##### 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, 2004
 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 Drive
Carrollton, Texas
    
    75006(Address of principal executive offices)
    
    (Zip Code)(972) 407-6080(Issuers Telephone Number)
 Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 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
 24,720,939
(Number of Shares Outstanding as of: December 31, 2004) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes þ No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o The issuers revenues for the fiscal year ended December 31, 2004 were $911,565. On March 28, 2005, the aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $15,858,179. This amount was calculated by
reducing the total number of shares of the registrants common stock outstanding by the total
number of shares of common stock held by officers and directors, and stockholders owning in excess
of 5% of the registrants common stock, and multiplying the remainder by the average of the bid and
asked price for the registrants common stock on March 28, 2005, as reported on the
Over-The-Counter Bulletin Board Market. The information provided shall in no way be construed as an
admission that any officer, director or more than 5% stockholder of the issuer may be deemed an
affiliate of the issuer or that such person is the beneficial owner of shares reported as being
held by such person, and any such inference is hereby disclaimed. Documents Incorporated by Reference: None. Transitional Small Business
Disclosure Format: Yes o  No þ   1




---



AXCESS INTERNATIONAL INC.
INDEX PART IItem 1. DESCRIPTION OF BUSINESS
    
    3Risk FactorsItem 2. DESCRIPTION OF PROPERTIES
    
    12Item 3. LEGAL PROCEEDINGS
    
    12Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    13PART IIItem 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
    
    13Item 6.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
    
    16Item 7. FINANCIAL STATEMENTS
    
    19Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    19Item 8A. CONTROLS AND PROCEDURES
    
    19PART IIIItem 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
    
    20Item 10. EXECUTIVE COMPENSATION
    
    22Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    23Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    25Item 13. EXHIBITS AND REPORTS ON FORM 8-K
    
    27Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    30SIGNATURES
    
    31FINANCIAL SECTIONREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    F-1Consolidated Balance Sheet
    
    F-2Consolidated Statements of Operations
    
    F-3Consolidated
Statements of Stockholders Deficit
    
    F-4Consolidated Statements of Cash Flows
    
    F-6Notes to
Consolidated Financial Statements
    
    F-7Borrowed Employees and Advisory AgreementCode of Ethics for Senior Financial OfficersSubsidiariesConsent of Hein & Associates LLPCertification of President, CEO and Principal Executive Officer Pursuant to Section 302Certification of Vice President, CFO, Secretary, Principal Accounting and Financial Officer Pursuant to Section 302Certification of President, CEO and Principal Executive Officer Pursuant to Section 906Certification of Vice President, CFO, Secretary, Principal Accounting and Financial Officer Pursuant to Section 906Audit Committee CharterNominating and Governance Committee CharterWhistleblower Policy
  2




---



##### Table of Contents



PART I Forward Looking Statements This annual report on Form 10-KSB includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), which can 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 or comparable terminology. All statements other than statements of historical fact
included in this annual report on Form 10-KSB, including without limitation, the statements under
Item 1. Description of Business and Item 6. Managements Discussion and Analysis or Plan of
Operation and located elsewhere herein regarding the financial position and liquidity of the
Company (defined below) are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Important factors with respect to any such
forward-looking statements, including certain risks and uncertainties that could cause actual
results to differ materially from the Companys expectations (Cautionary Statements), are
disclosed in this annual report on Form 10-KSB, including, without limitation, in conjunction with
the forward-looking statements and under the caption Risk Factors. In addition, important factors
that could cause actual results to differ materially from those in the forward-looking statements
included herein include, but are not limited to, inability to continue as a going concern, limited
working capital, limited access to capital, changes from anticipated levels of sales, future
national or regional economic and competitive conditions, changes in relationships with customers,
access to capital, difficulties in developing and marketing new products, marketing existing
products, customer acceptance of existing and new products, validity of patents, technological
change, dependence on key personnel, availability of key component parts, dependence on third party
manufacturers, vendors, contractors, product liability, casualty to or other disruption of the
production facilities, delays and disruptions in the shipment of the Companys products, and the
ability of the Company to meet its stated business goals. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. As used herein, references to the Company are to Axcess International, Inc., a Delaware
corporation (Axcess) and its subsidiaries. 
 Item 1. DESCRIPTION OF BUSINESS Recent Developments: Going Concern and Liquidity Problems Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial statements at December 31, 2004. The paragraph states that our recurring
losses from operations and resulting continued dependence on access to external financing raise
substantial doubts about our ability to continue as a going concern. Furthermore, the factors
leading to and the existence of the explanatory paragraph may adversely affect our relationship
with customers and suppliers and have an adverse effect on our ability to obtain financing. We do not have sufficient working capital to sustain our operations. We have been unable to
generate sufficient revenues to sustain our operations. We will have to obtain funds to meet our
cash requirements through business alliances, such as strategic or financial transactions with
third parties, the sale of securities or other financing arrangements, or we may be required to
curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws.
Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing
stockholders. In addition, no assurance may be given that the Company will be successful in raising
additional funds or entering into business alliances. See Risk Factors and Managements Discussion and Analysis of Financial Condition and
Results of Operations. The Company Axcess, through its proprietary technology, is a manufacturer of advanced physical security
and enterprise asset management systems that can automatically locate, identify, track, monitor,
count, and protect people, property and vehicles. The purpose of the systems is: to reduce loss and
liability; to increase the efficiency of a clients employees; and to improve the management of
personal property, logistics, and facilities. Axcess utilizes two patented and integrated
technologies: battery-powered wireless tagging called Active-Radio Frequency Identification (RFID)
and network based streaming digital video (IPTV). The primary applications of our technology are:
network-based security video recording and surveillance; automatic hands-free personnel and
vehicle access control; and automatic asset tracking and protection. Systems are sold through
systems integrators who manage the sale, provide the installation, and first level customer
service. The systems utilize the customers existing infrastructure or are embedded within an
integrators total solution package. Complete end-to-end systems can also be purchased from
Axcess employing enterprise software or browser-based hosted software. Our principal offices are
located at 3208 Commander Drive, Carrollton, Texas, 75006, and our telephone number is
972-407-6080. 3




---



##### Table of Contents



Company Evolution Axcess was formed in November 1982 as Lasertechnics, Inc. Prior to 1999, Axcess, through two
subsidiaries, sold high-end dye-sublimation card printers and high-speed laser marking equipment.
During 1998, we determined that it could not be consistently profitable selling these products.
Accordingly, in October 1998, we discontinued the operations of our 96% owned subsidiary, Sandia
Imaging Systems Corporation, which was engaged in distributing and reselling high-end
dye-sublimation card printers and consumables. We sold this business in December 1998. A second
subsidiary, Lasertechnics Marking Corporation, was engaged in fabricating, distributing and selling
high-speed laser marking equipment. In April 1999, we sold Lasertechnics Marking Corporation to
affiliates of Amphion Ventures, LP, a major stockholder of ours. See also Item 12. Certain
Relationships and Related Transactions. Axcess then made a concerted effort to enter into the high technology security products
marketplace, and identified RFID as its initial target. In September 1998, we consummated the
acquisition of the RFID based intellectual property assets of ASGI, Inc. and Nauta, Inc.,
unaffiliated entities to Axcess. The intellectual property assets included a patent, trade secret
rights, software, hardware, product designs and all other technical information necessary for us to
manufacture and market RFID products to the access control and asset management markets. In July 1999, Axcess acquired another company in the security technology marketplace in the
digital video or CCTV area. We acquired substantially all of the assets, including the network
video technology, of Prism Video, Inc. Prism Video, Inc. was engaged in the development, design,
manufacture and marketing of video security technology and video storage products. Axcess then
hired new senior management experienced in the packaging, sales, and marketing of high technology
security products. Axcess further developed the RFID and network-based streaming video technologies throughout
2002 and 2003. It also secured key reference accounts and established branding for its product
lines during the period. In November 2001, we acquired all of the assets of IVEX Corporation
relating to its VSA 1200 Project. The VSA 1200 project was an embedded processor-based multimedia
streaming network appliance that pushes advanced video and audio processing directly onto the
corporate or Internet backbone, then to any point on the network, including handheld devices.
Axcess believes that IVEXs unique architecture offers a strategic platform on which to build
value, adding video filtering and detection software, which we expect to, improve the effectiveness
of the IVEX product line as well as provide a competitive advantage to us. Throughout 2002, 2003
and 2004, we used our reference customers and our brand awareness to secure key marketing channel
partners. These partners are important to the future revenue growth of Axcess business due to
their market presence. We believe that by integrating our systems into the systems of these channel
partners, adoption of our technologies and products will be accelerated. Axcess has completed the
integration efforts with certain channel partners and is in the process of integrating others. In April 2003, we changed out name from Axcess Inc. to Axcess International, Inc. Sales Channels Axcess utilizes an indirect sales model focused primarily on system integrators as marketing
channel partners capable of selling, installing and servicing network-based CCTV, access control
and asset management applications. Other outlets include distributors, specialty dealers, catalog
sales organizations, and OEMs (original equipment manufacturers). Axcess is continuing channel
development in the security industry, by focusing on large system integrators that have significant
sales in which we hope to participate in. The system integrators and dealers are responsible for
the installation in almost all cases. Axcess has three sales people that support individual sales
as needed. Using established channels to gain widespread exposure and sales leverage is a
well-utilized model in the industry. The indirect sales model allows us to 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 with other
products, which become system solutions that require custom site planning and installation. Sales
generally have multiple locations with the average revenue per system location in the tens of
thousands, and are based on a new technology and its application to traditional security problems.
By working directly with established marketing channel partners, this indirect model also gives us
the flexibility to introduce new products and applications as they are developed. We work directly with the end user for certain focused large system sales opportunities. This
approach enables us to prospect directly for selected larger transactions and reference accounts in
a prudent, opportunity driven fashion. The eventual installation is still accomplished through an
established channel partner. In 2004, we began to pursue the enterprise supply chain/logistics market for RFID solutions.
We announced the Onlinesupervisor middleware and software platform and its ability to operate in a
compatible fashion with Global Electronic Product Code (EPC) RFID tagging standards. We also
announced a recent example where a customer implemented a vehicle access control solution, which
automatically tied the vehicle to the inventory it was carrying. 4




---



##### Table of Contents



Partnering Axcess believes that the security integration business will continue to go through
consolidations and grow by acquisition, and that each of the large integrators are working to
develop full-product portfolios to provide the widest range of solutions for their customers. We
also believe that our products can play a key role as strategic elements of these portfolios, and
that the integrators bring to Axcess broad product and corporate exposure and sales capabilities.
The security systems integration industry 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) Magazine report. The largest global integrators that provide
security technology solutions include Honeywell, Tyco, Siemens, Group 4 and General Electric. Axcess has signed partnering agreements with several integrators. In general, these agreements
provide for the integrators to sell and market Axcess products, favorably price Axcess products
based on the volume of the Axcess products sold, provide customer service support for the Axcess
products sold by the integrators, and integrate Axcess products into the integrators system. We
believe this integration strategy has advantages over its prior partnership arrangements and will
offer an increased opportunity for rapid sales growth. Honeywell. In 2000, Axcess signed a product development and marketing agreement with
Honeywell and completed their integration and began actively marketing our products during the
fourth quarter of 2003. Honeywell has bid and sold Axcess RFID products to support the United
States Department of Defense procurements in asset management and we believe that some of the
resulting programs may be awarded in 2005. Sonitrol (Tyco). In 2000, Axcess signed a strategic partnership agreement with Sonitrol. In
2002, Sonitrol finished the integration of Axcess software into the security-monitoring platform
of Sonitrol. The solution provides video capability for their security monitoring franchises. Software House, Sensormatic, and ADT (Tyco). In 2001, Axcess was selected by Software House
as the preferred provider of RFID solutions for asset management. Since then, Axcess ActiveTag
products have been integrated into the C-Cure 800 access control system. Sensormatic and ADT also
have the capability to sell the Axcess system integrated into C-Cure. During 2004, Tyco
Internationals ADT group delivered a new product release to its organization announcing the AXCESS
ActiveTagTM product line is now available for sale by ADT. Tycos SoftwareHouse group
currently carries and supports the complete line of ActiveTagTM products which is now
available to ADT. PSA Security. In 2003, the security industrys largest buying cooperative, PSA and
Axcess agreed to partner whereby we would supply PSAs approximate 135 integrators with our system
solutions. In April 2004, we demonstrated our products at PSAs annual trade show in Las Vegas. Other Integrator Partners Axcess has signed partnership agreements with GTSI, Anixter and Samsung USA. The Axcess system
has been integrated into the systems provided by Samsung, Iteras, and TVL, totaling five
integrators who have the Axcess system embedded into their core solutions. Products and Technology Under the ActiveTag label, Axcess supplies active RFID system solutions that connect directly
into standard security systems or utilize the enterprise networks or the Internet. ActiveTag is a
multi-use, single-system solution scaleable for small, medium, and large enterprises. This
versatile technology has three patents awarded with applications for two additional patents
pending. The system supports a variety of automatic monitoring and tracking applications, including
electronic asset protection and asset management, and automatic personnel and vehicle access
control. ActiveTag uses small, battery-powered tags that, when automatically activated at control
points throughout a facility, transmit a wireless message to palm-size receivers networked on an
existing corporate local area network (commonly referred to as LAN). Tag identification and
location information are instantly forwarded to a local security control panel or transmitted over
the network to a host computer. ActiveTrac is an application software program that logs and
displays the information from the tag to provide a comprehensive picture of the person, asset or
vehicle being tracked. In addition, Axcess is continuing to develop OnlineSupervisor software,
which has a browser-based display and provides real-time management solutions through reporting,
display, and decision and control functions. ActiveTag tracks assets as the assets enter, exit and move within a facility to monitor their
whereabouts, detect theft and prevent loss. ActiveTag software can link assets and personnel
together to provide a non-invasive, hands-free access control and asset protection solution at
perimeter doors and other controlled entry and exit points. Personnel tags include a panic button
for increased personal safety and peace of mind. This software can track vehicle and equipment
movements to provide real-time, paperless logistics data and automated gate control. Not only can
pallets, containers or boxes be tracked in real-time, but also a beaconing feature (where the tag
transmits on a fixed time interval) allows the user to automatically count and monitor all
inventory, even while stationary. One version of the RFID tag includes an embedded temperature
sensor inside to monitor and transmit measurement of ambient temperature or to signal when the
temperature moves outside of a defined range. This sensor 5




