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

**Washington,D.C. 20549**

#### ** **

**FORM 10-KSB**

 

| **ý**                                                         |   | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,  2003** |
|--------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                               |   |                                                                                                                                       |
| **or**                                                             |
|                                                               |   |                                                                                                                                       |
| **o**                                                              |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  EXCHANGE ACT**                                                                  |
|                                                               |   |                                                                                                                                       |
| **COMMISSION FILE NUMBER: 0-11933**                                |
|                                                               |   |                                                                                                                                       |
| **AXCESS  INTERNATIONAL INC.**                                     |
| (Exact name of small business  issuer as specified in its charter) |

 
| **Delaware**                                                    |   | **85-0294536**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |                                 |
| **3208 Commander Drive  Carrollton, Texas**                     |   | **75006**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |
|                                                            |   |                                 |
| **(972) 407-6080**                                              |
| (Issuer’s Telephone Number)                                |

 

Securities registered pursuant toSection 12(b) of the Exchange Act: **NONE**

Securities registered pursuant toSection 12(g) of the Exchange Act:

 
| **Title of Class:**                                            |   | **Name of exchange on which  registered:** |
|----------------------------------------------------------------|--------|--------------------------------------------|
| Common Stock, par value $.01 per share                         |   | Over-The-Counter Bulletin Board            |
|                                                           |   |                                       |
| **23,975,373**                                                 |
| (Number of Shares Outstanding as of: **March 15,  2004**) |

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý  No o

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.o

 

The issuer’s revenues for the fiscal yearended December 31, 2003 were $915,825.

 

On March 15, 2004, the aggregate marketvalue of voting and non-voting common equity held by non-affiliates of theregistrant was approximately $13,129,844. This amount was calculated byreducing the total number of shares of the registrant’s common stock outstandingby the total number of shares of common stock held by officers and directors,and stockholders owning in excess of 5% of the registrant’s common stock, andmultiplying the remainder by the average of the bid and asked price for theregistrant’s common stock on March 15, 2003, as reported on theOver-The-Counter Bulletin Board Market. The information provided shall in noway be construed as an admission that any officer, director or more than 5%stockholder of the issuer may be deemed an affiliate of the issuer or that suchperson is the beneficial owner of shares reported as being held by such person,and any such inference is hereby disclaimed.

 

Documents Incorporated by Reference:  **None**.

 

Transitional Small Business Disclosure Format: Yes  o  No  ý

 

 

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**AXCESSINTERNATIONAL INC.INDEX**

 
| **PART I**        |                                                                                                    |
|-------------------|---------------------------------------------------------------------------------------------------------|
|              | **Item 1. DESCRIPTION OF BUSINESS**                                                                     |   |
|              | **Risk Factors**                                                                                        |   |
|              |                                                                                                    |   |
|              | **Item 2. DESCRIPTION OF PROPERTIES**                                                                   |   |
|              |                                                                                                    |   |
|              | **Item 3. LEGAL PROCEEDINGS**                                                                           |   |
|              |                                                                                                    |   |
|              | **Item 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS**                                        |   |
|              |                                                                                                    |   |
| **PART II**       |                                                                                                    |
|              | **Item 5. MARKET FOR COMMON EQUITY AND  RELATED STOCKHOLDERS MATTERS**                                  |   |
|              |                                                                                                    |   |
|              | **Item 6. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |   |
|              |                                                                                                    |   |
|              | **Item 7. FINANCIAL STATEMENTS**                                                                        |   |
|              |                                                                                                    |   |
|              | **Item 8. CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**       |   |
|              |                                                                                                    |   |
| **PART III**      |                                                                                                    |
|              | **Item 9. DIRECTORS, EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL PERSONS;**                              |   |
|              |                                                                                                    |   |
|              | **Item 10. EXECUTIVE COMPENSATION**                                                                     |   |
|              |                                                                                                    |   |
|              | **Item 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**                      |   |
|              |                                                                                                    |   |
|              | **Item 12. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS**                                            |   |
|              |                                                                                                    |   |
|              | **Item 13. EXHIBITS AND REPORTS ON FORM 8-K**                                                           |   |
|              |                                                                                                    |   |
|              | **Item 14.  CONTROLS AND  PROCEDURES**                                                             |   |
|              |                                                                                                    |   |
| **SIGNATURES**    |                                                                                                    |
|              |                                                                                                    |   |
| FINANCIAL SECTION |                                                                                                    |
|              | REPORT OF INDEPENDENT AUDITORS                                                                          |   |
|              |                                                                                                    |   |
|              | Consolidated Balance Sheet                                                                              |   |
|              |                                                                                                    |   |
|              | Consolidated Statements of Operations                                                                   |   |
|              |                                                                                                    |   |
|              | Consolidated Statements of Stockholders’  Deficit                                                  |   |
|              |                                                                                                    |   |
|              | Consolidated Statements of Cash Flows                                                                   |   |
|              |                                                                                                    |   |
|              | Notes to Consolidated Financial Statements                                                              |   |

 

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**PART I**

 

**Forward Looking Statements**

 

This annual report on Form 10-KSBincludes “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whichcan be identified by the use of forward-looking terminology such as “may,”“can,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,”“will,” or “continue” or the negative thereof or other variations thereon orcomparable terminology.  All statementsother than statements of historical fact included in this annual report on Form10-KSB, including without limitation, the statements under “Item 1. Descriptionof Business” and “Item 6. Management’s Discussion and Analysis or Plan ofOperation” and located elsewhere herein regarding the financial position andliquidity of the Company (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-KSB, 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.

 

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

 

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

 

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

 

Our auditors have included anexplanatory paragraph in their audit opinion with respect to our consolidatedfinancial statements at December 31, 2003. The paragraph states that ourrecurring losses from operations and resulting continued dependence on accessto external financing raise substantial doubts about our ability to continue asa going concern. 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.

 

We do not have sufficient workingcapital to sustain our operations.  Wehave been unable to generate sufficient revenues to sustain our operations. Wewill have to obtain funds to meet our cash requirements through businessalliances, such as strategic or financial transactions with third parties, the saleof securities 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.

 

See “Risk Factors” and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**The Company**

 

Axcess, through its proprietary technology,provides advanced security surveillance and asset management systems that canautomatically locate, identify, track, monitor, count, and protect people,personal property and vehicles. The purpose of the systems provided by Axcessis to reduce loss and liability and improve operations to a client’s employees,personal property and facilities. Axcess utilizes two patented and integratedtechnologies: battery-powered wireless tagging called Active-Radio FrequencyIdentification (RFID) and network based streaming digital video. The primaryproducts or applications of our technology are network-based security videorecording and surveillance (closed circuit television), automatic personnel andvehicle access control, and automatic asset tracking and protection. The videosurveillance systems employ application and browser based software which allowssecurity personnel to be notified of a potential security breach through thecustomer’s own local area network computer system or through the Internet. Thealerts can be delivered to security personnel in the form of streaming video,emails or messages delivered to computer terminals, laptops and even hand-heldwireless PDAs.  Axcess providessolutions in enterprise vertical markets such as data centers, retail andconvenience stores, education, and corporate offices as well as homelandsecurity markets such as air and ground transportation, water treatmentfacilities, oil and gas, power plants, and the Department of Defense.  Ourprincipal offices are located at 3208 Commander Drive, Carrollton, Texas,75006, and its telephone number is 972-407-6080.

 

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**Company Evolution**

 

Axcess was formed inNovember 1982 as Lasertechnics, Inc. Prior to 1999, Axcess, through twosubsidiaries, sold high-end dye-sublimation card printers and high-speed lasermarking equipment. During 1998, we determined that it could not be consistentlyprofitable selling these products. Accordingly, in October 1998, wediscontinued the operations of our 96% owned subsidiary, Sandia Imaging SystemsCorporation, which was engaged in distributing and reselling high-enddye-sublimation card printers and consumables. We sold this business inDecember 1998. A second subsidiary, Lasertechnics Marking Corporation, wasengaged in fabricating, distributing and selling high-speed laser markingequipment. In April 1999, we sold Lasertechnics Marking Corporation toaffiliates of Amphion Ventures, L.P., a major stockholder of ours. See also“Item 12. Certain Relationships and Related Transactions.”

 

Axcess then made a concertedeffort to enter into the high technology security products marketplace, andidentified RFID as its initial target. In September 1998, we consummatedthe acquisition of the RFID based intellectual property assets of ASGI, Inc.and Nauta, Inc., unaffiliated entities to Axcess. The intellectual propertyassets included a patent, trade secret rights, software, hardware, productdesigns and all other technical information necessary for us to manufacture andmarket RFID products to the access control and asset management markets.

 

In July 1999, Axcessacquired another company in the security technology marketplace in the digitalvideo or CCTV area. We acquired substantially all of the assets, including thenetwork video technology, of Prism Video, Inc. Prism Video, Inc. was engaged inthe development, design, manufacture and marketing of video security technologyand video storage products. Axcess then hired new senior management experiencedin the packaging, sales, and marketing of high technology security products.

 

Axcess further developed the RFIDand network-based streaming video technologies throughout 2002 and 2003. It alsosecured key reference accounts and established branding for its product linesduring the period. In November 2001, we acquired all of the assets of IVEXCorporation relating to its VSA 1200 Project. The VSA 1200 project was anembedded processor-based multimedia streaming network appliance that pushesadvanced video and audio processing directly onto the corporate or Internetbackbone, then to any point on the network, including handheld devices. Axcessbelieves that IVEX’s unique architecture offers a strategic platform on whichto build value, adding video filtering and detection software, which we expectto improve the effectiveness of the IVEX product line as well as provide acompetitive advantage to us. Throughout 2002 and 2003, we used our referencecustomers and our brand awareness to secure key marketing channel partners.These partners are important to the future revenue growth of Axcess’ businessdue to their market presence. We believe that by integrating our systems intothe systems of these channel partners, 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.

 

In April 2003, we changedout name from Axcess Inc. to Axcess International, Inc.

 

**Sales Channels**

 

Axcess utilizes an indirect sales modelfocused primarily on system integrators as marketing channel partners capableof selling, installing and servicing network-based CCTV, access control andasset management applications. Other outlets include distributors, specialtydealers, catalog sales organizations, and OEMs (original equipmentmanufacturers). Axcess is continuing channel development in the securityindustry, by focusing on large system integrators that have significant salesin which we hope to participate in. The system integrators and dealers areresponsible for the installation in almost all cases. Axcess has three salespeople that support individual sales as needed. Using established channels togain widespread exposure and sales leverage is a well-utilized model in theindustry.

 

The indirect sales model allows us to addressmultiple industry segments generically, including manufacturing, wholesale /distribution, retail, services, government, education and finance. The indirectsales model fits the characteristics of our product portfolio with otherproducts, which become system solutions that require custom site planning andinstallation. Sales generally have multiplelocations with the average revenue per system location in the tens ofthousands, and are based on a new technology and its application to traditionalsecurity problems. By working directly with established marketing channelpartners, this indirect model also gives us the flexibility to introduce newproducts and applications as they are developed.

 

For certain focused large system salesopportunities, Axcess works more directly with end users. This approach enablesus to prospect directly for selectedlarger transactions and reference accounts in a prudent, “opportunity driven”fashion. The eventual installation is still accomplished through an establishedchannel partner.

 

**Partnering**

 

Axcess believes that the security integrationbusiness will continue to go through consolidations and grow by acquisition,and that each of the large integrators are working to develop full-productportfolios to provide the widest range of solutions for their customers. Wealso believe that our products can play a key role as strategic elements ofthese portfolios, and that the integrators bring to Axcess broad product andcorporate exposure and sales capabilities. The security systems integrationindustry is a $4.5 billion segment,up from $1.5 billion in 1995 and the segment is growing at approximately 12% -15% per annum according to a Security Distributing and Marketing (SDM) Magazinereport. The largest global integrators that provide security technologysolutions include Honeywell, Tyco, Siemens, Group 4 and General Electric.

 

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Axcess has signed partnering agreements withseveral integrators. In general, these agreements provide for the integratorsto sell and market Axcess’ products, favorably price Axcess’ products based onthe volume of the Axcess’ products sold, provide customer service support forthe Axcess products sold by the integrators, and integrate Axcess products intothe integrator’s system. We believe this integration strategy has advantagesover its prior partnership arrangements and will offer an increased opportunityfor rapid sales growth.

 

*Honeywell*.    In2000, Axcess signed a product development and marketing agreement withHoneywell and completed their integration and began actively marketing ourproducts during the fourth quarter of 2003. Honeywell has bid and sold Axcess’RFID products to support the UnitedStates Department of Defense procurements in asset management and we believethat some of the resulting programs may be awarded in 2004.

 

*Sonitrol (Tyco)*.   In2000, Axcess signed a strategic partnership agreement with Sonitrol. In 2002,Sonitrol finished the integration of Axcess’ software into thesecurity-monitoring platform of Sonitrol. The solution provides videocapability for their security monitoring franchises.

 

*Software House, Sensormatic, and ADT (Tyco)*.    In2001, Axcess was selected by Software House as the preferred provider of RFIDsolutions for asset management. Since then, Axcess’ ActiveTagTM products havebeen integrated into the C-Cure 800 access control system. Sensormatic and ADTalso have the capability to sell the Axcess system integrated into C-Cure.

 

**Other IntegratorPartners**

 

Axcess has signed partnership agreements with Anixter, Samsung USA, andLoronix (Comverse). The Axcess system has been integrated into thesystems provided by Samsung, Iteras, and Loronix, totaling four integrators whohave the Axcess system embedded into the solutions they sell.

 

**Products andTechnology**

 

Under the ActiveTagTM label, Axcess suppliesactive RFID system solutions that connect directly into standard securitysystems or utilize the enterprise networks or the Internet. ActiveTagTM is amulti-use, single-system solution scaleable for small, medium, and largeenterprises. This versatile technology has three patents awarded withapplications for two additional patents pending. The system supports a varietyof automatic monitoring and tracking applications, including electronic assetprotection and asset management, and automatic personnel and vehicle accesscontrol.

 

ActiveTagTM uses small, battery-powered tags that, when automaticallyactivated at control points throughout a facility, transmit a wireless messageto palm-size receivers networked on an existing corporate local area network(commonly referred to as LAN). Tag identification and location information areinstantly forwarded to a local security control panel or transmitted over thenetwork to a host computer. ActiveTracTM is an application software program thatlogs and displays the information from the tag to provide a comprehensivepicture of the person, asset or vehicle being tracked. In addition, Axcess iscontinuing to develop OnlineSupervisorTM software, which has a browser-baseddisplay and provides real-time management solutions through reporting, display,and decision and control functions.

 

ActiveTagTM tracks assets as the assets enter, exit and move within afacility to monitor their whereabouts, detect theft and prevent loss.ActiveTagTM software can link assets and personnel together to provide a non-invasive,hands-free access control and asset protection solution at perimeter doors andother controlled entry and exit points. Personnel tags include a panic buttonfor increased personal safety and peace of mind. This software can trackvehicle and equipment movements to provide real-time, paperless logistics dataand automated gate control. Not only can pallets, containers or boxes betracked in real-time, but also a beaconing feature (where the tag transmits ona fixed time interval) allows the user to automatically count and monitor allinventory, even while stationary. One version of the RFID tag includes anembedded temperature sensor inside to monitor and transmit measurement ofambient temperature or to signal when the temperature moves outside of a definedrange. This sensor capability is utilized today for helping with the earlydetection of computer server failure in data centers.  Another version of the RFID tag has external sensors so the tagcan act as a low-cost wireless transmitter.

 

The Axcess Prism Video products offer a fully networked, digital videosystem for enterprises providing remote and local security video (CCTV), aswell as digital video recording. Enterprises use this system to transmit andview video to detect security incidents. Axcess offers both standards-basedcompression, currently H.323 and JPEG, and proprietary VSLE video compression,supported by twelve patents with applications for one more patent pending. Theadvanced compression technology allows video to be viewed live over traditionalphone lines or on any network computer, and recorded and efficiently stored foranalysis at a later time. A full array of Prism Products, including cameras,transmitters and recorders, provide customers with low cost, enterprise-widedigital video solutions over the network. Cameras and transmitters can utilizeany transmission facility, including phone lines, ISDN, LAN, Internet or otherfacility. High speed, real-time video and audio provides visibility intooperations to improve life safety, improve efficiency, observe sales programs,reduce theft, and monitor compliance with both legal and corporate guidelines.

 

The LANconnectTM product line is comprised of advanced multimediastreaming network appliances that acquire video at the source, and then provideadvanced video and audio processing over the network to digital recorders andon to the other points of the network. The combination of highly-integratedembedded processing power and programmability allows digital video processingto be distributed at the analog source, freeing up valuable network bandwidth,reducing video storage

 

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requirements, eliminating single point of failure and enabling the userto select the quality of the video. The LANconnect system also stores videodigitally, which allows fully distributed storage. These storage possibilitiesmake the video network efficient by transmitting needed video only, yet makingall of the video available on demand. Only needed, “exception-based” video istransmitted either on alarm or on-demand.

 

The LANcamTM network camera transmits digitized CCTV video directly overan enterprise LAN at low bandwidths. Each camera is independently controllable,including the control for the amount of network capacity or bandwidth thecamera utilizes, which prevents performance impacts on other applications.

 

Network-based digital video recording can be widely distributedgeographically using LANcordersTM to provide easy access to recorded video alongwith live video on-demand. The Axcess specialized implementation includes asoftware only videocassette recorder, or time-lapse recorder, utilizingstandard computers on the existing network for recording rather than dedicatedhardware recorders. This architecture includes distributed video recordingalong with playback and live viewing over an existing computer network. Webelieve that this inherently low cost and flexible architecture establishes afoundation upon which we may compete today and in the future.

 

The Prism Video line includes a suite of software products for viewinglive and recorded video. These products range from dedicated security softwareapplications, to web page viewing for casual use. The products also permit auser to view video on wireless devices such as handheld computers connected toa standard wireless LAN system.

 

The OnlinesupervisorTM system integrates the presentation of RFID dataand digital video to a standard web browser. Through a display customized toeach end user, real-time status is integrated with live and recorded digitalvideo. Events that can be shown involve premises security, physical assetprotection, personnel staffing, and operations performance. Up to the minutepersonnel and asset inventory counts are provided. Live streaming video isavailable of each site, via the network connection. Each monitored event islinked to the database of recorded video files to enable the viewing of taggedevents such as personnel activity at door entrances and exits, access tocontrolled areas, and asset movements. The system is available as a standaloneenterprise solution or as a portal-based solution hosted by Axcess. We believethat the system is unique in its ability to link information read from a tagwith video clips and pictures from the scene surrounding the tag.

 

Typical applications of the our products include:

 

“*Hands-free”automatic personnel identification and access control*. 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. Theidentification can be linked to tagged assets to improve asset managementaccountability.

 

“*Hands-free”automatic vehicle identification and access control*. Vehiclesautomatically enter a controlled or gated area with a validated tag placed inthe vehicle. The tag is recognized as it approaches the gate, allowing “rollingaccess” and facilitating entrance and exit speed. For industrial applications,driver tags and inventory tags can be matched to ensure integrity of theshipment.

 

*Electronic asset protection and tracking*.Assets, such as computers and medical equipment, are automatically tracked asthey move throughout the facility and protected if they approach a perimeterdoor without authorization. Linking to custodian tags provides accountabilityand instant authorized movement.

 

*Electronic fixed asset inventory andprotection*. Static assets such as desktop computerscan be tagged and automatically inventoried at periodic intervals. Should theassets be moved, their location is identified and automatically tracked.

 

*Electronic inventory control and tracking*.Inventory items, such as pallets, crates, barrels and vessels, can beautomatically located, identified, and tracked as they move, and protectedagainst unauthorized removal.

 

*Corporate CCTV digital video recording*.Traditional security video recording can be done digitally, apart from thesource camera to ensure efficiency, quality, performance and availability.

 

*Remote CCTV surveillance*.Traditional security surveillance is provided via telephone line or over thenetwork to give remote viewing for security central monitoring and foroperations review. In retail stores, this provides life safety as well asimproved monitoring of operations. In schools, student monitoring is improvedwith live, on-campus video available to the police. In homeland defense, livevideo of an incident is available to authorities, including mobileprofessionals.

 

*Automatic personnel accounting (mustering)*.In cases of catastrophic disaster involving buildings, tags on people are usedto identify who exited safely.

 

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**Markets**

 

Axcess operates in the electronic security products and systemsmarkets. Its products have been designed, built and introduced with generalpurpose, broad applications in mind, cutting across many industries. Someexamples of product solutions in selected markets are provided below.

 

*Retail CCTV*.   Management and security station personnelcan use Axcess products to remotely supervise facilities such as retail stores,convenience stores, and fast food stores from the desktop using videotransmitted over an enterprise WAN, the Internet, or modem. Retail personnelcan also use remote video systems in retail for life safety and to reduceemployee theft. Axcess has many notable customers in this market.

 

*Education*. Various schools and universities are implementing tagging to protectdata center assets; schools and universities are also using networked video forlife safety reasons. Many schools and universities already have built-outnetworks, so RFID tagging and networked video may be added for the incrementalcost of this equipment. Built-out networks also offer additional flexibility tomove video remotely and share video data with school administrators andauthorities. A federal program entitled “Safe Schools, Health Schools” isscheduled to fund additional security equipment in kindergarten through twelfthgrade over the next several years, and Axcess intends to market its products toschools taking advantage of this program.

 

*Corporate Access Control and Asset Management*. Employees may gain access to companypremises using automatic hands-free personnel RFID tags that may also be placedon corporate assets, such as laptops, to track movements and prevent loss.Axcess, through its control-point architecture, believes that it has a uniquesolution to address this market by tagging laptops and implementing controlzones.

 

*Corporate Security CCTV*.  Webelieve that security CCTV is the fastest growing segment for security productsand systems. Management personnel can use security CCTV to view live motionvideo over the network and access stored video clips on-demand of operationsactivity, personnel corporate compliance, and security. Many existing securitysystems are analog, limiting video availability to cabled networks andvideocassette recorder tape. The Axcess products provide a bridge from analogsystems to digital networks. Networked video enables viewing from desktops andwireless handhelds by multiple departments. Recorded video may be madeavailable to numerous locations on the corporate LAN or via the Internet.

 

*Airport Security and Homeland Defense*. Axcess can provide hands-free premiseaccess control to employees and authorized vehicles needing easy, secure accessto the terminal and tarmac. Our products can provide controlled access for fueltrucks at the fuel depot. Courtesy vehicles can use access control for addedgate security. Networked video and recording may be added to the networkinfrastructure to extend security visibility throughout the terminal andgrounds.

 

*Data Center Asset Management*. Axcess products locate and protect computerservers, central processing units and other equipment using RFID tagging.Tagged servers can also be monitored with temperature sensor tags that not onlyprotect against loss and misplacement, but also provide an early indication ofpotential failure. Axcess products provide security and visibility from theentrances to the server and cage level. Many legacy data centers and computerrooms have the same characteristics. In addition to tagging the computers,users of Axcess products can tag authorized personnel to facilitate easymovement of the assets and to restrict access to sensitive areas. Videocomplements the asset management application by providing live viewingcapability into the co-location cage or cabinet area. Archived video is alsoavailable to investigate asset-based activity alarms.

 

*Healthcare Resource Management*. Our products have been designed to tagpersonnel and equipment to provide better utilization of clinical devices, tolocate patients, and to stage devices in order to speed up procedures. Users ofour RFID tagging products may reduce equipment and personnel costs associatedwith patients moving within the facility. Our equipment may enable healthcarefacilities to increase revenues from more efficient billing of equipment usage.

 

*Inventory and Transportation Management*. Cartons, pallets, containers and evenmissiles may be tagged so they can be located, tracked and monitored tofacilitate movement, rapid order picking and inventory verification. Bar codingis common in source product labeling at the start of the supply chain. Onceproducts are packaged in larger containers for shipping and warehousing, RFIDtagging complements bar coding and the warehouse system by enabling automaticlong-range identification and location of products. In production applications,the tag can be a wireless sensor for a production line, transmit informationabout the build specifications for a product, and send notifications from thefinished goods area after production is completed.

