##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
    
    85-0294536(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3208 Commander DriveCarrollton, Texas
    
    75006(Address of principal executive offices)
    
    (Zip Code)(972) 407-6080(Issuers Telephone Number)
 NONE
 Title of Class:
    
    Name of exchange on which registered:Common Stock, par value $.01 per share
    
    Over-The-Counter Bulletin Board
 28,657,313
 þ o
 o
   o þ
 None
 o þ




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##### 



AXCESS INTERNATIONAL INC.
INDEX
  
 Part IItem 1. Description of businessRisk FactorsItem 2. Description of propertiesItem 3. Legal proceedingsItem 4. Submission of matters to a vote of security holdersPart IIItem 5. Marketing for common equity and related stockholders mattersItem 6. Managements discussion and analysis of financial condition and results of operationsItem 7. Financial statementsItem 8. Changes in and disagreements with accountants on accounting and financial disclosureItem 8A. Controls and proceduresPart IIIItem 9. Directors, executive officers, promoters and control personsItem 10. Compensation discussion and analysisItem 11. Security ownership of certain beneficial owners and managementItem 12. Certain relationships and related transactionsItem 13. Exhibits and reports on form 8-KItem 14. Principal accountant fees and servicesSignaturesFinancial sectionReport of independent registered public accounting firmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders DeficitConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsAdvisory AgreementForm of Stock Purchase AgreementForm of Voting Common Stock Purchase Warrant - 2005 Preferred Stock OfferingForm of Voting Common Stock Purchase Warrant - 2006 Preferred Stock OfferingForm of Voting Common Stock Purchase Warrant - 2006B Preferred Stock OfferingForm of Voting Common Stock Purchase Warrant - 2006C Preferred Stock OfferingCode of Ethics for Senior Financial OfficersSubsidiariesConsent of Hein & Associates LLPCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906Audit Committee CharterNominating and Governance Committee CharterWhistleblower Policy
  2




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PART I
 Forward Looking Statements
   
 Item 1. DESCRIPTION OF BUSINESS
 Recent Developments: Going Concern and Liquidity Problems
    The Company
  3




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Company Evolution
       Sales Channels
    4




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TM
 Partnering
  Software House, Sensormatic, KanTech, and ADT (Tyco) TM
 PSA Security
 Media Recovery
  Other Integrator Partners
  5




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Products and Technology
      Automated Workforce Management Solutions .
 Automated Fleet Access Control and Data Capture Solutions.
 Electronic Asset Protection and Tracking.
 6




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Electronic Inventory Control and Tracking
 Automatic Personnel Identification
 Markets
  Corporate Access Control and Asset Management
 Airport and Port Security Infrastructure Homeland Defense
 Civil and Military Government.
 Education
 Inventory and Transportation Management
 Financial Data Center Asset Management
 7




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Patents and Proprietary Technology
  Engineering and Development
 TM
  TM
 TM
 TM
 8




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Competition
     TM
 Manufacturing and Suppliers
    9




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Research and Development
   Employees
  Government Regulation
  Environmental Factors
  
 Risk Factors
  We may not be able to continue as a going concern or fund our existing capital needs.
 See
 We have a history of losses and expectation of future losses; uncertainty of future profitability;
and limits on operations.
   10




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See
 We are dependent upon our proprietary technology and its marketability as state of the art.
   §
    
    we may not be successful in identifying, developing and marketing product
enhancements or new products that respond to technological change or evolving
industry standards;§
    
    we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and§
    
    we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and§
    
    our new products and enhanced products may not adequately meet the requirements
of the marketplace and achieve market acceptance or may not keep pace with advances
made by our competitors.
 See
 The loss of one or more members of management or key personnel could adversely affect our
operations and could lead to loss of clients and proprietary information.
  We may face substantial competition in attracting and retaining qualified personnel, and may be
unable to grow our business if we cannot attract and retain qualified personnel.
  Because we are significantly smaller and less established than a majority of our competitors, we
may lack the financial resources necessary to compete effectively and sustain profitability.
  11




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See
 We are dependent upon third party manufacturers and suppliers to produce our products.
 See
 The voting control of Axcess is held by Amphion Group, and other stockholders are unlikely to have
any ability to influence the governance or policies of our company.
 See
 The price of our common stock has been highly volatile and may continue to be highly volatile,
which may adversely affect your ability to sell your shares and our ability to raise additional
capital.
  
    
    changes in financial estimates or recommendations by securities analysts
regarding us or our common stock;
    
    our performance and the performance of our competitors and other companies in the
technology or marketing sectors;
    
    quarterly fluctuations in our operating results or the operating 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 the technology or advertising and
marketing sectors, in general; and
    
    competition, natural disasters, acts of war or terrorism or other developments
affecting us or our competitors.
 See
 Our common stock may be subject to penny stock rules and regulations.
  12




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Item 2. DESCRIPTION OF PROPERTIES.
  
 Item 3. LEGAL PROCEEDINGS.
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  1.
    
    Proposal to elect five directors to the board of directors to hold office until the next
annual meeting of stockholders or until their respective successors are duly elected and
qualified. The stockholders approved the proposal by the following vote:
 Director
    
    Votes For
    
    Votes Against
    
    Total VotesRichard C.E. Morgan
    
    
    19,926,335
    
    
    
    3,897
    
    
    
    19,930,232Allan Griebenow
    
    
    19,922,737
    
    
    
    7,495
    
    
    
    19,930,232Paul J. Coleman
    
    
    19,927,235
    
    
    
    2,997
    
    
    
    19,930,232Robert J. Bertoldi
    
    
    19,921,854
    
    
    
    8,378
    
    
    
    19,930,232Robert F. Hussey
    
    
    19,929,052
    
    
    
    1,180
    
    
    
    19,930,232
 2.
    
    Proposal to ratify the board of directors appointment of Hein & Associates LLP, as the
independent registered public accountants for the year ending December 31, 2006. The
stockholders approved the proposal by the following vote:
 VotesVotes For
    
    Against
    
    Abstain
    
    Total Votes19,927,162
    
    1,385
    
    1,685
    
    19,930,232
 3.
    
    Proposal to amend and restate the Companys Certificate of Incorporation to, among other
things, increase the number of authorized Common Stock, from 50,000,000 shares to 70,000,000
shares and the authorized Preferred Stock from 7,000,000 shares to 10,000,000 shares and to
eliminate the 2,250,000 shares of Non-Voting common stock. The stockholders approved the
proposal by the following vote:
 VotesVotes For
    
    Against
    
    Abstain
    
    Total Votes19,918,560
    
    9,557
    
    2,115
    
    19,930,232
 4.
    