---



##### Table of Contents



capability is utilized today for helping with the early detection of computer server failure
in data centers. Another version of the RFID tag has external sensors so the tag can act as a
low-cost wireless transmitter. The Axcess Prism Video products offer a fully networked, digital video system for enterprises
providing remote and local security video (CCTV), as well as digital video recording. Enterprises
use this system to transmit and view video to detect security incidents. Axcess offers proprietary
VSLE video compression, supported by twelve patents with applications for one more patent pending.
The advanced compression technology allows video to be viewed live over traditional phone lines or
on any network computer, and recorded and efficiently stored for analysis at a later time. A full
array of Prism Products, including cameras, transmitters and recorders, provide customers with low
cost, enterprise-wide digital video solutions over the network. Cameras and transmitters can
utilize any transmission facility, including phone lines, ISDN, LAN, Internet or other facility.
High speed, real-time video and audio provides visibility into operations to improve life safety,
improve efficiency, observe sales programs, reduce theft, and monitor compliance with both legal
and corporate guidelines. The LANconnect product line is comprised of advanced multimedia streaming network appliances
that acquire video at the source, and then provide advanced video and audio processing over the
network to digital recorders and on to the other points of the network. The combination of
highly-integrated embedded processing power and programmability allows digital video processing to
be distributed at the analog source, freeing up valuable network bandwidth, reducing video storage
requirements, eliminating single point of failure and enabling the user to select the quality of
the video. The LANconnect system also stores video digitally, which allows fully distributed
storage. These storage possibilities make the video network efficient by transmitting needed video
only, yet making all of the video available on demand. Only needed, exception-based video is
transmitted either on alarm or on-demand. The LANcam network camera transmits digitized CCTV video directly over an enterprise LAN at
low bandwidths. Each camera is independently controllable, including the control for the amount of
network capacity or bandwidth the camera utilizes, which prevents performance impacts on other
applications. Network-based digital video recording can be widely distributed geographically using
LANcorders to provide easy access to recorded video along with live video on-demand. The Axcess
specialized implementation includes a software only videocassette recorder, or time-lapse recorder,
utilizing standard computers on the existing network for recording rather than dedicated hardware
recorders. This architecture includes distributed video recording along with playback and live
viewing over an existing computer network. We believe that this inherently low cost and flexible
architecture establishes a foundation upon which we may compete today and in the future. The Prism Video line includes a suite of software products for viewing live and recorded
video. These products range from dedicated security software applications, to web page viewing for
casual use. The products also permit a user to view video on wireless devices such as handheld
computers connected to a standard wireless LAN system. The Onlinesupervisor system integrates the presentation of RFID data and digital video to a
standard web browser. Through a display customized to each end user, real-time status is integrated
with live and recorded digital video. Events that can be shown involve premises security, physical
asset protection, personnel staffing, and operations performance. Up to the minute personnel and
asset inventory counts are provided. Live streaming video is available of each site, via the
network connection. Each monitored event is linked to the database of recorded video files to
enable the viewing of tagged events such as personnel activity at door entrances and exits, access
to controlled areas, and asset movements. The system is available as a stand alone enterprise
solution or as a portal-based solution hosted by Axcess. We believe that the system is unique in
its ability to link information read from a tag with video clips and pictures from the scene
surrounding the tag. Typical applications of our products include: Hands-free automatic personnel identification and access control. Doors can be
automatically opened as the accredited employee approaches the door, enabling rapid and easy
entrance without presenting a card to be swiped. Multiple logical control zones can be set up
within a facility, making key areas automatically more secure as non-authorized people are
quickly identified. The identification can be linked to tagged assets to improve asset
management accountability. Hands-free automatic vehicle identification and access control. Vehicles automatically
enter a controlled or gated area with a validated tag placed in the vehicle. The tag is
recognized as it approaches the gate, allowing rolling access and facilitating entrance and
exit speed. For industrial applications, driver tags and inventory tags can be matched to
ensure integrity of the shipment. Electronic asset protection and tracking. Assets, such as computers and medical
equipment, are automatically tracked as they move throughout the facility and protected if
they approach a perimeter door without authorization. Linking to custodian tags provides
accountability and instant authorized movement. Electronic fixed asset inventory and protection. Static assets such as desktop computers
can be tagged and automatically inventoried at periodic intervals. Should the assets be
moved, their location is identified and automatically tracked. 6




---



##### Table of Contents



Electronic inventory control and tracking. Inventory items, such as pallets, crates,
barrels and vessels, can be automatically located, identified, and tracked as they move, and
protected against unauthorized removal. Corporate CCTV digital video recording. Traditional security video recording can be done
digitally, apart from the source camera to ensure efficiency, quality, performance and
availability. Remote CCTV surveillance. Traditional security surveillance is provided via telephone
line or over the network to give remote viewing for security central monitoring and for
operations review. In retail stores, this provides life safety as well as improved monitoring
of operations. In schools, student monitoring is improved with live, on-campus video
available to the police. In homeland defense, live video of an incident is available to
authorities, including mobile professionals. Automatic personnel accounting (mustering). In cases of catastrophic disaster involving
buildings, tags on people are used to identify who exited safely. Markets Axcess operates in the electronic security products and systems markets. Its products have
been designed, built and introduced with general purpose, broad applications in mind, cutting
across many industries. Some examples of product solutions in selected markets are provided below. Retail CCTV. Management and security station personnel can use Axcess products to
remotely supervise facilities such as retail stores, convenience stores, and fast food stores
from the desktop using video transmitted over an enterprise WAN, the Internet, or modem.
Retail personnel can also use remote video systems in retail for life safety and to reduce
employee theft. Axcess has many notable customers in this market. Education. Various schools and universities are implementing tagging to protect data
center assets; schools and universities are also using networked video for life safety
reasons. Many schools and universities already have built-out networks, so RFID tagging and
networked video may be added for the incremental cost of this equipment. Built-out networks
also offer additional flexibility to move video remotely and share video data with school
administrators and authorities. Corporate Access Control and Asset Management. Employees may gain access to company
premises using automatic hands-free personnel RFID tags that may also be placed on corporate
assets, such as laptops, to track movements and prevent loss. Axcess, through its
control-point architecture, believes that it has a unique solution to address this market by
tagging laptops and implementing control zones. Corporate Security CCTV. We believe that security CCTV is the fastest growing segment
for security products and systems. Management personnel can use security CCTV to view live
motion video over the network and access stored video clips on-demand of operations activity,
personnel corporate compliance, and security. Many existing security systems are analog,
limiting video availability to cabled networks and videocassette recorder tape. The Axcess
products provide a bridge from analog systems to digital networks. Networked video enables
viewing from desktops and wireless handhelds by multiple departments. Recorded video may be
made available to numerous locations on the corporate LAN or via the Internet. Airport Security and Homeland Defense. Axcess can provide hands-free premise access
control to employees and authorized vehicles needing easy, secure access to the terminal and
tarmac. Our products can provide controlled access for fuel trucks at the fuel depot.
Courtesy vehicles can use access control for added gate security. Networked video and
recording may be added to the network infrastructure to extend security visibility throughout
the terminal and grounds. Data Center Asset Management. Axcess products locate and protect computer servers,
central processing units and other equipment using RFID tagging. Tagged servers can also be
monitored with temperature sensor tags that not only protect against loss and misplacement,
but also provide an early indication of potential failure. Axcess products provide security
and visibility from the entrances to the server and cage level. Many legacy data centers and
computer rooms have the same characteristics. In addition to tagging the computers, users of
Axcess products can tag authorized personnel to facilitate easy movement of the assets and to
restrict access to sensitive areas. Video complements the asset management application by
providing live viewing capability into the co-location cage or cabinet area. Archived video
is also available to investigate asset-based activity alarms. Healthcare Resource Management. Our products have been designed to tag personnel and
equipment to provide better utilization of clinical devices, to locate patients, and to stage
devices in order to speed up procedures. Users of our RFID tagging products may reduce
equipment and personnel costs associated with patients moving within the facility. Our
equipment may enable healthcare facilities to increase revenues from more efficient billing
of equipment usage. Inventory and Transportation Management. Cartons, pallets, containers and even missiles
may be tagged so they can be located, tracked and monitored to facilitate movement, rapid
order picking and inventory verification. Bar coding is common in source product labeling at
the start of the supply chain. Once products are packaged in larger containers 7




---



##### Table of Contents



for shipping and warehousing, RFID tagging complements bar coding and the warehouse system by
enabling automatic long-range identification and location of products. In production
applications, the tag can be a wireless sensor for a production line, transmit information
about the build specifications for a product, and send notifications from the finished goods
area after production is completed. Patents and Proprietary Technology Axcess relies on a combination of patents, trade secrets, technology licenses, and other
intellectual property rights. In total, we have received fifteen U.S. patents with international
coverage around the globe. We also have three 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 to preserve our rights
relating to our key product technologies to the extent commercially reasonable. We have applied for
registration of a number of trade and service marks, including Axcess Inc. the Axcess Inc. (logo)
LANcam, ActiveTag, onlineaccess.com, Prism Video and LANcorder. Engineering and Development The Prism Video product line provides flexible capture and placement of video on a network
for recording and display over the network. During 2002, we completed development of specific
feature and function enhancements to our Prism Video product line that integrators have requested.
We are developing advanced video processing algorithms and will continue to focus on these
algorithms to increase the intelligence of our video appliances. Examples of these algorithms
include advanced motion detection, motion tracking, speed and direction measurement, object
addition and subtraction detection, facial recognition and people counting. During 2003 we introduced an electronic bracelet for automatically identifying, tracking and
protecting people or assets. We also introduced an anti-tamper cargo container tag to support
Operation Safe Commerce initiatives. We expect to reduce the cost of a personnel tag compared to
previous form factors. We continue to look at the development of new semiconductors for integrating
RFID functions into smaller and less costly devices. We intend to work toward the inclusion of
various sensors, such as motion, humidity and power, to enable the tagging system to more fully
address market needs in the data center and logistics markets. We anticipate that third party
improvements to battery technology and manufacturing methods will enable size reduction as well as
lower costs. OnlinesupervisorTM is a highly versatile product where radio frequency
identification (RFID) tag transmissions are received from readers over the network, then filtered
against the various criteria needed for managing a business most productively. The integration
middleware enables virtually any data format to be received, 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 to a digital
video clip of the transaction for supervisory review. Onlinesupervisor development continues to
add additional data sources that can be delivered over the same platform, making the product
expandable beyond RFID data on an industry specific basis into areas including condition monitoring
and data mining. Competition The market for our products and services is intensely competitive and is characterized by
rapidly changing technology, evolving user needs and the frequent introduction of new products. A number of our competitors are more established, benefit from greater name recognition and
have substantially greater financial, technical and marketing resources. We believe that the
principal factors affecting competition in our markets include product functionality, performance,
flexibility and features, use of open standards technology, quality of service and support, company
reputation, price and overall costs of ownership. In order to compete, we seek to provide products
that are technologically superior and that deliver better value. We believe that the following
factors help distinguish our products from those of competitors. The ActiveTag RFID automatic identification system benefits from low cost, long-range tag
activation and transmission, which have a small form factor, long-term battery life, and also a
platform for adding sensor capabilities. The activation of tags occurs at a separate low frequency,
a patented approach, which we believe, gives Axcess an advantage among active RFID companies in the
ability to establish physical control points, such as doorways, and virtual control points, such as
hallways. The receiver system is designed as a low cost infrastructure that connects directly into
legacy systems and also runs on a standard Ethernet network backbone. The system is flexible enough
to support multiple applications for people, physical assets, and vehicles. Finally, the tag data
is integrated with live and recorded streaming video on a multi-user browser display platform for
both casual viewing and industrial requirements. Flexibility comes from the use of dual frequencies for wake-up and transmission; low frequency
on wake-up and UHF for transmission. Tag transmission at UHF penetrates all materials except metal,
enabling reliable tag transmission. This also enables long range tag reads using omni-directional
antennas so that no line of sight is required. A simple transmission protocol allows multiple tags
to be read simultaneously. The advanced battery management design provides battery life of three to
five 8