 

**Patents andProprietary Technology**

 

Axcess relies on a combination of patents, trade secrets, technologylicenses, and other intellectual property rights. In total, we have receivedfifteen U.S. patents with international coverage around the globe. We also havethree patents in various stages of prosecution with foreign patent authorities.The period covered by our issued patents ranges from seven to seventeen years.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,

 

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including Axcess Inc.TM the Axcess Inc. (logo)TM LANcam, ActiveTagTM,onlineaccess.comTM, Prism VideoTM and LANcorderTM.

 

**Engineering andDevelopment**

 

The Prism VideoTM product line provides flexible capture and placementof video on a network for recording and display over the network. During 2002,we completed the majority of the integration tasks for the Prism VideoTM linewith the transmitter products we acquired from IVEX Corporation. The IVEXproducts included a network transmitter capable of serving up to eightsimultaneous viewers, and a combined transmitter and recorder, which allowrecording to be done and retained, near the camera. The IVEX products areintegrated into our core software platforms to offer customers an increasedrange of feature and function options. During 2002, we completed development ofspecific feature and function enhancements to its Prism VideoTM product linethat integrators have requested. We are developing advanced video processingalgorithms and will continue to focus on these algorithms to increase theintelligence of our video appliances. Examples of these algorithms includeadvanced motion detection, motion tracking, speed and direction measurement,object addition and subtraction detection, facial recognition and people counting.

 

During 2002, we developed a new, smaller key-fob size form factor forthe RFID tags and during 2003 we introduced an electronic bracelet forautomatically identifying, tracking and protecting people or assets.  We expect that these tags will reduce thecost of a personnel tag compared to previous form factors. We continue to lookat the development of new semiconductors for integrating RFID functions intosmaller and less costly devices. We intend to work toward the inclusion ofvarious sensors, such as motion, humidity and power, to enable the taggingsystem to more fully address market needs in the data center and logisticsmarkets. We anticipate that third party improvements to battery technology andmanufacturing methods will enable size reduction.

 

OnlinesupervisorTM is a highly versatile product where radiofrequency identification (RFID) tag transmissions are received from readersover the network, then filtered against the various criteria needed formanaging a business most productively. The integration middleware enables virtually any data format to bereceived, translated into another, and transmitted to the destination system.The browser-based viewing dashboard is customizable by type of user,particularly useful for customized alerting. Alerts are linked automatically toa digital video clip of the transaction for supervisory review.  OnlinesupervisorTM developmentcontinues to add additional data sources that can be delivered over the sameplatform, making the product expandable beyond RFID data on an industryspecific basis into areas including condition monitoring and data mining.

 

**Competition**

 

The market for our products and services is intensely competitive andis characterized by rapidly changing technology, evolving user needs and the frequentintroduction of new products.

 

A number of our competitors are more established, benefit from greatername recognition and have substantially greater financial, technical andmarketing resources. We believe that the principal factors affecting competitionin our markets include product functionality, performance, flexibility andfeatures, use of open standards technology, quality of service and support,company reputation, price and overall costs of ownership. In order to compete,we seek to provide products that are technologically superior and that deliverbetter value. We believe that the following factors help distinguish ourproducts from those of competitors.

 

The ActiveTagTM RFID automatic identification system benefits from lowcost, long-range tag activation and transmission, which have a small formfactor, long-term battery life, and also a platform for adding sensorcapabilities. The activation of tags occurs at a separate low frequency, apatented approach, which we believe, gives Axcess an advantage among activeRFID companies in the ability to establish physical control points, such asdoorways, and virtual control points, such as hallways. The receiver system isdesigned as a low cost infrastructure that connects directly into legacysystems and also runs on a standard Ethernet network backbone. The system isflexible enough to support multiple applications for people, physical assets,and vehicles. Finally, the tag data is integrated with live and recordedstreaming video on a multi-user browser display platform for both casualviewing and industrial requirements.

 

Flexibility comes from the use of dual frequencies for wake-up andtransmission; low frequency on wake-up and UHF for transmission. Tagtransmission at UHF penetrates all materials except metal, enabling reliabletag transmission. This also enables long range tag reads using omni-directionalantennas so that no line of sight is required. A simple transmission protocolallows multiple tags to be read simultaneously. The advanced battery managementdesign provides battery life of three to five years under normal operatingconditions, and five to seven years with an enhanced battery. Control point activation,combined with the ability for tags to transmit on set time intervals or bequeried individually enables the ActiveTagTM line to meet the major userrequirements, including dynamic tracking, static tracking, multiplesimultaneous tag reads, “authorized” movement of tagged assets, and a long readrange for tag transmission, which we believe gives us an advantage. We alsobelieve that these features enable the system to outperform passive systems,relative location positioning systems, and infrared and combo infrared / RFIDsystems from competitors.

 

The Prism VideoTM is a complete end-to-end system, which includes videotransmitters, streaming video cameras, software digital recording, web display,and wireless handheld display are all integrated in an open architecturefashion on the

 

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network using the LAN and Internet. The solution reduces the need forspecial camera cabling, also enabling network-based video recording to beplaced in geographically optimal positions. With the video on the network, allvideo is viewable from anywhere in the world the network provides authorizedaccess. The all-digital solution focuses on event-based security breachdetection, alarming, and evidence recording and notification. It makes a videosecurity system more economic, have a greater geographical reach and operatemore effectively. Personnel are able to focus on prevention and response ratherthan on evidence processing. Its efficiency is derived in part from advancedvideo compression performance, giving users the choice of standards-based H.323and JPEG, or proprietary VSLE. Whether the video is compressed in the LANcamTMcamera, the LANconnectTM network appliance products, or in a MicroMole videotransmitter, the compression will use between two and thirty times lessbandwidth than uncompressed systems. This means more cameras can be used on agiven network, and if only standard modem links are available, the videoperformance will still be adequate. Even the fast performance proprietaryscheme, VSLE, can be converted to the Windows standard .avi frame format forsoftware-only recording and live display. The network appliances under theLANconnect product family are programmable, ready for upgrades in compressiontypes and advanced video processing, which allows automated detection ofsecurity breaches. Axcess believes that its solutions provide an inherent partscost advantage over competitor’s digital video devices due to the simplicity ofthe compression code when implemented in an embedded system such as the LANcam.Similarly, because of this compression efficiency, stored video will take upless capacity on a hard drive, or other type of storage media than otherdigital video recorders. All camera, transmitter, and storage products arenetwork enabled. The Prism VideoTM line includes over thirty interfaces toperipheral control equipment such as pan, tilt, zoom, and multiplexers makingit compatible with legacy CCTV equipment and requirements.

 

**Manufacturing andSuppliers**

 

We outsource the manufacturing of our products and consequently dependon outside manufacturers to supply finished product. A large number ofmanufacturers in the U.S. have the capability to produce our products. Weperiodically seek bids for manufacturing and have multiple manufacturingsources for each of its products.

 

Although we depend on a number of outside suppliers for components ofour products, we have designed our current line of products so that we are notdependent on a single source for any of our products’ components. Most of thecomponents we use are “off the shelf” and are readily available. Although wehave generally been able to secure adequate suppliers, the inability of theCompany in the future to obtain sufficient suppliers of component parts couldhave a material adverse effect on our results of operations.

 

There are currently no long-term agreements between us and ourmanufacturers or suppliers.

 

**Research andDevelopment**

 

If we have sufficient working capital, we plan to continually developnew products utilizing our existing technology and we plan to bring newproducts to market throughout 2004. During 2002, the assimilation of the IVEXvideo products was largely completed. New products in both video and RFID willbe built upon the core platforms now in place. In RFID, we believe that our newtag with a key-fob form factor and electronic bracelet will offer a lower costand smaller version of the existing personnel access control tags. We believethese new tags will also be used for protecting assets from theft. In video, webelieve that the architecture acquired from IVEX will lead to products withadvanced detection software for automatically detecting security incidents. Thenew products should take advantage of the ability to record and store securityvideo at the camera location and transmit both live and recorded security videovia multiple simultaneous connections to critical users. There can be noassurance that we will have sufficient working capital to undertake theseactivities.

 

During 2003 and 2002, we spent $632,974 and $1,632,385, respectively,for research and development and plan to continue spending similar amounts infiscal year 2004 to develop products to support our continued revenue growth.However, any such spending will be dependent upon our ability to raiseadditional capital, as we do not have sufficient revenues to support such anactivity using our own resources.

 

**Employees**

 

As of December 31, 2003, we had fifteen full-time employees and nopart-time employees.

 

**Government Regulation**

 

Government regulations have not had, nor are they expected to have, amaterial effect on Axcess’ financial condition, results of operations orcompetitive position. FCC approval is required for some of our principalproducts.

 

**Environmental Factors**

 

There has been, and it is anticipated that there will continue to be,no material effect upon Axcess’ capital expenditures, earnings, or competitiveposition due to compliance with existing provisions of federal, state and locallaws regulating the discharge of material into, or otherwise relating to theprotection of, the environment.

 

**Risk Factors**

 

We operate in a changingenvironment that involves numerous risks, some of which are beyond our control.The following highlights some of these risks.

 

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

 

Our auditors have included an explanatory paragraph in their auditopinion with respect to our consolidated financial statements for the fiscalyear ended December 31, 2003. The paragraph states that our recurringlosses from operations and resulting continued dependence on external financingraise substantial doubts about our ability to continue as a going concern. Ourexisting and anticipated capital needs are significant. We believe our existingfinancing arrangements and estimated operating cash flows will not besufficient to fund our operations and working capital needs for the next twelvemonths and there can be no assurance that we will be able to fund our existingcapital 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 thananticipated revenues, increased expenses, potential acquisitions, or otherevents may cause us to seek additional financing sooner than anticipated,prevent us from achieving the goals of our business plan or expansion strategy,or prevent our newly acquired businesses, if any, from operating profitably. Ifwe are unable to fund our existing capital needs under our existing creditfacilities, or are otherwise unable to secure additional equity financing, ifnecessary, our business could be materially adversely affected. *See* Management’s Discussion and Analysisof Financial Condition and Results of Operation—Liquidity and CapitalResources.

 

**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, 2003, we haveincurred an accumulated loss of approximately $150.0 million and have beenprofitable in only one fiscal year during that time. There can be no assurancethat we will generate sufficient revenues to achieve profitability in thefuture. If we are unable to generate sufficient revenues, the valuation ofpurchased intellectual property may be affected. Recoverability of assets to beheld and used is measured by a comparison of the carrying amount of an asset tofuture net flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the asset exceeds the fair value of theasset. Our continued slow revenue growth and operating losses may indicatecircumstances requiring an impairment to be recorded.

 

If our losses continue, we will have to obtain funds to meet our cashrequirements through business alliances, such as strategic or financialtransactions with third parties, the sale of securities or other financingarrangements, or we may be required to curtail our operations, seek a mergerpartner, or seek protection under federal bankruptcy laws. Any of the foregoingmay be on terms that are unfavorable to us or disadvantageous to existing stockholders.In addition, no assurance may be given that we will be successful in raisingadditional funds or entering into business alliances. *See* Management’s Discussion and Analysisof Financial Condition and Results of Operation—Liquidity and Capital Resources.

 

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

 

The technology we use may become obsolete or limit our ability tocompete effectively within the wireless, automatic identification andmulti-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 pace withtechnological developments and emerging industry standards and that addressincreasingly sophisticated customer requirements.

 

Our business would be adversely affected ifwe were to incur difficulties or delays in developing new products orenhancements or if those products or enhancements did not gain marketacceptance. Specifically:

 

•                  we may not be successful in identifying,developing and marketing product enhancements or new products that respond totechnological change or evolving industry standards;

 

•                  we may experience difficulties that coulddelay or prevent the successful development, introduction and marketing ofthese products; and

 

•                  we may experience difficulties that coulddelay or prevent the successful development, introduction and marketing ofthese products; and

 

•                  our new products and enhanced products maynot adequately meet the requirements of the marketplace and achieve marketacceptance or may not keep pace with advances made by our competitors.

 

Wecurrently hold fifteen U.S. patents. We have three patents in various stages ofprosecution with foreign patent authorities and several additional patentsbeing prepared for filing. The time period covered by our patents ranges fromseven to seventeen years; however, there can be no assurance that ourtechnologies will be accepted in the marketplace. In addition, differenttechnologies owned by others could arise that would be superior or moremarketable than ours. *See*Description of Business—Patents and Proprietary Technology.

 

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

 

Our business, success, growth, operating results, and profitability aredependent upon the skills, experience, efforts, performance, and abilities ofmembers of management and other key personnel. We depend upon members ofmanagement and key personnel, including key sales personnel, to generate newbusiness and to service new and existing clients. If any members of managementor key personnel were to leave us, our business, success, growth, operatingresults, and profitability could suffer. If we lose any key personnel, we mayalso be unable to prevent the unauthorized disclosure or use of our technicalknowledge, practices, procedures, or client lists by the former personnel.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 upon our ability toattract and retain highly qualified and experienced personnel who possess theskills and experience necessary to satisfy our business and client serviceneeds. These personnel may be in great demand, particularly in certaingeographic 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 growthopportunities. To attract and retain these individuals, we will be required to investa significant amount of time and money. Many of the companies with which wewill compete for experienced personnel have greater financial resources andname recognition than we do. In addition, an important component of overallcompensation for our personnel will be equity. If our stock price does notincrease over time, it may be more difficult to retain personnel who have beencompensated with stock awards or options. The inability to attract, train, andretain experienced personnel could have a material adverse effect on ourbusiness.

 

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

 

We operate in competitive, fragmented industries and compete forclients with a variety of larger and smaller companies that offer similarproducts and services. These industries are subject to rapid technology changesand are significantly affected by new products and services and the marketingactivities of industry participants, which may often be beyond our control. Dueto 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 competition from new entrantsinto the market. We may be unable to compete with large multi-product securitycompanies, including the security divisions of large international firms. Thisincreased competition may result in pricing pressures, loss of market share orloss of clients, any of which could have an adverse effect on our business,financial condition, operating results and cash flows. *See* Description of Business—Competition.

 

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

 

As a cost efficiency measure, we do not manufacture our own parts andproduct line but contract such supply and manufacture to third parties. Thefailure by any of our vendors, suppliers or contractors to fulfill theircontractual obligations to us could adversely affect our operations. If we areunable to obtain sufficient components and manufacturers for our products, ordevelop alternative sources, delays in product introductions or shipments couldoccur and could have a material adverse effect on 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 March 15, 2004, Amphion Ventures, L.P. and affiliates ofAmphion Ventures, L.P., including Amphion Partners, Amphion Investments,Antiope Partners, XL Vision, Inc., Amphion Investments, NVW, LLC, AmphionCapital Management, LLC and VennWorks, LLC (formerly incuVest LLC)(collectively, the “Amphion Group”) owned approximately 71% of our outstandingvoting stock. This level of ownership provides the Amphion Group with the powerto determine the outcome of almost any matter submitted for the vote or consentof our stockholders. Additionally, two of our five directors are affiliates ofthe Amphion Group. *See* SecurityOwnership of Certain Beneficial Owners and Management.

 

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

 

The price of our common stock has been highly volatile and may continueto be highly volatile. For instance, from November 1, 2002 throughSeptember 15, 2003, our common stock traded from a low of $.025 to a highof $3.00 per share. The price of our common stock has experienced, and maycontinue to experience, significant volatility in response to many factors,some of which are beyond our control and may not even be directly related tous, including:

 

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•                  changes in financial estimates orrecommendations by securities analysts regarding us or our common stock;

 

•                  our performance and the performance of ourcompetitors and other companies in the technology or marketing sectors;

 

•                  quarterly fluctuations in our operatingresults or the operating results of other companies in the technology ormarketing sectors;

 

•                  additions or departures of key personnel;

 

•                  the trading volume of our common stock;

 

•                  general economic conditions and their effecton the technology or advertising and marketing sectors, in general; and

 

•                  competition, natural disasters, acts of waror terrorism or other developments affecting us or our competitors.

 

In addition, in recent years, the stock market has experienced extremeprice and volume fluctuations, which have often been unrelated ordisproportionate to the operating performance of particular companies. Thisvolatility has significantly affected and may continue to affect, the price ofour common stock and may adversely affect your ability to sell your shares andour ability to raise additional capital. *See*Market and Common Equity and Related Stockholder Matters.

 

**Our common stock maybe subject to penny stock rules and regulations.**

 

Federalrules and regulations under the Exchange Act regulate the trading of so-calledpenny stocks, which generally refers to low-priced (below $5.00), speculativesecurities of very small companies traded on the OTC Bulletin Board or in thePink Sheets. Trading, if any, in shares of our common stock may be subject tothe full range of penny stock rules. Before a broker/dealer can sell a pennystock, these rules require the broker/dealer to first approve the investor forthe transaction and obtain from the investor a written agreement regarding thetransaction. The broker/dealer must also furnish the investor with a documentdescribing the risks of investing in penny stocks. The broker/dealer must alsotell the investor the current market quotation, if any, for the penny stock andthe compensation the broker/dealer will receive for the trade. Finally, thebroker/dealer must send monthly account statements showing the market value ofeach penny stock held in the investor’s account. If these rules are notfollowed by the broker/dealer, the investor may have no obligation to purchasethe shares. Accordingly, these rules and regulations may make it more expensiveand difficult for broker/dealers to sell shares of our common stock, andpurchasers of our common stock may experience difficulty in selling such sharesin secondary trading markets.

 

**Item 2.** DESCRIPTION OF PROPERTIES.

** **

Axcessleases a 6,509 square foot facility in Carrollton, Texas, which is used foradministrative, engineering and sales offices. This facility is rented under amonth-to-month agreement. The monthly rent is $5,000. We also lease 1,500square feet in Costa Mesa, California, which is used for engineering space. Thelease will terminate in September 2004 and the monthly rent is $1,850. Webelieve these facilities are suitable and adequate to accommodate ouroperations. We consider each of these facilities to be in good condition and itis our opinion that the facilities are adequately covered by insurance.

 

**Item 3.** LEGAL PROCEEDINGS.

** **

Axcess is engaged in a number oflawsuits with approximately eleven vendors who claim they are owed amounts from$500 to $45,000, which aggregates in total $188,188. We are currently defendingor seeking to settle each of the vendor’s claims.  At December 31, 2003, we had accrued the delinquent amountswe expect to be liable for, for the claims described in this paragraph.

 

**Item 4.** SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.

** **

None.

 

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**PARTII**

 

**Item 5.****MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS.**

 

Axcess’common shares trade on the over-the-counter bulletin board under the symbolAXSI.BB. Prior to September 2002, our common stock traded on the NASDAQSmallCap Market tier of the NASDAQ Stock Market under the symbol AXSI. We werenotified in September of 2002 that we no longer qualified for the NASDAQSmallCap minimum listing requirements. The table below sets forth high and lowclosing prices for our common stock during each of the periods indicated, asreported the over-the-counter bulletin board by NASDAQ. Such price quotationsrepresent inter-dealer prices without retail markup, markdown or commission andmay not necessarily represent actual transactions. 

 
|              |   | **2003** |   | **2002** |   |
|-------------------|--------|----------|--------|----------|--------|
| **QUARTER ENDED** |   | **LOW**  |   | **HIGH** |   | **LOW** |   | **HIGH** |   |
| March 31     |   | $        | 0.30   |     | $      | 0.88 |   | $ | 2.20 |   | $ | 4.36 |   |
| June 30      |   | 0.56     |   | 2.55     |   | 0.93 |   | 2.50 |   |
| September 30 |   | 2.20     |   | 2.85     |   | 1.00 |   | 1.98 |   |
| December 31  |   | 1.95     |   | 2.59     |   | 0.25 |   | 1.01 |   |
|                   |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

As ofMarch 15, 2004, we had approximately 893 holders of record of votingcommon stock.

 

Axcesshas not paid dividends on our common stock and does not anticipate the paymentof cash dividends in the foreseeable future, as we contemplate retaining allearnings to finance the continued growth of our business.

 

**Equity CompensationPlans**

 

Information concerning the 2001 EquityIncentive Plan and the 1998 Directors Compensation Plan is presented in thetable that follows.  See “Item 13.  Stock Options and Warrants” in the notes tothe financial statements.

 
| **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     |   | 2,468,465                                                                                           |   | $                                                                                  | 2.40   |                                                                                                  | 715,750 |   |
| Equity compensation plans not approved by security  holders |   | —                                                                                              |   | —                                                                             |   | —                                                                                                |    |
| Total                                                       |   | 2,468,465                                                                                           |   | $                                                                                  | 2.40   |                                                                                                  | 715,750 |   |

 

**Recent Sale ofUnregistered Securities**

 

During 2003, we issued unregistered securities in connection with eachof the transactions described below. The issuance of the Preferred Stock, commonstock and promissory notes were exempt from the registration requirements ofthe Securities Act by virtue of Sections 4(2) and 4(6) thereof as a transactionnot involving a public offering and made solely to accredited investors.  An appropriate restrictive legend wasaffixed to the stock certificates and warrants.

 

**ConvertiblePromissory Note**

 

OnJanuary 17, 2003, Axcess entered into a bridge financing agreement withten accredited investors for the sale and issuance of 3.05 “units” to theinvestors for an aggregate purchase price of $305,000.  Each unit consists ofa convertible promissory note in the amount of $100,000 and 50,000 unregisteredshares of our common stock.

 

Pursuantto the bridge financing agreement, we registered the shares of common stockcomprising the units of the bridge financing agreement. By agreement, eachinvestor may not sell more than one-third of the common stock comprising theunits during any calendar month. The convertible promissory notes comprisingthe units bear interest at an annual rate of 7% and mature on January 31,2006. On each of January 31, 2004, January 31, 2005 andJanuary 31, 2006, the investors have the option to convert one-third ofthe principal amount of the notes into common stock of Axcess. The conversionprice of the notes is initially 65% of the average closing price of a share ofour common stock for the twenty trading days preceding the given anniversarydate of the notes. The maximum conversion price shall be $2.00 per share andthe minimum conversion price shall be $0.50 per share. The conversion pricewill be subject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in our shares of common stock. The notes may be prepaidin whole or in part by us without premium or penalty.

 

Noholders have converted their promissory notes or accrued interest in to commonstock of Axcess.

 

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**2003 PreferredEquity Offering**

 

Wecompleted a $1,537,500 exempt Preferred Stock Offering during May of 2003. ThePreferred Stock is designated as 2003 Preferred and each $75,000 unit consistedof 100,000 shares of Preferred Stock bearing a 7% dividend, approximately15,000 shares of common stock and 100,000 warrants to purchase our common stockexercisable for two years at $1.00 per share. The offering also included anautomatic conversion into Common Stock on a one for one basis if the closingtwenty-day average stock price is over $2.00. On June 5, 2003 the closingtwenty-day average was at $2.02 and the 2003 Preferred converted to 2,050,001shares of Common Stock.  InDecember 2003, we completed as SB-2 registration registering the commonshares issued in relation to the 2003 Preferred Equity Offering.

 

**2003B PreferredEquity Offering**

 

In November 2003, Axcessraised a net of approximately $2,500,000 of additional working capital throughan exempt Section 4(6) and a Section 4(2) privateoffering of Preferred Stock to accredited institutional investors.  ThePreferred Stock is designated as 2003B Preferred and each $70,000 unit consistsof 40,000 shares of Preferred Stock bearing a 7% dividend, 2,000 shares ofcommon stock and 40,000 warrants to purchase Axcess’ common stock exercisablefor two years at $2.75 per share. Each share of Series 2003B Preferred Stock is automatically convertibleinto voting common stock on a share-for-share basis (i) when Axcess achieves afull quarter of positive earnings before interest, taxes depreciation andamortization or (ii) when the share price surpasses $3.75 based on the averageclosing per share price for the 20 trading days preceding. In connectionwith the 2003B Preferred Stock offering including commissions, Axcess issued 1,570,000shares of the 2003B Preferred Stock, 157,000 shares of common stock and1,695,000 warrants.

 

In December 2003, Axcess raised a net ofapproximately $362,250 of additional working capital through a second closingof the 2003B Preferred.  Inconnection with the second close of the 2003B Preferred Stock offeringincluding commissions, Axcess issued 220,000 shares of 2003B Preferred and240,000 warrants.