    Proposal to ratify actions taken by our Board of Directors and Officers regarding prior
fund raising and restructuring activities of the Company. The stockholders approved the
proposal by the following vote:
 VotesVotes For
    
    Against
    
    Abstain
    
    Total Votes19,926,907
    
    3,280
    
    45
    
    19,930,232
 13




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5.
    
    Proposal to transact such other business as may properly come before the meeting or any
adjournment thereof. The stockholders approved the proposal by the following vote:
 VotesVotes For
    
    Against
    
    Abstain
    
    Total Votes19,893,599
    
    32,688
    
    3,945
    
    19,930,232
 
 PART II
 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
  2006
    
    2005QUARTER ENDED
    
    LOW
    
    HIGH
    
    LOW
    
    HIGHMarch 31
    
    $
    0.85
    
    
    $
    1.12
    
    
    $
    1.34
    
    
    $
    1.95June 30
    
    
    0.90
    
    
    
    1.45
    
    
    
    1.40
    
    
    
    1.75September 30
    
    
    0.87
    
    
    
    1.27
    
    
    
    1.10
    
    
    
    1.75December 31
    
    
    0.92
    
    
    
    1.25
    
    
    
    0.82
    
    
    
    1.20
   Equity Compensation Plans
  Number of securitiesNumber of securities to be
    
    
    Weighted-average
    
    
    remaining availableissued upon exercise of
    
    
    exercise price of
    
    
    for future issuanceoutstanding options,
    
    
    outstanding options,
    
    
    under equityPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    compensation plansEquity compensation
plans approved by
security holders
    
    
    4,616,873
    
    
    $
    1.95
    
    
    
    3,758,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,616,873
    
    
    $
    1.95
    
    
    
    3,758,000
 Recent Sale of Unregistered Securities
  Convertible Promissory Note
  14




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Dividends Paid
  2005 Preferred Equity Offering
  2006 Preferred Equity
  2006B Preferred Equity
  Warrants Exercised and Expired
  15




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Common Stock
  
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Recent Developments: Going Concern and Liquidity Problems
   Sales and Marketing Initiatives
  1.
    
    We upgraded our sales personnel;2.
    
    We began formalizing our partnership program;3.
    
    We adjusted our process to a modified direct approach.
   Results of Operations
 Sales and Gross Profit
 Operating Expenses.
    16




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Other income (expenses), net
 Net Loss
 Preferred Stock dividend requirements.
 Liquidity and Capital Resources
      Other Matters relating to future amortizable charges
  Recent Accounting Pronouncements
  17




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Critical Accounting Policies
  Allowance for Doubtful Accounts
  Inventory Valuation
  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
  Revenue Recognition and Warranty Costs
  Deferred Tax Valuation Allowance
  18




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##### Table of Contents



Stock-Based Compensation Expense
  Other
 Inflation.
 Seasonality.
 
 Item 7. FINANCIAL STATEMENTS.
 PageReport of Hein & Associates LLP, Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Financial Statements:Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-2Consolidated Statements of Operations for the Years Ended
December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Stockholders Deficit for the
Years Ended December 31, 2006 and 2005
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006 and 2005
    
    
    F-5Notes to Financial Statements
    
    
    F-6
 
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 Item 8A. CONTROLS AND PROCEEDURES.
    19




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PART III
 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
 Management of Axcess
  Name
    
    Age
    
    Position
    
    CommitteeRichard C.E. Morgan
    
    
    62
    
    
    Chairman of the Board of Directors
    
    (1*) (3*) (4)Allan Griebenow
    
    
    54
    
    
    Director, President and Chief Executive Officer
    
    (1) (4)Allan L. Frank
    
    
    43
    
    
    Vice President, Secretary and Chief Financial OfficerRobert J. Bertoldi
    
    
    52
    
    
    Directors
    
    (2) (4)Paul J. Coleman, Jr.
    
    
    74
    
    
    Director
    
    (2*) (4)Robert F. Hussey
    
    
    57
    
    
    Director
    
    (2) (3) (4)Raj Bridgelall
    
    
    39
    
    
    Vice President of EngineeringRay Cavanagh
    
    
    56
    
    
    Vice President of SalesBenjamin Donohue
    
    
    56
    
    
    Vice President of Business Development
 
 (1)
    
    Executive Committee(2)
    
    Audit Committee(3)
    
    Compensation Committee(4)
    
    Nominating and Governance Committee*
    
    Indicates Chairman of the Committee Richard C. E. Morgan
 Allan Griebenow
 Allan L. Frank
 Robert J. Bertoldi
 20




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##### Table of Contents



Paul J. Coleman, Jr.
 Robert F. Hussey .
 Raj Bridgelall
 Ray Cavanagh
 Ben Donohue
 Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  21




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Item 10. COMPENSATION DISCUSSION AND ANALYSIS
 Summary Compensation Table
  Summary Compensation TableStock
    
    Option
    
    All OtherName
    
    Year
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    Compensation
    
    TotalPrincipal Positions
    
    Ended
    
    ($)
    
    ($)
    
    ($)
    
    ($)(A)
    
    ($)(B)
    
    ($)Allan Griebenow
    
    
    2006
    
    
    
    230,009
    
    
    
    
    
    
    
    
    
    
    
    243,880
    
    
    
    
    
    
    
    479,889President and Chief Executive Officer
    
    
    2005
    
    
    
    230,946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,9462004
    
    
    
    177,651
    
    
    
    
    
    
    
    
    
    
    
    248,943
    
    
    
    
    
    
    
    426,594Allan L. Frank
    
    
    2006
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    195,650
    
    
    
    
    
    
    
    375,650Vice President, Secretary and Chief
    
    
    2005
    
    
    
    180,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,937Financial Officer
    
    
    2004
    
    
    
    139,448
    
    
    
    
    
    
    
    
    
    
    
    235,269
    
    
    
    
    
    
    
    374,717Raj Bridgelall
    
    
    2006
    (1)
    
    
    43,154
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    7,974
    
    
    
    171,128Vice President, EngineeringRay Cavanagh
    
    
    2006
    (2)
    
    
    93,750
    
    
    
    
    
    
    
    
    
    
    
    144,000
    
    
    
    
    
    
    
    237,750Vice President, SalesBen Donohue
    
    
    2006
    (3)
    
    
    115,837
    
    
    
    
    
    
    
    
    
    
    
    97,370
    
    
    
    
    
    
    
    213,207Vice President, Business Development
 
 (A)
    
    Reflects the grant date fair value calculated in accordance with FAS 123(R). See Notes
to Financial Statements  Summary of Significant Accounting Policies  Stock-Based
Compensation Adoption of SFAS 123R for a discussion of the relevant assumptions used in
calculating the grant date fair value pursuant to FAS 123(R).(B)
    
    Mr. Bridgelall All Other Compensation consists of reimbursement for moving expenses.(1)
    
