##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    85-0294536
(I.R.S. Employer Identification No.)
 3208 Commander DriveCarrollton, Texas
(Address of principal executive offices)
    
    75006
(Zip Code)(972) 407-6080
(Issuers Telephone Number)
 NONE
 Title of Class:
    
    Name of exchange on which registered:Common Stock, par value $.01 per share
    
    Over-The-Counter Bulletin Board
 27,437,111
 þ o
 o
   o þ
 None
 o þ
   1




---



##### 



AXCESS INTERNATIONAL INC.
INDEX
 Part IItem 1. Description of businessRisk FactorsItem 2. Description of propertiesItem 3. Legal proceedingsItem 4. Submission of matters to a vote of security holdersPart IIItem 5. Marketing for common equity and related stockholders mattersItem 6. Managements discussion and analysis of financial condition and results of operationsItem 7. Financial statementsItem 8. Changes in and disagreements with accountants on accounting and financial disclosureItem 8A. Controls and proceduresPart IIIItem 9. Directors, executive officers, promoters and control personsItem 10. Executive compensationItem 11. Security ownership of certain beneficial owners and managementItem 12. Certain relationships and related transactionsItem 13. Exhibits and reports on form 8-KItem 14. Principal accountant fees and servicesSignaturesBorrowed Employees and Advisory AgreementStock Purchase Agreement for 2005 Preferred Equity OfferingCode of Ethics for Senior Financial OfficersSubsidiariesConsent of Hein & Associates LLPCertification of President, CEO, and Principal Executive Officer Pursuant to Section 302Certification of VP, CFO, Secretary and Principal Accounting and Financial Officer Pursuant to Section 302Certification of President, CEO, and Principal Executive Officer Pursuant to Section 906Certification of VP, CFO, Secretary and Principal Accounting and Financial Officer Pursuant to Section 906Audit Committee CharterNominating and Governance Committee CharterWhistleblower Policy
  Financial section
 Report of independent registered public accounting firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
 2




---



##### Table of Contents



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




---



##### Table of Contents



Company Evolution
      Sales Channels
     4




---



##### Table of Contents



Partnering
   Software House, Sensormatic, KanTech,and ADT (Tyco) TM TM
 PSA Security
 Sun Partner Advantage Program
 Dynasys Technologies
 Other Integrator Partners
  Products and Technology
    5




---



##### Table of Contents



Hands-free automatic personnel identification and access control
 Hands-free automatic vehicle identification and access control
 Electronic asset protection and tracking
 Electronic fixed asset inventory and protection
 Electronic inventory control and tracking
 Corporate CCTV digital video recording
 Remote CCTV surveillance
 Automatic personnel accounting (mustering)
 6




---



##### Table of Contents



Markets
  Corporate Access Control and Asset Management
 Airport Security and Homeland Defense
 Education
 Inventory and Transportation Management
 Data Center Asset Management
 Healthcare Resource Management
 Retail CCTV
 Corporate Security CCTV
 Patents and Proprietary Technology
  7




---



##### Table of Contents



Engineering and Development
 TM
   TM
 Competition
     8




---



##### Table of Contents



Manufacturing and Suppliers
    Research and Development
   Employees
  Government Regulation
  Environmental Factors
  Risk Factors
  9




---



##### Table of Contents



We may not be able to continue as a going concern or fund our existing capital needs.
 See
 We have a history of losses and expectation of future losses; uncertainty of future profitability;
and limits on operations.
  See
 We are dependent upon our proprietary technology and its marketability as state of the art.
   §
    
    we may not be successful in identifying, developing and marketing product
enhancements or new products that respond to technological change or evolving
industry standards;§
    
    we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and§
    
    we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and§
    
    our new products and enhanced products may not adequately meet the requirements
of the marketplace and achieve market acceptance or may not keep pace with advances
made by our competitors.
 See
 10




---



##### Table of Contents



The loss of one or more members of management or key personnel could adversely affect our
operations and could lead to loss of clients and proprietary information.
  We may face substantial competition in attracting and retaining qualified personnel, and may be
unable to grow our business if we cannot attract and retain qualified personnel.
  Because we are significantly smaller and less established than a majority of our competitors, we
may lack the financial resources necessary to compete effectively and sustain profitability.
  See
 We are dependent upon third party manufacturers and suppliers to produce our products.
 See
 The voting control of Axcess is held by Amphion Group, and other stockholders are unlikely to have
any ability to influence the governance or policies of our company.
 See
 11




---



##### Table of Contents



The price of our common stock has been highly volatile and may continue to be highly volatile,
which may adversely affect your ability to sell your shares and our ability to raise additional
capital.
  
    
    changes in financial estimates or recommendations by securities analysts
regarding us or our common stock;
    
    our performance and the performance of our competitors and other companies in the
technology or marketing sectors;
    
    quarterly fluctuations in our operating results or the operating results of other
companies in the technology or marketing sectors;
    
    additions or departures of key personnel;
    
    the trading volume of our common stock;
    
    general economic conditions and their effect on the technology or advertising and
marketing sectors, in general; and
    
    competition, natural disasters, acts of war or terrorism or other developments
affecting us or our competitors.
 See
 Our common stock may be subject to penny stock rules and regulations.
  
 Item 2. DESCRIPTION OF PROPERTIES.
  