---



##### Table of Contents



years under normal operating conditions, 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
be queried individually enables the ActiveTag line to meet the major user requirements, including
dynamic tracking, static tracking, multiple simultaneous tag reads, authorized movement of tagged
assets, and a long read range for tag transmission, which we believe gives us an advantage. We also
believe that these features enable the system to outperform passive systems, relative location
positioning systems, and infrared and combo infrared / RFID systems from competitors. The Prism Video is a complete end-to-end system, which includes video transmitters, streaming
video cameras, software digital recording, web display, and wireless handheld display are all
integrated in an open architecture fashion on the network using the LAN and Internet. The solution
reduces the need for special camera cabling, also enabling network-based video recording to be
placed in geographically optimal positions. With the video on the network, all video is viewable
from anywhere in the world the network provides authorized access. The all-digital solution focuses
on event-based security breach detection, alarming, and evidence recording and notification. It
makes a video security system more economic, have a greater geographical reach and operate more
effectively. Personnel are able to focus on prevention and response rather than on evidence
processing. Its efficiency is derived in part from advanced video compression performance. Whether
the video is compressed in the LANcam camera, the LANconnect network appliance products, or in a
MicroMole video transmitter, the compression will use between two and thirty times less bandwidth
than uncompressed systems. This means more cameras can be used on a given network, and if only
standard modem links are available, the video performance will still be adequate. Even the fast
performance proprietary scheme, VSLE, can be converted to the Windows standard .avi frame format
for software-only recording and live display. The network appliances under the LANconnect product
family are programmable, ready for upgrades in compression types and advanced video processing,
which allows automated detection of security breaches. Axcess believes that its solutions provide
an inherent parts cost advantage over competitors digital video devices due to the simplicity of
the compression code when implemented in an embedded system such as the LANcam. Similarly, because
of this compression efficiency, stored video will take up less capacity on a hard drive, or other
type of storage media than other digital video recorders. All camera, transmitter, and storage
products are network enabled. The Prism Video line includes over thirty interfaces to peripheral
control equipment such as pan, tilt, zoom, and multiplexers making it compatible with legacy CCTV
equipment and requirements. Manufacturing and Suppliers We outsource the manufacturing of our products and consequently depend on outside
manufacturers to supply finished product. A large number of manufacturers in the U.S. have the
capability to produce our products. We periodically seek bids for manufacturing and have multiple
manufacturing sources for each of its products. Although we depend on a number of outside suppliers for components of our products, we have
designed our current line of products so that we are not dependent on a single source for any of
our products components. Most of the components we use are off the shelf and are readily
available. Although we have generally been able to secure adequate suppliers, the inability of the
Company in the future to obtain sufficient suppliers of component parts could have a material
adverse effect on our results of operations. There are currently no long-term agreements between us and our manufacturers or suppliers. Research and Development If we have sufficient working capital, we plan to continually develop new products utilizing
our existing technology and we plan to bring new products to market throughout 2004. New products
in both video and RFID will be built upon the core platforms now in place. In RFID, we believe that
our new tag with a key-fob form factor and electronic bracelet will offer a lower cost and smaller
version of the existing personnel access control tags. We believe these new tags will also be used
for protecting assets from theft. In video, we believe the complete TCP/IP network-based solution
the company provides to be the winning CCTV architecture, focusing now on the software-based
network video recorder (NVR). The new products take advantage of the ability to record and store
security video at the camera location and transmit both live and recorded security video via
multiple simultaneous connections to critical users. There can be no assurance that we will have
sufficient working capital to undertake these activities. During 2004 and 2003, we spent $718,278 and $632,974, respectively, for research and
development and plan to continue spending similar amounts in fiscal year 2005 to develop products
to support our continued revenue growth. However, any such spending will be dependent upon our
ability to raise additional capital, as we do not have sufficient revenues to support such an
activity using our own resources. Employees As of December 31, 2004, we had nineteen full-time employees and no part-time employees. Government Regulation Government regulations have not had, nor are they expected to have, a material effect on
Axcess financial condition, results of operations or competitive position. FCC approval is
required for some of our principal products. 9




---



##### Table of Contents



Environmental Factors There has been, and it is anticipated that there will continue to be, no material effect upon
Axcess capital expenditures, earnings, or competitive position due to compliance with existing
provisions of federal, state and local laws regulating the discharge of material into, or otherwise
relating to the protection of, the environment. Risk Factors We operate in a changing environment that involves numerous risks, some of which are beyond
our control. The following highlights some of these risks. We may not be able to continue as a going concern or fund our existing capital needs. Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial statements for the fiscal year ended December 31, 2004. The paragraph states
that our recurring losses from operations and resulting continued dependence on external financing
raise substantial doubts about our ability to continue as a going concern. Our existing and
anticipated capital needs are significant. We believe our existing financing arrangements and
estimated operating cash flows will not be sufficient to fund our operations and working capital
needs for the next twelve months and there can be no assurance that we will be able to fund our
existing capital needs under our existing credit facilities or otherwise secure additional funding,
if necessary. In addition, changes in our operating plans, the acceleration or modification of our
existing expansion plans, lower than anticipated revenues, increased expenses, potential
acquisitions, or other events 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. If we are unable to fund our existing
capital needs under our existing credit facilities, or are otherwise unable to secure additional
equity financing, if necessary, our business could be materially adversely affected. See
Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and
Capital Resources. We have a history of losses and expectation of future losses; uncertainty of future profitability;
and limits on operations. From our incorporation in 1982 through December 31, 2004, we have incurred an accumulated loss
of approximately $154.8 million and have been profitable in only one fiscal year during that time.
There can be no assurance that we will generate sufficient revenues to achieve profitability in the
future. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Our continued slow revenue growth
and operating losses may indicate circumstances requiring an impairment to be recorded. If our losses continue, we will have to obtain funds to meet our cash requirements through
business alliances, such as strategic or financial transactions with third parties, the sale of
securities or other financing arrangements, or we may be required to curtail our operations, seek a
merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may 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 raising additional funds or entering into
business alliances. SeeManagements Discussion and Analysis of Financial Condition and Results of
OperationLiquidity and Capital Resources. We are dependent upon our proprietary technology and its marketability as state of the art. The technology we use may become obsolete or limit our ability to compete effectively within
the wireless, automatic identification and multi-media applicable industries. These industries are
characterized by rapidly changing technology, evolving industry standards and frequent new product
introductions. The introduction of products embodying new technologies or the emergence of industry
standards can render existing products obsolete and unmarketable. Our success will depend on our
ability to enhance our existing products. Our success will also depend on our ability to develop
and introduce, on a timely and cost-effective basis, new products that keep pace with technological
developments and emerging industry standards and that address increasingly sophisticated customer
requirements. Our business would be adversely affected if we were to incur difficulties or delays in
developing new products or enhancements or if those products or enhancements did not gain market
acceptance. Specifically:  
    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 10




---



##### Table of Contents




    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. We currently hold fifteen U.S. patents. We have three patents in various stages of prosecution with
foreign patent authorities and several additional patents being prepared for filing. The time
period covered by our patents ranges from seven to seventeen years; however, there can be no
assurance that our technologies will be accepted in the marketplace. In addition, different
technologies owned by others could arise that would be superior or more marketable than ours. See
Description of BusinessPatents and Proprietary Technology. 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. Our business, success, growth, operating results, and profitability are dependent upon the
skills, experience, efforts, performance, and abilities of members of management and other key
personnel. We depend upon members of management and key personnel, including key sales personnel,
to generate new business and to service new and existing clients. If any members of management or
key personnel were to leave us, our business, success, growth, operating results and profitability
could suffer. If we lose any key personnel, we may also be unable to prevent the unauthorized
disclosure or use of our technical knowledge, practices, procedures, or client lists by the former
personnel. Disclosure or use of this information could harm our business. 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. Our success will depend to a significant degree upon our ability to attract and retain highly
qualified and experienced personnel who possess the skills and experience necessary to satisfy our
business and client service needs. These personnel may be in great demand, particularly in certain
geographic areas, and are likely to remain a limited resource for the foreseeable future. Our
ability to attract and retain employees with the requisite experience and skill depends on several
factors, including our ability to offer competitive wages, benefits, and professional growth
opportunities. To attract and retain these individuals, we will be required to invest a significant
amount of time and money. Many of the companies with which we will compete for experienced
personnel have greater financial resources and name recognition than we do. In addition, an
important component of overall compensation for our personnel will be equity. If our stock price
does not increase over time, it may be more difficult to retain personnel who have been compensated
with stock awards or options. The inability to attract, train, and retain experienced personnel
could have a material adverse effect on our business. 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. We operate in competitive, fragmented industries and compete for clients with a variety of
larger and smaller companies that offer similar products and services. These industries are subject
to rapid technology changes and are significantly affected by new products and services and the
marketing activities of industry participants, which may often be beyond our control. Due to the
nature of our business, we compete with companies in the security products, security consulting and
defense industries. Although we primarily compete directly with firms who offer similar security
products, we also compete directly and indirectly with a number of other companies, which provide
and install large security systems as a single contractor. Many of these competitors are more
established, offer more products, services and features, have a greater number of clients,
locations, and employees, and also have significantly greater financial (based on total assets and
annual revenues), technical, marketing, public relations, name recognition, and other resources
than we have. We also expect to experience increased competition from new entrants into the market. We may
be unable to compete with large multi-product security companies, including the security divisions
of large international firms. This increased competition may result in pricing pressures, loss of
market share or loss of clients, any of which could have an adverse effect on our business,
financial condition, operating results and cash flows. SeeDescription of BusinessCompetition. We are dependent upon third party manufacturers and suppliers to produce our products. As a cost efficiency measure, we do not manufacture our own parts and product line but
contract such supply and manufacture to third parties. The failure by any of our vendors, suppliers
or contractors to fulfill their contractual obligations to us could adversely affect our
operations. If we are unable to obtain sufficient components and manufacturers for our products, or
develop alternative sources, delays in product introductions or shipments could occur and could
have a material adverse effect on our results of operations. SeeDescription of
BusinessManufacturing. 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. As of December 31, 2004, Amphion Ventures LP and affiliates of Amphion Ventures LP, including
Amphion Partners, Amphion Investments, Antiope Partners, Amphion Capital Partners (formerly NVW,
LLC), Amphion Capital Management LLC 11




---



##### Table of Contents



and VennWorks LLC (formerly incuVest LLC) (collectively, the Amphion Group) owned
approximately 65% of our outstanding voting stock. This level of ownership provides the Amphion
Group with the power to determine the outcome of almost any matter submitted for the vote or
consent of our stockholders. Additionally, two of our five directors are affiliates of the Amphion
Group. SeeSecurity Ownership of Certain Beneficial Owners and Management. 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. The price of our common stock has been highly volatile and may continue to be highly volatile.
For instance, from November 1, 2002 through December 31, 2004, our common stock traded from a low
of $.025 to a high of $3.60 per share. The price of our common stock has experienced, and may
continue to experience, significant volatility in response to many factors, some of which are
beyond our control and may not even be directly related to us, including:  
    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. In addition, in recent years, the stock market has experienced extreme price and volume
fluctuations, which have often been unrelated or disproportionate to the operating performance of
particular companies. This volatility has significantly affected and may continue to affect, the
price of our common stock and may adversely affect your ability to sell your shares and our ability
to raise additional capital. SeeMarket and Common Equity and Related Stockholder Matters. Our common stock may be subject to penny stock rules and regulations. Federal rules and regulations under the Exchange Act regulate the trading of so-called penny
stocks, which generally refers to low-priced (below $5.00), speculative securities of very small
companies traded on the OTC Bulletin Board or in the Pink Sheets. Trading, if any, in shares of our
common stock may be subject to the full range of penny stock rules. Before a broker/dealer can sell
a penny stock, these rules require the broker/dealer to first approve the investor for the
transaction and obtain from the investor a written agreement regarding the transaction. The
broker/dealer must also furnish the investor with a document describing the risks of investing in
penny stocks. The broker/dealer must also tell the investor the current market quotation, if any,
for the penny stock and the compensation the broker/dealer will receive for the trade. Finally, the
broker/dealer must send monthly account statements showing the market value of each penny stock
held in the investors account. If these rules are not followed by the broker/dealer, the investor
may have no obligation to purchase the shares. Accordingly, these rules and regulations may make it
more expensive and difficult for broker/dealers to sell shares of our common stock, and purchasers
of our common stock may experience difficulty in selling such shares in secondary trading markets. 
 Item 2. DESCRIPTION OF PROPERTIES. Axcess leases a 6,509 square foot facility in Carrollton, Texas, which is used for
administrative, engineering and sales offices. This facility is rented on a one year agreement that
expires in October of 2005. The monthly rent is $5,000. We also lease 1,500 square feet in Costa
Mesa, California, which is used for engineering space. The lease will terminate in September 2005
and the monthly rent is $1,850. We believe these facilities are suitable and adequate to
accommodate our operations. We consider each of these facilities to be in good condition and it is
our opinion that the facilities are adequately covered by insurance. 
 Item 3. LEGAL PROCEEDINGS. Axcess is engaged in a number of lawsuits with approximately eight vendors who claim they are
owed amounts from $500 to $45,000, which aggregates in total $104,205. We are currently defending
or seeking to settle each of the vendors claims. At December 31, 2004, we had accrued the
delinquent amounts we expect to be liable for, for the claims described in this paragraph. 12




---



##### Table of Contents



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 
 PART II 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Axcess common shares trade on the over-the-counter bulletin board under the symbol AXSI.BB.
Prior to September 2002, our common stock traded on the NASDAQ SmallCap Market tier of the NASDAQ
Stock Market under the symbol AXSI. We were notified in September of 2002 that we no longer
qualified for the NASDAQ SmallCap minimum listing requirements. The table below sets forth high and
low closing prices for our common stock during each of the periods indicated, as reported the
over-the-counter bulletin board by NASDAQ. Such price quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent actual
transactions. 2004
    