 

**VennWorks LLC**

 

In December 2003, VennWorksagreed to convert the entire amount of their outstanding demand notes($1,130,233) plus all accrued unpaid dividends ($171,240) into 1,831,332common shares and an equal number of warrants priced at $2.75 that will expirein two years from their date of issue. As a result of the above-described transaction, Axcess recorded a losson debt settlement charge of $6,041,691 for the excess of the value of theshares and warrants issued over the book value of the notes.

 

**Amphion Ventures,L.P.**

 

Axcess reached an agreement with Amphion Ventures L.P. with regards tothe notes between the Parties.  Axcesswas indebted to Amphion Ventures LP for $5,530,637 of principal and accruedinterest.  Amphion Ventures LP owedAxcess  $4,711,915 of note receivableand accrued interest.    Theabove-described notes were set off against each other there by reducing thedebt owed Amphion Ventures L.P. by Axcess to $818,722.  Amphion Ventures L.P. also agreed to convertthe remaining amount of demand notes and accrued interest into 294,476 common sharesand an equal number of warrants priced at $2.75, that will expire in twoyears.  As a result of theabove-described transactions, Axcess recorded a loss on debt settlement chargeof $362,050 for the excess of the value of the shares and warrants issued overthe book value of the notes.

 

**Amphion Investment,LLC**

 

Axcess reached an agreement with Amphion Investment L.L.C. with regardsto a note executed between them for $393,787 of principal and accruedinterest.  Amphion Investment L.L.C.consented to a five-year extension of the note with an interest rate of 5% perannum from January 1, 2003 payable in full at maturity ofDecember 31, 2007.

 

**PV ProceedsHoldings, Inc.**

 

Axcess reached an Agreement to Amend Purchase Note and Payment Termwith PV Proceeds Holdings, Inc. the holders of a $4.0 million of non-interestbearing note that was due December 31, 2002 and in default.  PV Proceeds consented to a five-yearextension of the note with an interest rate of 5% per annum fromJanuary 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 have an exercise price of twodollars ($2.00) per share and shall expire on the earlier of February 14,2008 or forty-five days after the principal and all accrued interest of the newnote is paid.  Axcess has also agreed tocertain provisions that would further reduce the principal amount over time.  Axcessalso recorded deferred debt issuance costs of $689,932, which will be amortizedover the life of the loan.

 

On October 10, 2003 PV ProceedsHoldings, Inc. electedto convert their Series 1999 Preferred Stock plus accrued dividends into692,142 shares of Axcess common stock contingent upon this RegistrationStatement becoming effective within 90 days from the date hereof.  On December 2, 2003, our SB-2Registration statement went effective. PV Proceeds Holdings, Inc. hasagreed to certain limitations on the sale of these shares based on our currentand future share trading volumes.  AllanGriebenow, President and Chief Executive Officer of Axcess is currently a boardmember of PV Proceeds Holdings, Inc.

 

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**JP Morgan SBIC LLC(formerly known as J.P. Morgan Investment Corporation)**

 

Axcessissued to JP Morgan a Senior Promissory Note (“*Note*”)originally entered on June 25, 1997 and the last amendment was onApril 12, 2002. The Note was due on December 31, 2003 and as ofDecember 31, 2003 has an outstanding principal balance of $400,000.00 andunpaid interest thereon of $169,795.79. JP Morgan agreed to convert that amount of notes and accruedinterest into 227,918 common shares.  Asa result of the above-described transaction, Axcess recorded a gain on debtsettlements of $75,213.

 

JP Morgan agreed to convert $28,018 of Preferred Series J (includingaccrued dividends) into 11,173 shares of common stock of Axcess.  JP Morgan also agreed to convert $106,795 ofPreferred Series I (including accrued dividends) into 42,590 shares of commonstock of AXCESS.

 

**Antiope PartnersL.L.C.**

 

Antiope Partners L.L.C. agreed to convert $759,900 of Preferred SeriesI (including accrued dividends) into 303,960 shares of common stock of Axcess.Antiope Partners L.L.C. also agreed to convert $1,816,719 of Preferred Series J(including accrued dividends) into 726,688 shares of common stock of Axcess.

 

**Jackson Hole**

 

Jackson Hole agreed to convert $427,300 of Preferred Series C(including accrued dividends) into 173,858 shares of common stock ofAxcess.  Jackson Hole also agreed toconvert $170,520 of Preferred Series J (including accrued dividends) into68,208 shares of common stock of Axcess.

 

**Conclusion**

 

As a result of the debt and preferred stock transactions, we reducednotes payable and accrued interest by $6,071,901 and $1,350,173,respectively.  We reduced Preferredstock and accrued dividends by $4,356,724 and 710,727, respectively.  We issued 4,429,345 additional common sharesand 2,625,808 warrants.

 

**Item 6.** MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

** **

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

 

Our auditors have included anexplanatory paragraph in their audit opinion with respect to our consolidatedfinancial statements at December 31, 2003. The paragraph states that ourrecurring losses from operations and resulting continued dependence on accessto external financing raise substantial doubts about our ability to continue asa going concern. 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.

 

We do not have sufficient workingcapital to sustain our operations.  Wehave been unable to generate sufficient revenues to sustain our operations. Wewill have to obtain funds to meet our cash requirements through businessalliances, such as strategic or financial transactions with third parties, thesale of securities or other financing arrangements, or we may be required tocurtail our 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 we will be successful in raising additional funds or enteringinto business alliances.

 

See “Risk Factors.”

 

**Results of Operations**

 

*Sales and GrossProfit.* Sales forthe year ending December 31, 2003 and 2002 were $915,825 and $1,596,221,respectively. We realized gross profits of $204,900 in 2003 and $383,220 in2002. Three customers accounted for 28% of total revenue in 2003 and fouraccounted for 49% of the total revenue in 2002.  Cost of sales for the year endedDecember 31, 2003 and 2002 were $562,060 and $1,078,518,respectively.  We also recorded a chargeof $148,866 for inventory impairment during the year ended December 31,2003 compared to $134,483 for the year ended December 31, 2002.  The impairment was as a result of the changein strategy from self-manufacturing to contract manufacturing.  The amount reflects items that have not beenable to be used by our contract manufacturers in the building of additionalproducts.  The decrease in sales was dueto our lack of financing and the inability to fulfill orders, which wasaddressed with the 2003 and 2003B preferred equity offerings.  We are currently fulfilling orders in theordinary course of business.  The marginimprovement (excluding inventory impairment charge) is driven by a reduction ofthe production staff due to our move towards contract manufacturing.

 

Radio frequency identification (RFID) product sales were $587,100 and $641,810 for the year endedDecember 31, 2003 and 2002, respectively. Cost of sales was$374,727 for the year ended December 31, 2003 and $423,059 for the yearended December 31, 2002. We also recorded a charge of $35,746 and $75,293for inventory impairment during the year ended December 31, 2003 and 2002,respectively.  The impairment was as aresult of our change in strategy from self-manufacturing to

 

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contract manufacturing.  Theamount reflects items that have not been able to be used by our contractmanufacturers in the building of additional products. As a result, grossprofits from RFID products were $176,627 for the year ended December 31,2003 and $143,458 for the year ended December 31, 2002.  Theincrease in gross margin is mainly related to a reduction of production costsand warranty expenses.  Two customersaccounted for 26% and four customers accounted for 51% of the RFID sales during2003 and 2002, respectively.

 

Digital video product sales were $328,725 and$954,411 for the year ended December 31, 2003 and 2002, respectively.  Cost of sales was $187,333 for the yearended December 31, 2003 and $655,459 for the year ended December 31,2002. We also recorded a charge of $113,120 and $59,190 for inventoryimpairment during the year ended December 31, 2003 and 2002,respectively.  The impairment was as aresult of our change in strategy from self-manufacturing to contractmanufacturing.  The amount reflectsitems that have not been able to be used by our contract manufacturers in thebuilding of additional products.  As aresult, gross profits from digital video products were $28,272 for the yearended December 31, 2003 and $239,763 for the year ended December 31,2002.  The decrease margin percent was primarily due to the increase in inventoryimpairment and the decrease in sales volume. Two customers accounted for 51% and 56% of the video sales during 2003and 2002, respectively.

 

*OperatingExpenses.*Operating expenses were $2,641,681 and $4,840,043, in 2003 and 2002,respectively. We were able to lower our research and development, general andadministrative, selling and marketing and depreciation and amortizationexpenses.  This decrease was dueto cost reduction programs implemented during 2002 and continuing through 2003including a staffing reduction, fewer marketing expenditures and the completionof several research and development projects.

 

Research and development expenses were$632,974 in 2003 and $1,632,385 in 2002. The decrease is a result of the completion of the integration of some ofthe video and RFID products allowing for a reduction of employees, the closingof a facility in Georgia, the downsizing of the facility in California and theelimination of certain leased equipment. Offset by an increase in certification expense and product developmentexpenses.

 

Corporate general and administrative expenseswere $1,287,944 and $1,568,969 in 2003 and2002, respectively. During 2003 we hired a firm to assist us withinvestor relation activity and experienced an increase in our cost ofinsurance.  However, we were able todecrease our overall cost.  The decreasecan be attributed to a reduction in salary expense, elimination of contractlabor, lower rent with the closure of half of the Texas facility and areduction of outside legal and accounting service fees.

 

Selling and marketing expenses were $280,190 and $1,072,425 in 2003 and 2002, respectively.  The decrease was caused by our strategicshift away from a direct selling (our sales people contacting the end users)approach and an increased reliance on an indirect (focus on us selling to theintegrators who sell to the end users) marketing approach.  The strategic shift allowed us to decreasethe headcount and lower the advertising. The indirect sales model allows usto address multiple industry segments generically, including manufacturing,wholesale / distribution, retail, services, government, education and finance.The indirect sales model fits the characteristics of our product portfolio withother products, which become system solutions that require custom site planningand installation. By working directly with established marketing channelpartners, this indirect model also gives us the flexibility to introduce newproducts and application as they are developed.  However, during the fourth quarter of 2003 we did add a marketingindividual and two additional sales people to increase the support on theindirect channel.

 

Depreciation and amortization expenses were$440,573 for 2003 compared to $566,264 for2002.  The decrease is related tolower depreciation expense as a result of the age of the equipment, the closingof the Georgia facility and the downsizing of the California and Texasfacilities.

 

*Other expenses, net*. Other expenses, net, were$7,134,877 and $1,144,311 in 2003 and 2001, respectively.   During 2003, we exchanged and modified asignificant amount of our debt for common shares and warrants.  As a result of those transactions we recordeda charge of $6,328,527 for the excess of the value of the shares and warrantsissued over the book value of the notes. We also were able to settle several accounts payable issues relating toprior periods at a discount from the accrued amounts, which resulted in a$321,415 improvement in other expenses for the year ended December 31,2003 compared to the same period in 2002.

 

*Net Loss*. Net loss was $9,571,658 and$5,601,134 in 2003 and 2002, respectively. The increase is due primarily to charges from the balance sheetrestructuring, offset by lower production staffing, headcount reductions acrossall departments, reduced rent due to the Georgia facility being closed,downsizing of the Texas and California facilities, a reduction of outsideservices, gains on settlements of account payables and offset by the inventoryimpairment charge and increased spending on investor relations activities.

 

*Preferred Stock dividend requirements. *Preferred Stock dividend requirements were$1,841,670 in 2003 compared to $430,003 in 2002. This increase was primarilydue to the recording of a beneficial conversion discount of $614,516 for the2003 preferred stock converted during 2003.

 

**Liquidity and CapitalResources**

 

Since inception, we have utilizedthe proceeds from a number of public and private sales of our equitysecurities, the exercise of options and warrants and more recently, convertibledebt, short-term bridge loans from stockholders and preferred equity offeringsto meet our working capital requirements. At December 31, 2003, we hadworking capital of $786,900.

 

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Our operations continued togenerate losses in 2003. Our cash increased $2,130,728 during 2003 withoperating activities using $2,165,857 of cash. We funded operations primarilythrough borrowings and equity offerings with financing activities providing netcash of $4,300,718 .  No assurance canbe given that such activities will continue to be available to provide fundingto us.  Our business plan for 2004 ispredicated principally upon the successful marketing of our RFID and digitalvideo products. We anticipate that our existing working capital resources andrevenues from operations will not be adequate to satisfy our fundingrequirements in 2004.

 

Our working capital requirementswill depend upon many factors, including the extent and timing of our productsales, our operating results, the status of competitive products, and actualexpenditures and revenues compared to our business plan. We are currentlyexperiencing declining liquidity, losses from operations and negative cash flows,which makes it difficult for us to meet our current cash requirements,including payments to vendors, and may jeopardize our ability to continue as agoing concern. We intend to address our liquidity problems by controllingcosts, seeking additional funding (through capital raising transactions andbusiness alliances) and maintaining focus on revenues and collections.

 

Our auditors have included anexplanatory paragraph in their audit opinion with respect to our consolidatedfinancial statements at December 31, 2003. The paragraph states that ourrecurring losses from operations and resulting continued dependence on accessto external financing raise substantial doubts about our ability to continue asa going concern. 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.

 

Our business plan for 2004 ispredicated principally upon the successful marketing of its RFID products andthe digital video products. We anticipate that our existing working capitalresources and revenues from operations will not be adequate to satisfy ourfunding requirements through 2004.

 

If our losses continue, we willhave to obtain funds to meet our cash requirements through business alliances,such as 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 we will be successful in raising additional funds or enteringinto business alliances.

 

**Other Mattersrelating to future amortizable charges**

 

As of December 31, 2003 we have $1,356,309 of debt discount anddeferred debt issuance costs on our balance sheet, which will be amortizedusing the effective interest rate over lives of the related debt.  In connection with the issuance of the 2003BPreferred Stock, we recorded preferred stock dividend requirements of$1,782,831 that will be reflected as preferred stock dividends in the incomestatement as the underlying preferred stock converts to common stock.

 

**Recent AccountingPronouncements**

 

Effective January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards No. 145, *Rescissionof FAS Statements No. 4, 44 and 64, Amendment of FAS Statement No. 13, andTechnical Corrections* (“FAS 145”).  Through the rescission ofFAS Statements 4 and 64, FAS 145 eliminates the requirement that gains andlosses from extinguishment of debt be aggregated and, if material, beclassified as an extraordinary item net of any income tax effect.  FAS 145made several other technical corrections to existing pronouncements that maychange accounting practice.  Adoption of FAS 145 did not impact theCompany’s results of operations or financial position at December 31,2003, except that vendor concessions on accounts payable in 2003 were recordedas Other Income, whereas prior to the issuance of FAS 145, such items, whenmaterial, were recorded as extraordinary income.

 

Effective January 1, 2003, the Company adopted FinancialAccounting Standards No. 146, *Accounting forCosts Associated with Exit or Disposal Activities* (“FAS 146”). This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue No. 94-3, “*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity**(including CertainCosts Incurred in a Restructuring)*.”  Adoption of FAS 146 hadno impact on the Company’s results of operations or financial position andDecember 31, 2003.

 

Effective January 1, 2003, the Company adopted Interpretation No.45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (“FIN No. 45”).  FIN No. 45 broadens the disclosures tobe made by the guarantor about its obligations under certain guarantees. FINNo. 45 also requires a guarantor to recognize a liability for the fair value ofthe obligation undertaken in issuing the guarantee at the inception of aguarantee.  Adoption of FIN No. 45 did not have an impact on the Company’sresults of operations or financial position at December 31, 2003.

 

In April 2003, the FASB issued Financial Accounting Standards No.149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities* (“FAS No. 149”). FAS No. 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under FAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*.  FAS No. 149is generally effective for contracts entered into or

 

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modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003. The adoption of this statement did nothave an impact on the Company’s results of operations or financial position atDecember 31, 2003.

 

In May 2003, the FASB issued Financial Accounting Standards No.150, Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity (“FAS No. 150”).  FAS 150 establishes standards forhow an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  FAS 150 is generallyeffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  The adoption of this statement’soperational components did not have an impact on the Company’s results ofoperations or financial position at December 31, 2003.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51* (“FIN 46”), which was revised andsuperceded by FASB Interpretation No. 46R in December 2003 (FIN 46R).   FIN 46R requires the consolidation ofcertain variable interest entities, as defined.  FIN 46R is effectiveimmediately for special purpose entities and variable interest entities createdafter December 31, 2003, and must be applied to other variable interestentities no later than December 31, 2004. The Company believes it has nosuch variable interest entities and as a result FIN No. 46R will have no impacton its results of operations, financial position or cash flows.

 

**Critical AccountingPolicies**

 

In preparing our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States, we must make a variety of estimates that affectthe reported amounts and related disclosures. The following accounting policiesare currently considered most critical to the preparation of our financialstatements. If actual results differ significantly from our estimates andprojections, there could be a material effect on our financial statements.

 

**Allowance for Doubtful Accounts**

 

We continually evaluates thecreditworthiness of our customers’ financial condition and generally do notrequire collateral. We evaluate the collectability of our accounts based on acombination of factors. In circumstances where we are aware of a specificcustomer’s inability to meet its financial obligations to us, we record aspecific reserve for bad debts against amounts due. We have not experienced significantlosses on uncollectible accounts receivable.

 

**Inventory Valuation**

 

Inventories are stated at thelower of standard cost, which approximates actual cost determined on afirst-in, first-out basis, or estimated realized value. Adjustments to reduceinventories to estimated realizable value, including allowances for excess andobsolete inventories, are determined quarterly by comparing inventory levels ofindividual materials and parts to historical usage rates, current backlog andestimated future sales. Actual amounts realized upon the sale of inventoriesmay differ from estimates used to determine inventory valuation allowances dueto changes in customer demand, technology changes and other factors.

 

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

 

Long-lived assets andidentifiable intangible assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the asset 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.

 

**RevenueRecognition and Warranty Costs**

 

We recognize revenue on sales ofour products when the products are shipped from our facility in Carrollton, Texas.Our policy does not allow customers to return products for credit. We currentlyprovide a one-year warranty on all products. Provision is made at the time therelated revenue is recognized for estimated product repair costs.

 

**Deferral Tax Valuation Allowance**

 

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statements carrying amounts of existingassets and liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. Valuation allowances are established when necessary toreduce deferred tax assets to the amount more likely than not to be realized.Income tax expense is the total of tax payable for the period and the changeduring the period in deferred tax assets and liabilities.

 

**Other**

 

*Inflation.* Inflation has not had and is not expected tohave a material impact on the operations and financial condition of

 

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Axcess.

 

*Seasonality.* Seasonality has not had and is not expected tohave a material impact on the operations and financial condition of Axcess.

 

**Item 7.** FINANCIAL STATEMENTS.

 
| Report  of Hein & Associates LLP, Independent Auditors                                                  |   |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                        |   |   |
| Consolidated Financial Statements:                                                                          |   |   |
|                                                                                                        |   |   |
| Consolidated Balance Sheets at  December 31, 2003 and 2002                                             |   |   |
| Consolidated Statements of Operations for  the Years Ended  December 31, 2003 and 2002                 |   |   |
| Consolidated Statements of Stockholders’  Deficit for the  Years Ended December 31, 2003 and 2002 |   |   |
| Consolidated Statements of Cash Flows for  the Years Ended  December 31, 2003 and 2002                 |   |   |
| Notes to Financial Statements                                                                               |   |   |

 

**Item 8.** CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

** **

There were no reportable events of the typedescribed in Item 304(a)(1)(iv) of Regulation S-B.

 

**PART III**

 

**Item 9.** DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT.

** **

**Management of Axcess**

 

TheBoard elects executive officers annually at its first meeting following theannual meeting of stockholders. The following table sets forth, as ofMarch 15, 2004, Axcess’ directors, executive officers and significantemployees, their ages, and their positions within Axcess. 

 
| **Name**             |   | **Age** |   | **Position**                                          |   | **Committee** |   |
|----------------------|--------|---------|--------|-------------------------------------------------------|--------|---------------|--------|
| Richard C.E. Morgan  |   | 59      |   | Chairman of the Board of Directors                    |   | (1) (3)       |   |
| Allan Griebenow      |   | 51      |   | Director, President and Chief Executive Officer       |   | (1)           |   |
| Allan L. Frank       |   | 40      |   | Vice President, Secretary and Chief Financial Officer |   |          |   |
| Robert J. Bertoldi   |   | 49      |   | Directors                                             |   | (2)           |   |
| Paul J. Coleman, Jr. |   | 72      |   | Director                                              |   | (2)           |   |
| Robert F. Hussey     |   | 55      |   | Director                                              |   | (2) (3)       |   |

 

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(1)               Executive Committee

(2)               Audit Committee

(3)               Compensation Committee

 

**Richard C. E. Morgan** has served as adirector and Chairman of the Board of the company since 1985. Since 1986, hehas been a managing member of Antiope Partners, LLC and Amphion Partners, LLC.In November 1999, Mr. Morgan co-founded VennWorks, LLC and since then hasserved 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 Partners. From1986 to 1998, Mr. Morgan was the Managing General Partner of WolfensohnPartners, LP, and the predecessor to Amphion Capital Management. Mr. Morganserves on the Board of Directors of Celgene Corp., which develops and marketsbiotechnology products. Mr. Morgan is also a director of several private andnon-profit companies, including Orbis International, Inc., a non-profitorganization dedicated to fighting blindness worldwide.

 

**Allan Griebenow** has served as a director, Presidentand Chief Executive Officer of the Company since July 1999. He foundedPrism Video, Inc. in 1994 and was Chief Executive Officer of Prism Video, Inc.from 1994 to July 1999. Mr. Griebenow is currently President, CEO anda Director of PVHoldings (a current holder of equity and debt of Axcess).

 

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Mr. Griebenow spent the pasttwenty years in the telecommunications and advanced applications industries. Hestarted his career in 1979 as a Presidential Management Intern with NASA, andholds a B.S. in Business Administration from the University of Maryland and anMBA from San Francisco State University.

 

**Allan L. Frank** has served as 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-off fromPaging Network, Inc. (“PageNet”). Vast Solutions, Inc. filed for bankruptcy inApril 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 January 2000, Mr. Bertoldi has been thePresident of VennWorks, LLC, a venture capital limited liability company thathe co-founded. Since before 1995, Mr. Bertoldi has been a Managing Partnerof Amphion Capital Management, LLC, and a co-manager of Amphion Ventures, LP,an early-stage technology life science fund.

 

**Paul J. Coleman, Jr.** has served as a directorof the Company since 1982. He is President and Chief Executive Officer of theGirvan Institute of Technology, a non-profit, public benefit corporationengaged in research, technology development, and education related to thenation’s aerospace program. Dr. Coleman is a professor of space physicsemeritus at the University of California at Los Angeles (“UCLA”). He currentlyserves as a director of Biocentric Solutions, Inc., Knowledge Vector, Inc. andthe Girvan Institute. He is a former director of CACI International, FairchildSpace and Defense Corporation, the Universities Space Research Association andothers. His earlier positions include those of assistant director, Los AlamosNational Laboratory; president and chief executive officer, Universities SpaceResearch Association; director, Institute of Geophysics and Planetary Physicsat UCLA; and director, National Institute for Global Environmental Change ofthe U.S. Department of Energy.

 

**Robert F. Hussey** has served on the Board sinceSeptember 2002. Mr. Hussey currently serves as Chief OperatingOfficer and Director of H.C. Wainwright & Co. Mr. Hussey alsoserves on the boards of Digital Data Networks, Inc., Digital Lightwave, Inc.,NUR Corporation and on the board of advisors for Argentum Capital Partners andKaufman Fund. From 1991 through 1996, Mr. Hussey served as President, CEOand Director of MetroVision of North America. From 1984 through 1991,Mr. Hussey was Founder, President, CEO and Director of POP Radio Corp.Prior to POP Radio, Mr. Hussey worked at Grey Advertising, Inc., E.F.Hutton and American Home Products, Inc. Mr. Hussey received a B.S. inBusiness Administration from Georgetown University and an MBA in InternationalBusiness from George Washington University.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Under Section 16(a) of the Exchange Act, directors, certainofficers and beneficial owners of 10% or more of the Company’s Voting CommonStock are required from time to time to file with the Securities and ExchangeCommission reports on Forms 3, 4 or 5, relating principally to transactions inCompany securities by such persons. Based solely upon a review of Forms 3, 4 and 5 submitted to Axcessduring and with respect to 2003, all of these individuals or entities timelyfiled their respective Forms 3, 4 or 5 required by Section 16(a) of theExchange Act during 2003, except for Amphion Ventures, L.P. and VennWorks LLC.