    Represents compensation earned from September 2006, when Mr. Bridgelall was hired by
Axcess and he was elected as an officer at that time.(2)
    
    Represents compensation earned from May 2006, when Mr. Cavanagh was hired by Axcess and he
was elected as an officer in July 2006.(3)
    
    Represents compensation earned for the full year 2006. However, Mr. Donohue was elected an
officer in July 2006 but has been an employee of Axcess since July 1999. Stock Option Grants in 2006 to Named Executive Officers
  All Other
    
    All Other
    
    Exercise or
    
    Grant DateStock Awards:
    
    Option Awards:
    
    Base Price
    
    Fair ValueNumber of
    
    Number of
    
    Of Option
    
    Of Stock andGrant
    
    Shares of Stock
    
    Securities Under-
    
    Awards
    
    OptionName
    
    Date
    
    Or Units (#)
    
    Lying Options (#)
    
    ($ / Share)
    
    AwardsAllan Griebenow
    
    
    02/15/06
    
    
    
    
    
    
    
    268,000
    
    
    $
    1.04
    
    
    $
    243,880Allan L. Frank
    
    
    02/15/06
    
    
    
    
    
    
    
    215,000
    
    
    
    1.04
    
    
    
    195,650Raj Bridgelall
    
    
    10/01/06
    
    
    
    
    
    
    
    150,000
    
    
    
    0.93
    
    
    
    120,000Ray Cavanagh
    
    
    05/16/06
    
    
    
    
    
    
    
    150,000
    
    
    
    1.10
    
    
    
    144,000Ben Donohue
    
    
    02/15/06
    
    
    
    
    
    
    
    107,000
    
    
    
    1.04
    
    
    
    97,370
  22




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Outstanding Equity Awards at Fiscal Year End
  Option Awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanMarket
    
    Plan
    
    Awards:Value
    
    Awards:
    
    MarketNumber
    
    of
    
    Number
    
    or PayoutEquity
    
    
    
    
    
    
    
    
    
    of
    
    Shares
    
    of
    
    Value ofIncentive
    
    
    
    
    
    
    
    
    
    Shares
    
    or
    
    Unearned
    
    UnearnedPlan
    
    
    
    
    
    
    
    
    
    or Units
    
    Units
    
    Shares,
    
    Shares,Awards:
    
    
    
    
    
    
    
    
    
    of
    
    of
    
    Units or
    
    Units orNumber of
    
    Number of
    
    
    
    
    
    
    
    
    
    Stock
    
    Stock
    
    Other
    
    OtherNumber of
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    That
    
    That
    
    Rights
    
    RightsSecurities
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    Have
    
    Have
    
    That
    
    ThatUnderlying
    
    Unexercised
    
    Unexercised
    
    Option
    
    Option
    
    Not
    
    Not
    
    Have Not
    
    Have NotOptions(#)
    
    Options(#)
    
    Unearned
    
    Exercise
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    Options(#)
    
    Price ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    ($)Allan Griebenow (1)
    
    
    1,156,930
    
    
    
    166,030
    
    
    
    
    
    
    $
    2.28
    
    
    10 years from Grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allan Frank (2)
    
    
    549,726
    
    
    
    198,242
    
    
    
    
    
    
    $
    1.74
    
    
    10 years from Grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Raj Bridgelall (3)
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    $
    0.93
    
    
    10 years from Grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ray Cavanagh (4)
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    $
    1.10
    
    
    10 years from Grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ben Donohue (5)
    
    
    217,353
    
    
    
    89,014
    
    
    
    
    
    
    $
    1.30
    
    
    10 years from Grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes a grant made on July 28, 1999 for 450,000 options at a strike price of $2.50; 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 and a grant made on February 15, 2006 for
268,000 options with a strike price of $1.04.(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 and a grant made on
February 15, 2006 for 215,000 options with a strike price of $1.04.(3)
    
    Includes a grant made on October 1, 2006 for 150,000 options at a strike price of $0.93.(4)
    
    Includes a grant made on May 16, 2006 for 150,000 options at a strike price of $1.10.(5)
    
    Includes a grant made on September 29, 1999 for 12,000 options at a strike price of
$2.69; 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; a grant made on
January 17, 2003 for 78,000 options at a strike price of $0.40; a grant made on March
16, 2004 for 35,059 options at a strike price of $2.00 and a grant made on February 15,
2006 for 107,000 options with a strike price of $1.04. 23




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Aggregate Option Exercises in 2006 by Executive Officers
  Shares
    
    
    
    
    
    Number of Securities
    
    Value of UnexercisedAcquired
    
    
    
    
    
    Underlying Unexercised
    
    In-the-Money Options atOn
    
    Value
    
    Options at December 31, 2006
    
    December 31, 2006Name
    
    Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableAllan Griebenow
    
    
    
    
    
    $
    
    
    
    
    1,156,930
    
    
    
    240,142
    
    
    $
    134,220
    
    
    $
    26,130Allan L. Frank
    
    
    
    
    
    $
    
    
    
    
    549,726
    
    
    
    198,242
    
    
    $
    83,988
    
    
    $
    20,963Raj Bridgelall
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    150,000
    
    
    $
    
    
    
    $
    10,500Ray Cavanagh
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    150,000
    
    
    $
    
    
    
    $
    36,000Ben Donohue
    
    
    
    
    
    $
    
    
    
    
    217,353
    
    
    
    89,014
    
    
    $
    63,538
    
    
    $
    10,433
 Compensation of the Companys Directors
   Change inPension ValueandFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonqualifiedEarned or
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    DeferredPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Richard CE Morgan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Robert Bertoldi
    
    
    
    
    
    
    
    
    
    
    68,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,250Robert Hussey
    
    
    16,500
    
    
    
    
    
    
    
    68,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,750Paul Coleman
    
    
    11,000
    
    
    
    
    
    
    
    68,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,250
 Employment Agreement with Mr. Griebenow
  
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
  24




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##### Table of Contents



Amount and
    
    
    
    
    
    Percentage ofName and Address of
    
    
    
    Nature of
    
    Percentage
    
    CommonBeneficial Owner
    
    Title of Class
    
    Beneficial Owner
    
    of Class
    
    Voting PowerAmphion Group (1)
    
    Voting Common Stock
    
    
    20,145,573
    (2)
    
    
    50.8
    %
    
    
    43.1
    %330 Madison Avenue
    
    Series 2005
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    3.8
    %New York, NY 10017
    
    Series 2006B
    
    
    450,000
    
    
    
    65.0
    %
    
    
    1.0
    %
 
 (1)
    
    See the following table regarding the beneficial ownership of the Amphion Group.(2)
    