 Item 3. LEGAL PROCEEDINGS.
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  12




---



##### Table of Contents



PART II
 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
  2005
    
    2004QUARTER ENDED
    
    LOW
    
    HIGH
    
    LOW
    
    HIGHMarch 31
    
    $
    1.34
    
    
    $
    1.95
    
    
    $
    1.80
    
    
    $
    2.25June 30
    
    
    1.40
    
    
    
    1.75
    
    
    
    1.95
    
    
    
    3.60September 30
    
    
    1.10
    
    
    
    1.75
    
    
    
    1.90
    
    
    
    2.65December 31
    
    
    0.82
    
    
    
    1.20
    
    
    
    1.40
    
    
    
    2.10
   Equity Compensation Plans
  Number of securitiesNumber of securities to be
    
    
    Weighted-average
    
    
    remaining availableissued upon exercise of
    
    
    exercise price of
    
    
    for future issuanceoutstanding options,
    
    
    outstanding options,
    
    
    under equityPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    compensation plansEquity compensation
plans approved by
security holders
    
    
    3,117,485
    
    
    $
    2.40
    
    
    
    5,000,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,117,485
    
    
    $
    2.40
    
    
    
    5,000,000
 Recent Sale of Unregistered Securities
  Convertible Promissory Note
   13




---



##### Table of Contents



Dividends Paid
  2005 Preferred Equity Offering
   Warrant Exercised
   Common Stock
  SB-2 Registration Statement
  14




---



##### Table of Contents



2005 Equity Incentive Plan
  
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Recent Developments: Going Concern and Liquidity Problems
   Sales and Marketing Initiatives
  1.
    
    We were able to secure a number of important reference accounts in 2005;2.
    
    We grew the integrator channel;3.
    
    We began our thrust into Supply Chain tagging.
   Results of Operations
 Sales and Gross Profit.
  15




---



##### Table of Contents



Operating Expenses.
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Liquidity and Capital Resources
   16




---



##### Table of Contents



Other Matters relating to future amortizable charges
  Recent Accounting Pronouncements
 Accounting for Stock-Based Compensation.
 Accounting Changes and Error Corrections Accounting Changes, Reporting Accounting
Changes in Interim Financial Statements,
 Critical Accounting Policies
  Allowance for Doubtful Accounts
  17




---



##### Table of Contents



Inventory Valuation
  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
  Revenue Recognition and Warranty Costs
  Deferred Tax Valuation Allowance
  Other
 Inflation.
 Seasonality.
 
 Item 7. FINANCIAL STATEMENTS.
 PageReport of Hein & Associates LLP, Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Financial Statements:Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    F-2Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Stockholders Deficit for the
Years Ended December 31, 2005 and 2004
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004
    
    
    F-5Notes to Financial Statements
    
    
    F-6
 18




---



##### Table of Contents



Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  
 Item 8A. CONTROLS AND PROCEDURES.
   
 PART III
 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
 Management of Axcess
  Name
    
    Age
    
    Position
    
    CommitteeRichard C.E. Morgan
    
    
    61
    
    
    Chairman of the Board of Directors
    
    (1*) (3*) (4)Allan Griebenow
    
    
    53
    
    
    Director, President and Chief Executive Officer
    
    (1) (4)Allan L. Frank
    
    
    42
    
    
    Vice President, Secretary and Chief Financial OfficerRobert J. Bertoldi
    
    
    51
    
    
    Director
    
    (2) (4)Paul J. Coleman, Jr.
    
    
    73
    
    
    Director
    
    (2) (4)Robert F. Hussey
    
    
    56
    
    
    Director
    
    (2*) (3) (4)Jim A. Ferguson
    
    
    64
    
    
    Vice President, Strategic Sales
 
 (1)
    
    Executive Committee(2)
    
    Audit Committee(3)
    
    Compensation Committee(4)
    
    Nominating and Governance Committee*
    
    Indicates Chairman of the Committee Richard C. E. Morgan
 Allan Griebenow
 19




---



##### Table of Contents



Allan L. Frank
 Robert J. Bertoldi
 Paul J. Coleman, Jr.
 Robert F. Hussey
 James A. Ferguson
 Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  20




---



##### Table of Contents



Item 10. EXECUTIVE COMPENSATION.
  Summary Compensation TableAnnual Compensation
    
    
    
    
    
    Long Term CompensationOther
    
    Restricted
    
    
    
    
    
    LTIP
    
    All OtherName
    
    Year
    
    Salary
    
    Bonus
    
    Annual
    
    Stock
    
    Options/
    
    payouts
    
    Compen-Principal Positions
    
    Ended
    
    ($)
    
    ($)
    
    Compensation
    
    Awarded
    
    SARs (#)
    
    ($)
    
    sationAllan Griebenow
    
    
    2005
    
    
    
    230,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and
    
    
    2004
    
    
    
    230,946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,568
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2003
    
    
    
    177,651
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,000
    
    
    
    
    
    
    
    Allan L. Frank
    
    
    2005
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President, Secretary
    
    
    2004
    
    
    
    180,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,968
    
    
    
    
    
    
    
    And Chief Financial
Officer
    
    
    2003
    
    
    
    139,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    James A. Ferguson
    
    
    2005
    
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President
    
    
    2004
    (1)
    
    
    49,096
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    Strategic Sales
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents compensation earned from June 2004, when Mr. Ferguson rejoined Axcess. Stock Option Grants in 2005 to Axcess Named Executive Officers
  Option Grants in Last Fiscal YearIndividual GrantsNumber ofSecurities
    
    % of
    
    ExerciseUnderlying
    
    Total Options
    
    Or BaseOptions
    
    Granted to
    
    Price
    
    ExpirationName
    
    Granted (#)
    
    Employees
    
    ($ / share)
    
    DateAllan Griebenow
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allan L. Frank
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James A. Ferguson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Aggregate Option Exercises in 2005 by Axcess Executive Officers
  Shares
    
    
    
    
    
    Number of Securities
    
    Value of UnexercisedAcquired
    
    
    
    
    