 

Each of Amphion Ventures and VennWorks failed to file Form 4s to reportthe issuance in 2003 by Axcess of promissory notes convertible into commonstock, the conversion of shares of preferred stock into common stock, theconversion of demand notes in to common stock, the purchase of Convertibledebt.  These transactions are describedmore fully under Item 12. “CertainRelationships and Related Transactions —Amphion Ventures, L.P.Promissory Note Issuances and Conversions,”Item 12. “Certain Relationships and Related Transactions—VennWorks LLCPromissory Note Issuances and Conversions,”and Item 12. “Certain Relationships and Related Transactions—Preferred StockConversions.”

 

**Item 10.** EXECUTIVE COMPENSATION.

** **

Thefollowing table summarizes the compensation earned by Axcess’ Chief ExecutiveOfficer and Axcess’ two other most highly compensated executive officers (whoseannualized compensation exceeded $100,000) (collectively called the “namedexecutive officers”), for services rendered in all capacities to Axcess duringthe fiscal years ended December 31, 2003 and 2002. 

 
|                                                   |   | **Summary Compensation Table** |      |                     |   |                          |   |
|--------------------------------------------------------|--------|--------------------------------|-----------|--------------------------|--------|-------------------------------|--------|
|                                                   |   |                           |      | **Annual  Compensation** |   | **Long-Term****Compensation** |   | **All Other****Compensation** |   |
| **Name and Principal Positions**                       |   | **Year**                       |      | **Salary****($)**        |   | **Bonus****($)**              |   | **Securities  Underlying  Options (#)** |   | **($)** |   |
| Allan  Griebenow                                       |   | 2003                           |      | 177,651                  |   | —                        |   | 163,000 |   | — |   |
| President and  Chief Executive Officer                 |   | 2002                           | (1)  | 182,090                  |   | —                        |   | 85,000 |   | — |   |
|                                                   |   |                           |      |                     |   |                          |   |   |   |   |   |
| Allan L. Frank                                         |   | 2003                           |      | 139,448                  |   | —                        |   | 100,000 |   | — |   |
| Vice  President, Secretary and Chief Financial Officer |   | 2002                           | (2, 3)    | 103,039                  |   | —                        |   | 285,000 |   | — |   |
|                                                   |   |                           |      |                     |   |                          |   |   |   |   |   |
| Michael  Uremovich                                     |   | 2003                           | (4)       | 24,473                   |   | —                        |   | 78,000 |   | — |   |
| Vice President  of Sales                               |   | 2002                           | (4)       | 109,314                  |   | —                        |   | 35,000 |   | — |   |

 

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(1)                                  Includes $12,466 of accrued salary expensethat Axcess has not paid.

(2)                                  Represents compensation earned from March 2002,when Mr. Frank joined Axcess.

(3)                                  Includes $9,340 of accrued salary expensethat Axcess has not paid.

(4)                                  Includes $6,720 of accrued salary expensethat Axcess has not paid. Mr. Uremovich resigned his position as ofApril 1, 2003.

 

**Stock Option Grantsin 2003 to Axcess’ Named Executive Officers**

 

Thefollowing table provides information regarding the stock options granted by usto the named executive officers during the fiscal year ended December 31,2003. Other than those persons listed in the following table, we did not grantany stock options to any other named executive officers. One-fourth of each ofthe options listed in the table below vested on January 17, 2003;March 31, 2003; June 30, 2003 and September 30, 2003.

 
|               |   | **Option  Grants in Last Fiscal Year  Individual Grants**       |   |
|--------------------|--------|-----------------------------------------------------------------|--------|
| **Name**           |   | **Number of  Securities% of  Underlying  Options  Granted (#)** |   | **% of  Total Options  Granted to  Employees** |   | **Exercise or  Base Price  ($/Sh) (1)** |   | **Expiration  Date** |   |
| Allan  Griebenow   |   | 163,000                                                         |   | 20 | % | $0.40 |   | 02/06/2014 |   |
| Allan L. Frank     |   | 100,000                                                         |   | 13 | % | $0.40 |   | 02/06/2014 |   |
| Michael  Uremovich |   | 78,000                                                          |   | 10 | % | $0.40 |   | 02/06/2014 |   |

 

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(1)                                  The exercise price is equal to the closingprice of our Common Stock on the date of the grant.

 

**Aggregate OptionExercises in 2003 by Axcess’ Executive Officers**

 

Thefollowing table provides information as to options exercised, if any, by eachof the named executive officers in 2003 and the value of options held by thoseofficers at year-end measured in terms of the last reported sale price for theshares of our Voting Common Stock on December 31, 2003 ($2.25 as reportedon the Over-The-Counter Bulletin Board). 

 
| **Name**          |   | **Shares  Acquired  On  Exercise** |            | **Value  Realized** |              | **Number of  Securities  Underlying Unexercised  Options at December 31, 2003** |    | **Value of  Unexercised  In-the-Money Options at  December 31, 2003** |    |
|-------------------|--------|------------------------------------|-----------------|---------------------|-------------------|--------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------|---------|
| **Exercisable**   |   | **Unexercisable**                  | **Exercisable** |                | **Unexercisable** |
| Allan Griebenow   |   | —                             |            | $                   | —            |                                                                                 | 802,529 |                                                                       | 169,974 |   | $ | 313,238 |   | $ | 35,063 |   |
| Allan L. Frank    |   | —                             |            | $                   | —            |                                                                                 | 171,250 |                                                                       | 213,750 |   | $ | 196,688 |   | $ | 35,063 |   |
| Michael Uremovich |   | —                             |            | $                   | —            |                                                                                 | —  |                                                                       | —  |   | $ | — |   | $ | — |   |

 

**Compensation of theCompany’s Directors**

 

Thecurrent policy of Axcess is to pay each director who is not employed by us andwho does not beneficially own more than five percent of the shares of commonstock outstanding the compensation set forth in the Director Compensation Plan.Under the Director Compensation Plan, each eligible director receives an annualgrant of 10,000 options to acquire common stock at an exercise price equal tothe fair market value per share of the common stock at the time the option isgranted. The annual grant customarily takes place shortly after each annualmeeting of our stockholders. All new board members receive 50,000 options toacquire common stock at an exercise price equal to the fair market value pershare of the common stock on the date the board member is elected by ourstockholders. All new board members will also be eligible to receive the annualgrant. We have temporarily suspended paying any cash to eligible directors forpreparing and attending meetings of directors and committees until we reportquarterly net earnings. Once we have reported net earnings for a fiscalquarter, we will reconsider paying additional cash consideration to eligibledirectors. While directors do not receive additional compensation for attending

 

21

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meetings, we 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.

 

**Employment AgreementWith Mr. Griebenow**

 

OnJuly 16, 1999, the Company entered into an agreement with Allan Griebenow,under which Mr. Griebenow agreed to be the Company’s president and chiefexecutive officer. The agreement provides that Mr. Griebenow will receive asalary equal to $17,917 per month, a bonus payable within 90 days after the endof the Company’s fiscal year of up to 30% of his base salary, and option grantsto acquire 450,000 shares of our common stock. Mr. Griebenow is essentially an“at will” employee of the Company and may be terminated upon thirty days’notice. If the Company terminates Mr. Griebenow’s employment at any timewithout cause, as defined in the employment agreement, then Mr. Griebenow willbe entitled to continue to receive his then current salary for the six-monthperiod following his termination.

 

**Item 11.** SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.

 

Thefollowing table sets forth the number of shares of each class of stockbeneficially owned as of March 1, 2004, by each person known by Axcess tobe the beneficial owner of more than five percent of any class of our votingsecurities as of March 1, 2004. Except as noted below, to our knowledge,each stockholder listed below has sole voting and investment power with respectto all shares of stock shown beneficially owned by the stockholder.

 
| **Name and Address of  Beneficial Owner** |   | **Title of Class**       |       | **Amount and  Nature of****Beneficial Owner** |       | **Percentage****of Class** |       | **Percentage of****Common  Voting Power** |       |
|-------------------------------------------|--------|--------------------------|------------|-----------------------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|
|                                      |   |                     | ** ** |                                          | ** ** |                       | ** ** |                                      | ** ** |
| Amphion Group  (1)                        |   | Voting Common Stock      |       | 20,374,145                                    | (2)        | 59.6                       | %          | 56.3                                      | %          |
| 350 Madison  Avenue                       |   |                     |       |                                          |       |                       |       |                                      |       |
| New York, NY  10021                       |   |                     |       |                                          |       |                       |       |                                      |       |
|                                      |   |                     |       |                                          |       |                       |       |                                      |       |
| PV Proceeds  Holdings, Inc.               |   | Voting Common Stock      |       | 1,692,142                                     | (3)        | 4.9                        | %          | 4.7                                       | %          |
| 3208 Commander  Dr.                       |   |                     |       |                                          |       |                       |       |                                      |       |
| Carrollton, TX  75006                     |   |                     |       |                                          |       |                       |       |                                      |       |
|                                      |   |                     |       |                                          |       |                       |       |                                      |       |
| H.T. Ardinger                             |   | Voting Common Stock      |       | 31,491                                        |       |                       | *          |                                      | *          |
| 9040 Governors  Row                       |   | Series I Preferred Stock |       | 52                                            |       | 100.0                      | %          |                                      | *          |
| Dallas, TX 75247                          |   | Series J Preferred Stock |       | 2                                             |       | 100.0                      | %          |                                      | *          |

 

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*                                         Less than 1%

 

(1)                                  See the following table regarding thebeneficial ownership of the Amphion Group.

 

(2)                                  Includes 3,413,999 shares that the AmphionGroup has the right to acquire pursuant to warrants and options that areexercisable within 60 days.

 

(3)                                  Includes 1,000,000 shares that PV Proceeds Holdings,Inc. has the right to acquire pursuant to warrants that are exercisable within60 days.

 

Thefollowing table sets forth the number of shares beneficially owned by theAmphion Group, which is defined to include Mr. Richard C.E. Morgan, a Britishcitizen and Chairman of the Board of Directors of the Company (“Mr. Morgan”),Mrs. Anna Morgan, a British citizen and wife of Richard C.E. Morgan (“Mrs.Morgan”), Robert J. Bertoldi, a U.S. citizen and Director of the Company (“Mr.Bertoldi”), Amphion Ventures, L.P., a Delaware limited partnership (“AmphionVentures”), Amphion Partners, LLC, a Delaware limited liability company(“Amphion Partners”), Amphion Investments, LLC, a Delaware limited liabilitycompany (“Amphion Investments”), Antiope Partners, LLC, a Delaware limitedliability company (“Antiope Partners”), Amphion Capital Management, LLC, aDelaware limited liability company (“ACM”), NVW,LLC a Delaware limitedliability company (NVW”) and VennWorks, LLC, a Delaware limited liabilitycompany formerly known as incuVest, LLC, (“VennWorks”).

 

TheAmphion Group disclaims in its filings with the Securities and ExchangeCommission that it holds any securities of the Company as a group, within themeaning of any applicable securities law or regulation. Amphion Partners is thesole general partner of Amphion Ventures. Messrs. Morgan and Bertoldi are themanaging members of Amphion Partners, Antiope Partners and Amphion Investments.Mr. Morgan is the Chairman of the Board of Directors and Chief ExecutiveOfficer of VennWorks. Mr. Bertoldi is the President of VennWorks.

 

Based onamended Schedule 13D filed by certain members of the Amphion Group withthe SEC on February 10, 2000, Amphion Ventures, Amphion Partners and Mr.Morgan share voting power with respect to certain of the shares owned by them.Also, based on the Schedule 13D, Mr. Morgan shares voting power for theshares held by Amphion Investments, Antiope

 

22

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Partners and certain other sharesheld by Amphion Partners. Mr. Morgan disclaims beneficial ownership of theshares held by each of the Amphion Group.

 
|                   |   | **Voting  Common** |   | **Warrants** |   | **Options** |   | **Total**  |   |
|------------------------|--------|--------------------|--------|--------------|--------|-------------|--------|------------|--------|
| Amphion Ventures       |   | 9,219,306          |   | 975,834      | (1)    | —      |   | 10,195,140 |   |
| VennWorks              |   | 5,606,156          |   | 1,831,332    | (2)    | —      |   | 7,437,488  |   |
| Antiope Partners       |   | 1,117,182          |   | —       |   | —      |   | 1,117,182  |   |
| NVW                    |   | 470,000            |   | 418,000      | (3)    | —      |   | 888,000    |   |
| Mr. Morgan             |   | 385,270            | (4)    | —       |   | 53,000      | (5)    | 438,270    |   |
| Amphion Partners       |   | 108,232            |   | —       |   | —      |   | 108,232    |   |
| Mr. Bertoldi           |   | —             |   | —       |   | 97,500      | (6)    | 97,500     |   |
| Amphion Investments    |   | 54,000             |   | —       |   | —      |   | 54,000     |   |
| ACM                    |   | —             |   | 38,333       |   | —      |   | 38,333     |   |
| Total of Amphion Group |   | 16,960,146         |   | 3,263,499    |   | 150,500     |   | 20,374,145 |   |

 

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(1)                                  Includes five different grants ranging inprice ($2.10 to $2.75) and expiration dates (September 30, 2004 toSeptember 30, 2006).

(2)                                  Exercise price of$2.75 and expiration date of November 30, 2005.

(3)                                  Includes two different grants ranging inprice ($1.00 to $2.75) and expiration dates (May 15, 2005 to November 12,2005).

(4)                                  Includes 65,000 shares of common stock issuedto Mrs. Morgan, the wife of Mr. Morgan.

(5)                                  Options to purchase 53,000 shares of commonstock that are exercisable within 60 days.

(6)                                  Options to purchase 97,500 shares of commonstock that are exercisable within 60 days.

 

The following table sets forth the number of shares of each class ofstock beneficially owned as of March 1, 2004, by each director whobeneficially owns equity securities and the executive officers of Axcess, andall of our directors and executive officers as a group. The business address ofeach director and executive officer is c/o Axcess International, Inc., 3208Commander Drive, Carrollton, Texas 75006. To Axcess’ knowledge, each stockholderlisted below has sole voting and investment power with respect to all shares ofstock shown beneficially owned by the stockholder, except for Mr. Morgan’sbeneficial ownership, which is discussed in the introduction to the previoustable 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 (1)                                                            |   | Voting Common Stock |   | 16,960,146                                   |   | 70.7                        | %      | 70.7                                    | %      |
| Robert J.  Bertoldi (2)                                                             |   | Voting Common Stock |   | 16,574,876                                   |   | 69.1                        | %      | 69.1                                    | %      |
| Allan  Griebenow (3)                                                                |   | Voting Common Stock |   | 10,580                                       |   |                        | *      |                                    | *      |
| Paul J.  Coleman, Jr. (4)                                                           |   | Voting Common Stock |   | 80                                           |   |                        | *      |                                    | *      |
| Allan L. Frank  (5)                                                                 |   | Voting Common Stock |   | —                                       |   |                        | *      |                                    | *      |
| Robert F.  Hussey (6)                                                               |   | Voting Common Stock |   | —                                       |   |                        | *      |                                    | *      |
| All Directors, Director Nominees and  Executive Officers as a group (6 individuals) |   | Voting Common Stock |   | 16,970,806                                   |   | 70.8                        | %      | 70.8                                    | %      |

 

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*                                         Less than 1%.

 

(1)                                  The number of shares of voting common stockincludes 320,270 shares held directly, 16,574,876 shares held by other entitieswithin the Amphion Group (defined in Note 1 to the immediately preceding tableabove), 65,000 shares owned by Mr. Morgan’s wife.  However, the number of shares of voting common stock excludes 53,000shares that Mr. Morgan has the right to acquire pursuant to options that areexercisable within 60 days, 3,263,499 shares that entities within the AmphionGroup have the right to acquire pursuant to options and warrants that areexercisable within 60 days. As detailed in Note 1 to the immediately precedingtable above, Mr. Morgan disclaims beneficial ownership of all sharesbeneficially owned by entities within the Amphion Group.

 

(2)                                   Includes 16,574,876 shares held by otherentities within the Amphion Group (defined in Note 1 to the immediatelypreceding table above).  However,excludes 97,500 shares that Mr.Bertoldi has the right to acquire pursuant to options that are exercisablewithin 60 days and 3,263,499 shares that entities within the Amphion Group havethe right to acquire pursuant to options and warrants that are exercisablewithin 60 days. As detailed in Note 1 to the immediately preceding table above,Mr. Bertoldi disclaims beneficial ownership of all shares beneficially owned byentities within the Amphion Group.

 

23

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(3)                                   Includes 10,300 shares of common stock helddirectly by Mr. Griebenow and 280 shares owned jointly with his wife.  Excludes 871,156 shares that Mr. Griebenowhas the right to acquire pursuant to options that are exercisable within 60days.  Mr. Griebenow is the Presidentand Chief Executive Officer, and an 11% owner of the stock of PV ProceedsHoldings, Inc., a beneficial owner of more than 5% of the Company’s commonstock. Mr. Griebenow denies beneficial ownership of the shares of the Company’scommon stock owned by PV Proceedings Holdings, Inc.

 

(4)                                   Includes 80 shares of common stock helddirectly by Mr. Coleman and excludes 125,500 shares that Mr. Coleman has theright to acquire pursuant to options that are exercisable within 60 days.

 

(5)                                   Excludes 221,250 shares that Mr. Frank hasthe right to acquire pursuant to options that are exercisable within 60 days.

 

(6)                                   Excludes 50,000 shares that Mr. Hussey hasthe right to acquire pursuant to options that are exercisable within 60 days

 

**Item 12.** CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.

** **

**VennWorks**

 

OnSeptember 14, 2000, Axcess entered into a 9.5% convertible demand note(“9.5% Demand Note”) with VennWorks LLC (“VennWorks”). The principaloutstanding under this note may be converted into securities of Axcess at theoption of VennWorks. The borrowings are unsecured and are due and payable ondemand by VennWorks.  As ofNovember 30, 2003 the outstanding principal balance was $91,106.

 

OnJanuary 12, 2001, Axcess entered into a 9.0% convertible demand note (“9%Demand Note”) with VennWorks. The principal outstanding under this note may beconverted into securities of Axcess at the option of VennWorks. The borrowingsare unsecured and are due and payable on demand by VennWorks.  As of November 30, 2003 the outstandingprincipal balance was $712,249.

 

Axcessentered into a 6.75% convertible note with VennWorks, dated February 14,2002. The principal outstanding under this note may be converted intosecurities of Axcess at the option of VennWorks on terms yet to specified. Theborrowings are unsecured and are due and payable on demand by VennWorks. As ofNovember 30, 2003 the outstanding principal balance was $326,978.

 

In December 2003, VennWorksagreed to convert the entire amount of their outstanding demand notes($1,130,233) plus all accrued unpaid dividends ($171,240) into 1,831,332common shares and an equal number of warrants priced at $2.75 that will expirein two years.  As a result of theabove-described transaction, Axcess recorded a loss on debt settlement chargeof $6,041,691 for the excess of the value of the shares and warrants issuedover the book value of the notes.

 

**Amphion Ventures,L.P.**

 

OnSeptember 30, 1999, Axcess entered into a 10.0% convertible note dueSeptember 30, 2002 (“10.0% Demand Note”) with Amphion Ventures LP(“Amphion Ventures”). The principal outstanding under this note may beconverted into securities of Axcess at the option of Amphion Ventures. Theborrowings are unsecured and were due and payable on demand by Amphion Venturesafter the note went into default.  As ofNovember 30, 2003 the outstanding principal balance was $2,477,979.

 

OnNovember 14, 2001, Axcess entered into a 4.5% convertible demand note(“4.5% Demand Note”) with Amphion Ventures. The principal outstanding underthis note may be converted into securities of Axcess at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.  As ofNovember 30, 2003 the outstanding principal balance was $300,000.

 

Axcessentered into a 6.75% convertible note with Amphion Ventures, datedFebruary 14, 2002. The principal outstanding under this note may beconverted into securities of Axcess at the option of Amphion Ventures on termsyet to specified. The borrowings are unsecured and are due and payable ondemand by Amphion Ventures. As of November 30, 2003 the outstandingprincipal balance was $1,747,022.

 

AmphionVentures issued to Axcess a Subordinated Promissory Note Due March 31,2002 having a principal amount of $4,000,000. As of November 30, 2003 the outstanding principal balance was$3,902,375.

 

Axcess reached an agreement with AmphionVentures L.P. with regards to above described notes between the Parties.  Axcess was indebted to Amphion Ventures LPfor $5,530,637 of principal and accrued interest.  Amphion Ventures LP owed Axcess $4,711,915 of note receivable and accrued interest.    The above-described notes were set offagainst each other there by reducing the debt owed Amphion Ventures L.P. byAxcess to $818,722.  Amphion VenturesL.P. also agreed to convert the remaining amount of demand notes and accruedinterest into 294,476 common shares and an equal number of warrants priced at$2.75, that will expire in two years. As a result of the above-described transactions, Axcess recorded a losson debt settlement charge of $362,050 for the excess of the value of the sharesand warrants issued over the book value of the notes.

 

24

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Amphion Ventures currently hold warrants topurchase an additional 681,358 shares of Axcess common stock.  The exercise price range from $2.10 to $2.75and expire between September 30, 2004 and October 22, 2006.

 

**Amphion Investment,LLC**

 

Axcessentered into a 6.75% convertible note with Amphion Investments, LLC, datedJanuary 25, 2002. The principal outstanding under this note may beconverted into securities of Axcess at the option of Amphion Investments onterms yet to be specified. The borrowings are unsecured and are due and payableon demand by Amphion Investments. As of November 30, 2003, there was anoutstanding balance of $350,000 on this note and accrued interest of $43,787.

 

Axcess reached an agreement with Amphion Investment L.L.C. with regardsto the above-described note executed between them for $393,787 of principal andaccrued interest.    Amphion InvestmentL.L.C. consented to a five-year extension of the note with an interest rate of5% per annum from January 1, 2003 payable in full at maturity ofDecember 31, 2007.

 

**Antiope PartnersL.L.C.**

 

Antiope Partners L.L.C. agreed to convert $759,900 of Preferred SeriesI (including accrued dividends) into 303,960 shares of common stock of Axcess.Antiope Partners L.L.C. also agreed to convert $1,816,719 of Preferred Series J(including accrued dividends) into 726,688 shares of common stock of Axcess.

 

**PV ProceedsHoldings, Inc.**

 

Axcess reached an Agreement to Amend Purchase Note and Payment Termwith PV Proceeds Holdings, Inc. the holders of a $4.0 million of non-interestbearing note that 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 fromJanuary 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 have an exercise price of twodollars ($2.00) per share and shall expire on the earlier of February 14,2008 or forty-five days after the principal and all accrued interest arepaid.  Axcess has also agreed to certainprovisions that would further reduce the principal amount over time.  Axcessalso recorded deferred debt issuance costs of $689,932, which will be amortizedover the life of the loan. 

 

On October 10, 2003 PV ProceedsHoldings, Inc. electedto convert their Series 1999 Preferred Stock plus accrued dividends into692,142 shares of Axcess common stock contingent upon this RegistrationStatement becoming effective within 90 days from the date hereof.  On December 2, 2003, our SB-2Registration statement went effective. PV Proceeds Holdings, Inc. hasagreed to certain limitations on the sale of these shares based on our currentand future share trading volumes.  AllanGriebenow, President and Chief Executive Officer of Axcess is currently a boardmember of PV Proceeds Holdings, Inc.

 

PV Proceeds Holdings, Inc. currently has warrants to purchase up to1,000,000 additional common shares of Axcess. The exercise price of the warrants range in price from $2.00 to $2.50and they expire between July 28, 2004 and February 15, 2008.