    Includes 2,658,746 shares that the Amphion Group has the right to acquire
pursuant to warrants and options that are exercisable within 60 days.    Series
    
    SeriesVoting
    
    2005
    
    2006BCommon
    
    Preferred
    
    Preferred
    
    Warrants
    
    Options
    
    TotalAmphion Ventures LP
    
    
    9,219,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,219,305VennWorks LLC
    
    
    5,677,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,677,006Amphion Innovations plc
    
    
    670,000
    
    
    
    1,475,906
    
    
    
    150,000
    
    
    
    1,724,042
    (1)
    
    
    
    
    
    
    4,019,948Mr. Morgan
    
    
    722,509
    (2)
    
    
    294,118
    
    
    
    300,000
    
    
    
    614,118
    (3)
    
    
    94,293
    (4)
    
    
    2,025,038Antiope Partners LLC
    
    
    1,109,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,109,182Mr. Bertoldi
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226,293
    (5)
    
    
    226,293Amphion Investments LLC
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,000Amphion Partners LLC
    
    
    28,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,125Amhion Capital
Management LLC
    
    
    16,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,700Total of Amphion Group
    
    
    17,486,827
    
    
    
    1,770,024
    
    
    
    450,000
    
    
    
    2,338,160
    
    
    
    320,586
    
    
    
    22,365,597
 (1)
    
    Includes four different grants with exercise price ranging from $1.50 to $2.00
and expiration dates ranging form January 28, 2010 to December 1, 2011.(2)
    
    Includes 252,715 shares of common stock issued to Mrs. Morgan, the wife of Mr.
Morgan.(3)
    
    Includes four different grants with exercise price ranging from $1.50 to $2.00
and expiration dates ranging form January 28, 2010 to December 1, 2011.(4)
    
    Options to purchase 94,293 shares of common stock that are exercisable within 60
days.(5)
    
    Options to purchase 226,923 shares of common stock that are exercisable within 60
days.  25




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##### Table of Contents



Amount andNature of
    
    Percentage
    
    PercentageName of
    
    
    
    Beneficial
    
    of
    
    of CommonBeneficial Owner
    
    Title of Class
    
    Owner
    
    Class
    
    Voting PowerRichard C.E. Morgan
    
    Voting Common Stock (1)
    
    
    17,486,827
    
    
    
    61.0
    %
    
    
    48.9
    %Series 2005 Preferred
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    5.0
    %Series 2006B Preferred
    
    
    450,000
    
    
    
    60.0
    %
    
    
    1.3
    %Robert J. Bertoldi
    
    Voting Common Stock (2)
    
    
    16,764,318
    
    
    
    58.5
    %
    
    
    46.9
    %Series 2005 Preferred
    
    
    1,475,906
    
    
    
    54.0
    %
    
    
    4.1
    %Series 2006B Preferred
    
    
    150,000
    
    
    
    20.0
    %
    
    
    
    *Allan Griebenow
    
    Voting Common Stock (3)
    
    
    14,860
    
    
    
    
    *
    
    
    
    *Paul J. Coleman, Jr.
    
    Voting Common Stock (4)
    
    
    80
    
    
    
    
    *
    
    
    
    *Allan L. Frank
    
    Voting Common Stock (5)
    
    
    
    
    
    
    
    *
    
    
    
    *Robert F. Hussey
    
    Voting Common Stock (6)
    
    
    
    
    
    
    
    *
    
    
    
    *Raj Bridgelall
    
    Voting Common Stock (8)
    
    
    
    
    
    
    
    *
    
    
    
    *Raymond Cavanagh
    
    Voting Common Stock (9)
    
    
    
    
    
    
    
    *
    
    
    
    *Benjamin Donohue
    
    Voting Common Stock (10)
    
    
    
    
    
    
    
    *
    
    
    
    *All Directors, Director
    
    Voting Common Stock
    
    
    17,501,767
    
    
    
    61.1
    %
    
    
    48.9
    %Nominees and
    
    Series 2005 Preferred
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    5.0
    %Executive Officers as
    
    Series 2006B Preferred
    
    
    450,000
    
    
    
    60.0
    %
    
    
    1.3
    %a group (10 individuals)
 
 *
    
    Less than 1%.(1)
    
    The number of shares of voting common stock includes 469,794 shares held directly,
16,764,318 shares held by other entities within the 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 708,411 shares that Mr. Morgan has the
right to acquire pursuant to option and warrant agreements that are exercisable within 60
days, 1,724,042 shares that entities within the Amphion Group have the right to acquire
pursuant to option and warrant agreements that are exercisable within 60 days. As detailed
in Note 1 to the immediately preceding table above, Mr. Morgan disclaims beneficial
ownership of all shares beneficially owned by entities within the Amphion Group.(2)
    
    Includes 16,764,318 shares held by other entities within the Amphion Group (defined in
Note 1 to the immediately preceding table above). However, excludes 226,293 shares that
Mr. Bertoldi has the right to acquire pursuant to option and warrant agreements that are
exercisable within 60 days and 1,724,042 shares that entities within the Amphion Group have
the right to acquire pursuant to option and warrant agreements that are exercisable within
60 days. As detailed in Note 1 to the immediately preceding table above, Mr. Bertoldi
disclaims beneficial ownership of all shares beneficially owned by entities within the
Amphion Group.(3)
    
    Includes 14,580 shares of common stock held directly by Mr. Griebenow and 280 shares
owned jointly with his wife. Excludes 1,397,072 shares that Mr. Griebenow has the right to
acquire pursuant to option agreements that are exercisable within 60 days.(4)
    
    Includes 80 shares of common stock held directly by Mr. Coleman and excludes 254,293
shares that Mr. Coleman has the right to acquire pursuant to option agreements that are
exercisable within 60 days.(5)
    
    Excludes 747,968 shares that Mr. Frank has the right to acquire pursuant to options
that are exercisable within 60 days.(6)
    
    Excludes 216,293 shares that Mr. Hussey has the right to acquire pursuant to options
that are exercisable within 60 days.(7)
    
    Excludes 0 shares that Mr. Bridgelall has the right to acquire pursuant to options that
are exercisable within 60 days.(8)
    
    Excludes 0 shares that Mr. Cavanagh has the right to acquire pursuant to options that
are exercisable within 60 days. 26




---



##### Table of Contents



(9)
    
    Excludes 208,717 shares that Mr. Donohue has the right to acquire pursuant to options
that are exercisable within 60 days. 
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 Amphion Investment LLC
  PV Proceeds Holdings Inc.
    Amphion Capital Partners LLC (formerly NVW LLC)
  Other Matters
   27




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##### Table of Contents



Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
 Exhibit No.
    