    
    2003QUARTER ENDED
    
    LOW
    
    
    HIGH
    
    
    LOW
    
    
    HIGHMarch 31
    
    $
    1.80
    
    
    $
    2.25
    
    
    $
    0.30
    
    
    $
    0.88June 30
    
    
    1.95
    
    
    
    3.60
    
    
    
    0.56
    
    
    
    2.55September 30
    
    
    1.90
    
    
    
    2.65
    
    
    
    2.20
    
    
    
    2.85December 31
    
    
    1.40
    
    
    
    2.10
    
    
    
    1.95
    
    
    
    2.59
 As of March 28, 2005, we had approximately 695 holders of record of voting common stock. Axcess has not paid dividends on our common stock and does not anticipate the payment of cash
dividends in the foreseeable future, as we contemplate retaining all earnings to finance the
continued growth of our business. Equity Compensation Plans Information concerning the 2001 Equity Incentive Plan and the 1998 Directors Compensation Plan
is presented in the table that follows. See Item 13. Stock Options and Warrants in the notes to
the financial statements. 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
    
    
    3,288,414
    
    
    $
    2.37
    
    
    
    1Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,288,414
    
    
    $
    2.37
    
    
    
    1
 Recent Sale of Unregistered Securities During 2004, we issued unregistered securities in connection with each of the transactions
described below. The issuance of the Preferred Stock, common stock and promissory notes were exempt
from the registration requirements of the Securities Act by virtue of Sections 4(2) and 4(6)
thereof as a transaction not involving a public offering and made solely to accredited investors.
An appropriate restrictive legend was affixed to the stock certificates and warrants. Convertible Promissory Note On July 30, 2002, the Company entered into a bridge financing agreement with ten accredited
investors for the sale and issuance of 10 units to the investors for an aggregate purchase price
of $1,000,000. Each unit consists of a convertible promissory note in the amount of $100,000 and
25,000 shares of the Companys common stock. Each investor has agreed to not sell more than
one-third of the common stock comprising the units during any calendar month. The convertible
promissory notes comprising the units bear interest at an annual rate of 7% and mature on July 30,
2005. On each of July 30, 2003, July 30, 2004 and July 30, 2005, the investors have the option to
convert one-third of the principal amount of the notes into common stock of the Company. The
conversion price of the notes is initially 65% of the average closing price of a share of the
Companys common stock for the 20 trading days preceding the given 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. The conversion price will be subject to adjustment from time to time to reflect
any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split or similar change in the Companys shares of common stock. The Company without premium or
penalty may prepay the notes in whole or in part. 13




---



##### Table of Contents



During 2004, nine holders elected to convert $500,000 of their notes plus $122,313 of accrued
interest into 399,721 shares of Axcess common stock, which were issued during 2004. On January 17, 2003, Axcess entered into a bridge financing agreement with ten accredited
investors for the sale and issuance of 3.05 units to the investors for an aggregate purchase
price of $305,000. Each unit consists of a convertible promissory note in the amount of $100,000
and 50,000 unregistered shares of our common stock. Pursuant to the bridge financing agreement, we registered the shares of common stock
comprising the units of the bridge financing agreement. By agreement, each investor may not sell
more than one-third of the common stock comprising the units during any calendar month. The
convertible promissory notes comprising the units bear interest at an annual rate of 7% and mature
on January 31, 2006. On each of January 31, 2004, January 31, 2005 and January 31, 2006, the
investors have the option to convert one-third of the principal amount of the notes into common
stock of Axcess. The conversion price of the notes is initially 65% of the average closing price of
a share of our common stock for the twenty trading days preceding the given 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. The conversion price will be subject to adjustment from time to time to reflect
any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split or similar change in our shares of common stock. The notes may be prepaid in whole or in part
by us without premium or penalty. During 2004 nine holders elected to convert $68,333 of their note plus $18,646 of accrued
interest into 72,947 shares of Axcess common stock, which were issued during 2004. During 2004 the
Board elected to convert $9,018 of accrued and unpaid interest into 3,681 shares of Axcess common
stock. 2003 Preferred Equity Offering We completed a $1,537,500 exempt Preferred Stock Offering during May of 2003. The Preferred
Stock is designated as 2003 Preferred and 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 purchase our common stock exercisable for two years at $1.00 per share. The offering
also included an automatic conversion into Common Stock on a one for one basis if the closing
twenty-day average stock price is over $2.00. On June 5, 2003 the closing twenty-day average was at
$2.02 and the 2003 Preferred converted to 2,050,001 shares of Common Stock. In December 2003, we
completed an SB-2 registration registering the common shares issued in relation to the 2003
Preferred Equity Offering. In December 2004, we completed an SB-2 registration registering the
common shares underlying the warrants issued in connection with the 2003 Preferred Equity Offering. 2003B Preferred Equity Offering In November 2003, Axcess raised a net of approximately $2,500,000 of additional working
capital through an exempt Section 4(6) and a Section 4(2) private offering of Preferred Stock to
accredited institutional investors. The Preferred Stock is designated as 2003B Preferred and 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 Axcess common stock exercisable for two years at
$2.75 per share. Each share of Series 2003B Preferred Stock is automatically convertible into
voting common stock on a share-for-share basis (i) when Axcess achieves a full quarter of positive
earnings before interest, taxes depreciation and amortization or (ii) when the share price
surpasses $3.75 based on the average closing per share price for the 20 trading days preceding. In
connection with the 2003B Preferred Stock offering including commissions, Axcess issued 1,570,000
shares of the 2003B Preferred Stock, 157,000 shares of common stock and 1,695,000 warrants. In December 2003, Axcess raised a net of approximately $362,250 of additional working capital
through a second closing of the 2003B Preferred. In connection with the second close of the 2003B
Preferred Stock offering including commissions; Axcess issued 220,000 shares of 2003B Preferred and
240,000 warrants. In December 2004, we completed an SB-2 registration registering the common shares underlying
the warrants issued in connection with the 2003B Preferred Equity Offering. 2004 Preferred Equity Offering During the second quarter of 2004 the Company raised a net of approximately $1,200,000 of
additional working capital through an exempt Preferred Stock offering. The Preferred Stock is
designated as 2004 Preferred and consists of 625,000 shares of Preferred Stock bearing a 7%
dividend and 357,142 warrants to purchase the Companys common stock exercisable for two years at
$3.20 per share. The offering also included an automatic conversion into common stock on a one for
one basis if the closing twenty-day average stock price is over $4.00 per share or when we achieve
a full quarter of profitability. VennWorks LLC In December 2003, VennWorks agreed to convert the entire amount of their outstanding demand
notes ($1,130,233) plus all accrued unpaid dividends ($171,240) into 1,831,332 common shares and an
equal number of warrants priced at $2.75 14




---



##### Table of Contents



that will expire in two years from their date of issue. The shares were issued during 2004. In
December 2004, we completed an SB-2 registration registering the common shares underlying the
warrants issued with conversion. Amphion Ventures, LP Axcess reached an agreement with Amphion Ventures LP with regards to the notes between the
Parties. Axcess was indebted to Amphion Ventures LP for $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 off against each other there by reducing the debt owed Amphion
Ventures LP by Axcess to $818,722. Amphion Ventures LP also agreed to convert the remaining amount
of demand notes and accrued interest into 294,476 common shares and an equal number of warrants
priced at $2.75 that will expire in two years. The shares were issued during 2004. In December
2004, we completed an SB-2 registration registering the common shares underlying the warrants
issued with conversion. PV Proceeds Holdings, Inc. Axcess reached an Agreement to Amend Purchase Note and Payment Term with PV Proceeds Holdings,
Inc. the holders of a $4.0 million of non-interest bearing note that was due December 31, 2002 and
in default. PV Proceeds consented to a five-year extension of the note with an interest rate of 5%
per annum from January 1, 2003 payable in full at maturity of December 31, 2007. As further
consideration for entering into the agreement Axcess granted to PV Proceeds Holdings, Inc. a
warrant to purchase up to 500,000 shares of common stock of Axcess. The warrants have an exercise
price of two dollars ($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 new note is paid. Axcess has
also agreed to certain provisions that would further reduce the principal amount over time. In
December 2004, we completed an SB-2 registration registering the common shares underlying the
warrants issued with the extension. On October 10, 2003 PV Proceeds Holdings, Inc. elected to convert their Series 1999 Preferred
Stock plus accrued dividends into 692,142 shares of Axcess common stock contingent upon this
Registration Statement becoming effective within 90 days from the date hereof. The shares were
issued during 2004. On December 2, 2003, our SB-2 Registration statement went effective. PV
Proceeds Holdings, Inc. has agreed to certain limitations on the sale of these shares based on our
current and future share trading volumes. JP Morgan SBIC LLC (formerly known as J.P. Morgan Investment Corporation) Axcess issued to JP Morgan a Senior Promissory Note (Note) originally entered on June 25,
1997 and the last amendment was on April 12, 2002. The Note was due on December 31, 2003 and as of
December 31, 2003 has an outstanding principal balance of $400,000 and unpaid interest thereon of
$169,796. JP Morgan agreed to convert that amount of notes and accrued interest into 227,918
common shares. The shares were issued during 2004. JP Morgan agreed to convert $28,018 of Preferred Series J (including accrued dividends) into
11,173 shares of common stock of Axcess. JP Morgan also agreed to convert $106,795 of Preferred
Series I (including accrued dividends) into 42,590 shares of common stock of AXCESS. The shares
were issued during 2004. Antiope Partners LLC Antiope Partners LLC agreed to convert $759,900 of Preferred Series I (including accrued
dividends) into 303,960 shares of common stock of Axcess. Antiope Partners LLC also agreed to
convert $1,816,719 of Preferred Series J (including accrued dividends) into 726,688 shares of
common stock of Axcess. The shares were issued during 2004. Jackson Hole Jackson Hole agreed to convert $427,300 of Preferred Series C (including accrued dividends)
into 173,858 shares of common stock of Axcess. Jackson Hole also agreed to convert $170,520 of
Preferred Series J (including accrued dividends) into 68,208 shares of common stock of Axcess. The
shares were issued during 2004. Ardinger Ardinger agreed to convert $621,922 of Preferred Series I (including accrued dividends) into
248,769 shares of common stock of Axcess. Ardinger also agreed to convert $24,119 of Preferred
Series J (including accrued dividends) into 9,648 shares of common stock of Axcess. The shares were
issued during 2004. Common Stock for Services Rendered On July 16, 2004 we issued 25,000 restricted common shares to Equitis, Inc. to compensate them
for services provided to Axcess. During 2004 we cancelled 100,000 unvested shares that had been
issued to MRB for services rendered. 15




---



##### Table of Contents



Common Stock During 2004 we had four employees exercise 85,800 stock options. Other Matters relating to future amortizable charges As of December 31, 2004 we have $830,455 of debt discount and deferred debt issuance costs on
our balance sheet, which will be amortized using the effective interest rate over lives of the
related debt. In connection with the issuance of the 2003B Preferred Stock, we recorded preferred
stock dividend requirements of $1,782,831 that will be reflected as preferred stock dividends in
the income statement as the underlying preferred stock converts to common stock. In connection with
the issuance of the 2004 Preferred Stock, we recorded preferred stock dividend requirements of
$1,002,540 that will be reflected as preferred stock dividends in the income statement as the
underlying preferred stock converts to common stock. 
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Recent Developments: Going Concern and Liquidity Problems Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial statements at December 31, 2004. The paragraph states that our recurring
losses from operations and resulting continued dependence on access to external financing raise
substantial doubts about our ability to continue as a going concern. Furthermore, the factors
leading to and the existence of the explanatory paragraph may adversely affect our relationship
with customers and suppliers and have an adverse effect on our ability to obtain financing. We do not have sufficient working capital to sustain our operations. We have been unable to
generate sufficient revenues to sustain our operations. We will have to obtain funds to meet our
cash requirements through business alliances, such as strategic or financial transactions with
third parties, the sale of securities or other financing arrangements, or we may be required to
curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws.
Any of the foregoing may 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 raising
additional funds or entering into business alliances. Sales and Marketing Initiatives In the past our sales volume has not been sufficient to sustain our operations. During 2004 we
were able, through the recent financing, to initiate a new marketing emphasis, which is intended by
us to build sales, primarily of our RFID products. During 2005, we are optimistic about our ability
to grow the business. We continue to see broad-based awareness and acceptance of RFID as whole
world-wide. Our three accomplishments during 2004 which should assist in growing revenue during
2005 are:  1.
    We were able to secure a number of important reference accounts in 2004;2.
    We grew the integrator channel;3.
    We began our thrust into Supply Chain tagging. While there can be no assurance that our efforts will be successful, we believe that these
accomplishments will assist us in our goal of becoming profitable. See Risk Factors. Results of Operations Sales and Gross Profit.Sales for the year ending December 31, 2004 and 2003 were $911,565 and
$915,825, respectively. We realized gross profits of $457,476 in 2004 and $204,899 in 2003. One
customer accounted for 14% of total revenue in 2004 and three customers accounted for 28% of total
revenue in 2003. Cost of sales for the year ended December 31, 2004 and 2003 were $439,215 and
$562,060, respectively. We also recorded a charge of $14,874 for inventory impairment during the
year ended December 31, 2004 compared to $148,866 for the year ended December 31, 2003. The
impairment was as a result of the change in strategy from self-manufacturing to contract
manufacturing. The amount reflects items that have not been able to be used by our contract
manufacturers in the building of additional products. The decrease in sales was as a result of the
change of focus from video to RFID during 2003. The margin improvement (excluding inventory
impairment charge) is driven by the production staff not being at full capacity and continued move
towards contract manufacturing. Radio frequency identification (RFID) product sales were $772,475 and $587,100 for the year
ended December 31, 2004 and 2003, respectively. Cost of sales was $378,956 for the year ended
December 31, 2004 and $374,727 for the year ended December 31, 2003. We also recorded a charge of
$5,498 and $35,746 for inventory impairment during the year ended December 31, 2004 and 2003,
respectively. The impairment was as a result of our change in strategy from self-manufacturing to
contract manufacturing. The amount reflects items that have not been able to be used by our
contract manufacturers in the building of additional products. As a result, gross profits from RFID
products were $388,021 for the year ended December 31, 2004 and $176,627 for the year ended
December 31, 2003. The increase in gross margin is related to improved utilization of the 16