    Underlying Unexercised
    
    In-the-Money Options atOn
    
    Value
    
    Options at December 31, 2005
    
    December 31, 2005Name
    
    Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableAllan Griebenow
    
    
    
    
    
    $
    
    
    
    
    990,396
    
    
    
    136,676
    
    
    $
    68,560
    
    
    $
    Allan L. Frank
    
    
    
    
    
    $
    
    
    
    
    350,742
    
    
    
    182,226
    
    
    $
    42,000
    
    
    $
    James A. Ferguson
    
    
    
    
    
    $
    
    
    
    
    18,750
    
    
    
    56,250
    
    
    $
    
    
    
    $
    
 21




---



##### Table of Contents



Compensation of the Companys Directors
  Employment Agreement with Mr. Griebenow
  
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
  Amount and
    
    
    
    
    
    Percentage ofName and Address of
    
    
    
    
    
    Nature of
    
    Percentage
    
    CommonBeneficial Owner
    
    Title of Class
    
    Beneficial Owner
    
    of Class
    
    Voting PowerAmphion Group (1)
    
    Voting Common Stock
    
    
    19,937,276
    (2)
    
    
    54.2
    %
    
    
    47.6
    %330 Madison Avenue
    
    Series 2005
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    4.2
    %New York, NY 10017
 
 (1)
    
    See the following table regarding the beneficial ownership of the Amphion Group.(2)
    
    Includes 2,271,157 shares that the Amphion Group has the right to acquire
pursuant to warrants and options that are exercisable within 60 days.    22




---



##### Table of Contents



SeriesVoting
    
    
    
    
    
    2005Common
    
    
    
    
    
    Preferred
    
    Warrants
    
    
    
    
    
    Options
    
    
    
    
    
    TotalAmphion Ventures LP
    
    
    9,219,305
    
    
    
    
    
    
    
    
    
    
    
    382,997
    (1
    )
    
    
    

    
    
    
    
    
    
    
    
    
    
    9,602,302VennWorks LLC
    
    
    5,677,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,677,006Amphion Innovations plc
    
    
    670,000
    
    
    
    
    
    
    
    1,475,906
    
    
    
    1,574,042
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,719,948Mr. Morgan
    
    
    697,509
    (3)
    
    
    
    
    
    
    294,118
    
    
    
    314,118
    (4
    )
    
    
    
    
    
    73,646
    (5
    )
    
    
    

    
    
    1,379,391Antiope Partners LLC
    
    
    1,109,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,109,182Mr. Bertoldi
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,646
    (6
    )
    
    
    

    
    
    130,646Amphion Investments LLC
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,000Amphion Partners LLC
    
    
    28,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,125Amhion Capital Management LLC
    
    
    16,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,700Total of Amphion Group
    
    
    17,461,827
    
    
    
    
    
    
    
    1,770,024
    
    
    
    2,271,157
    
    
    
    
    
    
    
    204,292
    
    
    
    
    
    
    
    21,707,300
 
 (1)
    
    Includes two different grants ranging in price ($1.50 to $2.38) and expiration
dates (December 31, 2006 to January 28, 2010).(2)
    
    Includes two different grants with an exercise price of $1.50. 98,136 expire on
January 28, 2010 and the remaining expiring on March 14, 2011.(3)
    
    Includes 252,715 shares of common stock issued to Mrs. Morgan, the wife of Mr.
Morgan.(4)
    
    Includes two different grants with an exercise price of $1.50. 20,000 expire on
January 28, 2010 and the remaining expiring on March 14, 2011.(5)
    
    Options to purchase 73,646 shares of common stock that are exercisable within 60
days.(6)
    
    Options to purchase 130,646 shares of common stock that are exercisable within 60
days.  Amount andNature of
    
    Percentage
    
    PercentageName of
    
    
    
    
    
    
    
    
    
    Beneficial
    
    of
    
    of CommonBeneficial Owner
    
    Title of Class
    
    
    
    
    
    Owner
    
    Class
    
    Voting PowerRichard C.E. Morgan
    
    Voting Common Stock
    (1
    )
    
    
    
    
    17,461,827
    
    
    
    61.9
    %
    
    
    52.4
    %Series 2005 Preferred
    
    
    
    
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    5.3
    %Robert J. Bertoldi
    
    Voting Common Stock
    (2
    )
    
    
    
    
    16,764,318
    
    
    
    59.4
    %
    
    
    50.3
    %Series 2005 Preferred
    
    
    
    
    
    
    1,475,906
    
    
    
    54.5
    %
    
    
    4.4
    %Allan Griebenow
    
    Voting Common Stock
    (3
    )
    
    
    
    
    14,860
    
    
    
    
    *
    
    
    
    *Paul J. Coleman, Jr.
    
    Voting Common Stock
    (4
    )
    
    
    
    
    80
    
    
    
    
    *
    
    
    
    *Allan L. Frank
    
    Voting Common Stock
    (5
    )
    
    
    
    
    
    
    
    
    
    *
    
    
    
    *Robert F. Hussey
    
    Voting Common Stock
    (6
    )
    
    

    
    
    
    
    
    
    
    *
    
    
    
    *James A. Ferguson
    
    Voting Common Stock
    (7
    )
    
    
    
    
    
    
    
    
    
    *
    
    
    
    *All Directors, Director
    
    Voting Common Stock
    
    
    
    
    
    
    17,476,767
    
    
    
    61.9
    %
    
    
    52.4
    %Nominees and
    
    Series 2005 Preferred
    
    
    
    
    
    
    1,770,024
    
    
    
    65.3
    %
    
    
    5.3
    %Executive Officers asa group (7 individuals)
 
 *
    
    Less than 1%.(1)
    