    Description3.1
    
    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, 20063.2
    
    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 B to the Companys 2005 Definitive Proxy Statement filed June 2,
2006.5.1
    
    Opinion of Vial, Hamilton, Koch & Knox, LLP+ 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 and restated purchase note dated as of December 12, 2003, executed
by Axcess and PV Proceeds holdings, Inc. Incorporated herein by reference
to Exhibit 10.2 on Form 8-K filed on December 16, 2003.10.5
    
    Agreement to amend demand note dated as of December 12, 2003, executed by
Axcess and Amphion Investment LLC. Incorporated herein by reference to
Exhibit 10.3 on Form 8-K filed on December 16, 2003.10.6
    
    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, 2003.10.7
    
    Axcess Convertible note dated as of November 9, 2006, executed by Axcess
payable to Amphion Innovations PLC in the principal amount of $140,000.
Incorporated herein by reference to Exhibit 10.1 on Form 8-K filed
November 13, 2006.
 28




---



##### Table of Contents



Exhibit No.
    
    Description10.8
    
    Form of Bridge Financing Agreement, dated as of July 30, 2002, between the
Company and certain investors. Incorporated herein by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2002.10.9
    
    Advisory agreement between NVW LLC
and Axcess. *10.10
    
    Form of Stock Purchase agreement for the 2006C Preferred Equity Offering. *10.11
    
    Form of Voting Common Stock Purchase Warrant between the Company and
certain investors of the exempt 2005 Preferred Stock Offering. *10.12
    
    Form of Voting Common Stock Purchase Warrant between the Company and
certain investors of the exempt 2006 Preferred Stock Offering. *10.13
    
    Form of Voting Common Stock Purchase Warrant between the Company and
certain investors of the exempt 2006B Preferred Stock Offering. *10.14
    
    Form of Voting Common Stock Purchase Warrant between the Company and
certain investors of the exempt 2006C Preferred Stock Offering. *21.1
    
    Subsidiaries of the Company. *23.1
    
    Consent of Hein & Associates LLP. *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. *
 (b)
    
    Reports on Form 8-K:
 Date
    
    DescriptionFebruary 15, 2007
    
    On February 15, 2007, Axcess International Inc.
filed an 8-K announcing the results for the year
ended December 31, 2006.January 31, 2007
    
    On January 31, 2007, Axcess International Inc.
filed an 8-K announcing they closed on
$1,500,000 of the 2006C Preferred Equity round.January 23, 2006
    
    On January 23, 2007, Axcess International Inc.
filed an 8-K announcing they closed on $500,000
of the 2006C Preferred Equity round and received
a $2,006,000 million order from an entity in
Barbados.
 
 *
    
    Filed herewith+
    
    Denotes management contract or compensatory plan. 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  December 31,
    
    
    December 31,2006
    
    
    2005Audit fees (1)
    
    $
    59,661
    
    
    $
    48,064Audit related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    10,000
    
    
    
    10,930All other fees (4)
    
    
    
    
    
    
    Total
    
    $
    69,661
    
    
    $
    58,994
 29




---



##### Table of Contents



SIGNATURES
 nd
 AXCESS INTERNATIONAL INC.By:
    /s/ Richard C.E. MorganRichard C.E. Morgan, Chairman of the Board nd
 Signature
    
    Capacity/s/ Richard C.E. Morgan
    
    Chairman of the BoardRichard C.E. Morgan/s/ Allan Griebenow
    
    Director, President and Chief Executive OfficerAllan Griebenow
    
    (Principal
Executive Officer)/s/ Allan L. Frank
    
    Chief Financial OfficerAllan L. Frank
    
    (Principal
Accounting and Financial Officer)/s/ Paul J. Coleman, Jr.
    
    DirectorPaul J. Coleman, Jr./s/ Robert J. Bertoldi
    
    DirectorRobert J. Bertoldi/s/ Robert F. Hussey
    
    DirectorRobert F. Hussey
 30




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 F-1




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2006 and 2005
 2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    347,361
    
    
    $
    236,869Accounts receivable  trade, net of allowance for doubtful accounts of
16,868 and $17,389 for 2006 and 2005, respectively.
    
    
    252,230
    
    
    
    141,200Inventory, net
    
    
    396,305
    
    
    
    112,270Prepaid expenses and other
    
    
    92,090
    
    
    
    72,628Total current assets
    
    
    1,087,986
    
    
    
    562,967Property, plant and equipment, net
    
    
    18,369
    
    
    
    29,387Deferred debt issuance costs
    
    
    168,963
    
    
    
    337,926Other assets
    
    
    2,934
    
    
    
    2,699Total assets
    
    $
    1,278,252
    
    
    $
    932,979LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    101,261
    
    
    $
    252,155Accrued liabilities
    
    
    1,147,015
    
    
    
    959,149Notes payable:Convertible notes payable (includes $80,000 with related parties in 2005)
    
    
    3,365,500
    
    
    
    396,666Discounts on convertible debt
    
    
    
    
    
    
    (5,520
    )Dividends payable
    
    
    138,594
    
    
    
    208,780Total current liabilities
    
    
    4,752,370
    
    
    
    1,811,230Notes payable to stockholders
    
    
    
    
    
    
    3,709,071Total liabilities
    
    
    4,752,370
    
    
    
    5,520,301Commitments and contingencies (Notes 1, 2, 8 and 13)Stockholders deficit:Convertible preferred stock, 10,000,000 and 7,000,000 shares authorized in
2006 and 2005, respectively Without liquidation preferences; $0.01 par
value, 7,073,550 and 3,371,495 shares issued and outstanding in 2006 and
2005, respectively
    
    
    70,735
    
    
    
    33,715Common stock, $.01 par value, 70,000,000 and 50,000,000 shares authorized
in 2006 and 2005, respectively; 28,657,313 shares issued and outstanding
in 2006 and 27,437,111 shares issued and outstanding in 2005
    
    
    286,573
    
    
    
    274,371Shares of common stock to be issued, 5,333 shares as of December 31, 2005
    
    
    
    
    
    
    53Non-voting convertible common stock, $.01 par value, 0 and 2,250,000 shares
authorized in 2006 and 2005, respectively; no shares issued and outstanding
in 2006 or 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    158,184,537
    
    
    
    153,436,725Accumulated deficit
    
    
    (162,015,963
    )
    
    
    (158,332,186
    )Total stockholders deficit
    
    
    (3,474,118
    )
    
    
    (4,587,322
    )Total liabilities and stockholders deficit
    
    $
    1,278,252
    
    
    $
    932,979
  F-2




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2006 and 2005
 2006
    
    
    2005Sales
    
    $
    1,501,296
    
    
    $
    1,080,240Cost of sales
    
    
    837,789
    
    
    
    594,158Inventory impairment
    
    
    6,664
    
    
    
    55,557Gross profit
    
    
    656,843
    
    
    