 

**NVW L.L.C.**

 

In January 2004, Axcess entered into a one year Advisory Agreementwith NVW L.L.C. (“NVW”).  NVW agreedwork cooperatively with us to assist in our growth as set forth.  NVW may provide Axcess: (i) Identify,evaluate, and advise on a variety of options for Axcess’ to undertake toenhance its current capital structure including business model, financialoperations, operational, managerial, strategic, CRM, and strategic technologypartnering,  (ii) Prepare or coordinatewith Axcess and others in the development of business plans, investorpresentations, and financial models, when appropriate; (iii) Advise and assistAxcess with strategies relating to asset development, asset enhancement andmaximization of asset utilization, including those associated with anyintellectual property assets, (iv) Advise and assist Axcess in connection withthe preparation of any registration statements, periodic or other SEC reportsor proxies, and  (v) Coordinate with,and advise on with the activities of outside professionals, including withoutlimitation attorneys, accountants, market professionals.   In return Axcess has agreed to pay NVW$5,000.00 per month in advance.

 

NVW LLC Inc. currently has warrants to purchase up to 418,000additional common shares of Axcess.  Theexercise price of the warrants range in price from $1.00 to $2.75 and theyexpire between May 15, 2005 and November 12, 2005.

 

**Other Matters**

 

OnJuly 30, 2002, the wife of Richard C.E. Morgan invested $100,000 inAxcess, pursuant to the terms of a bridge financing agreement. Mrs. Morganacquired a convertible promissory note in the principal amount of $100,000 and25,000 unregistered shares of Axcess’ common stock. Axcess registered thecommon shares in December 2003, and Mrs. Morgan agreed not to sell morethan one-third of the shares in any calendar month. Axcess and Mrs. Morgan madecertain representations and warranties in the bridge financing agreement. Theconvertible promissory note bears interest at a rate of seven percentcompounded annually. At each of July 30, 2003; July 30, 2004; andJuly 30, 2005, Mrs. Morgan may elect to convert one-third of the principalamount of the note (plus accrued interest thereon) into shares of the Axcess’common stock, provided that we

 

25

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have not, on or prior to each suchconversion date, retired one-third of the principal amount of the Note. Theconversion price initially is 65% of the average closing price of a share ofour common stock for the twenty trading days preceding the given anniversarydate, provided that the maximum conversion price shall be $4.00 per share andthe minimum conversion price shall be $1.00 per share, and the conversion priceis subject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or other similar change in Axcess’ shares of common stock. Subject toMrs. Morgan’s right to convert the note in accordance with its terms, the notemay be prepaid without penalty. Mrs. Morgan has not elected to convert any ofthe principal or accrued interest.

 

InJanuary 2003, the wife of Richard C.E. Morgan invested an additional$20,000 in Axcess, pursuant to the terms of a bridge financing agreement. Mrs.Morgan acquired a convertible promissory note in the principal amount of$20,000 and 40,000 unregistered shares of Axcess’ common stock. Axcessregistered the common shares in December 2003, and Mrs. Morgan agreed notto sell more than one-third of the shares in any calendar month. Axcess andMrs. Morgan made certain representations and warranties in the bridge financingagreement. The convertible promissory note bears interest at a rate of sevenpercent compounded annually. At each of January 31, 2004; January 31,2005; and January 31, 2006, Mrs. Morgan may elect to convert one-third ofthe principal amount of the note (plus accrued interest thereon) into shares ofthe Axcess’ common stock, provided that we have not, on or prior to each suchconversion date, retired one-third of the principal amount of the Note. Theconversion price initially is 65% of the average closing price of a share ofour common stock for the twenty trading days preceding the given anniversarydate, provided that the maximum conversion price shall be $4.00 per share andthe minimum conversion price shall be $1.00 per share, and the conversion priceis subject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or other similar change in Axcess’ shares of common stock. Subject toMrs. Morgan’s right to convert the note in accordance with its terms, the notemay be prepaid without penalty. Mrs. Morgan has not elected to convert any ofthe principal or accrued interest.

 

RichardC.E. Morgan, the Chairman of Axcess’ Board of Directors, is the owner of 51.58%of Antiope Partners, L.L.C., 41.65% of Amphion Partners, L.L.C., 49.50% ofAmphion Investments, L.L.C., 0.28% of Amphion Ventures L.P., 43.50% of AmphionCapital Management L.L.C., 20.53% of NVW L.L.C. and, 8.54% of VennWorks, L.L.C.Mr. Morgan disclaims beneficial ownership of all of Axcess shares held by theseentities.

 

RobertJ. Bertoldi, a director of Axcess, is the owner of 12.60% of NVW L.L.C., 23.58%of Amphion Partners, L.L.C., 33.00% of Amphion Investments, L.L.C. 29.00% ofAmphion Capital Management L.L.C. 0.05% of Amphion Ventures L.P., and 3.87% ofVennWorks, L.L.C. Mr. Bertoldi disclaims beneficial ownership of all ofAxcess shares held by these entities.

 

**Item 13.** EXHIBITS AND REPORTS ON FORM 8-K.

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                          |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Certificate of Incorporation of the Company.  Incorporated herein by reference to  Exhibit 3.1 to the Company’s Registration Statement of Form s-1 (Registration  No. 2-80946)                                                 |
|            |   |                                                                                                                                                                                                                                     |
| 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             |   | First Amendment to Certificate of  Incorporation of the Company dated June 6, 1986. Incorporated herein by  reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-KSB for  the year ended December 31, 1987. |
|            |   |                                                                                                                                                                                                                                     |
| 3.4             |   | Second Amendment to Certificate of  Incorporation of the Company dated May 27, 1987. Incorporated herein by  reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for  the year ended December 31, 1987.     |
|            |   |                                                                                                                                                                                                                                     |
| 3.5             |   | Third Amendment to Certificate of  Incorporation of the Company dated November 11, 1994. Incorporated  herein by reference to Exhibit 4.4 to the Company’s Registration Statement on  Form S-3 (Registration No. 333-10665).   |
|            |   |                                                                                                                                                                                                                                     |
| 3.6             |   | Fourth Amendment to Certificate of  Incorporation of the Company dated July 28, 1995. Incorporated herein by  reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-3  (Registration No. 333-10665).      |
|            |   |                                                                                                                                                                                                                                     |
| 3.7             |   | Fifth Amendment to Certificate of  Incorporation of the Company dated June 25, 1997. Incorporated herein by  reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3  (Registration No. 333-10665).       |
|            |   |                                                                                                                                                                                                                                     |
| 3.8             |   | Sixth Amendment to Certificate of  Incorporation of the Company dated March 31, 1998. Incorporated herein  by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K  dated April 13, 1998.                |
|            |   |                                                                                                                                                                                                                                     |
| 3.9             |   | Seventh Amendment to Certificate of  Incorporation of the Company dated March 31, 1998. Incorporated herein  by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K  dated April 13, 1998.              |

 

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| 3.10   |   | Eighth Amendment to Certificate of  Incorporation of the Company dated April 9, 1998. Incorporated herein by  reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K dated  April 13, 1998.                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 3.11   |   | Ninth Amendment to Certificate of  Incorporation of the Company dated June 9, 1999. Incorporated herein by  reference to Exhibit 3.11 to the Company’s Annual Report on Form 10-KSB for  the year ended December 31, 1999.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 3.12   |   | Certificate of Amendment of Certificate of  Incorporation of the Company dated June 6, 2000. Incorporated herein by  reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for  the period ended June 30, 2000.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Certificate of Designation of the Company’s  Series A, B and C Preferred Stock, dated December 27, 1995. Incorporated  herein by reference to Exhibit 4.7 to the Company’s Registration Statement on  Form S-3 (Registration No. 333-10665).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Certificate of Designation of the Company’s  Series I Preferred Stock. Incorporated herein by reference to Exhibit 4.2 to  the Company’s Annual Report on Form 10-KSB for the year ended  December 31, 1998.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | Certificate of Designation of the Company’s  Series J Preferred Stock. Incorporated herein by reference to Exhibit 4.3 to  the Company’s Annual Report on Form 10-KSB for the year ended  December 31, 1998.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Certificate of Designation of the Company’s  Series 1999 Preferred Stock. Incorporated herein by reference to Exhibit 4.4  to the Company’s Quarterly Report on Form 10-QSB for the period ended  June 30, 1999.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.5    |   | Certificate of Designation of the Company’s  Series 1999 Non-Voting Preferred Stock. Incorporated herein by reference to  Exhibit 4.5 to the Company’s Quarterly Report on Form 10-QSB for the period  ended June 30, 1999.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 4.6    |   | Certificate of Designation of the Company’s Series 2000 Non-Voting Preferred Stock. Incorporated herein by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1999.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | 1991 Incentive Stock Option Plan, dated  August 14, 1991. Incorporated herein by reference to Exhibit 10.10 to  Lasertechnics’ Annual Report on Form 10-KSB for the year ended  December 31, 1991. +                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Note Purchase Agreement dated June 25,  1997, by and among the Company, J. P. Morgan Investment Corporation and  Wolfensohn Associates L.P. Incorporated by reference to Exhibit 10.15 to the  Company’s Quarterly Report on Form 10-QSB for the period ended  September 30, 1997.                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Amendment to Notes and Note Purchase  Agreement dated December 31, 1998, by and among the Company, Antiope  Partners L.L.C. and J. P. Morgan Investment Corporation. Incorporated herein  by reference to Exhibit 10.16 to Amendment No. 1 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 1997. |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Preferred Stock Purchase Agreement dated  October 21, 1998 by and between the Company and Amphion Ventures L.P.  Incorporated herein by reference to Exhibit 10.8 to the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 1998.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Form of Warrant to purchase shares of the  Company’s common stock issued to Antiope Partners L.L.C. and Amphion Ventures  L.P. Incorporated herein by reference to Exhibit 10.20 to Amendment No. 1 to  the Company’s Annual Report on Form 10-KSB for the year ended  December 31, 1997.                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Asset Purchase Agreement dated  July 15, 1999, by and between the Company and Prism Video, Inc.  Incorporated herein by reference to Exhibit 2.1 to the Company’s Current  Report on Form 8-K dated July 28, 1999.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Convertible Note Payable dated  September 30, 1999, executed by the Company payable to Amphion Ventures  L.P. in the stated principal amount of up to $6,000,000. Incorporated herein  by reference to Exhibit 10.12 to the Company’s Quarterly Report Form 10-QSB  for the period ended September 30, 1999.                    |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Non-Voting Common Stock Purchase Warrant dated  September 30, 1999, to purchase 180,362 shares of the Company’s  non-voting common stock, issued to Amphion Ventures L.P. Incorporated herein  by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 1999.          |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.9   |   | 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. +                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| 10.10  |   | AXCESS Inc. Stock Option Plan. Incorporated  herein by reference to Exhibit 4.1 to the Company’s Registration Statement on  Form S-8 (Registration No. 333-80857). +                                                                                                                                                                      |

 

27

----

 
| 10.11  |   | AXCESS Inc. Director Compensation Plan.  Incorporated herein by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 (Registration No. 333-80843). +                                                                                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | AXCESS Inc. Non-Employee Directors’ Stock  Option Plan. Incorporated herein by reference to Exhibit 4. (a) to the  Company’s Registration Statement on Form S-8 (Registration No. 333-98160). +                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13  |   | Amendment No. 1 to the AXCESS Inc. 1991  Incentive Stock Option Plan dated April 26, 2000. Incorporated herein by  reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB  for the period ended June 30, 2000. +                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14  |   | Demand Note dated as of September 14,  2000, executed by the Company payable to incuVest LLC in the principal amount  of $400,000. Incorporated herein by reference to Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-QSB for the period ended  September 30, 2000.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15  |   | Senior Promissory Note dated  December 14, 2000, executed by the Company payable to J.P. Morgan  Investment Corporation, in the principal amount of $400,000. Incorporated  herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form  10-KSB for the year ended December 31, 2000.                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16  |   | Demand Note dated as of January 12,  2001, executed by the Company payable to incuVest LLC in the principal amount  of $264,000. Incorporated herein by reference to Exhibit 10.32 to the  Company’s Annual Report on Form 10-KSB for the year ended December 31,  2000.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17  |   | Amended Schedule of Advances to the  Demand Note dated as of January 12, 2001, executed by the Company  payable to incuVest LLC in the principal amount of $264,000.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.18  |   | Subordinated Promissory Note dated  April 30, 1999 executed by Amphion Ventures L.P. payable to the Company,  in the principal amount of $4,000,000. Incorporated herein by reference to  Exhibit 10.33 to the Company’s Annual Report on Form 10-KSB for the year  ended December 31, 2000.                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.19  |   | Purchase Note dated July 28, 1999  executed by the Company payable to Prism Video, Inc. and BIL Far East  Holdings Limited, in the principal amount of $4,000,000. Incorporated herein  by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 2000.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.20  |   | Demand Note dated as of November 14,  2001, executed by the Company payable to Amphion Ventures, L.P. in the  principal amount of $200,000.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.21  |   | Amended Schedule of Advances to the  Demand Note dated as of November 14, 2001, executed by the Company  payable to Amphion Ventures, L.P. in the principal amount of $200,000.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.22  |   | AXCESS Inc. 2001 Incentive Plan.  Incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly  Report on Form 10-QSB for the quarter ended June 30, 2001. +                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.23  |   | Demand note dated as of January 25,  2002, executed by the Company payable to Amphion Investments, LLC in the  principal amount of $200,000 (plus additional amounts shown on the  schedule of advances to the note).   Incorporated herein by reference to Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.24  |   | Demand note dated as of February 14,  2002, executed by the Company payable to VennWorks, LLC in the principal  amount of $150,000 (plus additional amounts shown on the schedule of  advances to the note).  Incorporated  herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form  10-QSB for the quarter ended June 30, 2002.             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.25  |   | Demand note dated as of February 28,  2002, executed by the Company payable to Amphion Ventures, LP in the  principal amount of $150,000 (plus additional amounts shown on the  schedule of advances to the note).   Incorporated herein by reference to Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30,  2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.26  |   | 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.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.27  |   | Senior Promissory Note, dated April 12,  2002, executed by the Company payable to J.P. Morgan Investment Corporation  in the principal amount of $400,000.   Incorporated herein by reference to Exhibit 10.6 to the Company’s  Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002.                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.28  |   | 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.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.29  |   | Amended and restated purchase note dated as  of December 12, 2003, executed by AXCESS and PV Proceeds                                                                                                                                                                                                                                                                                  |

 

28

----

 
|   |   | holdings, Inc. Incorporated herein by  reference to Exhibit 10.2 on Form 8-K filed on December 16, 2003.                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| 10.30  |   | 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.                                 |
|   |   |                                                                                                                                                                                                                                               |
| 10.31  |   | 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. |
|   |   |                                                                                                                                                                                                                                               |
| 10.32  |   | Letter dated November 30, 2003, from  Antiope Partners LLC regarding conversion Series I Preferred Stock and  accrued dividends.  *                                                                                                      |
|   |   |                                                                                                                                                                                                                                               |
| 10.33  |   | Letter dated November 30, 2003, from  Antiope Partners LLC regarding conversion Series J Preferred Stock and  accrued dividends.  *                                                                                                      |
|   |   |                                                                                                                                                                                                                                               |
| 10.34  |   | Agreement to offset and convert between  Amphion Ventures L.P. and Axcess.  *                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                               |
| 10.35  |   | Agreement to convert between VennWorks LLC  and Axcess.  *                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                               |
| 10.36  |   | Agreement to convert between JP Morgan SBIC  and Axcess.  *                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                               |
| 10.37  |   | Letter dated December 18, 2003, from  Jackson Hole regarding conversion Series J Preferred Stock and accrued  dividends.  *                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| 10.38  |   | Letter dated December 18, 2003, from  Jackson Hole regarding conversion Series C Preferred Stock and accrued  dividends.  *                                                                                                              |
| 10.39  |   | Advisory agreement between NVW LLC and  Axcess. *                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                               |
| 14.1   |   | Code of Ethics for Senior Financial Officers dated and approved by  the Board of Director on March 26, 2004. *                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                               |
| 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. *                                                                                                                                                                                                                         |

 

(b) Reports on Form 8-K:

 
| **Date**               |   | **Description**                                                                                                                 |
|------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
| December 16, 2003 |   | On December 16, 2003, AXCESS International Inc. filed an 8-K  outlining the completion of the balance sheet restructuring. |
| February 14, 2004 |   | Amended 8-K disclosing the Pro forma financial statements of the  balance sheet restructuring.                                  |

 

----

*                                 Filed herewith

+                                 Denotes management contract or compensatory plan.

 

(b) Reports on Form 8-K. None.

 

**Item 14.****CONTROLS AND PROCEDURES**

 

**Controls and Procedures**

 

(a)                                  Evaluationof Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by thisAnnual Report on Form 10-KSB, the Company’s principal executive officer andprincipal financial officer have

 

29

----

 

concluded that the Company’s disclosure controls and procedures (asdefined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934 (the “Exchange Act”)) are effective to ensure that information required tobe disclosed by the Company in reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission.

 

(b)                                 Changesin Internal Controls.  During theperiod covered by this report, there were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d)of the Exchange Act, the registrant has caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on the 30thday of March 2004.

 

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

 

In accordance with the Exchange Act, thisreport has been signed by the following persons on behalf of the registrant andin the capacities indicated, on the 30th day of March 2004.

 

 
| **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         |   |                                          |
|                          |        |                                               |  |  |  |

 

30

----

 

**REPORT OF HEIN &ASSOCIATES LLP, INDEPENDENT AUDITORS**

 

The Board of Directors and Stockholders ofAxcess International, Inc.

 

We have audited the accompanying consolidatedbalance sheets of Axcess Interntaional, Inc. (the Company) as ofDecember 31, 2003 and 2002 and the related consolidated statements ofoperations, stockholders’ deficit and cash flows for the years then ended.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. 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 a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Axcess International, Inc., at December 31, 2003 and 2002, andthe results of its operations and cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 2 to the consolidated financial statements,the Company’s recurring losses from operations and resulting continueddependence upon access to additional external financing raise substantial doubtabout its ability to continue as a going concern.  If the Company is unable to generate profitable operations orraise additional capital it may be forced to seek protection under federalbankruptcy laws.  Management’s plans inregard to these matters are also described in Note 2. The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

 
| /s/ HEIN & ASSOCIATES LLP |   |
|-------------------------------|--------|
|                          |   |
|                          |   |
| March 3, 2004            |   |
| Dallas, Texas                 |   |

 

F-1

----

 

**AXCESS INTERNATIONAL INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2003 AND 2002**

 
|                                                                                                                                                                                 |   | **2003**     |      | **2002**     |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|-----------|--------------|---------|
| ASSETS                                                                                                                                                                               |   |         |      |         |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Current assets:                                                                                                                                                                      |   |         |      |         |    |
| Cash and cash equivalents                                                                                                                                                            |   | $            | 2,163,977 |         | $       | 33,249 |   |
| Restricted cash                                                                                                                                                                      |   | —       |      | 140,000      |    |
| Accounts receivable - trade, net of  allowance for doubtful accounts of $65,367 and $67,908, respectively.                                                                           |   | 85,248       |      | 85,379       |    |
| Inventory, net                                                                                                                                                                       |   | 131,515      |      | 231,619      |    |
| Prepaid expenses and other                                                                                                                                                           |   | 148,490      |      | 93,944       |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Total current assets                                                                                                                                                                 |   | 2,529,230    |      | 584,191      |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Property, plant and equipment, net                                                                                                                                                   |   | 61,756       |      | 213,794      |    |
| Intellectual property, net                                                                                                                                                           |   | 149,704      |      | 447,245      |    |
| Deferred debt issuance costs                                                                                                                                                         |   | 675,852      |      | —       |    |
| Other assets                                                                                                                                                                         |   | 595          |      | 29,384       |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Total assets                                                                                                                                                                         |   | $            | 3,417,137 |         | $       | 1,274,614 |   |
|                                                                                                                                                                                 |   |         |      |         |    |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                           |   |         |      |         |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Current liabilities:                                                                                                                                                                 |   |         |      |         |    |
| Accounts payable                                                                                                                                                                     |   | $            | 813,976   |         | $       | 1,404,060 |   |
| Accrued liabilities                                                                                                                                                                  |   | 802,355      |      | 1,501,727    |    |
| Restricted cash for future funding                                                                                                                                                   |   | —       |      | 140,000      |    |
| Notes payable:                                                                                                                                                                       |   |         |      |         |    |
| Stockholders, including $2,477,979 in  default in 2002                                                                                                                               |   | —       |      | 10,405,227   |    |
| Other                                                                                                                                                                                |   | —       |      | 65,844       |    |
| Dividends payable                                                                                                                                                                    |   | 125,999      |      | 455,285      |    |
| Total current liabilities                                                                                                                                                            |   | 1,742,330    |      | 13,972,143   |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Notes payable to stockholders                                                                                                                                                        |   | 4,058,956    |      | —       |    |
| Convertible notes payable (includes  $100,000 and $120,000 with related party in 2003 and 2002, respectively)                                                                        |   | 1,288,333    |      | 1,000,000    |    |
| Discount on convertible debt                                                                                                                                                         |   | (680,457     | )    | (956,148     | )  |
|                                                                                                                                                                                 |   |         |      |         |    |
| Total liabilities                                                                                                                                                                    |   | 6,409,162    |      | 14,015,995   |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Commitments and contingencies (Notes 2, 8 and 13)                                                                                                                                    |   |         |      |         |    |
|                                                                                                                                                                                 |   |         |      |         |    |
| Stockholders’ deficit:                                                                                                                                                          |   |         |      |         |    |
| Convertible preferred stock, 7,000,000  shares authorized                                                                                                                            |   |         |      |         |    |
| With liquidation preference; 54 and 11,976  shares issued and outstanding in 2003 and 2002, respectively; $536,623  aggregated liquidation in 2003 and $4,872,847 in 2002            |   | 536,623      |      | 4,872,847    |    |
| Without liquidation preference; $0.01 par  value, 1,790,000 shares issued and outstanding in 2003                                                                                    |   | 17,900       |      | —       |    |
| Common stock, $.01 par value, 50,000,000  shares authorized in 2002 and 2001; 19,446,028 shares issued and outstanding  in 2003 and 16,566,148 shares issued and outstanding in 2002 |   | 194,461      |      | 165,662      |    |
| Shares of common stock to be issued,  4,529,345 shares                                                                                                                               |   | 45,293       |      | —       |    |
| Non-voting convertible common stock, $.01  par value, 2,250,000 shares authorized; no shares issued and outstanding in  2003 or 2002                                                 |   | —       |      | —       |    |
| Additional paid-in capital                                                                                                                                                           |   | 146,246,094  |      | 123,768,261  |    |
| Note receivable and accrued interest due  from stockholder, in default in 2002                                                                                                       |   | —       |      | (4,711,915   | )       |
| Accumulated deficit                                                                                                                                                                  |   | (150,032,396 | )         | (136,836,236 | )       |
|                                                                                                                                                                                 |   |         |      |         |    |
| Total stockholders’ deficit                                                                                                                                                     |   | (2,992,025   | )         | (12,741,381  | )       |
|                                                                                                                                                                                 |   |         |      |         |    |
| Total liabilities and stockholders’ deficit                                                                                                                                     |   | $            | 3,417,137 |         | $       | 1,274,614 |   |

 

See accompanying notes.