---



##### Table of Contents



production costs, reduction in warranty expense and more favorable prices from our contract
manufactures. One customer accounted for 16% and two customers accounted for 26% of the RFID sales
during 2004 and 2003, respectively. Digital video product sales were $139,090 and $328,725 for the year ended December 31, 2004
and 2003, respectively. Cost of sales was $60,260 for the year ended December 31, 2004 and
$187,333 for the year ended December 31, 2003. We also recorded a charge of $9,375 and $113,120 for
inventory impairment during the year ended December 31, 2004 and 2003, respectively. The
impairment was as a result of our change in strategy from self-manufacturing to contract
manufacturing. The amount reflects items that have not been able to be used by our contract
manufacturers in the building of additional products. As a result, gross profits from digital
video products were $69,455 for the year ended December 31, 2004 and $28,272 for the year ended
December 31, 2003. The increased margin percent was primarily due to improved utilization of the
production costs, reduction in warranty expense and the decrease in inventory impairment. Three
customers accounted for 65% of the video sales during both 2004 and 2003. Operating Expenses.Operating expenses were $3,276,932 and $2,641,681 in 2004 and 2003,
respectively. This increase was due to increased salaries, increased advertising, additional
research and development and the hiring of outside professional services companies. Research and development expenses were $718,278 in 2004 and $632,974 in 2003. The increase is
a result of increased salaries from the recession of the pay reduction implemented during 2003,
increase in contract labor for a software development project and some additional travel offset by
the downsizing of the California facility, fewer prototype projects and completion of Canadian
certification testing. Corporate general and administrative expenses were $1,528,937 and $1,287,944 in 2004 and 2003,
respectively. The increase is a result of increased salaries from the recession of the pay
reduction implemented during 2003 and increased spending on investor relations firms. However, we
were able to offset some of that increase with a reduction in legal expenses, reduction in
insurance expense and lower telephone costs. Selling and marketing expenses were $827,323 and $280,190 in 2004 and 2003, respectively. The
increase is a result of increased salaries from the recession of the pay reduction implemented
during 2003, increased headcount, additional market research and an increase in advertising. We
attended several trade shows during 2004 as well as placed several advertisements. We are
attempting to reestablish our place in the market. Based on independent market research received
during 2004, we decided to enter the transportation and logistics segment. To that effect in the
second half of 2004 we added two key senior level sales and marketing vice presidents. During 2004
we also attempted to increase our level of marketing and advertising to drive more sales. Depreciation and amortization expenses were $202,394 for 2004 compared to $440,573 for 2003.
The decrease is related to lower amortization expense related to our intangible assets and lower
depreciation expense as a result of the age of the equipment, the closing of the Georgia facility
and the downsizing of the California and Texas facilities. Other expenses, net. Other expenses, net, were $597,096 and $7,134,877 in 2004 and 2003,
respectively. During 2003, we exchanged and modified a significant amount of our debt for common
shares and warrants. As a result of those transactions we recorded a charge of $6,328,527 for the
excess of the value of the shares and warrants issued over the book value of the notes and had a
reduction of interest expense of $367,625 in 2004 compared to 2003. We also were able to continue
to settle several accounts payable issues relating to prior periods at a discount from the accrued
amounts. During 2004 we had settlements from vendors of $177,787 compared to $355,848 during 2003. Net Loss. Net loss was $3,416,552 and $9,571,659 in 2004 and 2003, respectively. The decrease
is due primarily to the expenses related to the balance sheet restructuring in 2003, lower
inventory impairment and reduced interest expense. Offset by increased salaries from the recession
of the pay reduction implemented during 2003, increased selling and marketing headcount and
advertising, an increase in investor relations fees and a reduction in gains on settlements of
account payables. Preferred Stock dividend requirements.Preferred Stock dividend requirements were $299,481 in
2004 compared to $1,841,670 in 2003. The decrease was primarily due to the recording of a
beneficial conversion discount of $614,516 for the 2003 preferred stock converted during 2003 and
the significant reduction in the number of preferred shares outstanding in 2004. Liquidity and Capital Resources Since inception, we have utilized the proceeds from a number of public and private sales of
our equity securities, the exercise of options and warrants and more recently, convertible debt,
short-term bridge loans from stockholders and preferred equity offerings to meet our working
capital requirements. At December 31, 2004, we had working capital deficit of $1,006,650. Our operations continued to generate losses in 2004. Our cash decreased $1,702,876 during 2004
with operating activities using $2,769,868 of cash. We funded operations primarily through
borrowings and equity offerings with financing activities providing net cash of $1,107,454. No
assurance can be given that such activities will continue to be available to provide funding to us.
Our business plan for 2005 is predicated principally upon the successful marketing of our RFID and
digital video products. We anticipate that our existing working capital resources and revenues from
operations will not be adequate to satisfy our funding requirements in 2005. 17




---



##### Table of Contents



Our working capital requirements will depend upon many factors, including the extent and
timing of our product sales, our operating results, the status of competitive products, and actual
expenditures and revenues compared to our business plan. We are currently experiencing declining
liquidity, losses from operations and negative cash flows, which make it difficult for us to meet
our current cash requirements, including payments to vendors, and may jeopardize our ability to
continue as a going concern. We intend to address our liquidity problems by controlling costs,
seeking additional funding (through capital raising transactions and business alliances) and
maintaining focus on revenues and collections. Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial statements at December 31, 2004. The paragraph states that our recurring
losses from operations and resulting continued dependence on access to external financing raise
substantial doubts about our ability to continue as a going concern. Furthermore, the factors
leading to and the existence of the explanatory paragraph may adversely affect our relationship
with customers and suppliers and have an adverse effect on our ability to obtain financing. If our losses continue, we will have to obtain funds to meet our cash requirements through
business alliances, such as strategic or financial transactions with third parties, the sale of
securities or other financing arrangements, or we may be required to curtail our operations, seek a
merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may 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 raising additional funds or entering into
business alliances. Other Matters relating to future amortizable charges As of December 31, 2004 we have $830,455 of debt discount and deferred debt issuance costs on
our balance sheet, which will be amortized using the effective interest rate over lives of the
related debt. In connection with the issuance of the 2003B Preferred Stock, we recorded preferred
stock dividend requirements of $1,782,831 that will be reflected as preferred stock dividends in
the income statement as the underlying preferred stock converts to common stock. In connection
with the issuance of the 2004 Preferred Stock, we recorded preferred stock dividend requirements of
$1,002,540 that will be reflected as preferred stock dividends in the income statement as the
underlying preferred stock converts to common stock. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 123R (SFAS 123R), a revision of SFAS No. 123 (SFAS 123),
Accounting for Stock-Based Compensation.This statement requires an entity to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The compensation expense will be recognized over the period during which
an employee is required to provide service in exchange for the award. Public entities that file as
small business issuers will be required to apply SFAS 123R in the first interim or annual reporting
period that begins after December 15, 2005. The adoption of SFAS 123R will require us to record
compensation expense for the unvested fair value of our equity instruments given to our employees.
We are in the process of evaluating the impact of the adoption of SFAS 123R on our financial
position and results of operations. However, the adoption of SFAS 123R will have no effect on our
cash flows, but will have an adverse impact on our results of operations. Critical Accounting Policies In preparing our consolidated financial statements in conformity with accounting principles
generally accepted in the United States, we must make a variety of estimates that affect the
reported amounts and related disclosures. The following accounting policies are currently
considered most critical to the preparation of our financial statements. If actual results differ
significantly from our estimates and projections, there could be a material effect on our financial
statements. Allowance for Doubtful Accounts We continually evaluates the creditworthiness of our customers financial condition and
generally do not require collateral. We evaluate the collectability of our accounts based on a
combination of factors. In circumstances where we are aware of a specific customers inability to
meet its financial obligations to us, we record a specific reserve for bad debts against amounts
due. We have not experienced significant losses on uncollectible accounts receivable. Inventory Valuation Inventories are stated at the lower of standard cost, which approximates actual cost
determined on a first-in, first-out basis, or estimated realized value. Adjustments to reduce
inventories to estimated realizable value, including allowances for excess and obsolete
inventories, are determined quarterly by comparing inventory levels of individual materials and
parts to historical usage rates, current backlog and estimated future sales. Actual amounts
realized upon the sale of inventories may differ from estimates used to determine inventory
valuation allowances due to changes in customer demand, technology changes and other factors. 18




---



##### Table of Contents



Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and identifiable intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the assets based on estimated
future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Revenues from the sale of products utilizing our purchased
technologies have grown slowly. We believe that assumptions made in projecting future cash flows
for this evaluation are reasonable. However, if future actual results do not meet our expectation,
we may be required to record an additional impairment charge, the amount of which could be material
to the results of its operations and financial position. Revenue Recognition and Warranty Costs We recognize revenue on sales of our products when the products are shipped from our facility
in Carrollton, Texas. Our policy does not allow customers to return products for credit. We
currently provide a one-year warranty on all products. Provision is made at the time the related
revenue is recognized for estimated product repair costs. Deferred Tax Valuation Allowance Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the total of tax payable for the period and the change during the period in deferred
tax assets and liabilities. Other Inflation.Inflation has not had and is not expected to have a material impact on the
operations and financial condition of Axcess. Seasonality.Seasonality has not had and is not expected to have a material impact on the
operations and financial condition of Axcess. 
 Item 7. FINANCIAL STATEMENTS. PageReport of Hein & Associates LLP, Independent Registered Public Accounting Firm
    
    F-1Consolidated Financial Statements:Consolidated Balance Sheets at December 31, 2004 and 2003
    
    F-2Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003
    
    F-3Consolidated Statements of Stockholders Deficit for the
Years Ended December 31, 2004 and 2003
    
    F-4Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003
    
    F-6Notes to Financial Statements
    
    F-7
 
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no reportable events of the type described in Item 304(a)(1)(iv) of Regulation S-B. 
 Item 8A. CONTROLS AND PROCEDURES. As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act), we
carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2004. This evaluation was carried out under the
supervision and with the participation of our Chief Executive. Based upon that evaluation, our
Chief Executive and Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting management to material information relating to us required to be
included in our periodic SEC filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls subsequent to the
date we carried out our evaluation. 19




---



##### Table of Contents



Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive, to allow timely decisions regarding required disclosure. 
 PART III 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT. Management of Axcess The Board elects executive officers annually at its first meeting following the annual meeting
of stockholders. The following table sets forth, as of March 28, 2005, Axcess directors, executive
officers and significant employees, their ages, and their positions within Axcess. Name
    
    Age
    
    Position
    
    CommitteeRichard C.E. Morgan
    
    60
    
    Chairman of the Board of Directors
    
    (1) (3) (4)Allan Griebenow
    
    52
    
    Director, President and Chief Executive Officer
    
    (1) (4)Allan L. Frank
    
    41
    
    Vice President, Secretary and Chief Financial OfficerRobert J. Bertoldi
    
    50
    
    Director
    
    (2) (4)Paul J. Coleman, Jr.
    