    430,525Expenses:Research and development
    
    
    1,380,875
    
    
    
    935,248General and administrative
    
    
    1,795,479
    
    
    
    1,373,980Selling and marketing
    
    
    1,171,023
    
    
    
    960,249Depreciation, amortization and impairment
    
    
    18,805
    
    
    
    27,631Operating expenses
    
    
    4,366,182
    
    
    
    3,297,108Loss from operations
    
    
    (3,709,338
    )
    
    
    (2,866,583
    )Other income (expense):Interest expense
    
    
    (351,791
    )
    
    
    (715,895
    )Gain on vendor settlements
    
    
    102,516
    
    
    
    326,424Gain on sale of intellectual property
    
    
    600,000
    
    
    
    Other income (expense), net
    
    
    350,725
    
    
    
    (389,471
    )Net loss
    
    
    (3,358,613
    )
    
    
    (3,256,054
    )Preferred stock dividend requirementsRecurring
    
    
    (325,163
    )
    
    
    (325,163
    )Warrant inducement
    
    
    
    
    
    
    (2,060,3972005 Preferred equity offering
    
    
    (1,489,245
    )
    
    
    (813,021
    )2006 Preferred equity offering
    
    
    (645,020
    )
    
    
    2006B Preferred equity offering
    
    
    (750,000
    )
    
    
    Preferred stock dividend requirements
    
    
    (3,209,428
    )
    
    
    (3,198,581
    )Net loss applicable to common stock
    
    $
    (6,568,041
    )
    
    $
    (6,454,635
    )Basic and diluted net loss per share
    
    $
    (0.23
    )
    
    $
    (0.24
    )Weighted average shares of common stock outstanding
    
    
    28,329,221
    
    
    
    26,850,272
  F-3




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 YEARS ENDED DECEMBER 31, 2006 and 2005
 CONVERTIBLEPREFERRED STOCK
    
    
    COMMON STOCKNUMBER
    
    
    
    
    
    
    NUMBER
    
    
    
    
    
    
    ADDITIONAL
    
    
    COMMON
    
    
    
    
    
    
    TOTALOF
    
    
    PAR
    
    
    OF
    
    
    PAR
    
    
    PAID-IN
    
    
    STOCK
    
    
    ACCUMULATED
    
    
    STOCKHOLDERSSHARES
    
    
    VALUE
    
    
    SHARES
    
    
    VALUE
    
    
    CAPITAL
    
    
    ISSUABLE
    
    
    DEFICIT
    
    
    DEFICITBalance at December 31, 2004
    
    
    2,415,000
    
    
    $
    24,150
    
    
    
    24,720,939
    
    
    $
    247,209
    
    
    $
    149,898,600
    
    
    $
    
    
    
    $
    (154,750,969
    )
    
    $
    (4,581,010
    )Shares issued in conjunction
with 2005 Preferred equity
offering
    
    
    362,942
    
    
    
    3,629
    
    
    
    
    
    
    
    
    
    
    
    304,870
    
    
    
    
    
    
    
    
    
    
    
    308,499Conversion of notes payable and
accrued interest into 2005
preferred stock
    
    
    593,553
    
    
    
    5,936
    
    
    
    
    
    
    
    
    
    
    
    498,585
    
    
    
    
    
    
    
    
    
    
    
    504,521Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    369,968
    
    
    
    3,700
    
    
    
    369,924
    
    
    
    
    
    
    
    
    
    
    
    373,624Issuance of common stock upon
exercise of warrants
    
    
    
    
    
    
    
    
    
    
    296,066
    
    
    
    2,961
    
    
    
    300,890
    
    
    
    
    
    
    
    
    
    
    
    303,851Shares issued in conjunction
with accrued dividends
    
    
    
    
    
    
    
    
    
    
    292,198
    
    
    
    2,922
    
    
    
    429,524
    
    
    
    
    
    
    
    
    
    
    
    432,446Shares issued in conjunction
with warrant inducement
    
    
    
    
    
    
    
    
    
    
    1,702,840
    
    
    
    17,028
    
    
    
    1,612,841
    
    
    
    53
    
    
    
    
    
    
    
    1,629,922Issuance of common stock upon
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    55,100
    
    
    
    551
    
    
    
    21,491
    
    
    
    
    
    
    
    
    
    
    
    22,042Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325,163
    )
    
    
    (325,163
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,256,054
    )
    
    
    (3,256,054
    )Balance at December 31, 2005
    
    
    3,371,495
    
    
    $
    33,715
    
    
    
    27,437,111
    
    
    $
    274,371
    
    
    $
    153,436,725
    
    
    $
    53
    
    
    $
    (158,332,186
    )
    
    $
    (4,587,322
    )Issuance of common stock upon
exercise of warrants
    
    
    
    
    
    
    
    
    
    
    55,333
    
    
    
    553
    
    
    
    32,000
    
    
    
    (53
    )
    
    
    
    
    
    
    32,500Issuance of common stock upon
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    19,200
    
    
    
    192
    
    
    
    7,488
    
    
    
    
    
    
    
    
    
    
    
    7,680Conversion of convertible note
and accrued interest
    
    
    
    
    
    
    
    
    
    
    706,394
    
    
    
    7,064
    
    
    
    409,712
    
    
    
    
    
    
    
    
    
    
    
    416,776Shares issued in conjunction
with 2005 Preferred stock
offering
    
    
    1,752,055
    
    
    
    17,520
    
    
    
    
    
    
    
    
    
    
    
    1,446,724
    
    
    
    
    
    
    
    
    
    
    
    1,464,244Conversion of accrued dividends
    
    
    
    
    
    
    
    
    
    
    439,275
    
    
    
    4,393
    
    
    
    390,956
    
    
    
    
    
    
    
    
    
    
    
    395,349Shares issued in conjunction
with 2006 Preferred stock
offering
    
    
    1,200,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    1,008,000
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Shares issued in conjunction
with 2006B Preferred stock
offering
    
    
    750,000
    
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    742,500
    
    
    
    
    
    
    
    
    
    
    
    750,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325,163
    )
    
    
    (325,163
    )Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    710,432
    
    
    
    
    
    
    
    
    
    
    
    710,432Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,358,613
    )
    
    
    (3,358,613
    )Balance at December 31, 2006
    
    
    7,073,550
    
    
    $
    70,735
    
    
    
    28,657,313
    
    
    $
    286,573
    
    
    $
    158,184,537
    
    
    $
    
    
    
    $
    (162,015,963
    )
    
    $
    (3,474,118
    )
  F-4




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 2006 and 2005
 2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (3,358,613
    )
    
    $
    (3,256,054
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    18,805
    
    
    
    27,631Gain on vendor settlements and statutory write-off of payables
    
    
    (102,516
    )
    