 

F-2

----

 

**AXCESS INTERNATIONAL INC.CONSOLIDATED STATEMENTS OFOPERATIONSYEARS ENDED DECEMBER 31, 2003 and 2002**

 
|                                                 |   | **2003**   |        | **2002**   |   |
|------------------------------------------------------|--------|------------|-------------|------------|--------|
|                                                 |   |       |        |       |   |
| Sales                                                |   | $          | 915,825     |       | $      | 1,596,221 |   |
| Cost of sales                                        |   | 562,060    |        | 1,078,518  |   |
| Inventory impairment                                 |   | 148,866    |        | 134,483    |   |
|                                                 |   |       |        |       |   |
| Gross profit                                         |   | 204,899    |        | 383,220    |   |
| Expenses:                                            |   |       |        |       |   |
| Research and development                             |   | 632,974    |        | 1,632,385  |   |
| General and administrative                           |   | 1,287,944  |        | 1,568,969  |   |
| Selling and marketing                                |   | 280,190    |        | 1,072,425  |   |
| Depreciation, amortization and impairment            |   | 440,573    |        | 566,264    |   |
|                                                 |   |       |        |       |   |
| Operating expenses                                   |   | 2,641,681  |        | 4,840,043  |   |
|                                                 |   |       |        |       |   |
| Loss from operations                                 |   | (2,436,681 | )           | (4,456,823 | )      |
|                                                 |   |       |        |       |   |
| Other income (expense):                              |   |       |        |       |   |
| Interest expense                                     |   | (1,149,059 | )           | (1,152,898 | )      |
| Gain on vendor settlements                           |   | 355,848    |        | 34,433     |   |
| Other                                                |   | (13,139    | )           | (25,846    | )      |
| Loss on debt settlements, net                        |   | (6,328,527 | )           | —     |   |
|                                                 |   |       |        |       |   |
| Other expense, net                                   |   | (7,134,877 | )           | (1,144,311 | )      |
|                                                 |   |       |        |       |   |
| Net loss                                             |   | (9,571,658 | )           | (5,601,134 | )      |
|                                                 |   |       |        |       |   |
| Preferred stock dividend requirements                |   | (1,841,670 | )           | (430,003   | )      |
|                                                 |   |       |        |       |   |
| Net loss applicable to common stock                  |   | $          | (11,413,328 | )          | $      | (6,031,137 | ) |
|                                                 |   |       |        |       |   |
| Basic and diluted net loss per share                 |   | $          | (0.62       | )          | $      | (0.37 | ) |
|                                                 |   |       |        |       |   |
| Weighted average shares of common stock  outstanding |   | 18,337,645 |        | 16,132,374 |   |

 

See accompanying notes.

 

F-3

----

 

**AXCESS INC.CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICITYEARS ENDED DECEMBER 31, 2003 and 2002**

 
|                                                                            |   | **CONVERTIBLE  PREFERRED STOCK** |   | **COMMON STOCK** |      | **NON-VOTING  CONVERTIBLE  COMMON STOCK** |       | **ADDITIONAL  PAID-IN  CAPITAL** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------|--------|------------------|-----------|-------------------------------------------|------------|----------------------------------|--------|
|                                                                            |   | **NUMBER OF  SHARES**            |   | **PAR VALUE**    |      | **NUMBER OF  SHARES**                     |       | **PAR  VALUE**                   |   | **NUMBER OF  SHARES** |   | **PAR  VALUE** |   |   |
|                                                                            |   |                             |   |             |      |                                      |       |                             |   |   |   |   |   |   |   |
| Balance at December 31,  2001                                              |   | 12,028                           |   | $                | 5,392,847 |                                      | 15,848,179 |                             | $      | 158,482 |   | 112,492 |   | $ | 1,125 |   | $ | 121,447,062 |   |
| Conversion of Preferred  Series I                                               |   | (52                              | )      | (520,000         | )         | 207,477                                   |       | 2,075                            |   | — |   | — |   | 517,925 |   |
| Conversion of Non-Voting  Convertible Common Stock                              |   | —                           |   | —           |      | 112,492                                   |       | 1,125                            |   | (112,492 | ) | (1,125 | ) | — |   |
| Common Stock issued pursuant  to asset Purchase of IVEX                         |   | —                           |   | —           |      | 148,000                                   |       | 1,480                            |   | — |   | — |   | 590,520 |   |
| Shares issued in conjunction  with convertible debt offering                    |   | —                           |   | —           |      | 250,000                                   |       | 2,500                            |   | — |   | — |   | — |   |
| Debt discount in conjunction  with convertible debt offering                    |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 952,500 |   |
| Capital contribution of  employees Salaries for the fourth quarter of 2002      |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 251,054 |   |
| Warrants issued for  extension of debt                                          |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 9,200 |   |
| Preferred stock dividends                                                       |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | — |   |
| Net Loss                                                                        |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | — |   |
|                                                                            |   |                             |   |             |      |                                      |       |                             |   |   |   |   |   |   |   |
| Balance at December 31,  2002                                              |   | 11,976                           |   | $                | 4,872,847 |                                      | 16,566,148 |                             | $      | 165,662 |   | — |   | $ | — |   | $ | 123,768,261 |   |
|                                                                            |   |                             |   |             |      |                                      |       |                             |   |   |   |   |   |   |   |
| Shares issued in conjunction  with convertible debt offering                    |   | —                           |   | —           |      | 272,500                                   |       | 2,725                            |   | — |   | — |   | 81,697 |   |
| Shares issued in conjunction  with 2003 Preferred equity offering               |   | 2,050,001                        |   | 20,500           |      | 315,000                                   |       | 3,150                            |   | — |   | — |   | 1,436,975 |   |
| Preferred stock discount in  conjunction with 2003 Preferred stock offering     |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 1,460,230 |   |
| Conversion of Preferred  Series 2003                                            |   | (2,050,001                       | )      | (20,500          | )         | 2,050,001                                 |       | 20,500                           |   | — |   | — |   | — |   |
| Shares issued for services  rendered                                            |   | —                           |   | —           |      | 200,000                                   |       | 2,000                            |   | — |   | — |   | 78,000 |   |
| Issuance of common stock  upon exercise of stock options                        |   | —                           |   | —           |      | 30,750                                    |       | 308                              |   | — |   | — |   | 51,968 |   |
| Conversion of Convertible  note                                                 |   | —                           |   | —           |      | 11,629                                    |       | 116                              |   | — |   | — |   | 20,050 |   |
| Shares issued in conjunction  with 2003B Preferred equity offering              |   | 1,790,000                        |   | 17,900           |      | —                                    |       | —                           |   | — |   | — |   | 4,662,236 |   |
| Preferred stock discount in  conjunction with 2003 Preferred stock offering     |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | — |   |
| Conversion and offset of  Amphion Venture notes receivable and payable          |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 1,177,827 |   |
| Conversion of VennWorks  demand notes                                           |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 7,324,850 |   |
| JP Morgan conversion of  promissory note                                        |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 492,304 |   |
| Conversion of PV Proceeds  Holdings, Inc. Series 1999 preferred to common stock |   | (152                             | )      | (1,515,492       | )         | —                                    |       | —                           |   | — |   | — |   | 1,723,432 |   |
| Conversion of Antiope  Partners Series I preferred to common stock              |   | (65                              | )      | (645,369         | )         | —                                    |       | —                           |   | — |   | — |   | 756,861 |   |
| Conversion of Antiope  Partners Series J preferred to common stock              |   | (157                             | )      | (1,566,675       | )         | —                                    |       | —                           |   | — |   | — |   | 1,809,452 |   |
| Conversion of Jackson Hole  Series C preferred to common stock                  |   | (11,522                          | )      | (347,869         | )         | —                                    |       | —                           |   | — |   | — |   | 432,906 |   |
| Conversion of Jackson Hole  Series J preferred to common stock                  |   | (15                              | )      | (146,629         | )         | —                                    |       | —                           |   | — |   | — |   | 169,838 |   |
| Conversion of JP Morgan  Series I preferred to common stock                     |   | (9                               | )      | (90,171          | )         | —                                    |       | —                           |   | — |   | — |   | 106,369 |   |
| Conversion of JP Morgan  Series J preferred to common stock                     |   | (2                               | )      | (24,019          | )         | —                                    |       | —                           |   | — |   | — |   | 27,906 |   |
| Warrants issued in  conjunction with PV Proceeds note extension                 |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | 664,932 |   |
| Preferred stock dividends                                                       |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | — |   |
| Net Loss                                                                        |   | —                           |   | —           |      | —                                    |       | —                           |   | — |   | — |   | — |   |
|                                                                            |   |                             |   |             |      |                                      |       |                             |   |   |   |   |   |   |   |
| Balance at December 31,  2003                                              |   | 1,790,054                        |   | $                | 554,523   |                                      | 19,446,028 |                             | $      | 194,461 |   | — |   | $ | — |   | $ | 146,246,094 |   |

 

F-4

----

 
|                                                                            |   | **COMMON  STOCK  ISSUABLE** |    | **DUE FROM  STOCKHOLDERS** |   | **ACCUMULATED  DEFICIT** |   | **TOTAL  STOCKHOLDERS’  EQUITY (DEFICIT)** |         |
|---------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|--------------------------|--------|-------------------------------------------------|--------------|
|                                                                            |   |                        |    |                       |   |                     |   |                                            |         |
| Balance at  December 31, 2001                                              |   | $                           | 592,000 |                       | $      | (4,711,915               | )      | $                                               | (130,805,099 | ) | $ | (7,925,498 | ) |
|                                                                            |   |                        |    |                       |   |                     |   |                                            |         |
| Conversion of  Preferred Series I                                               |   | —                      |    | —                     |   | —                   |   | —                                          |         |
| Conversion of  Non-Voting Convertible Common Stock                              |   | —                      |    | —                     |   | —                   |   | —                                          |         |
| Common Stock  issued pursuant to asset Purchase of IVEX                         |   | (592,000                    | )       | —                     |   | —                   |   | —                                          |         |
| Shares issued  in conjunction with convertible debt offering                    |   | —                      |    | —                     |   | —                   |   | 2,500                                           |         |
| Debt discount  in conjunction with convertible debt offering                    |   | —                      |    | —                     |   | —                   |   | 952,500                                         |         |
| Capital  contribution of employees salaries for the fourth quarter of 2002      |   | —                      |    | —                     |   | —                   |   | 251,054                                         |         |
| Warrants  issued for extension of debt                                          |   | 9,200                       |    |                       |   |                     |   |                                            |         |
| Preferred  stock dividends                                                      |   | —                      |    | —                     |   | (430,003                 | )      | (430,003                                        | )            |
| Net loss                                                                        |   | —                      |    | —                     |   | (5,601,134               | )      | (5,601,134                                      | )            |
|                                                                            |   |                        |    |                       |   |                     |   |                                            |         |
| Balance at  December 31, 2002                                              |   | $                           | —  |                       | $      | (4,711,915               | )      | $                                               | (136,836,236 | ) | $ | (12,741,381 | ) |
|                                                                            |   |                        |    |                       |   |                     |   |                                            |         |
| Shares issued  in conjunction with convertible debt offering                    |   | —                      |    | —                     |   | —                   |   | 84,422                                          |         |
| Shares issued  in conjunction with 2003 Preferred equity offering               |   | —                      |    | —                     |   | —                   |   | 1,460,625                                       |         |
| Preferred  stock discount in conjunction with 2003 Preferred stock offering     |   | —                      |    | —                     |   | —                   |   | 1,460,230                                       |         |
| Conversion of  Preferred Series 2003                                            |   | —                      |    | —                     |   | —                   |   | —                                          |         |
| Shares issued  for services rendered                                            |   | —                      |    | —                     |   | —                   |   | 80,000                                          |         |
| Issuance of  common stock upon exercise of stock options                        |   | —                      |    | —                     |   | —                   |   | 52,275                                          |         |
| Conversion of  Convertible note                                                 |   | —                      |    | —                     |   | —                   |   | 20,167                                          |         |
| Shares issued  in conjunction with 2003B Preferred equity offering              |   | 1,570                       |    | —                     |   | —                   |   | 4,681,706                                       |         |
| Preferred  stock discount in conjunction with 2003B Preferred stock offering    |   | —                      |    | —                     |   | (1,782,831               | )      | (1,782,831                                      | )            |
| Conversion and  offset of Amphion Venture   note receivable and payable    |   | 2,945                       |    | 4,711,915                  |   | —                   |   | 5,892,687                                       |         |
| Conversion of  VennWorks demand notes                                           |   | 18,313                      |    | —                     |   | —                   |   | 7,343,163                                       |         |
| JP Morgan  conversion of promissory note                                        |   | 2,279                       |    | —                     |   | —                   |   | 494,583                                         |         |
| Conversion of  PV Proceeds Holdings, Inc. Series 1999 preferred to common stock |   | 6,921                       |    | —                     |   | —                   |   | 214,862                                         |         |
| Conversion of  Antiope Partners Series I preferred to common stock              |   | 3,040                       |    | —                     |   | —                   |   | 114,531                                         |         |
| Conversion of  Antiope Partners Series J preferred to common stock              |   | 7,267                       |    | —                     |   | —                   |   | 250,044                                         |         |
| Conversion of  Jackson Hole Series C preferred to common stock                  |   | 1,739                       |    | —                     |   | —                   |   | 86,775                                          |         |
| Conversion of  Jackson Hole Series J preferred to common stock                  |   | 682                         |    | —                     |   | —                   |   | 23,891                                          |         |
| Conversion of  JP Morgan Series I preferred to common stock                     |   | 426                         |    | —                     |   | —                   |   | 16,624                                          |         |
| Conversion of  JP Morgan Series J preferred to common stock                     |   | 112                         |    | —                     |   | —                   |   | 3,999                                           |         |
| Warrants  issued in conjunction with PV Proceeds note extension                 |   | —                      |    | —                     |   | —                   |   | 664,932                                         |         |
| Preferred  stock dividends                                                      |   | —                      |    | —                     |   | (1,841,670               | )      | (1,841,670                                      | )            |
| Net Loss                                                                        |   | —                      |    | —                     |   | (9,571,658               | )      | (9,571,658                                      | )            |
|                                                                            |   |                        |    |                       |   |                     |   |                                            |         |
| Balance at  December 31, 2003                                              |   | $                           | 45,293  |                       | $      | —                   |   | $                                               | (150,032,396 | ) | $ | (2,992,025 | ) |

 

See accompanying notes

 

F-5

----

 

**AXCESS, INC.CONSOLIDATED STATEMENT OF CASH FLOWSYEARS ENDED DECEMBER 31, 2003 and 2002**

 
|                                                                                                 |   | **2003**   |       | **2002**   |    |
|------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|---------|
|                                                                                                 |   |       |       |       |    |
| Cash flows from operating activities:                                                                |   |       |       |       |    |
| Net loss                                                                                             |   | $          | (9,571,658 | )          | $       | (5,601,134 | ) |
| Adjustments to reconcile net loss to net  cash used  by operating activities:                        |   |       |       |       |    |
| Depreciation and amortization                                                                        |   | 440,573    |       | 566,264    |    |
| Gain on vendor settlements                                                                           |   | (355,848   | )          | —     |    |
| Loss on debt settlements, net                                                                        |   | 6,328,527  |       | —     |    |
| Amortization of financing discount and  issuance costs                                               |   | 379,946    |       | 608,809    |    |
| Capital contributions of employees’  salaries                                                   |   | —     |       | 251,054    |    |
| Shares issued for services rendered                                                                  |   | 80,000     |       | —     |    |
| Loss on sale of assets                                                                               |   | 13,139     |       | 26,202     |    |
| Inventory impairment                                                                                 |   | 148,866    |       | 134,483    |    |
| Changes in operating assets and  liabilities:                                                        |   |       |       |       |    |
| Accounts receivable                                                                                  |   | 131        |       | 72,900     |    |
| Inventory                                                                                            |   | (49,302    | )     | 332,956    |    |
| Prepaid expenses and other                                                                           |   | (60,679    | )     | 44,035     |    |
| Other assets                                                                                         |   | 28,789     |       | (150       | )       |
| Accounts payable and accrued liabilities                                                             |   | 451,659    |       | 331,423    |    |
| Net cash used by operating activities                                                                |   | (2,165,857 | )          | (3,233,158 | )       |
|                                                                                                 |   |       |       |       |    |
| Cash flow from investing activities:                                                                 |   |       |       |       |    |
| Proceeds from asset sales                                                                            |   | —     |       | 11,016     |    |
| Capital expenditures                                                                                 |   | (4,133     | )          | (2,348     | )       |
| Increase in restricted cash                                                                          |   | —     |       | (140,000   | )       |
| Net cash used by investing activities                                                                |   | (4,133     | )          | (131,332   | )       |
|                                                                                                 |   |       |       |       |    |
| Cash flow from financing activities:                                                                 |   |       |       |       |    |
| Borrowings under financing agreements                                                                |   | 611,603    |       | 3,518,810  |    |
| Principal payments on financing agreements                                                           |   | (697,662   | )          | (121,071   | )  |
| Note payable extension fee                                                                           |   | (25,000    | )          | —     |    |
| Net proceeds from issuance of common stock  from employee options                                    |   | 52,277     |       | —     |    |
| Net proceeds from issuance of common and  preferred stock                                            |   | 4,359,500  |       | —     |    |
| Net cash provided by financing activities                                                            |   | 4,300,718  |       | 3,397,739  |    |
|                                                                                                 |   |       |       |       |    |
| Net increase in cash and cash equivalents                                                            |   | 2,130,728  |       | 33,249     |    |
| Cash and cash equivalents, beginning of  year                                                        |   | 33,249     |       | —     |    |
| Cash and cash equivalents, end of year                                                               |   | $          | 2,163,977  |       | $       | 33,249 |   |
|                                                                                                 |   |       |       |       |    |
| Supplemental information:                                                                            |   |       |       |       |    |
| Cash paid during the year for interest                                                               |   | $          | 4,780      |       | $       | 3,328 |   |
|                                                                                                 |   |       |       |       |    |
| Supplemental disclosure of non-cash  investing and financing activities:                             |   |       |       |       |    |
| Value of equity instruments and beneficial  conversion feature recorded as preferred stock dividends |   | $          | 3,243,060  |       | —  |   |
| Conversions of notes payable into common  stock                                                      |   | 6,071,901  |       | —     |    |
| Conversions of accrued interest into common  stock                                                   |   | 1,350,173  |       | —     |    |
| Record discounts on notes payable                                                                    |   | 84,598     |       | —     |    |
| Record debt issuance costs                                                                           |   | 664,932    |       | —     |    |
| Conversions of preferred stock into common  stock                                                    |   | 4,356,724  |       | —     |    |
| Conversions of accrued interest into notes  payable                                                  |   | 43,787     |       | —     |    |
| Conversions of accrued dividends into  common stock                                                  |   | 710,727    |       | —     |    |
| Preferred stock dividends accrued                                                                    |   | 381,440    |       | —     |    |

 

See accompanying notes.

 

F-6

----

 

**AXCESSNOTES TO FINANCIAL STATEMENTS**

 

**(1)****Summary of Significant Accounting Policies**

 

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

 

TheCompany provides advanced security and asset management systems, which locate,identify, track, monitor and protect assets. The main applications of theCompany’s systems are security video through closed circuit television (calledCCTV), personnel and vehicle access control, and automatic asset tracking andprotection. The Company provides solutions in the recently identified homelandsecurity markets such as air and ground transportation, water treatmentfacilities, oil and gas, power plants, as well as in the markets for datacenters, retail / convenience stores, education, healthcare, and corporateoffices. AXCESS utilizes two patented and integrated technologies:network-based radio frequency identification (RFID) and tagging and streamingvideo. Both application and browser-based software options deliver criticalreal-time information tailored to each end user via the enterprise network orInternet, also providing custom alerts in the form of streaming video, e-mail,or messages delivered to wireless devices.

 

The Company’s business plan for 2004 ispredicated principally upon the successful marketing of its RFID and digitalvideo products. During 2003, operating activities utilized approximately $2.2million of cash. During 2003 the Company raised a net of $4.4 million ofadditional working capital through two exempt Preferred Stock offering. Thefirst, closed during the second quarter, raised approximately $1.5 million andis designated as 2003 Preferred.  Each$75,000 unit consisted of 100,000 shares of Preferred Stock bearing a 7% dividend,approximately 15,000 shares of common stock and 100,000 warrants to purchasethe Company’s common stock exercisable for two years at $1.00 per share.  The offering also included an automaticconversion into common stock on a one for one basis if the closing twenty-dayaverage stock price is over $2.00 per share. On June 5, 2003 our twenty-day trailing closing price was over$2.00 per share and the 2003 Preferred shares converted into common shares.

 

The second, closed during the fourth quarter,raised a net of approximately $2.9 million andis designated as 2003B Preferred.  Each$70,000 unit consists of 40,000 shares of Preferred Stock bearing a 7%dividend, 2,000 shares of common stock and 40,000 warrants to purchase theCompany’s common stock exercisable for two years at $2.75 per share. Theoffering also included an automatic conversion into common stock on a one forone basis if the closing twenty-day average stock price is over $3.75 pershare. In connection with the 2003B Preferred Stock offering includingcommissions, Axcess issued 1,790,000 shares of the 2003B Preferred Stock and1,935,000 warrants.  In addition Axcesswill issue 157,000 shares of common stock. However, even with the additionalfunding, the Company anticipates that its existing working capital resourcesand revenues from operations will not be adequate to satisfy its fundingrequirements in 2004.

 

Thefuture results of operations and financial condition of the Company will beimpacted by the following factors, among others: changes from anticipatedlevels of sales, access to capital, future national or regional economic andcompetitive conditions, changes in relationships with customers, difficultiesin developing and marketing new products, marketing existing products, customeracceptance of existing and new products, validity of patents, technologicalchange, dependence on key personnel, availability of key component parts,dependence on third party manufacturers, vendors, contractors, productliability, casualty to or other disruption of the production facilities, delaysand disruptions in the shipment of the Company’s products, and the ability ofthe Company to meet its stated business goals.

 

If theCompany’s losses or lack of operating capital continue, the Company will haveto obtain funds to meet its cash requirements through business alliances, suchas strategic or financial transactions with third parties, the sale ofsecurities or other financing arrangements, or the Company may be required tocurtail its operations, seek a merger partner, or seek protection under federalbankruptcy laws. Any of the foregoing may be on terms that are unfavorable tothe Company or disadvantageous to existing stockholders. In addition, noassurance may be given that the Company will be successful in raisingadditional funds or entering into business alliances.

 

**(b)**                                  **Company Organization andBasis of Presentation**

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its majority-owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Certainamounts from prior years have been reclassied to conform with the 2003presentation.

 

TheCompany has received working capital in various forms from Amphion Ventures, L.P. and affiliates of Amphion Ventures, L. P. including Amphion Partners,Amphion Investments LLC, Antiope Partners L.L.C., VennWorks LLC (formerlyincuVest LLC), Amphion Capital Management L.L.C., and NVW, LLC (collectively,the “Amphion Group”). Following the conversion of the 2003 preferred stock heldby the Amphion Group into common stock in 2003, the Amphion Group ownsapproximately 71% of the outstanding voting stock of the Company.

 

F-7

----

 

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

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that effect the amounts reported in the financial statementsand accompanying notes. As discussed below, the Company makes significantassumptions in recording its allowance for doubtful accounts, inventoryvaluation, impairment of long-lived assets, warranty costs and the valuationallowance for deferred tax assets. Actual results could differ from those estimates,and the differences may be significant.

 

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

 

TheCompany considers all highly liquid debt instruments with original maturitiesof three months or less to be cash equivalents.

 

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

 

Inventoryis valued at the lower of cost or market using the first-in, first-out method.Inventory was comprised of the following at December 31, 2003 andDecember 31, 2002: 

 
|            |   | **December 31,  2003** |    | **December 31,  2002** |   |
|-----------------|--------|-----------------------------|---------|-----------------------------|--------|
| Raw materials   |   | $                           | 36,682  |                        | $      | 162,806 |   |
| Work-in-process |   | 10,513                      |    | 3,370                       |   |
| Finished goods  |   | 84,320                      |    | 65,443                      |   |
|            |   | $                           | 131,515 |                        | $      | 231,619 |   |

 

The Company recorded a charge of $148,866 and $134,483 for inventoryimpairment during the years ended December 31, 2003 and 2002,respectively.  The amount reflects itemsthat have not been able to be used by our contract manufacturers in thebuilding of additional products. The impairment was as a result of the changein strategy to contract manufacturing.

 

Thecomponents of cost of sales are summarized as follows:

 
|                 |   | **December 31,  2003** |    | **December 31,  2002** |   |
|----------------------|--------|-----------------------------|---------|-----------------------------|--------|
| Product Cost         |   | $                           | 531,543 |                        | $      | 1,051,205 |   |
| Warranty Expense     |   | 30,517                      |    | 27,313                      |   |
| Inventory Impairment |   | 148,866                     |    | 134,483                     |   |
| Cost of Sales        |   | $                           | 710,926 |                        | $      | 1,213,001 |   |

 

**(f)**                                    **Property and Equipment**

 

Propertyand equipment are recorded at cost and depreciated using the straight-linemethod over the estimated useful lives of the assets. The Company capitalizescosts associated with software developed or obtained for internal use when boththe preliminary project stage is completed and management has authorizedfurther funding for the project, which it deems completion to be probable, andthat the project will be used to perform the function intended. Capitalizationof such costs ceases no later than the point at which the project issubstantially complete and ready for its intended use. The Company currentlyhas no capitalized software development on its books.