    The number of shares of voting common stock includes 434,794 shares held directly,
16,764,318 shares held by other entities within the Amphion Group (defined in Note 1 to the
immediately preceding table above), 252,715 shares owned by Mr. Morgans wife. However,
the number of shares of voting common stock excludes 387,764 shares that Mr. Morgan has the
right to acquire pursuant to option and warrant agreements that are exercisable 23




---



##### Table of Contents



within 60 days, 1,957,039 shares that entities within the Amphion Group have the right to
acquire pursuant to option and warrant agreements that are exercisable within 60 days. As
detailed in Note 1 to the immediately preceding table above, Mr. Morgan disclaims
beneficial ownership of all shares beneficially owned by entities within the Amphion
Group.(2)
    
    Includes 16,764,318 shares held by other entities within the Amphion Group (defined in
Note 1 to the immediately preceding table above). However, excludes 130,646 shares that
Mr. Bertoldi has the right to acquire pursuant to option and warrant agreements that are
exercisable within 60 days and 1,268,804 shares that entities within the Amphion Group have
the right to acquire pursuant to option and warrant agreements that are exercisable within
60 days. As detailed in Note 1 to the immediately preceding table above, Mr. Bertoldi
disclaims beneficial ownership of all shares beneficially owned by entities within the
Amphion Group.(3)
    
    Includes 14,580 shares of common stock held directly by Mr. Griebenow and 280 shares
owned jointly with his wife. Excludes 1,029,538 shares that Mr. Griebenow has the right to
acquire pursuant to option agreements that are exercisable within 60 days.(4)
    
    Includes 80 shares of common stock held directly by Mr. Coleman and excludes 158,646
shares that Mr. Coleman has the right to acquire pursuant to option agreements that are
exercisable within 60 days.(5)
    
    Excludes 437,734 shares that Mr. Frank has the right to acquire pursuant to options
that are exercisable within 60 days.(6)
    
    Excludes 95,646 shares that Mr. Hussey has the right to acquire pursuant to options
that are exercisable within 60 days.(7)
    
    Excludes 18,750 shares that Mr. Ferguson has the right to acquire pursuant to options
that are exercisable within 60 days. 
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 Amphion Investment LLC
  PV Proceeds Holdings Inc.
    Amphion Capital Partners LLC (formerly NVW LLC)
  24




---



##### Table of Contents



Other Matters
     25




---



##### Table of Contents



Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
 Exhibit No.
    
    Description3.1
    
    
    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, 1998.3.10
    
    
    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, 2000.10.1
    
    
    Employment Agreement dated July 16, 1999, by and between the Company and Allan
Griebenow. Incorporated herein by reference to Exhibit 10.19 to the Companys Annual
Report on Form 10-KSB for the year ended December 31, 1999. +10.2
    
    
    AXCESS 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). +10.3
    
    
    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). +10.4
    
    
    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). +10.5
    
    
    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, 2003.10.6
    
    
    Amended demand note dated as of November 30, 2003, executed by AXCESS payable to
Amphion Investment LLC in the principal amount of $393,787. Incorporated herein by
reference to Exhibit 10.4 on Form 8-K filed on December 16, 2003.10.7
    
    
    Stock Purchase agreement for the 2004 Preferred Equity Offering from May 2004.
Incorporated herein by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-QSB for the period ended March 31,
 26




---



##### Table of Contents



2004.10.8
    
    
    Advisory agreement between NVW LLC and Axcess. Incorporated herein by reference to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-QSB for the period ended
March 31, 2004.10.9
    
    
    Borrowed employees and advisory agreement between Amphion Capital Partners and Axcess. *10.10
    
    
    Stock Purchase agreement for the 2005 Preferred Equity Offering from December 2005. *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. *99.2
    
    
    Nominating and Governance Committee charter. *99.3
    
    
    Whistleblower Policy. *
  Date
    
    DescriptionFebruary 2, 2005
    
    On February 2, 2005, Axcess International Inc.
filed an 8-K announcing the results for the year
ended December 31, 2004.July 18, 2005
    
    On July 18, 2005, Axcess International Inc. filed
an 8-K announcing the results from their annual
shareholders meeting.January 4, 2006
    
    On January 4, 2006, Axcess International Inc.
filed an 8-K announcing they closed on $813,020
of the 2005 Preferred Equity round.
 
 
 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  December 31,
    
    
    December 31,2005
    
    
    2004Audit fees (1)
    
    $
    48,064
    
    
    $
    68,200Audit related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    10,930
    
    
    
    16,100All other fees (4)
    
    
    
    
    
    
    Total
    
    $
    58,994
    
    
    $
    84,300
 
 1)
    
    Audit Fees consist of fees billed for professional services rendered for
the audit of the Companys consolidated annual financial statements and review
of the interim consolidated financial statements included in quarterly reports
and services that are normally provided by Hein & Associates LLP in connection
with statutory and regulatory filings or engagements. 27




---



##### Table of Contents



2)
    
    Audit-Related Fees would normally consist of fees billed for assurance and
related services that are reasonably related to the performance of the audit or
review of the Companys consolidated financial statements and are not reported
under Audit Fees.(3)
    
    Tax Fees consist of fees billed for professional services rendered for
federal and state tax compliance, tax advice and tax planning.(4)
    
    All Other Fees would normally consist of fees for services other than the
services reported above.  28




---



##### Table of Contents



SIGNATURES
 th
 AXCESS INTERNATIONAL INC.By:
    /s/ Richard C.E. MorganRichard C.E. Morgan, Chairman of the Board th
 Signature
    
    Capacity/s/ Richard C.E. Morgan

Richard C.E. Morgan
    
    Chairman of the Board/s/ Allan Griebenow

Allan Griebenow
    
    Director, President and Chief
Executive Officer (Principal
Executive Officer)/s/ Allan L. Frank

Allan L. Frank
    
    Chief Financial Officer (Principal
Accounting and Financial Officer)/s/ Paul J. Coleman, Jr.