    
    (326,424
    )Amortization of financing discount and issuance costs
    
    
    174,483
    
    
    
    487,010Stock based compensation expense
    
    
    710,432
    
    
    
    Gain on sale of intellectual property
    
    
    (600,000
    )
    
    
    Inventory impairment
    
    
    6,664
    
    
    
    55,557Changes in operating assets and liabilities:Accounts receivable
    
    
    (111,030
    )
    
    
    (61,235
    )Inventory
    
    
    (290,699
    )
    
    
    (23,113
    )Prepaid expenses and other
    
    
    (19,462
    )
    
    
    24,536Other assets
    
    
    (235
    )
    
    
    1,207Accounts payable and accrued liabilities
    
    
    159,597
    
    
    
    312,850Net cash used by operating activities
    
    
    (3,412,574
    )
    
    
    (2,758,035
    )Cash flow from investing activities:Proceeds from sale of intellectual property
    
    
    600,000
    
    
    
    Capital expenditures
    
    
    (7,787
    )
    
    
    (7,490
    )Net cash generated / (used) by investing activities
    
    
    592,213
    
    
    
    (7,490
    )Cash flow from financing activities:Principal payments on financing agreements
    
    
    (343,570
    )
    
    
    (223,022
    )Borrowings in financing agreements
    
    
    
    
    
    
    500,000Net proceeds from issuance of common stock from employee options
    
    
    7,680
    
    
    
    22,042Net proceeds from issuance of common and preferred stock and exercise of warrants
    
    
    3,266,743
    
    
    
    2,242,273Net cash provided by financing activities
    
    
    2,930,853
    
    
    
    2,541,293Net increase / (decrease) in cash and cash equivalents
    
    
    110,492
    
    
    
    (224,232
    )Cash and cash equivalents, beginning of year
    
    
    236,869
    
    
    
    461,101Cash and cash equivalents, end of year
    
    $
    347,361
    
    
    $
    236,869Supplemental information:Cash paid during the year for interest
    
    $
    
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Conversions of notes payable into common stock
    
    $
    396,667
    
    
    
    323,333Conversions of accrued interest into common stock
    
    
    20,109
    
    
    
    50,291Conversions of accrued dividends into common stock
    
    
    395,349
    
    
    
    432,446Preferred stock dividends accrued
    
    
    325,163
    
    
    
    325,163Conversion of notes payable into preferred stock
    
    
    
    
    
    
    500,000Conversion of accrued interest into preferred stock
    
    
    
    
    
    
    4,520
  F-5




---



##### Table of Contents



AXCESS INTERNATIONAL, Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies
 (a) Description of Business
     (b) Company Organization and Basis of Presentation
   (c) Use of Estimates
  (d) Cash and Cash Equivalents




---



##### Table of Contents



(e) Inventory
  December 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    31,344
    
    
    $
    10,887Work-in-process
    
    
    114
    
    
    
    109Finished goods
    
    
    364,847
    
    
    
    101,274$
    396,305
    
    
    $
    112,270
   December 31,
    
    
    December 31,2006
    
    
    2005Product Cost
    
    $
    811,669
    
    
    $
    609,295Warranty Expense
    
    
    26,120
    
    
    
    (15,137
    )Inventory Impairment
    
    
    6,664
    
    
    
    55,557Cost of Sales
    
    $
    844,453
    
    
    $
    649,715
 (f) Property and Equipment
  (g) Intangible Assets
  (h) Impairment of Long-Lived Assets-and Long-Lived Assets to Be Disposed Of
  (i) Financial Instruments




---



##### Table of Contents



(j) Revenue Recognition
  (k) Research and Development Costs
  (l) Depreciation and Amortization
  (m) Stock-Based Compensation
 Share-Based Payment
   Pro-Forma Stock Compensation Expense for the Twelve Months Ended December 31, 2005




---



##### Table of Contents



TwelveMonthsEndedDecember 31,2005Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (6,454,635
    )Less: fair value of employee stock compensation
    
    
    (688,485
    )Pro forma net loss attributed to common stock
    
    
    (7,143,120
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.24
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.27
    )Weighted average Black-Scholes fair value
assumptionsRisk free interest rate
    
    
    4.25
    %Expected life
    
    3 yearsExpected volatility
    
    
    164
    %Expected dividend yield
    
    
    0.0
    %
  Twelve Months EndedDecember 31,2006
    
    
    2005Research and development expense
    
    $
    152,391
    
    
    $
    113,247General and administrative expense
    
    
    417,889
    
    
    
    447,594Selling and marketing expense
    
    
    140,152
    
    
    
    127,644Total
    
    $
    710,432
    
    
    $
    688,485
 (n) Income Taxes
  (o) Net Loss Per Common Share
  (p) Significant Customers
  (q) Recent Accounting Pronouncements




---



##### Table of Contents



(2) Operations, Liquidity and Going Concern
      (3) Prepaid Expenses and Other Current Assets
  December 31,
    
    
    December 31,2006
    
    
    2005Prepaid insurance
    
    $
    58,571
    
    
    $
    47,733Prepaid trade shows
    
    
    6,800
    
    
    
    6,600Prepaid other
    
    
    26,719
    
    
    
    18,295$
    92,090
    
    
    $
    72,628




---



##### Table of Contents



(4) Property, Plant and Equipment
  Amortization/December 31,
    
    
    December 31,
    
    
    Depreciation2006
    
    
    2005
    
    
    PeriodLeasehold improvements
    
    $
    66,435
    
    
    $
    66,435
    
    
    Lease termMachinery and equipment
    
    
    1,800,742
    
    
    
    1,792,956
    
    
    5 yearsFurniture and fixtures
    
    
    128,675
    
    
    
    128,675
    
    
    
    5 to 10 years1,995,852
    
    
    
    1,988,066Accumulated depreciation and amortization
    
    
    (1,977,483
    )
    
    
    (1,958,679
    )Property, plant and equipment, net
    
    $
    18,369
    
    
    $
    29,387
  (5) Intellectual property
  WeightedAverageRemainingUsefulLives atDecember 31,
    
    
    December 31,
    
    
    Useful
    
    
    December 31,2006
    
    
    2005
    
    
    Lives
    
    
    2005Purchased RFID technology
    
    $
    1,714,449
    
    
    $
    1,714,449
    
    
    5 years
    
    
    Purchased video technology
    
    
    5,087,483
    
    
    
    5,087,483
    
    
    5 years
    
    
    Internally developed software
    
    
    350,337
    
    
    
    350,337
    
    
    5 years
    
    
    7,152,269
    
    
    
    7,152,269Accumulated amortization and impairment
    
    
    (7,152,269
    )
    
    
    (7,152,269
    )Intellectual property, net
    
    $
    
    
    