 

**(g)****                                ****Intangible Assets**

 

Intangibleassets, which consist primarily of patents and developed technologies, havebeen recorded as the result of acquisitions of business and developedtechnologies and are being amortized on the straight-line basis over fiveyears.

 

**(h)**                                 **Impairment of Long-LivedAssets-and Long-Lived Assets to Be Disposed Of**

 

Long-livedassets and identifiable intangible assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated-by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the asset exceeds the fair value of the assets based onestimated future cash flows. Assets to be disposed of are reported at the lowerof-the carrying amount or fair value less costs to sell. Revenues from the saleof products utilizing the Company’s purchased technologies have not grownaccording to our expectations and the Company has experienced operating lossessince the respective dates of acquisition. The Company believes that assumptions made in projecting future cashflows for this evaluation are reasonable. However, if future actual results donot meet expectations, the Company may be required to record an additionalimpairment charge, the amount of which could be material to the results of itsoperations and financial position. During the years ended December 31,2003 and 2002 the Company recorded no impairment charges.

 

F-8

----

 

**(i)**                                    **Financial Instruments**

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consists primarily of trade accounts receivable and notes receivable. Productsare sold to customers, including distributors and integrators, 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.

 

Thecarrying amounts of cash equivalents, accounts receivable, accounts payable,accrued liabilities and notes payable approximate fair value because of theshort-term maturity of these instruments.

 

**(j)**                                    **Revenue Recognition**

 

TheCompany recognizes revenue on sales of its products when the products areshipped from the Company. Company policy does not allow customers to returnproducts for credit. The Company currently provides a one-year warranty on allproducts. Provision is made at the time the related revenue is recognized forestimated product repair costs.

 

**(k)**                                **Research and DevelopmentCosts**

 

Researchand development costs are expensed as incurred. The Company capitalizes certaincosts incurred during an internal-use software development project, includingcosts related to applications, infrastructure and graphics developments.Capitalizable costs consist of (a) certain external direct cost of materialsand services incurred in developing or obtaining internal-use computersoftware, (b) payroll and payroll-related costs for employees who are directlyassociated with and who devote time to the project and (c) interest costincurred. Costs that are considered to be related to research and developmentactivities are incurred during the preliminary project stage, or for dataconversion activities, training, maintenance and general administrative oroverhead costs are expensed as incurred. Costs that cannot be separated betweenmaintenance of, and relatively minor upgrades and enhancements to, theCompany’s internally developed software are also expensed as incurred.

 

**(l)**                                    **Depreciation andAmortization**

 

Depreciationof property and equipment is recorded using the straight-line method over theestimated useful lives of the respective assets. Internally developed softwareand purchased technologies ***(Note 5)*** are amortized over the estimated usefullives of the respective technology.

 

**(m)**                              **Stock-Based Compensation**

 

TheCompany accounts for its stock-based compensation plan under AccountingPrinciples Board (“ABP”) Opinion No. 25, Accounting for Stock Issued toEmployees. The pro forma information below is based on provisions of Statementof Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-BasedCompensation, as amended by FAS 148, Accounting for Stock-BasedCompensation—Transition and Disclosure, issued in December 2002.

 

TheCompany does not have a history of paying cash dividends and none have beenassumed in estimating the fair value of its options.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including expected stock price volatility. Because,among other things, changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable measure of the fair value of its employeestock options. For purposes of pro forma disclosures, the estimated fair valueof the options is amortized to expense over the options’ vesting periods.

 
|                                                       |   | **Twelve Months Ended****December 31,** |        |
|------------------------------------------------------------|--------|----------------------------------------------|-------------|
|                                                       |   | **2003**                                     |        | **2002** |   |
| **Pro forma impact of  fair value method (FAS 148)**       |   |                                         |        |   |   |
| Reported net loss attributed to common  stock              |   | $                                            | (11,413,328 | ) | $ | (6,031,137 | ) |
| Less: fair value of employee stock  compensation           |   | (617,303                                     | )           | (318,689 | ) |
| Pro forma net loss attributed to common  stock             |   | (12,030,631                                  | )           | (6,349,826 | ) |
|                                                       |   |                                         | ** **  |   | ** ** |
| **Loss  per common share**                                 |   |                                         | ** **  |   | ** ** |
| Basic and diluted net loss per share – as  reported   |   | $                                            | (0.62       | ) | $ | (0.37 | ) |
| Basic and diluted net loss per share – pro  forma     |   | $                                            | (0.66       | ) | $ | (0.39 | ) |
|                                                       |   |                                         | ** **  |   | ** ** |
| **Weighted  average Black-Scholes fair value assumptions** |   |                                         | ** **  |   | ** ** |
| Risk free interest rate                                    |   | 4.25                                         | %           | 5.00 | % |
| Expected life                                              |   | 3 years                                      |        | 5 years |   |
| Expected volatility                                        |   | 142                                          | %           | 88 - 92 | % |
| Expected dividend yield                                    |   | 0.0                                          | %           | 0.0 | % |

 

F-9

----

 

**(n)**                                 **Income Taxes**

 

Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount more likely than not tobe realized. Income tax expense is the total of tax payable for the period andthe change during the period in deferred tax assets and liabilities.

 

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

 

Basicloss per share data is computed by dividing the net loss applicable to commonstock by the weighted average number of common shares outstanding during theyear. Diluted earnings per share, which includes the dilutive effect of theconversion of convertible preferred stock and the convertible debt and exerciseof options and warrants has not been presented because, due to the net lossesrecorded by the Company for all periods presented, their inclusion would beantidilutive. Conversion of convertible preferred stock, convertible debt andthe exercise of options and warrants would result in 36,205,589 and 23,339,121common shares outstanding at December 31, 2003 and 2002, respectively.

 

**(p)**                                  **Segment Reporting**

 

TheCompany operates in one-industry segment selling two primary product lines,digital video and RFID. Sales, cost of sales and gross profits for each productline are as follows:

 

 
|                                      |   | **Digital  Video** |    | **RFID** |   |
|-------------------------------------------|--------|--------------------|---------|----------|--------|
| **Twelve Months Ended December 31:** |   | **2003**           |    | **2002** |   | **2003** |   | **2002** |   |
| Sales                                     |   | $                  | 328,725 |     | $      | 954,411 |   | $ | 587,100 |   | $ | 641,810 |   |
| Cost of Sales                             |   | 187,333            |    | 655,459  |   | 374,727 |   | 423,059 |   |
| Inventory Impairment                      |   | 113,120            |    | 59,190   |   | 35,746 |   | 75,293 |   |
| Gross Profit                              |   | $                  | 28,272  |     | $      | 239,762 |   | $ | 176,627 |   | $ | 143,458 |   |

 

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

 

Duringthe twelve months ended 2003, the Company had three customers that accountedfor 28% of the Company’s overall revenue, three customers that accounted for65% of the digital video product sales and two customers accounted for 26% ofthe RFID product sales. During the twelve months ended December 31, 2002the Company had four customers that accounted for 49% of the overall revenue,two customers accounted for 56% of the digital video product sales and fourcustomers accounted for 44% of the RFID product sales.

 

**(r)**                                  **Recent AccountingPronouncements**

 

Effective January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards No. 145, *Rescissionof FAS Statements No. 4, 44 and 64, Amendment of FAS Statement No. 13, andTechnical Corrections* (“FAS 145”).  Through the rescission ofFAS Statements 4 and 64, FAS 145 eliminates the requirement that gains andlosses from extinguishment of debt be aggregated and, if material, beclassified as an extraordinary item net of any income tax effect.  FAS 145made several other technical corrections to existing pronouncements that maychange accounting practice.  Adoption of FAS 145 did not impact theCompany’s results of operations or financial position at December 31,2003, except that vendor concessions on accounts payable in 2003 were recordedas Other Income, whereas prior to the issuance of FAS 145, such items, whenmaterial, were recorded as extraordinary income.

 

Effective January 1, 2003, the Company adopted FinancialAccounting Standards No. 146, *Accounting forCosts Associated with Exit or Disposal Activities* (“FAS 146”). This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue No. 94-3, “*Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity**(including Certain Costs Incurred in aRestructuring)*.”  Adoption of FAS 146 had no impact on theCompany’s results of operations or financial position and December 31, 2003.

 

Effective January 1, 2003, the Company adopted Interpretation No.45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (“FIN No. 45”).  FIN No. 45 broadens the disclosures tobe made by the guarantor about its obligations under certain guarantees. FINNo. 45 also requires a guarantor to recognize a liability for the fair value ofthe obligation undertaken in issuing the guarantee at the inception of aguarantee.  Adoption of FIN No. 45 did not have an impact on the Company’sresults of operations or financial position at December 31, 2003.

 

F-10

----

 

In April 2003, the FASB issued Financial Accounting Standards No.149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities* (“FAS No. 149”). FAS No. 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under FAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*.  FAS No. 149is generally effective for contracts entered into or modified afterJune 30, 2003, and for hedging relationships designated afterJune 30, 2003. The adoption of this statement did not have an impact onthe Company’s results of operations or financial position at December 31,2003.

 

In May 2003, the FASB issued Financial Accounting Standards No.150, Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity (“FAS No. 150”).  FAS 150 establishes standards forhow an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  FAS 150 is generallyeffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  The adoption of this statement’soperational components did not have an impact on the Company’s results ofoperations or financial position at December 31, 2003.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51* (“FIN 46”), which was revised andsuperceded by FASB Interpretation No. 46R in December 2003 (FIN 46R).   FIN 46R requires the consolidation ofcertain variable interest entities, as defined.  FIN 46R is effectiveimmediately for special purpose entities and variable interest entities createdafter December 31, 2003, and must be applied to other variable interestentities no later than December 31, 2004. The Company believes it has nosuch variable interest entities and as a result FIN No. 46R will have no impacton its results of operations, financial position or cash flows.

 

**(2)**                                 **Operations, Liquidity andGoing Concern**

 

Since inception, we have utilizedthe proceeds from a number of public and private sales of our equitysecurities, the exercise of options and warrants and more recently, convertibledebt, short-term bridge loans from stockholders and preferred equity offeringsto meet our working capital requirements. At December 31, 2003, we hadworking capital of $786,900.

 

Our operations continued togenerate losses in 2003. Our cash increased $2,130,728 during 2003 withoperating activities using $2,165,857 of cash. We funded operations primarilythrough borrowings and equity offerings with financing activities providing netcash of $4,300,718. No assurance can be given that such activities willcontinue to be available to provide funding to us.  Our business plan for 2004 is predicated principally upon thesuccessful marketing of our RFID and digital video products. We anticipate thatour existing working capital resources and revenues from operations will not beadequate to satisfy our funding requirements in 2004.

 

Our working capital requirementswill depend upon many factors, including the extent and timing of our productsales, our operating results, the status of competitive products, and actualexpenditures and revenues compared to our business plan. We are currentlyexperiencing declining liquidity, losses from operations and negative cashflows, which makes it difficult for us to meet our current cash requirements,including payments to vendors, and may jeopardize our ability to continue as agoing concern. We intend to address our liquidity problems by controllingcosts, seeking additional funding (through capital raising transactions andbusiness alliances) and maintaining focus on revenues and collections.

 

Our auditors have included anexplanatory paragraph in their audit opinion with respect to our consolidatedfinancial statements at December 31, 2003. The paragraph states that ourrecurring losses from operations and resulting continued dependence on accessto external financing raise substantial doubts about our ability to continue asa going concern. 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.

 

Our business plan for 2004 ispredicated principally upon the successful marketing of our RFID products andthe digital video products. We anticipate that our existing working capitalresources and revenues from operations will not be adequate to satisfy ourfunding requirements through 2004.

 

If our losses continue, we willhave to obtain funds to meet our cash requirements through business alliances,such as 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 to usor disadvantageous to existing stockholders. In addition, no assurance may begiven that we will be successful in raising additional funds or entering intobusiness alliances.

 

**(3)****                                ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaidexpenses and other consists of the following: 

 
|                 |   | **December 31,  2003** |    | **December 31,  2002** |   |
|----------------------|--------|-----------------------------|---------|-----------------------------|--------|
| Prepaid  insurance   |   | $                           | 115,673 |                        | $      | 87,811 |   |
| Prepaid trade  shows |   | 30,949                      |    | —                      |   |
| Prepaid  interest    |   | —                      |    | 6,133                       |   |
| Prepaid other        |   | 1,868                       |    | —                      |   |
|                 |   | $                           | 148,490 |                        | $      | 93,944 |   |

 

F-11

----

 

**(4)**                                 **Property, Plant andEquipment**

 

Property,plant and equipment consists of the following:

 
|                                       |   | **December 31,  2003** |   | **December 31,  2002** |   | **Amortization/  Depreciation  Period** |   |
|--------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|-----------------------------------------|--------|
| Leasehold  improvements                    |   | $                           | 66,435 |                        | $      | 80,775                                  |   | Lease term |   |
| Machinery and  equipment                   |   | 1,744,467                   |   | 1,742,463                   |   | 5 years                                 |   |
| Furniture and  fixtures                    |   | 128,675                     |   | 147,800                     |   | 5 to 10 years                           |   |
|                                       |   | 1,939,577                   |   | 1,971,038                   |   |                                    |   |
| Accumulated  depreciation and amortization |   | (1,877,821                  | )      | (1,757,244                  | )      |                                    |   |
| Property,  plant and equipment, net        |   | $                           | 61,756 |                        | $      | 213,794                                 |   |   |   |

 

Depreciationtotaled $143,032 and $268,723 during 2003 and 2002, respectively.

 

**(5)**                                 **Intellectual property**

 

Intellectualproperty consists of the following: 

 
|                                     |   | **December 31,  2003** |      | **December 31,  2002** |   | **Useful  Lives** |   | **Weighted  Average  Remaining  Useful  Lives at  December 31,  2003** |   |
|------------------------------------------|--------|-----------------------------|-----------|-----------------------------|--------|-------------------|--------|------------------------------------------------------------------------|--------|
| Purchased RFID  technology               |   | $                           | 1,714,449 |                        | $      | 1,714,449         |   | 5 years                                                                |   | — |   |
| Purchased  video technology              |   | 5,087,483                   |      | 5,087,483                   |   | 5 years           |   | 0.5 years                                                              |   |
| Internally  developed software           |   | 350,337                     |      | 350,337                     |   | 5 years           |   | —                                                                 |   |
|                                     |   | 7,152,269                   |      | 7,152,269                   |   |              |   |                                                                   |   |
| Accumulated  amortization and impairment |   | (7,002,565                  | )         | (6,705,024                  | )      |              |   |                                                                   |   |
| Intellectual  property, net              |   | $                           | 149,704   |                        | $      | 447,245           |   |                                                                   |   |   |   |

 

Thefollowing table sets forth the estimated amortization expense on theintellectual property for the fiscal years ended December 31:

 

| 2004  |   | $   | 149,570 |   |
|-------|--------|-----|---------|--------|
| 2005  |   | 134 |    |
| Total |   | $   | 149,704 |   |

 

Thevideo technology was acquired in 1999 and consists of proprietary digital videocompression technology used in video and CCTV products as well as the relatedU.S. and international patent rights.

 

The RFIDtechnology was acquired in 1998 and includes a patent, trade secret rightssoftware, hardware, product designs and all other technical informationnecessary for the Company to manufacture and market radio frequencyidentification products in the areas of access control and asset management. Upto an aggregate of an additional $6,000,000 is payable by the Company to thesellers of the RFID technology only if certain net operating profit targets arerealized during each of the five years following the acquisition date. Suchpayments would be treated as additional cost of the RFID technology, if andwhen paid, and amortized over the remaining economic life of the technology. AtDecember 31, 2003 and December 31, 2002, no additional considerationwas due to the sellers.

 

Internallydeveloped software costs were capitalized once the technological feasibilitywas achieved. These costs are reviewed for recoverability based on the expectedfuture cash flows to be generated.

 

Amortizationexpense of intellectual property totaled $297,541 and $297,542 during 2003 and2002, respectively.

 

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

 

Accruedliabilities consist of the following:

 
|                                                         |   | **December 31,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------------------------|--------|-----------------------------|---------|-----------------------------|--------|
| Accrued  vacation                                            |   | $                           | 147,404 |                        | $      | 147,044 |   |
| Accrued  interest payable                                    |   | 314,751                     |    | 963,827                     |   |
| Accrued  professional fees, litigation settlements and other |   | 340,200                     |    | 390,856                     |   |
|                                                         |   | $                           | 802,355 |                        | $      | 1,501,727 |   |

 

F-12

----

 

**(7)****                                ****Note Receivable and Accrued Interest due from Stockholder**

 

The notereceivable and related accrued interest was due from Amphion Ventures L.P.(“Amphion Ventures”), interest was due at 8% per annum, payable quarterly. TheCompany had assigned all payments of principal under this note receivable toPrism Video, Inc. (“Prism”) until the balance of the note receivable is paid infull or until the balance due under the note payable to Prism (Note 9) is paidin full, whichever occured first. Amphion Ventures did not make its requiredpayments under this note during 2001 or 2002. Accordingly, the note receivableand accrued interest were reclassified in the accompanying balance sheets atDecember 31, 2002 as a reduction of stockholders’ equity due to theAmphion Group’s controlling voting interest in the Company (Note 1) and theuncertainty as to the timing of repayment. The note was due March 31, 2002and was not paid. The Company stopped accruing interest income in 2002.

 

Axcess reached an agreement with Amphion Ventures L.P. with regards toabove described notes between the Parties. Axcess was indebted to Amphion Ventures LP for $5,530,637 of principaland accrued interest.  Amphion VenturesLP owed Axcess  $4,711,915 of notereceivable and accrued interest.    Theabove-described notes were set off against each other there by reducing thedebt owed Amphion Ventures L.P. by Axcess to $818,722.  Amphion Ventures L.P. also agreed to convertthe remaining amount of demand notes and accrued interest into 294,476 commonshares and an equal number of warrants priced at $2.75, that will expire in twoyears.  As a result of theabove-described transactions, Axcess recorded a loss on debt settlement chargeof $362,050 for the excess of the value of the shares and warrants issued over thebook value of the notes.

 

**(8)****                                ****Lease Obligations**

 

TheCompany leases its office space and certain equipment under operating leases.Annual rental expense recorded for operating leases was $106,813 and $259,676for the years ended December 31, 2003 and 2002, respectively. TheCompany’s Carrollton, Texas facility is on a month-to-month lease and theCalifornia lease runs through September 2004.  At December 31, 2003, future minimum lease payments onoperating leases were 15,255, all due in 2004.

 

**(9)****                                ****Notes Payable to Stockholders**

 

Notespayable consist of the following: 

 
|                                                           |   | **December 31,  2003** |      | **December 31,  2002** |   |
|----------------------------------------------------------------|--------|-----------------------------|-----------|-----------------------------|--------|
| Due to  stockholders:                                          |   |                        |      |                        |   |
| 5.00% PV  Proceeds Holdings, Inc., due December 31, 2007  |   | $                           | 3,665,169 |                        | $      | 4,000,000 |   |
| 7.00%  convertible debt                                        |   | 1,288,333                   |      | 1,000,000                   |   |
| Discount  relating to 7.00% convertible debt                   |   | (680,457                    | )         | (956,148                    | )      |
| 5.00% Amphion  Investment LLC note, due December 31, 2007 |   | 393,787                     |      | —                      |   |
| Amphion  Convertible Note                                      |   | —                      |      | 2,477,979                   |   |
| JP Morgan Note  Purchase Agreement                             |   | —                      |      | 400,000                     |   |
| 9.00% demand  note payable to VennWorks                        |   | —                      |      | 803,255                     |   |
| 6.75% demand  note payable to Amphion Ventures                 |   | —                      |      | 1,255,000                   |   |
| 6.75% demand  note payable to Amphion Investment               |   | —                      |      | 355,000                     |   |
| 6.75% demand  note payable to VennWorks                        |   | —                      |      | 814,000                     |   |
| 4.50% demand  note payable to Amphion Ventures                 |   | —                      |      | 300,000                     |   |
| Other  miscellaneous                                           |   | —                      |      | (7                          | )      |
|                                                           |   | 4,666,832                   |      | 10,449,079                  |   |
| Less current  maturities                                       |   | —                      |      | 10,405,227                  |   |
| Non-current  notes payable to stockholders                     |   | $                           | 4,666,832 |                        | $      | 43,852 |   |
|                                                           |   |                        |      |                        |   |
| Other current  notes payable                                   |   | $                           | —    |                        | $      | 65,844 |   |

 

Thefollowing table sets forth the maturities for notes payable for the fiscalyears ended December 31:

 
| 2004   |   | $         | —    |   |
|--------|--------|-----------|-----------|--------|
| 2005   |   | 983,333   |      |
| 2006   |   | 305,000   |      |
| 2007   |   | 4,058,956 |      |
| 2008   |   | —    |      |
|   |   | $         | 5,347,289 |   |

 

F-13

----

 

**Amphion VenturesL.P.**

 

OnSeptember 30, 1999, the Company signed a 10% convertible note maturingSeptember 30, 2002 (“Amphion Convertible Note”), under which the Companycould borrow up to $6,000,000 from Amphion Ventures. Amphion Ventures mayconvert all or any portion of the indebtedness into Series 1999 Non-VotingPreferred Stock of the Company. In consideration for the financing arrangement,the Company issued warrants to acquire 180,362 shares in 1999 and 117,999shares in 2000 and 2001 of the Company’s non-voting common stock at an exerciseprice of $2.10 per share. The fair value of the warrants are recorded asprepaid interest when issued and amortized over 12 months. No additionalborrowings were available to the Company under the Amphion Convertible Note atDecember 31, 2002. The balance of the indebtedness under the 10%convertible note issued was due in full by the Company on September 30,2002.

 

TheCompany entered into a 6.75% convertible note with Amphion Ventures L.P.(“Amphion Ventures”), dated February 28, 2002. During the twelve monthsended December 31, 2002, the Company borrowed $1,255,000 under this note.The principal outstanding under this note could be converted into securities ofthe Company at the option of Amphion Ventures. The borrowings were unsecuredand are due and payable on demand by Amphion Ventures.

 

OnNovember 14, 2001, the Company entered into a 4.5% convertible demand notewith Amphion Ventures. During 2001, the Company borrowed $300,000 under thisnote, leaving a balance of $300,000 outstanding at September 30, 2003 andDecember 31, 2002. The principal outstanding under this note could beconverted into securities of the Company at the option of Amphion Ventures. Theborrowings are unsecured and were due and payable on demand by AmphionVentures.

 

OnJune 29, 2001, Amphion Ventures, L.P. elected to convert $580,000 of theoutstanding principal balance and $140,000 of accrued interest of a 10% notepayable, dated April 30, 1998, issued by the Company to Amphion Ventures, L.P.into 72 shares of the Company’s Series 2000 Non-Voting Preferred Stock, parvalue $.01 per share (the “Series 2000 Preferred Stock”).

 

Axcess reached an agreement with AmphionVentures L.P. with regards to above described notes between the Parties.  Axcess was indebted to Amphion Ventures LPfor $5,530,637 of principal and accrued interest.  Amphion Ventures LP owed Axcess $4,711,915 of note receivable and accrued interest.    The above-described notes were set offagainst each other there by reducing the debt owed Amphion Ventures L.P. byAxcess to $818,722.  Amphion VenturesL.P. also agreed to convert the remaining amount of demand notes and accruedinterest into 294,476 common shares and an equal number of warrants priced at$2.75, that will expire in two years. As a result of the above-described transactions, Axcess recorded a losson debt settlement charge of $362,050 for the excess of the value of the sharesand warrants issued over the book value of the notes.