    73
    
    Director
    
    (2) (4)Robert F. Hussey
    
    55
    
    Director
    
    (2) (3) (4)Jim A. Ferguson
    
    63
    
    Vice President, Strategic SalesPeter J. Dehring
    
    42
    
    Vice President, Marketing
   (1)
    
    Executive Committee(2)
    
    Audit Committee(3)
    
    Compensation Committee(4)
    
    Nominating and Governance Committee Richard C. E. Morganhas served as a director and Chairman of the Board of the company since
1985. Since 2003 Mr. Morgan has been Chairman and Chief Executive Officer of Amphion Capital
Partners LLC a private equity and venture firm that he co-founded. In November 1999, Mr. Morgan
co-founded VennWorks LLC, a venture capital company and since then has served as its Chairman and
Chief Executive Officer. In 1995, Mr. Morgan co-founded Amphion Capital Management, LLC, a private
equity and venture capital firm, and since then has served as one of its Managing Members. From
1986 Mr. Morgan has been a Managing Member of Wolfensohn Partners, LP, (now known as Amphion
Partners LLC), the General Partner of Wolfensohn Associates LP (known as Amphion Ventures LP) a
technology and life science fund. Mr. Morgan serves on the Board of Directors of Celgene Corp.,
which develops and markets biotechnology products. Mr. Morgan is also a director of several private
and non-profit companies, including Orbis International, Inc., a non-profit organization dedicated
to fighting blindness worldwide. Allan Griebenowhas served as a director, President and Chief Executive Officer of the Company
since July 1999. He founded Prism Video, Inc. in 1994 and was Chief Executive Officer of Prism
Video, Inc. from 1994 to July 1999. Mr. Griebenow was President, CEO and a Director of PV Holdings,
Inc. until December 2003. Mr. Griebenow spent the past twenty years in the telecommunications and
advanced applications industries. He started his career in 1979 as a Presidential Management Intern
with NASA, and holds a B.S. in Business Administration from the University of Maryland and an MBA
from San Francisco State University. Allan L. Frankhas 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 from Paging Network, Inc.
(PageNet). Vast Solutions, Inc. filed for bankruptcy in April 2001. From September 1993 through
July 1999, Mr. Frank served in numerous positions at PageNet, including as Vice President of
Corporate Development and Director of Financial Analysis, and as Director of International Finance
for Paging Network International, a subsidiary of PageNet. Prior to PageNet, Mr. Frank worked at
FoxMeyer Corporation, OrNda HealthCare and Dalfort Aviation Services. Mr. Frank holds a B.S. in
Business Administration from The Ohio State University and an MBA from the University of North
Texas. Robert J. Bertoldihas been a director of the Company since June 2000. Since 2003 he has been
the President and Chief Financial Officer of Amphion Capital Partners LLC a private equity and
venture capital firm that he co-founded. Since January 2000, Mr. Bertoldi has been the President
of VennWorks, LLC, a venture capital company that he co-founded. Since 1995, Mr. Bertoldi has been
a Managing Member of Amphion Capital Management, LLC, a private equity and venture capital 20




---



##### Table of Contents



firm, and of Amphion Partners LLC, the General Partner of Amphion Ventures LP, a technology
and life science fund. Prior to 1995 Mr. Bertoldi served as the Chief Financial Officer of James
D. Wolfensohn Inc. and Hambro America Inc. Paul J. Coleman, Jr.has served as a director of the Company since 1982. He is President and
Chief Executive Officer of the Girvan Institute of Technology, a non-profit, public benefit
corporation engaged in research, technology development, and education related to high-technology
enterprise. Dr. Coleman is an emeritus professor of space physics at the University of California
at Los Angeles (UCLA). He currently serves as a director of Knowledge Vector, Inc., Girvan
Ventures, Inc. Moffett Management Pvt. Ltd., and the Girvan Institute. He is a former director of
CACI International, Fairchild Space and Defense Corporation, the Universities Space Research
Association (USRA) and others. He has held positions as assistant director of the Los Alamos
National Laboratory; president and chief executive officer of USRA, (managing) director of the
Institute of Geophysics and Planetary Physics at UCLA; and (managing) director of the National
Institute for Global Environmental Change of the U.S. Department of Energy. Robert F. Husseyhas served on the Board since September 2002. Mr. Hussey currently serves as
Chief Operating Officer and Director of H.C. Wainwright & Co. and interim President, CEO and
Director Digital Lightwave, Inc. Mr. Hussey also serves on the boards of i2Telecom, Inc., NUR
Corporation, Distributed Power Corporation and on the board of advisors for Argentum Capital
Partners. From 1991 through 1996, Mr. Hussey served as President, CEO and 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. in Business Administration from Georgetown
University and an MBA in International Business from George Washington University. James A. Fergusonhas served as Vice President, Strategic Sales since June 2004. From June
2002 through May 2004, Mr. Ferguson was Vice President, Business Development for Innovision
Research & Technology PLC, a United Kingdom based application specific integrated circuit (ASIC)
design organization. From 2000 to 2002, Mr. Ferguson served as National Sales Manager with Axcess.
From 1997 to 2000, Mr. Ferguson served as Regional Sales Manager with Prism Video, Inc. Mr.
Ferguson has served in numerous technology sales positions with Xerox Corporation and Wang
Laboratories. Mr. Ferguson was a commission USAF officer from 1967 to 1972. Mr. Ferguson holds a
B.S. in Business Administration from the University of Arizona and a M.S. from Ball State
University. Peter J. Dehringhas served as Vice President, Marketing since July 2004. From 2003 through
2004, Mr. Dehring was Director, Reorganization for Adelphia Communications. From 2000 to 2001, Mr.
Dehring served as a Principal and Associate Director for Arthur D. Little Management Consulting.
From 1996 to 2000, Mr. Dehring was Senior Director for U S West / Qwest Communications and from
1994 to 1996 he was Managing Consultant for A T Kearney Management Consulting. Mr. Dehring holds a
B.S. from the Louisiana State University and an MBA from Tulane University. Section 16(a) Beneficial Ownership Reporting Compliance Under Section 16(a) of the Exchange Act, directors, certain officers and beneficial owners of
10% or more of the Companys Voting Common Stock are required from time to time to file with the
Securities and Exchange Commission reports on Forms 3, 4 or 5, relating principally to transactions
in Company securities by such persons. Based solely upon a review of Forms 3, 4 and 5 submitted to
Axcess during and with respect to 2003, all of these individuals or entities timely filed their
respective Forms 3, 4 or 5 required by Section 16(a) of the Exchange Act during 2003, except for
Amphion Ventures, LP and VennWorks LLC. Each of Amphion Ventures and VennWorks failed to file Form 4s to report the issuance in 2003
by Axcess of promissory notes convertible into common stock, the conversion of shares of preferred
stock into common stock, the conversion of demand notes in to common stock, the purchase of
Convertible debt. These transactions are described more fully under Item 12. Certain
Relationships and Related Transactions Amphion Ventures, LP Promissory Note Issuances and
Conversions, Item 12. Certain Relationships and Related TransactionsVennWorks LLC Promissory
Note Issuances and Conversions, and Item 12. Certain Relationships and Related
TransactionsPreferred Stock Conversions. 21




---



##### Table of Contents



Item 10. EXECUTIVE COMPENSATION. The following table summarizes the compensation earned by Axcess Chief Executive Officer and
Axcess two other most highly compensated executive officers (whose annualized compensation
exceeded $100,000) (collectively called the named executive officers), for services rendered in
all capacities to Axcess during the fiscal years ended December 31, 2004 through 2002. Summary Compensation TableAnnual

    
    Long-Term

    
    All OtherCompensation

    
    Compensation

    
    CompensationSecuritiesSalary

    
    Bonus

    
    Underlying OptionsName and Principal Positions
    
    Year

    
    ($)

    
    ($)

    
    (#)

    
    ($)Allan Griebenow
    
    
    2004
    
    
    
    230,946
    
    
    
    
    
    
    
    156,568
    
    
    
    President and Chief Executive Officer
    
    
    2003
    
    
    
    177,651
    
    
    
    
    
    
    
    163,000
    
    
    
    2002
    (1)
    
    
    182,090
    
    
    
    
    
    
    
    85,000
    
    
    
    Allan L. Frank
    
    
    2004
    
    
    
    180,937
    
    
    
    
    
    
    
    147,968
    
    
    
    Vice President, Secretary
    
    
    2003
    
    
    
    139,448
    
    
    
    
    
    
    
    100,000
    
    
    
    And Chief Financial Officer
    
    
    2002
    (2,3)
    
    
    103,039
    
    
    
    
    
    
    
    285,000
    
    
    
    James A. Ferguson
    
    
    2004
    (4)
    
    
    49,096
    
    
    
    
    
    
    
    75,000
    
    
    
    Vice President, Strategic Sales
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    (5)
    
    
    38,306
    
    
    
    
    
    
    
    
    
    
    
    Peter J. Dehring
    
    
    2004
    (6)
    
    
    73,365
    
    
    
    
    
    
    
    100,000
    
    
    
    Vice President, Marketing
   (1)
    
    Includes $11,528 of accrued salary expense that Axcess has not paid.(2)
    
    Represents compensation earned from March 2002, when Mr. Frank joined Axcess.(3)
    
    Includes $8,403 of accrued salary expense that Axcess has not paid.(4)
    
    Represents compensation earned from June 2004, when Mr. Ferguson rejoined Axcess.(5)
    
    Mr. Ferguson resigned his position as of May 31, 2002.(6)
    
    Represents compensation earned from July 2004, when Mr. Dehring rejoined Axcess. Stock Option Grants in 2004 to Axcess Named Executive Officers The following table provides information regarding the stock options granted by us to the
named executive officers during the fiscal year ended December 31, 2004. Other than those persons
listed in the following table, we did not grant any stock options to any other named executive
officers. One-fourth of each of the options listed in the table below vested on the anniversary of
the grant date. Option Grants in Last Fiscal YearIndividual GrantsNumber of
    
    
    
    
    
    
    ExerciseSecurities
    
    
    % of
    
    
    Or BaseUnderlying
    
    
    Total Options
    
    
    PriceOptions
    
    
    Granted to
    
    
    ($ / share)
    
    
    ExpirationName
    
    Granted (#)
    
    
    Employees
    
    
    (1)
    
    
    DateAllan Griebenow
    
    
    156,568
    
    
    
    17%
    
    
    $
    2.00
    
    
    
    03/16/2014Allan L. Frank
    
    
    147,968
    
    
    
    16%
    
    
    $
    2.00
    
    
    
    03/16/2014James A. Ferguson
    
    
    75,000
    
    
    
    8%
    
    
    $
    2.45
    
    
    
    08/25/2014Peter J. Dehring
    
    
    100,000
    
    
    
    11%
    
    
    $
    2.55
    
    
    
    08/25/2014
   (1)
    
    The exercise price is equal to the closing price of our Common Stock on the date of the grant. 22




---



##### Table of Contents



Aggregate Option Exercises in 2004 by Axcess Executive Officers The following table provides information as to options exercised, if any, by each of the named
executive officers in 2004 and the value of options held by those officers at year-end measured in
terms of the last reported sale price for the shares of our Voting Common Stock on December 30,
2004 ($1.75 as reported on the Over-The-Counter Bulletin Board). Shares
    
    
    
    
    
    
    Number of Securities
    
    
    Value of UnexercisedAcquired
    
    
    
    
    
    
    Underlying Unexercised
    
    
    In-the-Money Options atOn
    
    
    Value
    
    
    Options at December 31, 2004
    
    
    December 31, 2004Name
    
    Exercise
    
    
    Realized
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableAllan Griebenow
    
    
    
    
    
    $
    
    
    
    
    892,406
    
    
    
    236,666
    
    
    $
    222,175
    
    
    $
    2,125Allan L. Frank
    
    
    
    
    
    $
    
    
    
    
    242,500
    
    
    
    290,468
    
    
    $
    137,125
    
    
    $
    2,125James A. Ferguson
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    75,000
    
    
    $
    
    
    
    $
    Peter J. Dehring
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    100,000
    
    
    $
    
    
    
    $
    
 Compensation of the Companys Directors The current policy of Axcess is to pay each director who is not employed by us and who does
not beneficially own more than five percent of the shares of common stock outstanding the
compensation set forth in the Director Compensation Plan. Under the Director Compensation Plan,
each eligible director receives an annual grant of 10,000 options to acquire common stock at an
exercise price equal to the fair market value per share of the common stock at the time the option
is granted. The annual grant customarily takes place shortly after each annual meeting of our
stockholders. All new board members receive 50,000 options to acquire common stock at an exercise
price equal to the fair market value per share of the common stock on the date the board member is
elected by our stockholders. All new board members will also be eligible to receive the annual
grant. We have temporarily suspended paying any cash to eligible directors for preparing and
attending meetings of directors and committees until we report quarterly net earnings. Once we have
reported net earnings for a fiscal quarter, we will reconsider paying additional cash consideration
to eligible directors. While directors do not receive additional compensation for attending
meetings, we pay ordinary and necessary out-of-pocket expenses for directors to attend board and
committee meetings. Directors who are officers or employees of Axcess receive no fees for service
on the board or committees thereof. Employment Agreement with Mr. Griebenow On July 16, 1999, the Company entered into an agreement with Allan Griebenow, under which Mr.
Griebenow agreed to be the Companys president and chief executive officer. The agreement provides
that Mr. Griebenow will receive a salary equal to $17,917 per month, a bonus payable within 90 days
after the end of the Companys fiscal year of up to 30% of his base salary, and option grants to
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 time without cause, as defined in the employment agreement, then Mr.
Griebenow will be entitled to continue to receive his then current salary for the six-month period
following his termination. 
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number of shares of each class of stock beneficially owned
as of March 28, 2005, by each person known by Axcess to be the beneficial owner of more than five
percent of any class of our voting securities as of March 28, 2005. Except as noted below, to our
knowledge, each stockholder listed below has sole voting and investment power with respect to all
shares of stock shown beneficially owned by the stockholder. Name and Address of
    
    
    
    
    
    Amount and
    
    
    
    
    
    
    Percentage ofNature of
    
    
    Percentage
    
    
    CommonBeneficial Owner
    
    Title of Class

    
    Beneficial Owner
    
    
    of Class
    
    
    Voting PowerAmphion Group (1)
    
    Voting Common Stock
    
    
    20,302,864
    (2)
    
    
    55.0
    %
    
    
    51.1
    %330 Madison AvenueNew York, NY 10017
   (1)
    
    See the following table regarding the beneficial ownership of the Amphion Group.(2)
    
    Includes 3,134,056 shares that the Amphion Group has the right to acquire
pursuant to warrants and options that are exercisable within 60 days. The following table sets forth the number of shares beneficially owned by the Amphion Group,
which is defined to include Mr. Richard C.E. Morgan, a British citizen 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, LP, a Delaware limited partnership
(Amphion Ventures), 23