Paul J. Coleman, Jr.
    
    Director/s/ Robert J. Bertoldi

Robert J. Bertoldi
    
    Director/s/ Robert F. Hussey

Robert F. Hussey
    
    Director
 29




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 F-1




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    236,869
    
    
    $
    461,101Accounts receivable  trade, net of allowance for doubtful accounts of
$17,389 and $8,859, respectively.
    
    
    141,200
    
    
    
    79,965Inventory, net
    
    
    112,270
    
    
    
    144,714Prepaid expenses and other
    
    
    72,628
    
    
    
    97,164Total current assets
    
    
    562,967
    
    
    
    782,944Property, plant and equipment, net
    
    
    29,387
    
    
    
    49,395Intellectual property, net
    
    
    
    
    
    
    133Deferred debt issuance costs
    
    
    337,926
    
    
    
    506,889Other assets
    
    
    2,699
    
    
    
    3,906Total assets
    
    $
    932,979
    
    
    $
    1,343,267LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    252,155
    
    
    $
    490,100Accrued liabilities
    
    
    959,149
    
    
    
    789,589Notes payable:Convertible notes payable (includes $80,000 and $66,667 with
related parties in 2005 and 2004, respectively)
    
    
    396,666
    
    
    
    483,333Discounts on convertible debt
    
    
    (5,520
    )
    
    
    (289,482
    )Dividends payable
    
    
    208,780
    
    
    
    316,062Total current liabilities
    
    
    1,811,230
    
    
    
    1,789,602Notes payable to stockholders
    
    
    3,709,071
    
    
    
    3,932,092Convertible notes payable (includes $13,333 with related party in 2004)
    
    
    
    
    
    
    236,667Discount on convertible debt
    
    
    
    
    
    
    (34,084
    )Total liabilities
    
    
    5,520,301
    
    
    
    5,924,277Commitments and contingencies (Notes 2, 8 and 13)Stockholders deficit:Convertible preferred stock, 7,000,000 shares authorizedWith liquidation preference; no shares issued and outstanding in
2005 and 2004, respectively;
    
    
    
    
    
    
    Without liquidation preference; $0.01 par value, 3,371,495 and
2,415,000 shares issued and outstanding in 2005 and 2004,
respectively
    
    
    33,715
    
    
    
    24,150Common stock, $.01 par value, 50,000,000 shares authorized in 2005 and
2004; 27,437,111 shares issued and outstanding in 2005 and 24,720,939
shares issued and outstanding in 2004
    
    
    274,371
    
    
    
    247,209Shares of common stock to be issued, 5,333 shares in 2005
    
    
    53
    
    
    
    Non-voting convertible common stock, $.01 par value, 2,250,000 shares
authorized; no shares issued and outstanding in 2005 or 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    153,436,725
    
    
    
    149,898,600Accumulated deficit
    
    
    (158,332,186
    )
    
    
    (154,750,969
    )Total stockholders deficit
    
    
    (4,587,322
    )
    
    
    (4,581,010
    )Total liabilities and stockholders deficit
    
    $
    932,979
    
    
    $
    1,343,267
  F-2




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2005 and 2004
 2005
    
    
    2004Sales
    
    $
    1,080,240
    
    
    $
    911,565Cost of sales
    
    
    594,158
    
    
    
    439,215Inventory impairment
    
    
    55,557
    
    
    
    14,874Gross profit
    
    
    430,525
    
    
    
    457,476Expenses:Research and development
    
    
    935,248
    
    
    
    718,278General and administrative
    
    
    1,373,980
    
    
    
    1,528,937Selling and marketing
    
    
    960,249
    
    
    
    827,323Depreciation, amortization and impairment
    
    
    27,631
    
    
    
    202,394Operating expenses
    
    
    3,297,108
    
    
    
    3,276,932Loss from operations
    
    
    (2,866,583
    )
    
    
    (2,819,456
    )Other income (expense):Interest expense
    
    
    (715,895
    )
    
    
    (781,434
    )Gain on vendor settlements and statutory
write-off
    
    
    326,424
    
    
    
    177,787Other
    
    
    
    
    
    
    6,549Other expense, net
    
    
    (389,471
    )
    
    
    (597,098
    )Net loss
    
    
    (3,256,054
    )
    
    
    (3,416,554
    )Preferred stock dividend requirementsRecurring
    
    
    (325,163
    )
    
    
    (299,481
    )Warrant inducement
    
    
    (2,060,397
    )
    
    
    2005 Preferred equity offering
    
    
    (813,021
    )
    
    
    Preferred stock dividend requirements
    
    
    (3,198,581
    )
    
    
    (299,481
    )Net loss applicable to common stock
    
    $
    (6,454,635
    )
    
    $
    (3,716,035
    )Basic and diluted net loss per share
    
    $
    (0.24
    )
    
    $
    (0.16
    )Weighted average shares of common stock outstanding
    
    
    26,850,272
    
    
    
    23,848,676
  F-3




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 YEARS ENDED DECEMBER 31, 2005 and 2004
 CONVERTIBLEPREFERRED STOCK
    
    
    COMMON STOCKNUMBER
    
    
    
    
    
    
    NUMBER
    
    
    
    
    
    
    ADDITIONAL
    
    
    COMMON
    
    
    
    
    