 

**PV ProceedsHoldings, Inc.**

 

On July 28,1999, the Company acquired substantially all of the assets of PV ProceedsHoldings, Inc. (formerly “Prism Video”), a privately held corporation, andagreed to pay $4,000,000 to PV Proceeds Holdings, Inc. on December 31,2002. The balance of the indebtedness under the PV Proceeds Holdings, Inc. noteissued was due in full by the Company on December 31, 2002 and was indefault during 2003 until extended by PV Proceeds Holdings, Inc.  The note payable has a face amount of$4,000,000 and was collateralized by the Company’s note receivable from AmphionVentures, L.P. (“Amphion Ventures”) (Note 7). Pursuant to the Asset PurchaseAgreement between AXCESS and PV Proceeds Holdings, Inc., AXCESS assigned PVProceeds Holdings, Inc. all payments of principal to be made by AmphionVentures under the note receivable until the balance of the note receivable waspaid in full or the balance due under the note payable to PV Proceeds Holdings,Inc. was paid in full, whichever occured first. In addition, the shares of commonstock, which PV Proceeds Holdings, Inc. may acquire upon conversion ofpreferred stock or by exercise of the warrant, are subject to a three-yearlockup from the date of the closing, which may be reduced to two years upon theoccurrence of certain events. The warrant is exercisable on or beforeJuly 28, 2004.

 

Axcess reached an Agreement to Amend Purchase Note and Payment Termwith PV Proceeds Holdings, Inc. the holders of a $4.0 million non-interestbearing note that 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 fromJanuary 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 have an exercise price of $2.00per share and shall expire on the earlier of February 14, 2008 or forty-fivedays after the principal and all accrued interest are paid.  Axcess has also agreed to certain provisionsthat would further reduce the principal amount over time.  Axcessalso recorded deferred debt issuance costs of $689,932 for the value of thewarrants, which will be amortized over the life of the loan.

 

**VennWorks LLC**

 

OnSeptember 14, 2000, Axcess entered into a 9.5% convertible demand note(“9.5% Demand Note”) with VennWorks LLC (“VennWorks”). The principaloutstanding under this note could be converted into securities of Axcess at theoption of VennWorks. The borrowings were unsecured and were due and payable ondemand by VennWorks.  As ofNovember 30, 2003 the outstanding principal balance was $91,106.

 

OnJanuary 12, 2001, the Company entered into a 9.0% convertible demand note(“9% Demand Note”) with VennWorks. During the year ended December 31,2001, the Company borrowed $4,392,149 under this note. The principaloutstanding under this note could be converted into securities of the Companyat the option of VennWorks. The borrowings were unsecured and were due andpayable on demand by VennWorks. During 2001, VennWorks converted $3,680,000 ofthe

 

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principal balance of the 9% DemandNote and $80,000 of accrued interest on the demand notes due to VennWorks into376 shares of Series 2000 Preferred Stock As of November 30, 2003 the outstanding principal balance was$712,249.

 

Axcessentered into a 6.75% convertible note with VennWorks, dated February 14,2002. The principal outstanding under this note could be converted intosecurities of Axcess at the option of VennWorks on terms yet to specified. Theborrowings were unsecured and were due and payable on demand by VennWorks. Asof November 30, 2003 the outstanding principal balance was $326,978.

 

In December 2003, VennWorksagreed to convert the entire amount of their outstanding demand notes($1,130,233) plus all accrued unpaid interest ($171,240) into 1,831,332common shares and an equal number of warrants priced at $2.75 that will expirein two years.  As a result of theabove-described transaction, Axcess recorded a loss on debt settlement chargeof $6,041,691 for the excess of the value of the shares and warrants issuedover the book value of the notes.

 

**JP Morgan SBIC LLC(formerly known as J.P. Morgan Investment Corporation)**

 

Axcessissued to JP Morgan a Senior Promissory Note (“***Note***”) originally entered onJune 25, 1997 and the last amendment was on April 12, 2002. The Notewas due on December 31, 2003 and as of December 31, 2003 has anoutstanding principal balance of $400,000 and unpaid interest thereon of$169,796.  JP Morgan agreed toconvert that amount of notes and accrued interest into 227,918 commonshares.  As a result of theabove-described transaction, Axcess recorded a restructuring gain on debtsettlement of $75,213.

 

**Amphion Investment,LLC**

 

Axcessentered into a 6.75% convertible note with Amphion Investments, LLC, datedJanuary 25, 2002. The principal outstanding under this note may beconverted into securities of Axcess at the option of Amphion Investments onterms yet to be specified. The borrowings are unsecured and are due and payableon demand by Amphion Investments. As of November 30, 2003, there was anoutstanding balance of $350,000 on this note and accrued interest of $43,787.

 

Axcess reached an agreement with Amphion Investment L.L.C. with regardsto the above-described note executed between them for $393,787 of principal andaccrued interest.    Amphion InvestmentL.L.C. consented to a five-year extension of the note with an interest rate of5% per annum from January 1, 2003 payable in full at maturity ofDecember 31, 2007.

 

**7% Convertible Note**

 

OnJuly 30, 2002, the Company entered into a bridge financing agreement withten accredited investors for the sale and issuance of 10 “units” to theinvestors for an aggregate purchase price of $1,000,000. Each unit consists ofa convertible promissory note in the amount of $100,000 and 25,000 unregisteredshares of the Company’s common stock.

 

Pursuantto the bridge financing agreement, the Company registered the shares of commonstock comprising the units in December 2003.  Each investor has agreed to not sell more than one-third of thecommon stock comprising the units during any calendar month. The convertiblepromissory notes comprising the units bear interest at an annual rate of 7% andmature on July 30, 2005. On each of July 30, 2003, July 30, 2004and July 30, 2005, the investors have the option to convert one-third ofthe principal amount of the notes into common stock of the Company. Theconversion price of the notes is initially 65% of the average closing price ofa share of the Company’s common stock for the 20 trading days preceding thegiven anniversary date of the notes. The maximum conversion price shall be$4.00 per share and the minimum conversion price shall be $1.00 per share. Theconversion price will be subject to adjustment from time to time to reflect anyreorganization, recapitalization, reclassification, stock dividend, stocksplit, reverse stock split or similar change in the Company’s shares of commonstock. The Company without premium or penalty may prepay the notes in whole orin part. In July 2003, one holder elected to convert one-third of his noteplus accrued interest into 11,629 shares of Axcess common stock.

 

Inconnection with this bridge financing, the Company recorded a $1,000,000 debtdiscount due to the value of the equity consideration and beneficial conversionof the financing, pursuant to the guidance issued by the Emerging Issues TaskForce. The debt discount will be amortized using the effective interest methodover the three-year life of the agreement.

 

OnJanuary 17, 2003, Axcess entered into a bridge financing agreement withten accredited investors for the sale and issuance of 3.05 “units” to theinvestors for an aggregate purchase price of $305,000.  Each unit consists ofa convertible promissory note in the amount of $100,000 and 50,000 unregisteredshares of our common stock.

 

Pursuantto the bridge financing agreement, the Company registered the shares of commonstock comprising the units of the bridge financing agreement. By agreement,each investor may not sell more than one-third of the common stock comprisingthe units during any calendar month. The convertible promissory notescomprising the units bear interest at an annual rate of 7% and mature onJanuary 31, 2006. On each of January 31, 2004, January 31, 2005and January 31, 2006, the investors have the option to convert one-thirdof the principal amount of the notes into common stock of Axcess. Theconversion price of the notes is initially 65% of the average closing price ofa share of our common stock for the twenty (20) trading days preceding thegiven anniversary date of the notes. The maximum conversion price shall be$2.00 per share and the minimum conversion price shall be $0.50 per share. Theconversion price will be subject to adjustment from time to time to reflect anyreorganization,

 

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recapitalization, reclassification,stock dividend, stock split, reverse stock split or similar change in ourshares of common stock. The notes may be prepaid in whole or in part by uswithout premium or penalty.

 

Inconnection with this bridge financing, the Company recorded a $84,598 debtdiscount due to the value of the equity consideration of the financing,pursuant to the guidance issued by the Emerging Issues Task Force. The debtdiscount will be amortized using the effective interest method over thethree-year life of the agreement.

 

Noholders have converted their promissory notes or accrued interest in to commonstock of Axcess.

 

**(10)****                         ****Preferred Stock**

 

TheCompany has authorized 7,000,000 shares of convertible preferred stock, ofwhich shares designated in five series have been issued. Information withrespect to the series of preferred stock outstanding at each balance sheet dateis summarized below.

 
|                                                                    |   | **Series C**                        |   | **Series I**                        |   | **Series J**                        |   | **Series 1999**                     |   | **2003B Series**                |   |
|-------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|---------------------------------|--------|
| Number of shares authorized                                             |   | 1,500,000                           |   | 2,500                               |   | 2,500                               |   | 2,500                               |   | 2,750,000                       |   |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| Stated value                                                            |   | $                                   | 30.20  |                                | $      | 10,000                              |   | $                                   | 10,000 |                            | $      | 10,000 |   | $ | 0.01 |   |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| Number of shares issued and outstanding:                                |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| December 31, 2002                                                  |   | 11,522                              |   | 125                                 |   | 177                                 |   | 152                                 |   | —                          |   |
| December 31, 2003                                                  |   | —                              |   | 52                                  |   | 2                                   |   | —                              |   | 1,790,000                       |   |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| Conversion ratio (or conversion price) of  preferred shares into common |   | 1 to 1 into voting common stock     |   | $2.51 into voting common stock      |   | $2.51 into non-voting common stock  |   | $2.50 into voting common stock      |   | 1 to 1 into voting common stock |   |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| Liquidation preference                                                  |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | Stated value plus accrued dividends |   | None                            |   |
|                                                                    |   |                                |   |                                |   |                                |   |                                |   |                            |   |
| Dividend rights                                                         |   | 10% per annum, cumulative           |   | 8% per annum, cumulative            |   | 8% per annum, cumulative            |   | 8% per annum, cumulative            |   | 7% per   annum, cumulative |   |
|                                                                         |        |                                     |        |                                     |        |                                     |        |                                     |        |                                 |        |  |  |  |  |  |

 

*(a)**                              **Series A, Series B and Series C Convertible Preferred Stock*

 

As ofDecember 31, 2003 and December 31, 2002, the Company had no Series Aor Series B Convertible Preferred shares outstanding. The holders of theCompany’s Series C Preferred Stock are entitled to receive quarterly dividendson each such share held at the annual rate of 10% of the original issue priceof each share payable in arrears, when, as and if declared by the Company’sboard of directors, in cash or additional shares of preferred stock at theoption of the holder.

 

During2003, Jackson Hole converted 11,522 shares of Series C Preferred Stock plusaccrued dividends into an aggregate of 173,858 shares of the Company’s commonstock.   As of December 31, 2003,the Company had no Series C Convertible Preferred shares outstanding.

 

Theholders of the Company’s Series C Preferred Stock were entitled to receivequarterly dividends on each such share held at the annual rate of 10% of theoriginal issue price of each share payable in arrears, when, as and if declaredby the Company’s board of directors, in cash or additional shares of preferredstock at the option of the holder. Dividends payable for Series C PreferredStock were $0 and $53,051 at December 31, 2003 and December 31, 2002,respectively.

 

*(b)**                              **Series I and J Convertible Preferred Stock*

 

EachShare of Series I Preferred Stock and Series J Preferred Stock are convertiblein whole or in part at any time at the option of the holder into a number ofshares of voting or non-voting common stock of the Company, respectively, equalto the quotient of (a) the aggregate original issue price of $10,000 per sharedivided by (b) the conversion price of $2.51 per share. The Series I PreferredStock and the Series J Preferred Stock are both subject to optional redemptionat any time by the Company, in whole or in part, at a redemption price pershare equal to the stated value, plus any accrued, but unpaid dividendsthereon. The Company’s optional right of redemption is subject to each SeriesI. Preferred Stock or Series J Preferred Stockholder’s right to convert suchSeries I Preferred Stock or Series J Preferred Stock into voting or non-votingcommon stock, as the case may be, within ten business days after the Company’snotice of redemption.

 

TheSeries I Preferred Stock and the Series J Preferred Stock are also subject tothe mandatory conversion by the Company into shares of the Company’s voting ornon-voting common stock, as the case may be, if the closing bid price of theCompany’s common stock on the NASDAQ SmallCap Market is at least $10.00 pershare for a period of at least ninety (90)

 

F-16

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consecutive trading days. Althoughthe Company’s non-voting common stock may be converted to common stock at anytime by a holder thereof, Amphion Ventures has agreed not to convert any sharesof non-voting common stock to voting common stock without the prior consent ofthe Company.

 

Theholders of Series I Preferred Stock and Series J Preferred Stock are entitledto receive semi-annual dividends on each such share at the annual rate of 8% ofthe original issue price of each share payable in arrears, when, as and ifdeclared by the Company’s board of directors, in cash or additional shares ofpreferred stock. Shares of Series I Preferred Stock and Series J PreferredStock are convertible into shares of common stock at a conversion price of$2.51 per share. The Company has accrued $95,182 and $129,245 of dividendspayable for Series I Preferred Stock at December 31, 2003 andDecember 31, 2002, respectively. The Company has also accrued $3,384 and$150,067 of dividends payable for Series J Preferred Stock at December 31,2003 and December 31, 2002, respectively.

 

During December 2003, the Company reached an agreement with theAntiope Partners LLC that converted 65 shares of Preferred Series I (plusaccrued dividends) and 157 shares of Preferred Series J (plus accrueddividends) into 1,030,648 shares of common stock of Axcess.

 

During December 2003, the Company reached an agreement with theJackson Hole that converted 15 shares of the Preferred Series J (plus accrueddividends) into 68,208 shares of common stock of Axcess.

 

During December 2003, the Company reached an agreement with the JPMorgan SBIC LLC that converted 9 shares of Preferred Series I (plus accrueddividends) and 2 shares of Preferred Series J (plus accrued dividends) into53,763 shares of common stock of Axcess. As of December 31, 2003, the Company had 52 shares of PreferredSeries I  and 2 shares of PreferredSeries J outstanding.

 

*(c)**                               **Series 1999 and 2000 Preferred Stock*

 

Inconnection with the purchase of the Prism video assets during 1999, the Companyissued 125 shares of Series 1999 Preferred Stock (“Series 1999 PreferredStock”). Dividends are payable-semi-annually on each share at the annual rateof 8% in cash or in additional shares of Series 1999 Preferred Stock at the optionof the Company. Shares of 1999 Preferred Stock are convertible into shares ofCommon Stock at a conversion price of $2.51 per share.

 

Theshares of common stock which Prism may acquire upon conversion of the Series1999 Preferred Stock are subject to a three-year lockup from the date of theclosing, which may be reduced to two years upon the occurrence of certainevents

 

Prior to2003, all but 152 shares of the Company’s Series 1999 Preferred Stock wereconverted into common stock. As of December 31, 2003 and December 31,2002 there were 0 shares and 152 shares outstanding, respectively. The Companyhas accrued $0 and $122,922 of dividends for the Series 1999 Preferred Sharesat December 31, 2003 and December 31, 2002 respectively.

 

During December 2003, the Company reached an agreementwith the holder of the preferred series 1999 that converted 152 shares ofPreferred Series 1999 (plus accrued dividends) into 692,142 shares of commonstock of Axcess.  As of December 31,2003, the Company had no Series 1999 or 2000 Preferred shares outstanding.

 

*(d)**                              **Series 2003 Preferred Stock*

 

TheCompany completed a $1,537,500 exempt Preferred Stock Offering during May of2003. The Preferred Stock is designated as 2003 Preferred and each $75,000 unitconsisted of 100,000 shares of Preferred Stock bearing a 7% dividend,approximately 15,000 shares of common stock and 100,000 warrants to purchasethe Company’s common stock exercisable for two years at $1.00 per share. Theoffering also included an automatic conversion into Common Stock on a one forone basis if the closing twenty-day average stock price is over $2.00. OnJune 5, 2003 the closing twenty-day average was at $2.02 and the 2003Preferred converted to 2,050,001 shares of Common Stock. As of December 31, 2003, the Company had no Series 2003Preferred shares outstanding.

 

In connection with the issuance of the 2003 Preferred Stock,the Company recorded preferred stock dividends of $1,460,625 which arereflected in the income statement.

 

*(e)**                               **Series 2003B Preferred Stock*

 

TheCompany completed a $3,132,500 exempt Preferred Stock Offering during thefourth quarter of 2003. The Preferred Stock is designated as 2003B Preferredand each $70,000 unit consisted of 40,000 shares of Preferred Stock bearing a7% dividend, approximately 2,000 shares of common stock and 40,000 warrants topurchase the Company’s common stock exercisable for two years at $2.75 pershare. The offering also included an automatic conversion into Common Stock ona one for one basis if the closing twenty-day average stock price is over$3.75. The Company has also accrued $27,433 of dividends payable for Series2003B Preferred Stock at December 31, 2003. Asof December 31, 2003, the Company had 1,790,000 shares of Series 2003BPreferred shares outstanding.

 

F-17

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In connection with the issuance of the 2003B Preferred Stock,the Company recorded preferred stock dividend requirements of $1,782,831 thatwill be reflected as preferred stock dividends as the underlying preferredstock converts to common stock.  As ofDecember 31, 2003 that amount is reflected in accumulated deficit on thebalance sheet.

 

TheSeries I and the Series J Preferred Stock rank senior in right of payment tothe Company’s common stock.

 

**(11)****                         ****Employee Benefit Plans**

 

TheCompany sponsors a 401(k) retirement plan. The Company, at its discretion,matches a portion of the participant’s contribution. Participants are vested inthe Company’s matching contribution after 4 years of full time service and mayjoin the plan January or July of each year. The Company suspended itsmatching contribution on February 28, 2001.

 

**(12)****                         ****Stock Options and Warrants**

 

*(a)**                              **Stock Option Plans.*

 

Underthe Company’s 2001 Equity Incentive Plan, the Company may grant up to 2,000,000shares of common stock to its employees. The exercise price of each option isnot less than the market price of the Company’s stock on the date of grant andan option’s maximum term is ten years. The Company has issued stock options tovarious members of the Board of Directors and officers of the Company underthis plan. Options are generally granted each year and have various vestingrequirements. Options granted typically vest over a four-year period.  During 2003 and 2002, the Company made grantsof 0 and 200,0000 options, respectively, as an inducement for the employment ofcertain officers of the Company, which does not reduce the 2,000,000 optionsavailable for grant under the stock option plan.

 

In 1998,the Company adopted a director compensation plan pursuant to which it pays eachdirector who is not employed by the Company and who does not beneficially ownmore than 5% of the shares of common stock outstanding an annual grant of 5,000options to acquire common stock of the Company at an exercise price equal tothe fair market value per share of the common stock at the time the option isgranted (the “Annual Grant”). The Annual Grant customarily occurs on the dateof the Company’s annual meeting. The director compensation plan also providedfor an one-time initial grant of 15,000 to each director of the Company as ofJuly 21, 1998, the date the director compensation plan was approved by theCompany’s stockholders (the “Initial Grant”). The Company has authorized150,000 shares for issuance under this plan.

 

Stockoption transactions for the years ended December 31, 2003 and 2002 aresummarized below:

 
|                                                |   | **2003**    |   | **2002**                               |   |
|-----------------------------------------------------|--------|-------------|--------|----------------------------------------|--------|
|                                                |   | **OPTIONS** |   | **WEIGHTED  AVERAGE  EXERCISE  PRICE** |   | **OPTIONS** |   | **WEIGHTED  AVERAGE  EXERCISE  PRICE** |   |
| Options  outstanding at beginning of year           |   | 2,175,999   |   | $                                      | 3.20   |   | 2,060,537 |   | $ | 3.81 |   |
| Options  granted                                    |   | 1,000,000   |   | 0.40                                   |   | 1,031,000 |   | 2.03 |   |
| Options  exercised                                  |   | (30,750     | )      | 1.70                                   |   | — |   | — |   |
| Options  forfeited                                  |   | (676,784    | )      | 2.04                                   |   | (915,538 | ) | 3.26 |   |
| Options  outstanding at end of year                 |   | 2,468,465   |   | 2.40                                   |   | 2,175,999 |   | 3.20 |   |
|                                                |   |        |   |                                   |   |   |   |   |   |
| Options  exercisable at end of year                 |   | 1,840,670   |   | 1.94                                   |   | 688,272 |   | 3.09 |   |
|                                                |   |        |   |                                   |   |   |   |   |   |
| Options  available for grant at the end of the year |   | 715,750     |   |                                   |   | 974,001 |   |   |   |
|                                                |   |        |   |                                   |   |   |   |   |   |
| Fair value of  options granted during the year      |   | 270,000     |   |                                   |   | 1.307,580 |   |   |   |
|                                                     |        |             |        |                                        |        |  |  |  |  |  |  |

 

The options outstanding atDecember 31, 2003 have exercise prices as indicated in the table below. 

 
| **Option Price**   |   | **Number of  Options** |   | **Weighted Average  Remaining Life** |   |
|--------------------|--------|------------------------|--------|--------------------------------------|--------|
| $0.00 - $1.00      |   | 855,500                |   | 9.05                                 |   |
| $1.01 - $2.00      |   | 429,250                |   | 9.15                                 |   |
| $2.01 – $3.00 |   | 714,375                |   | 6.34                                 |   |
| $3.01 - $4.00      |   | 201,340                |   | 6.84                                 |   |
| $4.01 - $5.00      |   | 20,000                 |   | 7.42                                 |   |
| $5.01 - $6.25      |   | 248,000                |   | 6.23                                 |   |
| Total              |   | 2,468,465              |   | 7.81                                 |   |

 

TheCompany has issued warrants to purchase common stock in connection with issuanceof notes payable to stockholders, convertible debentures, and preferred stock.The following table summarizes warrants outstanding at December 31: 

 

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| **2003**     |   | **2002**           |   |
|--------------|--------|--------------------|--------|
| **WARRANTS** |   | **EXERCISE PRICE** |   | **EXPIRATION** |   | **WARRANTS** |   | **EXERCISE PRICE** |   | **EXPIRATION** |   |
| 8,012,167    |   | $0.65 - 3.00       |   | 07/04 - 02/08 |   | 1,261,358 |   | $2.10 - 10.00 |   | 07/04 - 09/06 |   |
|         |   |               |   |   |   |   |   |   |   |   |   |
| 8,012,167    |   |               |   |   |   | 1,261,358 |   |   |   |   |   |

 

Duringthe twelve months ended December 31, 2003 the Company issued an additional6,750,090 warrants in conjunction with the 2003 preferred equity offering,2003B preferred equity offering and the balance sheet restructuring. Thewarrant price range from $0.65 to $2.75 and they expire between January 1,2005 and February 14, 2008.

 

**(13)****                         ****Contingencies**

 

Pioneer Standard Electronics,Incorporated (“Pioneer”), filed a lawsuit against the Company in the countycourt in Dallas County, Texas on September 28, 2001.  Pioneer was a vendor to the Company andseeks damages of $81,533 for non-payment for services provided.  During the first quarter of 2003, Pioneerwas granted a judgment for the entire amount. The Company reached a settlement with Pioneer in 2003 and is makingpayments under the settlement agreement.

 

Axcess is also engaged in anumber of lawsuits with approximately eleven vendors who claim they are owedamounts from $500 to $45,000, which aggregates in total $188,188. We arecurrently defending or seeking to settle each of the vendor’s claims.  At December 31, 2003, we had accruedthe delinquent amounts we expect to be liable for, for the claims described inthis paragraph.

 

**(14)****                         ****Income Taxes**

 

There was no provision for income taxes for the years endedDecember 31, 2003 and 2002 due to the net loss incurred for each year.  The Company had no material deferred taxliabilities at December 31, 2003.

 

The Company had the following deferred tax assets atDecember 31, 2003 as follows:

 
| Net operating  loss     |   | $           | 14,600,000 |   |
|-------------------------|--------|-------------|------------|--------|
| Property and  equipment |   | 1,900,000   |       |
| Other                   |   | 100,000     |       |
| Valuation  allowance    |   | (16,600,000 | )          |
|                    |   | $           | —     |   |

 

The valuation allowance increased by approximately $1,400,000and $1,900,000 during the years ended December 31, 2003 and 2002,respectively.

 

At December 31, 2003 and 2002, the Company had a netoperating loss carry forward of approximately $39,300,000 and $38,600,000,respectively for U.S. federal income tax purposes. The net operating loss willexpire from 2004 through 2018.

 

A change in ownership, as defined for purposes of theInternal Revenue Code, occurred in 1996 and the Company believes that asubsequent ownership change occurred during 1998, each of which limit theannual utilization of the U.S. federal net operating loss carry forward underthe applicable Internal Revenue Service. Other portions of the net operating loss may also be limited due tosubsequent ownership changes.

 

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