---



##### Table of Contents



Amphion Partners, LLC, a Delaware limited liability company (Amphion
Partners), Amphion Investments, LLC, a Delaware limited liability company (Amphion Investments),
Antiope Partners, LLC, a Delaware limited liability company (Antiope Partners), Amphion Capital
Management, LLC, a Delaware limited liability company (ACM), NVW,LLC a Delaware limited liability
company (NVW) and VennWorks, LLC, a Delaware limited liability company formerly known as incuVest,
LLC, (VennWorks). The Amphion Group disclaims in its filings with the Securities and Exchange Commission that it
holds any securities of the Company as a group, within the meaning of any applicable securities law
or regulation. Amphion Partners is the sole general partner of Amphion Ventures. Messrs. Morgan and
Bertoldi are the managing members of Amphion Partners, Antiope Partners and Amphion Investments.
Mr. Morgan is the Chairman of the Board of Directors and Chief Executive Officer of VennWorks. Mr.
Bertoldi is the President of VennWorks. Based on amended Schedule 13D filed by certain members of the Amphion Group with the 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 the shares held by Amphion Investments, Antiope Partners and certain other shares
held by Amphion Partners. Mr. Morgan disclaims beneficial ownership of the shares held by each of
the Amphion Group. VotingCommon
    
    
    Warrants
    
    
    Options
    
    
    TotalAmphion Ventures LP
    
    
    9,219,305
    
    
    
    795,472
    (1)
    
    
    
    
    
    
    10,014,777VennWorks LLC
    
    
    5,677,006
    
    
    
    1,831,332
    (2)
    
    
    
    
    
    
    7,508,338Antiope Partners LLC
    
    
    1,109,182
    
    
    
    
    
    
    
    
    
    
    
    1,109,182Amphion Capital Partners LLC
    
    
    568,136
    
    
    
    218,000
    (3)
    
    
    
    
    
    
    786,136Mr. Morgan
    
    
    506,354
    (4)
    
    
    41,689
    (5)
    
    
    63,323
    (6)
    
    
    611,366Mr. Bertoldi
    
    
    
    
    
    
    25,584
    (7)
    
    
    120,323
    (8)
    
    
    145,907Amphion Capital Management LLC
    
    
    16,700
    
    
    
    38,333
    (9)
    
    
    
    
    
    
    55,033Amphion Investments LLC
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    44,000Amphion Partners LLC
    
    
    28,125
    
    
    
    
    
    
    
    
    
    
    
    28,125Total of Amphion Group
    
    
    17,168,808
    
    
    
    2,950,410
    
    
    
    183,646
    
    
    
    20,302,864
   (1)
    
    Includes four different grants ranging in price ($2.10 to $2.75) and expiration
dates (September 30, 2005 to October 22, 2008).(2)
    
    Exercise price of $2.75 and expiration date of November 30, 2005.(3)
    
    Includes three different grants ranging in price ($1.00 to $2.75) and expiration
dates (May 15, 2005 to January 28, 2010).(4)
    
    Includes 104,584 shares of common stock issued to Mrs. Morgan, the wife of Mr.
Morgan.(5)
    
    Includes two different grants ranging in price ($1.00 to $1.50) and expiration
dates (May 15, 2005 to January 28, 2010)(6)
    
    Options to purchase 63,323 shares of common stock that are exercisable within 60
days.(7)
    
    Exercise price of $1.00 and expiration date of May 15, 2005.(8)
    
    Options to purchase 120,323 shares of common stock that are exercisable within 60
days.(9)
    
    Exercise price of $1.26 and expiration date of May 15, 2005. The following table sets forth the number of shares of each class of stock beneficially owned
as of March 28, 2005, by each director who beneficially owns equity securities and the executive
officers of Axcess, and all of our directors and executive officers as a group. The business
address of each director and executive officer is c/o Axcess International, Inc., 3208 Commander
Drive, Carrollton, Texas 75006. To Axcess knowledge, each stockholder listed below has sole voting
and investment power with respect to all shares of stock shown beneficially owned by the
stockholder, except for Mr. Morgans beneficial ownership, which is discussed in the introduction
to the previous table above. Amount andNature of
    
    
    Percentage

    
    PercentageName of
    
    
    
    
    
    Beneficial
    
    
    of
    
    
    of CommonBeneficial Owner
    
    Title of Class
    
    
    Owner
    
    
    Class
    
    
    Voting PowerRichard C.E. Morgan (1)
    
    Voting Common Stock
    
    
    17,168,808
    
    
    
    64.6
    %
    
    
    64.6
    %Robert J. Bertoldi (2)
    
    Voting Common Stock
    
    
    16,662,454
    
    
    
    62.7
    %
    
    
    62.7
    %Allan Griebenow (3)
    
    Voting Common Stock
    
    
    14,580
    
    
    
    *
    
    
    
    *Paul J. Coleman, Jr. (4)
    
    Voting Common Stock
    
    
    80
    
    
    
    *
    
    
    
    *Allan L. Frank (5)
    
    Voting Common Stock
    
    
    
    
    
    
    *
    
    
    
    *Robert F. Hussey (6)
    
    Voting Common Stock
    
    
    
    
    
    
    *
    
    
    
    *James A. Ferguson
    
    Voting Common Stock
    
    
    
    
    
    
    *
    
    
    
    *Peter J. Dehring
    
    Voting Common Stock
    
    
    
    
    
    
    *
    
    
    
    *All Directors, Director
    
    Voting Common Stock
    
    
    17,183,072
    
    
    
    64.6
    %
    
    
    64.6
    %Nominees and Executive Officers as
a group (8 individuals)
   *
    
    Less than 1%. 24




---



##### Table of Contents



(1)
    
    The number of shares of voting common stock includes 401,770 shares held directly,
16,662,454 shares held by other entities within the Amphion Group (defined in Note 1 to the
immediately preceding table above), 104,584 shares owned by Mr. Morgans wife. However,
the number of shares of voting common stock excludes 105,012 shares that Mr. Morgan has the
right to acquire pursuant to option and warrant agreements that are exercisable within 60
days, 2,950,410 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 16,662,058 shares held by other entities within the Amphion Group (defined in
Note 1 to the immediately preceding table above). However, excludes 145,907 shares that
Mr. Bertoldi has the right to acquire pursuant to option and warrant agreements that are
exercisable within 60 days and 2,950,410 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 969,146 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 138,000
shares that Mr. Coleman has the right to acquire pursuant to option agreements that are
exercisable within 60 days.(5)
    
    Excludes 329,492 shares that Mr. Frank has the right to acquire pursuant to options
that are exercisable within 60 days.(6)
    
    Excludes 72,823 shares that Mr. Hussey has the right to acquire pursuant to options
that are exercisable within 60 days. 
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. VennWorks LLC In December 2003, VennWorks agreed to convert the entire amount of their outstanding demand
notes ($1,130,233) plus all accrued unpaid dividends ($171,240) into 1,831,332 common shares and an
equal number of warrants priced at $2.75 that will expire on November 30, 2005. The shares and
warrants were issued in the first part of 2004. Amphion Ventures LP Axcess reached an agreement with Amphion Ventures LP with regards notes between the Parties.
Axcess was indebted to Amphion Ventures LP for $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 off against each other there by reducing the debt owed Amphion
Ventures LP by Axcess to $818,722. Amphion Ventures LP also agreed to convert the remaining amount
of demand notes and accrued interest into 294,476 common shares and an equal number of warrants
priced at $2.75 that will expire on November 30, 2005. The shares and warrants were issued in the
first part of 2004. Amphion Ventures currently hold warrants to purchase an additional 500,996 shares of Axcess
common stock. The exercise price range from $2.10 to $2.75 and expire between September 30, 2005
and October 22, 2008. Amphion Investment LLC Axcess reached an agreement with Amphion Investment LLC with regards to the note executed
between them for $393,787 of principal and accrued interest. Amphion Investment LLC consented to
a five-year extension of the note with an interest rate of 5% per annum from January 1, 2003
payable in full at maturity of December 31, 2007. 25




---



##### Table of Contents



Antiope Partners LLC Antiope Partners LLC agreed to convert $759,900 of Preferred Series I (including accrued
dividends) into 303,960 shares of common stock of Axcess. Antiope Partners LLC also agreed to
convert $1,816,719 of Preferred Series J (including accrued dividends) into 726,688 shares of
common stock of Axcess. The shares were issued in the first part of 2004. PV Proceeds Holdings Inc. Axcess reached an Agreement to Amend Purchase Note and Payment Term with PV Proceeds Holdings,
Inc. the holders of a $4.0 million of non-interest bearing note that was due December 31, 2002 and
was in default. PV Proceeds consented to a five-year extension of the note with an interest rate
of 5% per annum from January 1, 2003 payable in full at maturity of December 31, 2007. As further
consideration for entering into the agreement Axcess granted to PV Proceeds Holdings, Inc. a
warrant to purchase up to 500,000 shares of common stock of Axcess. The warrants have an exercise
price of two dollars ($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 are paid. Axcess has also agreed to
certain provisions that would further reduce the principal amount over time. On October 10, 2003 PV Proceeds Holdings, Inc. elected to convert their Series 1999 Preferred
Stock plus accrued dividends into 692,142 shares of Axcess common stock contingent upon this
Registration Statement becoming effective within 90 days from the date hereof. On December 2,
2003, our SB-2 Registration statement went effective. PV Proceeds Holdings, Inc. has agreed to
certain limitations on the sale of these shares based on our current and future share trading
volumes. PV Proceeds Holdings, Inc. currently has warrants to purchase up to 500,000 additional common
shares of Axcess. The exercise price of the warrants is $2.00 and they expire February 15, 2008 or
forty-five days after the note and interest are paid in full. Amphion Capital Partners LLC (formerly NVW LLC) In January 2004, Axcess entered into a one year Advisory Agreement with Amphion Capital
Partners LLC (formerly knows as NVW L.L.C) (ACP), ACP agreed work cooperatively with us to assist
in our growth as set forth. ACP may provide Axcess: (i) Identify, evaluate, and advise on a
variety of options for Axcess to undertake to enhance its current capital structure including
business model, financial operations, operational, managerial, strategic, CRM, and strategic
technology partnering, (ii) Prepare or coordinate with Axcess and others in the development of
business plans, investor presentations, and financial models, when appropriate; (iii) Advise and
assist Axcess with strategies relating to asset development, asset enhancement and maximization of
asset utilization, including those associated with any intellectual property assets, (iv) Advise
and assist Axcess in connection with the preparation of any registration statements, periodic or
other SEC reports or proxies, and (v) Coordinate with, and advise on with the activities of
outside professionals, including without limitation attorneys, accountants, market professionals.
In return Axcess has agreed to pay ACP $5,000.00 per month in advance. This agreement was
terminated on December 31, 2004. In 2005, Axcess has entered into a one year Borrowed Employees and Advisory Agreement with
Amphion Capital Partners LLC (ACP), to assist us in a variety of areas relating to investor
relations and technology research. ACP will provide Axcess with the use of employees who will be
dedicated, on a part-time basis, to provide these services, in addition to the services of Robert
Bertoldi and Richard Morgan. ACP will provide Axcess the following: (i) Identification, evaluation
and advice on a variety of options the Axcess to undertake to enhance its current technology
offering, including sources of complementary technology and technology partnering; (ii) Investor
relations services, including becoming the initial point of contact for the Preferred Equity
Investors, providing both materials and information to interested parties; (iii) Advice and
assistance with strategies relating to asset enhancement and maximization of asset utilization,
including those associated with and intellectual property assets. In return Axcess has agreed to
pay ACP $7,500 per month in advance. ACP currently has warrants to purchase up to 317,440 additional common shares of Axcess. The
exercise price of the warrants range in price from $1.00 to $2.75 and they expire between May 15,
2005 and January 28, 2010. Other Matters On July 30, 2002, the wife of Richard C.E. Morgan invested $100,000 in Axcess, pursuant to the
terms of a bridge financing agreement. Mrs. Morgan acquired a convertible promissory note in the
principal amount of $100,000 and 25,000 unregistered shares of Axcess common stock. Axcess
registered the common shares in December 2003, and Mrs. Morgan agreed not to sell more than
one-third of the shares in any calendar month. Axcess and Mrs. Morgan made certain representations
and warranties in the bridge financing agreement. The convertible promissory note bears interest at
a rate of seven percent compounded annually. At each of July 30, 2003; July 30, 2004; and July 30,
2005, Mrs. Morgan may elect to convert one-third of the principal amount of the note (plus accrued
interest thereon) into shares of the Axcess common stock, provided that we have not, on or prior
to each such conversion date, retired one-third of the principal amount of the Note. The conversion
price initially is 65% of the average closing price of a share of our common stock for the twenty
trading days preceding the given anniversary date, provided that the maximum conversion price shall
be $4.00 per share and the minimum conversion price shall be $1.00 per share, and the conversion
price is subject to adjustment from time to time to reflect any reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other similar change in
Axcess shares of common stock. Subject to Mrs. Morgans right to convert the note in accordance
with its terms, the note may be prepaid without 26