    
    TOTALOF
    
    
    PAR
    
    
    OF
    
    
    PAR
    
    
    PAID-IN
    
    
    STOCK
    
    
    ACCUMULATED
    
    
    STOCKHOLDERSSHARES
    
    
    VALUE
    
    
    SHARES
    
    
    VALUE
    
    
    CAPITAL
    
    
    ISSUABLE
    
    
    DEFICIT
    
    
    DEFICITBalance at December 31, 2003
    
    
    1,790,054
    
    
    $
    554,523
    
    
    
    19,446,028
    
    
    $
    194,461
    
    
    $
    146,246,094
    
    
    $
    45,293
    
    
    $
    (150,032,396
    )
    
    $
    (2,992,025
    )Shares issued from issueable at
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    4,529,345
    
    
    
    45,293
    
    
    
    
    
    
    
    (45,293
    )
    
    
    
    
    
    
    Conversion of Ardinger Series I
preferred to common stock
    
    
    (52
    )
    
    
    (516,299
    )
    
    
    248,769
    
    
    
    2,488
    
    
    
    619,434
    
    
    
    
    
    
    
    
    
    
    
    105,623Conversion of Ardinger Series J
preferred to common stock
    
    
    (2
    )
    
    
    (20,324
    )
    
    
    9,648
    
    
    
    96
    
    
    
    24,022
    
    
    
    
    
    
    
    
    
    
    
    3,794Shares issued in conjunction with
2004 Preferred equity offering
    
    
    625,000
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    2,196,290
    
    
    
    
    
    
    
    (1,002,540
    )
    
    
    1,200,000Shares issued for services rendered
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    250
    
    
    
    64,750
    
    
    
    
    
    
    
    
    
    
    
    65,000Shares cancelled related to
services rendered
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (1,000
    )
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    476,349
    
    
    
    4,763
    
    
    
    713,548
    
    
    
    
    
    
    
    
    
    
    
    718,311Issuance of common stock upon
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    85,800
    
    
    
    858
    
    
    
    33,462
    
    
    
    
    
    
    
    
    
    
    
    34,320Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (299,481
    )
    
    
    (299,481
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,416,552
    )
    
    
    (3,416,552
    )Balance at December 31, 2004
    
    
    2,415,000
    
    
    $
    24,150
    
    
    
    24,720,939
    
    
    $
    247,209
    
    
    $
    149,898,600
    
    
    $
    
    
    
    $
    (154,750,969
    )
    
    $
    (4,581,010
    )Shares issued in conjunction with
2005 Preferred equity offering
    
    
    362,942
    
    
    
    3,629
    
    
    
    
    
    
    
    
    
    
    
    304,870
    
    
    
    
    
    
    
    
    
    
    
    308,499Conversion of notes payable and
accrued interest into 2005
preferred stock
    
    
    593,553
    
    
    
    5,936
    
    
    
    
    
    
    
    
    
    
    
    498,585
    
    
    
    
    
    
    
    
    
    
    
    504,521Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    369,968
    
    
    
    3,700
    
    
    
    369,924
    
    
    
    
    
    
    
    
    
    
    
    373,624Issuance of common stock upon
exercise of warrants
    
    
    
    
    
    
    
    
    
    
    296,066
    
    
    
    2,961
    
    
    
    300,890
    
    
    
    
    
    
    
    
    
    
    
    303,851Shares issued in conjunction with
accrued dividends
    
    
    
    
    
    
    
    
    
    
    292,198
    
    
    
    2,922
    
    
    
    429,524
    
    
    
    
    
    
    
    
    
    
    
    432,446Shares issued in conjunction with
warrant inducement
    
    
    
    
    
    
    
    
    
    
    1,702,840
    
    
    
    17,028
    
    
    
    1,612,841
    
    
    
    53
    
    
    
    
    
    
    
    1,629,922Issuance of common stock upon
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    55,100
    
    
    
    551
    
    
    
    21,491
    
    
    
    
    
    
    
    
    
    
    
    22,042Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325,163
    )
    
    
    (325,163
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,256,054
    )
    
    
    (3,256,054
    )Balance at December 31, 2005
    
    
    3,371,495
    
    
    $
    33,715
    
    
    
    27,437,111
    
    
    $
    247,371
    
    
    $
    153,436,725
    
    
    $
    53
    
    
    $
    (158,332,186
    )
    
    $
    (4,587,322
    )
  F-4




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 2005 and 2004
 2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (3,256,054
    )
    
    $
    (3,416,552
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    27,631
    
    
    
    202,394Gain on vendor settlements and statutory write-off of payables
    
    
    (326,424
    )
    
    
    (177,787
    )Amortization of financing discount and issuance costs
    
    
    487,010
    
    
    
    525,854Shares issued for services rendered
    
    
    
    
    
    
    65,000Inventory impairment
    
    
    55,557
    
    
    
    14,874Changes in operating assets and liabilities:Accounts receivable
    
    
    (61,235
    )
    
    
    5,283Inventory
    
    
    (23,113
    )
    
    
    (28,073
    )Prepaid expenses and other
    
    
    24,536
    
    
    
    51,326Other assets
    
    
    1,207
    
    
    
    (3,311
    )Accounts payable and accrued liabilities
    
    
    312,850
    
    
    
    (8,876Net cash used by operating activities
    
    
    (2,758,035
    )
    
    
    (2,769,868
    )Cash flow from investing activities:Capital expenditures
    
    
    (7,490
    )
    
    
    (40,462
    )Net cash used by investing activities
    
    
    (7,490
    )
    
    
    (40,462
    )Cash flow from financing activities:Principal payments on financing agreements
    
    
    (223,022
    )
    
    
    (126,866
    )Borrowings in financing agreements
    
    
    500,000
    
    
    