    $
    
      (6) Gain on vendor settlements and statutory write-off
  December 31,
    
    
    December 31,2006
    
    
    2005Gain (loss) on settlements on vendor
    
    $
    (2,048
    )
    
    $
    10,000Expiration of statue of limitations
    
    
    89,184
    
    
    
    313,904Other
    
    
    15,380
    
    
    
    2,520$
    102,516
    
    
    $
    326,424




---



##### Table of Contents



(7) Accrued Liabilities
  December 31,
    
    
    December 31,2006
    
    
    2005Accrued vacation
    
    $
    183,624
    
    
    $
    171,881Accrued interest payable
    
    
    763,288
    
    
    
    606,939Accrued professional fees, litigation settlements and other
    
    
    200,103
    
    
    
    180,329$
    1,147,015
    
    
    $
    959,149
 (8) Lease Obligations
  Future LeasePayments2007
    
    $
    72,9502008
    
    
    1,950$
    74,900
 (9) Notes Payable to Stockholders (including convertible notes payable)
  December 31,
    
    
    December 31,2006
    
    
    2005Due to stockholders:5.00% PV Proceeds Holdings, Inc., due December 31, 2007
    
    $
    2,971,713
    
    
    $
    3,315,2835.00% Amphion Investment LLC note, due December 31, 2007
    
    
    393,787
    
    
    
    393,7877.00% convertible debt
    
    
    
    
    
    
    396,667Discount relating to 7.00% convertible debt
    
    
    
    
    
    
    (5,520
    )3,365,500
    
    
    
    4,100,217Less current maturities including discount amortization
    
    
    (3,365,500
    )
    
    
    (391,146
    )Non-current notes payable to stockholders
    
    $
    
    
    
    $
    3,709,071
  2007
    
    $
    3,365,500$
    3,365,500
 PV Proceeds Holdings, Inc.




---



##### Table of Contents



Amphion Investment LLC
   7% Convertible Note




---



##### Table of Contents



(10) Preferred Stock
  2003B
    
    Series
    
    Series
    
    Series
    
    SeriesSeries
    
    2004
    
    2005
    
    2006
    
    2006BNumber of shares authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    2,750,000
    
    
    
    1,200,000
    
    
    
    750,000Stated value
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued
and outstanding:December 31, 2005
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    956,495
    
    
    
    
    
    
    
    December 31, 2006
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    2,708,550
    
    
    
    1,200,000
    
    
    
    750,000Conversion ratio (or
conversion price) of
    
    
    1 to 1 into votingpreferred shares into common
    
    common
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into votingstock
    
    common stock
    
    common stock
    
    common stock
    
    common stockLiquidation preference
    
    None
    
    None
    
    None
    
    None
    
    NoneDividend rights
    
    7% per
    
    7% perannum, cumulative
    
    annum, cumulative
    
    None
    
    None
    
    None
 (a) Series 2003B Preferred Stock
   (b) Series 2004 Preferred Stock




---



##### Table of Contents



(c) Series 2005 Preferred Stock
      (d) Series 2006 Preferred Stock
   (e) Series 2006B Preferred Stock




---



##### Table of Contents



(11) Employee Benefit Plans
  (12) Stock Options and Warrants
 (a) Stock Option Plans.
      2006
    
    2005WEIGHTED
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    EXERCISEOPTIONS
    
    PRICE
    
    OPTIONS
    
    PRICEOptions outstanding at beginning of year
    
    
    3,117,485
    
    
    $
    2.40
    
    
    
    3,288,414
    
    
    $
    2.37Options granted
    
    
    1,683,000
    
    
    
    1.04
    
    
    
    
    
    
    
    Options exercised
    
    
    (19,200
    )
    
    
    0.40
    
    
    
    (55,100
    )
    
    
    0.40Options forfeited
    
    
    (164,412
    )
    
    
    1.47
    
    
    
    (115,829
    )
    
    
    2.47Options outstanding at end of year
    
    
    4,616,873
    
    
    
    1.95
    
    
    
    3,117,485
    
    
    
    2.40Options exercisable at end of year
    
    
    2,647,869
    
    
    
    2.19
    
    
    
    2,522,320
    
    
    
    2.11Options available for grant at the end of the year
    
    
    3,758,000
    
    
    
    
    
    
    
    5,000,000Fair value of options granted during the year
    
    
    1,531,730
    
    
    
    
    
    
    
    




---



##### Table of Contents



Intrinsic Value ofNumber of
    
    
    Weighted Average
    
    
    Vested UnexerciedOption Price
    
    Options
    
    
    Remaining Life
    
    
    Options$0.00 - $1.00
    
    
    845,400
    
    
    
    6.71
    
    
    $
    535,558$1.01 - $2.00
    
    
    2,520,258
    
    
    
    8.07
    
    
    
    750$2.01  $3.00
    
    
    789,375
    
    
    
    3.72$3.01 - $4.00
    
    
    193,840
    
    
    
    3.83$4.01 - $5.00
    
    
    20,000
    
    
    
    4.42$5.01 - $6.25
    
    
    248,000
    
    
    
    3.22Total
    
    
    4,616,873
    
    
    
    6.62
    
    
    $
    536,308
  2006
    
    2005WEIGHTED
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    EXERCISEWARRANTS
    
    PRICE
    
    OPTIONS
    
    PRICEWarrants outstanding at beginning of year
    
    
    4,184,474
    
    
    $
    1.70
    
    
    
    7,918,947
    
    
    $
    2.15Warrants issued
    
    
    3,102,055
    
    
    
    2.75
    
    
    
    2,699,335
    
    
    
    1.50Warrants exercised
    
    
    (50,000
    )
    
    
    0.65
    
    
    
    (1,998,906
    )
    
    
    1.03Warrants expired unexercised
    
    
    (594,808
    )
    
    
    2.50
    
    
    
    (4,434,902
    )
    
    
    2.53Warrants outstanding at end of year
    
    
    6,641,721
    
    
    
    2.10
    
    
    
    4,184,474
    
    
    
    1.70
  Number of
    
    Weighted AverageStrike Price
    
    Warrants
    
    Remaining Life$0.00 - $1.00
    
    
    
    
    
    
    $1.01 - $2.00
    
    
    6,351,723
    
    
    
    3.52$2.01  $3.00
    
    
    289,998
    
    
    
    0.58Total
    
    
    6,641,721
    
    
    
    3.52
   (13) Commitments and Contingencies




---



##### Table of Contents



(14) Income Taxes
   Net operating loss
    
    $
    18,452,000Property, equipment and intangibles
    
    
    1,378,000Other
    
    
    85,000Valuation allowance
    
    
    (19,915,000
    )$
    
    (15) Subsequent Event (unaudited)