      |       | 231,556                |       | 0.23                                 |       | —                                              |       |
| Total              |       | 6,361,417              |       | 6.37                                 |       | $                                                   | 57,000     |   |

 

Total unrecognized share-based compensation expense fromunvested stock options as of December 31, 2009 is $1,971,930 and will berecognized over a remaining service period through December 31, 2013.

 

The Company has issued warrants to purchase common stock inconnection with issuance of notes payable to stockholders, convertibledebentures, and preferred stock. The following table summarizes warrantsoutstanding at December 31:

 
| ** **                                 | ** ** | **2009**     | ** ** | **2008**                               | ** ** |
|--------------------------------------------|------------|--------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **WARRANTS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **WARRANTS** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Warrants  outstanding at beginning of year |       | 9,952,956    |       | $                                      | 1.64       |   | 8,307,213 |   | $ | 1.73 |   |
| Warrants  issued                           |       | 1,873,570    |       | 0.67                                   |       | 2,145,743 |   | 1.34 |   |
| Warrants  exercised                        |       | —       |       | —                                 |       | — |   | — |   |
| Warrants  expired unexercised              |       | —       |       | —                                 |       | (500,000 | ) | 2.00 |   |
| Warrants  outstanding at end of year       |       | 11,826,526   |       | 1.48                                   |       | 9,952,956 |   | 1.64 |   |
|                                            |            |              |            |                                        |            |  |  |  |  |  |  |

 

Thewarrants outstanding at December 31, 2009 have exercise prices asindicated in the table below.

 
| **Strike Price** | ** ** | **Number of   Warrants** | ** ** | **Weighted Average  Remaining Life** | ** ** |
|------------------|------------|--------------------------|------------|--------------------------------------|------------|
| $0.00 - $1.00    |       | 2,103,564                |       | 4.74                                 |       |
| $1.01 - $2.00    |       | 9,722,962                |       | 1.73                                 |       |
| Total            |       | 11,826,526               |       | 2.27                                 |       |

 

During the year ended December 31, 2009 the Company issued anadditional 1,873,570 warrants in conjunction with various notes offerings.  The warrant price ranged from $0.22 to $0.75and they expire between January 14, 2014 and December 31, 2014.

 

During the year ended December 31, 2008 the Company issued anadditional 2,145,743 warrants in conjunction with various exempt equity andnotes offerings.  The warrant priceranged from $0.22 to $1.50 and they expire between January 15, 2013 and December 30,2013.  During that same period theCompany had 500,000 warrants expire without being exercised.

 

**(12) ****       ****Commitments and Contingencies**

 

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

 

Axcess is engaged in a number of lawsuits withapproximately four vendors and one customer who claim they are owed amountsfrom $500 to $27,000, which aggregates in total $63,999. We are currently defendingor seeking to settle each of the vendor’s and customer claims.  At December 31, 2009, we accrued $46,999which represents the delinquent amounts we expect to be liable for, for theclaims described in this paragraph.

 

On March 31, 2008,Axcess entered into an agreement with the developer of our next generation RFIDproduct, the Dot, whereby Axcess has agreed to pay a minimum commercializationfee of one million dollars over the next six years.  The amount is still contingent on thesupplier completing the testing and certifying the product is within all of theoriginal specifications.  The testing isongoing but the product has not passed all of the preliminary testing and weare still evaluating the impact on the product. As of December 31, 2009 Axcess has not signed off on the completionof the product and Innovison has issued a letter of termination for failure topay. We currently have accrued $392,808 for services that have been completed;however, we have not accrued the remainder for services that have not beencompleted.

 

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**(13) ****       ****Income Taxes**

 

There was no provision for incometaxes for the years ended December 31, 2009 and 2008 due to the net lossincurred for each year and the valuation established against the net deferredtax assets.  The Company had no materialdeferred tax liabilities at December 31, 2009.

 

The provision for income taxes isreconciled with statutory rate for the year ended December 31, 2009 and2008 as follows:

 
| ** **                                          | ** ** | **December 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Provision computed at  federal statutory rate       |       | $                            | (388,745   | )                            | $          | (1,623,480 | ) |
|                                                |       |                         |       |                         |       |
| Permanent differences:                              |       |                         |       |                         |       |
| True-up to deferred                                 |       | 155,774                      |       | 404,526                      |       |
| Research and development  wages & expenses |       | 20,773                       |       | 29,938                       |       |
| Incentive stock option  expense                     |       | 220,074                      |       | —                       |       |
| Meals and entertainment                             |       | 2,159                        |       | 3,885                        |       |
|                                                |       | 10,035                       |       | (1,185,131                   | )          |
|                                                |       |                         |       |                         |       |
| Expiration of NOL carry  forward                    |       | 177,725                      |       | 192,627                      |       |
| State taxes                                         |       | 125                          |       | 520,595                      |       |
| Change in tax rate                                  |       | 1,430,663                    |       | —                       |       |
| Changes in prior year  estimates                    |       | —                       |       | (150,440                     | )          |
| Tax credits                                         |       | (61,098                      | )          | (88,053                      | )          |
| Other                                               |       | —                       |       | 85,402                       |       |
| Change in valuation  allowance                      |       | (1,557,450                   | )          | 625,000                      |       |
|                                                |       | $                            | —     |                         | $          | — |   |

 

The Company had the following deferredtax assets as of December 31, 2009 and 2008 as follows:

 
| ** **                           | ** ** | **December 31,    2009** | ** ** | **December 31,    2008** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Net  operating loss                  |       | $                             | 19,171,000 |                          | $          | 20,597,000 |   |
| Property,  equipment and intangibles |       | 302,000                       |       | 348,000                       |       |
| Other                                |       | 1,361,000                     |       | 1,446,000                     |       |
| Valuation  allowance                 |       | (20,834,000                   | )          | (22,391,000                   | )          |
|                                 |       | $                             | —     |                          | $          | — |   |

 

The valuation allowance decreased by approximately $1,557,000for the year ended December 31, 2009 and increased $625,000 during theyear ended December 31, 2008.

 

At December 31, 2009 and 2008, the Company had a netoperating loss carry forward of approximately $55,300,000 and $55,500,000,respectively for U.S. federal income tax purposes. The net operating loss willexpire from 2010 through 2029.

 

A change in ownership, as defined for purposes of the InternalRevenue Code, occurred in 1996 and the Company believes that a subsequentownership change occurred during 1998, each of which limit the annualutilization of the U.S. federal net operating loss carry forward under theapplicable Internal Revenue Service. Other portions of the net operating loss may also be limited due tosubsequent ownership changes.

 

**(14) ****       ****Subsequent Events**

 

During the first quarter of 2010, Amphion Innovations fundedan additional $225,000 of their commitment leaving an additional $175,000 to befunded during 2010.  In addition Axcessentered into certain convertible notes with several accredited investorsincluding Richard Morgan, the Chairman of Axcess and an affiliate of theAmphion Group, our majority shareholder. The additional principal of the notes is $250,000 and is unsecured (the “ConvertibleNotes”).  The Convertible Notes have afive percent per annum simple interest rate and will become due on December 31,2014.  The Convertible Notes areconvertible into 500,000 common shares of Axcess at the option of each of theholders.  As part of the considerationfor the Convertible Notes, Axcess also issued to the note holders warrants topurchase an aggregate of 250,000 common shares with an exercise price of $0.75.The warrants expire on December 31, 2014.

 

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