    Net proceeds from issuance of common stock from employee options
    
    
    22,042
    
    
    
    34,320Net proceeds from issuance of common and preferred stock and
exercise of warrants
    
    
    2,242,273
    
    
    
    1,200,000Net cash provided by financing activities
    
    
    2,541,293
    
    
    
    1,107,454Net decrease in cash and cash equivalents
    
    
    (224,232
    )
    
    
    (1,702,876
    )Cash and cash equivalents, beginning of year
    
    
    461,101
    
    
    
    2,163,977Cash and cash equivalents, end of year
    
    $
    236,869
    
    
    $
    461,101Supplemental information:Cash paid during the year for interest
    
    $
    
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Conversions of notes payable into common stock
    
    $
    323,333
    
    
    
    568,333Conversions of accrued interest into common stock
    
    
    50,291
    
    
    
    149,979Conversions of preferred stock into common stock
    
    
    
    
    
    
    536,623Conversions of accrued dividends into common stock
    
    
    432,446
    
    
    
    109,417Preferred stock dividends accrued
    
    
    325,163
    
    
    
    299,481Conversion of notes payable into preferred stock
    
    
    500,000
    
    
    
    Conversion of accrued interest into preferred stock
    
    
    4,520
    
    
    
    
  F-5




---



##### Table of Contents



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




---



##### Table of Contents



(e) Inventory
  December 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    10,887
    
    
    $
    56,701Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    101,274
    
    
    
    87,904$
    112,270
    
    
    $
    144,714
   December 31,
    
    
    December 31,2005
    
    
    2004Product Cost
    
    $
    609,295
    
    
    $
    452,682Warranty Expense
    
    
    (15,137
    )
    
    
    (13,467
    )Inventory Impairment
    
    
    55,557
    
    
    
    14,874Cost of Sales
    
    $
    649,715
    
    
    $
    454,089
 (f) Property and Equipment
  (g) Intangible Assets
  (h) Impairment of Long-Lived Assets-and Long-Lived Assets to Be Disposed Of
  (i) Financial Instruments




---



##### Table of Contents



(j) Revenue Recognition
  (k) Research and Development Costs
  (l) Depreciation and Amortization
 (Note 5)
 (m) Stock-Based Compensation
    Twelve Months EndedDecember 31,2005
    
    
    2004Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (6,454,635
    )
    
    $
    (3,716,035
    )Less: fair value of employee stock compensation
    
    
    (688,485
    )
    
    
    (568,994
    )Pro forma net loss attributed to common stock
    
    
    (7,143,120
    )
    
    
    (4,285,029
    )Loss per common shareBasic and
diluted net loss per share  as reported
    
    $
    (0.24
    )
    
    $
    (0.16
    )Basic and
diluted net loss per share  pro forma
    
    $
    (0.27
    )
    
    $
    (0.18
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.25
    %
    
    
    4.25
    %Expected life
    
    3 years
    
    3 yearsExpected volatility
    
    
    164
    %
    
    
    164
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 (n) Income Taxes
  (o) Net Loss Per Common Share




---



##### Table of Contents



(p) Segment Reporting
  Digital Video
    
    
    RFID2005
    
    
    2004
    
    
    2005
    
    
    2004Twelve Months Ended December 31:Sales
    
    $
    93,863
    
    
    $
    139,090
    
    
    $
    986,377
    
    
    $
    772,475Cost of Sales
    
    
    23,569
    
    
    
    60,260
    
    
    
    570,589
    
    
    
    378,956Inventory Impairment
    
    
    53,960
    
    
    
    9,375
    
    
    
    1,597
    
    
    
    5,498Gross Profit
    
    $
    16,334
    
    
    $
    69,455
    
    
    $
    414,191
    
    
    $
    388,021
 (q) Significant Customers
   (r) Recent Accounting Pronouncements
 Accounting for Stock-Based Compensation.
 (2) Operations, Liquidity and Going Concern




---



##### Table of Contents



(3) Prepaid Expenses and Other Current Assets
  December 31,
    
    
    December 31,2005
    
    
    2004Prepaid insurance
    
    $
    47,733
    
    
    $
    49,270Prepaid trade shows
    
    
    6,600
    
    
    
    32,750Prepaid other
    
    
    18,295
    
    
    
    15,144$
    72,628
    
    
    $
    97,164
 (4) Property, Plant and Equipment
  Amortization/December 31,
    
    
    December 31,
    
    
    Depreciation2005
    
    
    2004
    
    
    PeriodLeasehold improvements
    
    $
    66,435
    
    
    $
    66,435
    
    
    Lease termMachinery and equipment
    
    
    1,792,956
    
    
    
    1,785,466
    
    
    5 yearsFurniture and fixtures
    
    
    128,675
    
    
    
    128,675
    
    
    5 to 10 years1,988,066
    
    
    
    1,980,576Accumulated depreciation and amortization
    
    
    (1,958,679
    )
    
    
    (1,931,181
    )Property, plant and equipment, net
    
    $
    29,387
    
    
    $
    49,395
  (5) Intellectual property
  WeightedAverageRemainingUsefulLives atUseful
    
    
    December 31,December 31, 2005
    
    
    December 31, 2004
    
    
    Lives
    
    
    2005Purchased RFID technology
    
    $
    1,714,449
    
    
    $
    1,714,449
    
    
    5 years
    
    
    Purchased video technology
    
    
    5,087,483
    
    
    
    5,087,483
    
    
    5 years
    
    
    Internally developed software
    
    
    350,337
    
    
    
    350,337
    
    
    5 years
    
    
    7,152,269
    
    
    
    7,152,269Accumulated amortization and impairment
    
    
    (7,152,269
    )
    
    
    (7,152,136
    )Intellectual property, net
    
    $
    
    
    
    $
    133




---



##### Table of Contents



(6) Gain on vendor settlements and statutory write-off
  December 31,
    
    
    December 31,2005
    
    
    2004Gain on settlements on vendor
    
    $
    10,000
    
    
    $
    161,477Expiration of statue of limitations
    
    
    313,903
    
    
    
    Other
    
    
    2,520
    
    
    
    16,310$
    326,424
    
    
    $
    177,787
 (7) Accrued Liabilities
  December 31,
    
    
    December 31,2005
    
    
    2004Accrued vacation
    
    $
    171,881
    
    
    $
    161,919Accrued interest payable
    
    
    606,939
    
    
    
    431,449Accrued professional fees, litigation settlements and other
    
    
    180,329
    
    
    
    196,221$
    959,149
    
    
    $
    789,589
 (8) Lease Obligations
  (9) Notes Payable to Stockholders (including convertible notes payable)
  December 31,
    
    
    December 31,2005
    
    
    2004Due to stockholders:5.00% PV Proceeds Holdings, Inc., due December 31, 2007
    
    $
    3,315,283
    
    
    $
    3,538,3055.00% Amphion Investment LLC note, due December 31, 2007
    
    
    393,787
    
    
    
    393,7877.00% convertible debt
    
    
    396,667
    
    
    
    720,000
    )Discount relating to 7.00% convertible debt
    
    
    (5,520
    )
    
    
    (323,566
    )4,100,217
    
    
    
    4,328,526Less current maturities including discount amortization
    
    
    (391,146
    )
    
    
    (193,851
    )Non-current notes payable to stockholders
    
    $
    3,709,071
    
    
    $
    4,134,675
  2006
    
    $
    391,1462007
    
    
    3,709,071$
    4,100,217




---



##### Table of Contents



PV Proceeds Holdings, Inc.
   Amphion Investment LLC
   7% Convertible Note




---



##### Table of Contents



(10) Preferred Stock
  2003B Series
    
    
    Series 2004
    
    
    2005 SeriesNumber of shares authorized
    
    
    2,750,000
    
    
    
    625,000
    
    
    
    1,650,000Stated value
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued and outstanding:December 31, 2004
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    December 31, 2005
    
    
    1,790,000
    
    
    
    625,000
    
    
    
    956,495Conversion ratio (or
conversion price) of
preferred shares into
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into votingcommon
    
    common stock
    
    common stock
    
    common stockLiquidation preference
    
    None
    
    None
    
    NoneDividend rights
    
    7% per
    
    7% per
    
    
    noneannum, cumulative
    
    annum, cumulative
 (a) Series I and J Convertible Preferred Stock




---



##### Table of Contents



(b) Series 2003B Preferred Stock
    (c) Series 2004 Preferred Stock
    (d) Series 2005 Preferred Stock




---



##### Table of Contents



(11) Employee Benefit Plans
  (12) Stock Options and Warrants
 (a) Stock Option Plans.
     2005
    
    
    2004WEIGHTED
    
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISEOPTIONS
    
    
    PRICE
    
    
    OPTIONS
    
    
    PRICEOptions outstanding at beginning of year
    
    
    3,288,414
    
    
    $
    2.37
    
    
    
    2,468,465
    
    
    $
    2.40Options granted
    
    
    
    
    
    
    
    
    
    
    905,749
    
    
    
    2.10Options exercised
    
    
    (55,100
    )
    
    
    0.40
    
    
    
    (85,800
    )
    
    
    0.40Options forfeited
    
    
    (115,829
    )
    
    
    2.47
    
    
    
    
    
    
    
    Options outstanding at end of year
    
    
    3,117,485
    
    
    
    2.40
    
    
    
    3,288,414
    
    
    
    2.37Options exercisable at end of year
    
    
    2,522,320
    
    
    
    2.11
    
    
    
    2,113,755
    
    
    
    2.10Options available for grant at the end of the year
    
    
    5,000,000
    
    
    
    
    
    
    
    1Fair value of options granted during the year
    
    
    
    
    
    
    
    
    
    
    1,552,141




---



##### Table of Contents



Number of
    
    
    Weighted AverageOption Price
    
    Options
    
    
    Remaining Life$0.00 - $1.00
    
    
    714,600
    
    
    
    8.44$1.01 - $2.00
    
    
    1,144,170
    
    
    
    7.76$2.01  $3.00
    
    
    789,375
    
    
    
    4.74$3.01 - $4.00
    
    
    201,340
    
    
    
    4.84$4.01 - $5.00
    
    
    20,000
    
    
    
    5.42$5.01 - $6.25
    
    
    248,000
    
    
    
    4.22Total
    
    
    3,117,485
    
    
    
    6.67
  2005
    
    
    
    
    
    
    
    
    
    
    2004WARRANTS
    
    EXERCISE PRICE
    
    
    EXPIRATION
    
    
    WARRANTS
    
    
    EXERCISE PRICE
    
    
    EXPIRATION4,184,474
    
    $
    0.65 - 3.20
    
    
    
    01/06 - 12/10
    
    
    
    7,918,947
    
    
    $
    0.65 - 3.20
    
    
    
    05/05 - 02/084,184,474
    
    
    
    
    
    
    
    
    
    
    7,918,947
    (13) Commitments and Contingencies
   (14) Income Taxes
   Net operating loss
    
    $
    17,660,000Property, equipment and intangibles
    
    
    1,560,000Other
    
    
    94,000Valuation allowance
    
    
    (19,314,000
    )$
    




---



##### Table of Contents



(15) Subsequent Event
      (16) Subsequent Funding Event (Unaudited)