---



##### Table of Contents



penalty. On May 10, 204 Mrs. Morgan elected to convert $33,333 of the principal or accrued
interest into 33,412 shares of Axcess common stock. In January 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. Axcess registered the common shares in December 2003, and Mrs. Morgan agreed not to sell
more than one-third of the shares in any calendar month. Axcess and Mrs. Morgan made certain
representations and warranties in the bridge financing agreement. The convertible promissory note
bears interest at a rate of seven percent compounded annually. At each of January 31, 2004; January
31, 2005; and January 31, 2006, Mrs. Morgan may elect to convert one-third of the principal amount
of the note (plus accrued interest thereon) into shares of the Axcess common stock, provided that
we have not, on or prior to each such conversion date, retired one-third of the principal amount of
the Note. The conversion price initially is 65% of the average closing price of a share of our
common stock for the twenty trading days preceding the given anniversary date, provided that the
maximum conversion price shall be $4.00 per share and the minimum conversion price shall be $1.00
per share, and the conversion price is subject to adjustment from time to time to reflect any
reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar change in Axcess shares of common stock. Subject to Mrs. Morgans right to
convert the note in accordance with its terms, the note may be prepaid without penalty. On May 10,
204 Mrs. Morgan elected to convert $6,667 of the principal or accrued interest into 6,172 shares of
Axcess common stock. Richard C.E. Morgan, the Chairman of Axcess Board of Directors, is the owner of 100.00% of
Antiope Partners, LLC, 60.01% of Amphion Partners, LLC, 60.00% of Amphion Investments, LLC, 0.49%
of Amphion Ventures LP, 60.00% of Amphion Capital Management LLC, 20.84% of Amphion Capital
Partners LLC (formerly NVW LLC) and 9.80% of VennWorks, LLC. Mr. Morgan disclaims beneficial
ownership of all of Axcess shares held by these entities. Robert J. Bertoldi, a director of Axcess, is the owner of 12.79% of Amphion Capital Partners
LLC (formerly NVW LLC), 33.98% of Amphion Partners, LLC, 40.00% of Amphion Investments, LLC, 40.00%
of Amphion Capital Management LLC, 0.07% of Amphion Ventures LP, and 4.71% of VennWorks, LLC. Mr.
Bertoldi disclaims beneficial ownership of all of Axcess shares held by these entities. In 2005, Axcess has entered into a one year Borrowed Employees and Advisory Agreement with
Amphion Capital Partners LLC (ACP), to assist us in a variety of areas relating to investor
relations and technology research. ACP will provide Axcess with the use of employees who will be
dedicated, on a part-time basis, to provide these services, in addition to the services of Robert
Bertoldi and Richard Morgan. ACP will provide Axcess the following: (i) Identification, evaluation
and advice on a variety of options the Axcess to undertake to enhance its current technology
offering, including sources of complementary technology and technology partnering; (ii) Investor
relations services, including becoming the initial point of contact for the Preferred Equity
Investors, providing both materials and information to interested parties; (iii) Advice and
assistance with strategies relating to asset enhancement and maximization of asset utilization,
including those associated with and intellectual property assets. In return Axcess has agreed to
pay ACP $7,500 per month in advance. 
 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).
 27




---



##### Table of Contents



Exhibit No.

    
    Description3.7
    
    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
    
    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
    
    Form of Warrant to purchase shares of the Companys common stock issued to Antiope
Partners LLC and Amphion Ventures LP 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, 1997.10.3
    
    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 LP
Incorporated herein by reference to Exhibit 10.18 to the Companys Annual Report on
Form 10-KSB for the year ended December 31, 1999.10.4
    
    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. +10.5
    
    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). +10.6
    
    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). +10.7
    
    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). +10.8
    
    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. +10.9
    
    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. +10.10
    
    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, 2002.10.11
    
    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, 2003.10.12
    
    Amended and restated purchase note dated as of December 12, 2003, executed by AXCESS
and PV Proceeds holdings, Inc. Incorporated herein by reference to Exhibit 10.2 on Form
8-K filed on December 16, 2003.10.13
    
    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, 2003.10.14
    
    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, 2003.10.15
    
    Letter dated November 30, 2003, from Antiope Partners LLC regarding conversion Series I
Preferred Stock and accrued dividends. Incorporated herein by
reference to Exhibit 10.32 on Form 10-KSB filed March 30,
2004.
 28




---



##### Table of Contents



Exhibit No.
    
    Description10.16
    
    Letter dated November 30, 2003, from Antiope Partners LLC regarding conversion Series J
Preferred Stock and accrued dividends. Incorporated herein by
reference to Exhibit 10.33 on Form 10-KSB filed March 30,
2004.10.17
    
    Agreement to offset and convert between Amphion Ventures LP and Axcess. Incorporated herein by
reference to Exhibit 10.34 on Form 10-KSB filed March 30,
2004.10.18
    
    Agreement to convert between
VennWorks LLC and Axcess.  Incorporated herein by
reference to Exhibit 10.35 on Form 10-KSB filed March 30,
2004.10.19
    
    Agreement to convert between JP Morgan SBIC and Axcess. Incorporated herein by
reference to Exhibit 10.36 on Form 10-KSB filed March 30,
2004.10.20
    
    Letter dated December 18, 2003, from Jackson Hole regarding conversion Series J
Preferred Stock and accrued dividends. Incorporated herein by
reference to Exhibit 10.37 on Form 10-KSB filed March 30,
2004.10.21
    
    Letter dated December 18, 2003, from Jackson Hole regarding conversion Series C
Preferred Stock and accrued dividends. Incorporated herein by
reference to Exhibit 10.38 on Form 10-KSB filed March 30,
2004.10.22
    
    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, 2004.10.23
    
    Letter dated April 14, 2004, from Ardinger regarding conversion Series I Preferred
Stock and accrued dividends. Incorporated herein by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-QSB for the period ended March 31, 2004.10.24
    
    Letter dated April 14, 2004, from Ardinger regarding conversion Series J Preferred
Stock and accrued dividends. Incorporated herein by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-QSB for the period ended March 31, 2004.10.25
    
    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, 2004.10.26
    
    Borrowed employees and advisory agreement between Amphion Capital Partners 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. *99.2
    
    Nominating and Governance Committee charter. *99.3
    
    Whistleblower Policy. *
 (b) Reports on Form 8-K: Date
    
    DescriptionJuly 19, 2004
    
    On July 19, 2004, Axcess International Inc. filed an
8-K announcing an exclusive license agreement
between Axcess and TechSearch dated June 30, 2004.November 23, 2004
    
    On November 23, 2004 Axcess International Inc. filed
an 8-K announcing Tyco Internationals ADT group
delivered a new product release to its organization
announcing that Axcess ActiveTag product line is now
available for sale by ADT.February 2, 2005
    
    On February 2, 2005, Axcess International Inc. filed
an 8-K announcing the results for the year ended
December 31, 2004.
   *
    
    Filed herewith+
    
    Denotes management contract or compensatory plan. 29




---



##### Table of Contents



Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The following table presents fees for professional audit services rendered by Hein &
Associates LLP for the audit of Axcess International Inc.s annual consolidated financial
statements for the years ended December 31, 2004 and December 31, 2003 and fees billed for other
services rendered by Hein & Associates LLP during those periods. December 31,
    
    
    December 31,2004
    
    
    2003Audit fees (1)
    
    $
    68,200
    
    
    $
    65,700Audit related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    16,100
    
    
    
    10,400All other fees (4)
    
    
    
    
    
    
    Total
    
    $
    84,300
    
    
    $
    76,100
  1)
    Audit Fees consist of fees billed for professional services
rendered for the audit of the Companys consolidated annual financial
statements and review of the interim consolidated financial statements
included in quarterly reports and services that are normally provided by Hein
& Associates LLP in connection with statutory and regulatory filings or
engagements.2)
    Audit-Related Fees would normally consist 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. Axcess International, Inc.s Audit Committee approves the engagement of an accountant to
render all audit and non-audit services prior to the engagement of the accountant based
upon a proposal by the accountant of estimated fees and scope of the engagement. Axcess
International, Inc.s Audit Committee has received the written disclosure and the letter from Hein
& Associates LLP required by Independence Standards Board Standard No. 1, as currently in effect,
and has discussed with Hein & Associates LLP their independence. 30




---



##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on the
31st day of March 2005. AXCESS INTERNATIONAL INC.By:
    
    /s/ Richard C.E. MorganRichard C.E. Morgan, Chairman of the Board
 In accordance with the Exchange Act, this report has been signed by the following persons on behalf
of the registrant and in the capacities indicated, on the 31st day of March 2005. Signature
    
    Capacity/s/ Richard C.E. Morgan
    
    Chairman of the BoardRichard C.E. Morgan/s/ Allan Griebenow
    
    Director, President and Chief Executive OfficerAllan Griebenow
    
    (Principal Executive Officer)/s/ Allan L. Frank
    
    Chief Financial OfficerAllan L. Frank
    
    (Principal Accounting and Financial Officer)/s/ Paul J. Coleman, Jr.
    
    DirectorPaul J. Coleman, Jr./s/ Robert J. Bertoldi
    
    DirectorRobert J. Bertoldi/s/ Robert F. Hussey
    
    DirectorRobert F. Hussey
 31




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Axcess International, Inc. We have audited the accompanying consolidated balance sheets of Axcess International, Inc. (the
Company) as of December 31, 2004 and 2003 and the related consolidated statements of operations,
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 based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Axcess International, Inc., at December 31, 2004 and 2003, and
the results of its operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Companys recurring losses from operations and resulting continued dependence upon access to
additional external financing raise substantial doubt about its ability to continue as a going
concern. If the Company is unable to generate profitable operations or raise additional capital it
may be forced to seek protection under federal bankruptcy laws. Managements plans in regard to
these matters are also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty. /s/ HEIN & ASSOCIATES LLP January 21, 2005
Dallas, Texas F- 1




---



##### Table of Contents



AXCESS INTERNATIONAL INC. 
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2004 AND 2003
 2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    461,101
    
    
    $
    2,163,977Accounts receivable  trade, net of allowance for doubtful accounts of
$8,859 and $65,367, respectively.
    
    
    79,965
    
    
    
    85,248Inventory, net
    
    
    144,714
    
    
    
    131,515Prepaid expenses and other
    
    
    97,164
    
    
    
    148,490Total current assets
    
    
    782,944
    
    
    
    2,529,230Property, plant and equipment, net
    
    
    49,395
    
    
    
    61,756Intellectual property, net
    
    
    133
    
    
    
    149,704Deferred debt issuance costs
    
    
    506,889
    
    
    
    675,852Other assets
    
    
    3,906
    
    
    
    595Total assets
    
    $
    1,343,267
    
    
    $
    3,417,137LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    490,100
    
    
    $
    813,976Accrued liabilities
    
    
    789,589
    
    
    
    802,355Notes payable:Convertible notes payable (includes $66,667 with related party in 2004)
    
    
    483,333
    
    
    
    Discounts on convertible debt
    
    
    (289,482
    )
    
    
    Dividends payable
    
    
    316,062
    
    
    
    125,999Total current liabilities
    
    
    1,789,602
    
    
    
    1,742,330Notes payable to stockholders
    
    
    3,932,092
    
    
    
    4,058,956Convertible notes payable (includes $13,333 and $120,000 with related
party in 2004 and 2003, respectively)
    
    
    236,667
    
    
    
    1,288,333Discount on convertible debt
    
    
    (34,084
    )
    
    
    (680,457
    )Total liabilities
    
    
    5,924,277
    
    
    
    6,409,162Commitments and contingencies (Notes 2, 8 and 13)
Stockholders deficit:Stockholders deficit:Convertible preferred stock, 7,000,000 shares authorized
    
    
    
    
    
    
    536,623With liquidation preference; 0 and 54 shares issued and outstanding in
2004 and 2003, respectively; $536,623 aggregated liquidation
preference in 2003
    
    
    
    
    
    
    536,623Without liquidation preference; $0.01 par value, 2,415,000 and
1,790,000 shares issued and outstanding in 2004 and 2003, respectively
    
    
    24,150
    
    
    
    17,900Common stock, $.01 par value, 50,000,000 shares authorized in 2004 and
2003; 24,720,939 shares issued and outstanding in 2004 and 19,446,028
shares issued and outstanding in 2003
    
    
    247,209
    
    
    
    194,461Shares of common stock to be issued, 4,529,345 shares in 2003
    
    
    
    
    
    
    45,293Non-voting convertible common stock, $.01 par value, 2,250,000 shares
authorized; no shares issued and outstanding in 2004 or 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    149,898,600
    
    
    
    146,246,094Accumulated deficit
    
    
    (154,750,969
    )
    
    
    (150,032,396
    )Total stockholders deficit
    
    
    (4,581,010
    )
    
    
    (2,992,025
    )Total liabilities and stockholders deficit
    
    $
    1,343,267
    
    
    $
    3,417,137
 See accompanying notes F- 2




---



##### Table of Contents



AXCESS INTERNATIONAL INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2004 and 2003
 2004
    
    
    
    
    
    
    2003Sales
    
    $
    911,565
    
    
    
    
    
    
    $
    915,825Cost of sales
    
    
    439,215
    
    
    
    
    
    
    
    562,060Inventory impairment
    
    
    14,874
    
    
    
    
    
    
    
    148,866Gross profit
    
    
    457,476
    
    
    
    
    
    
    
    204,899Expenses:Research and development
    
    
    718,278
    
    
    
    
    
    
    
    632,974General and administrative
    
    
    1,528,937
    
    
    
    
    
    
    
    1,287,944Selling and marketing
    
    
    827,323
    
    
    
    
    
    
    
    280,190Depreciation, amortization and impairment
    
    
    202,394
    
    
    
    
    
    
    
    440,573Operating expenses
    
    
    3,276,932
    
    
    
    
    
    
    
    2,641,681Loss from operations
    
    
    (2,819,456
    )
    
    
    
    
    
    
    (2,436,782
    )Other income (expense):Interest expense
    
    
    (781,434
    )
    
    
    
    
    
    
    (1,149,059
    )Gain on vendor settlements
    
    
    177,787
    
    
    
    
    
    
    
    355,848Other
    
    
    6,551
    
    
    
    
    
    
    
    (13,139
    )Loss on debt settlements, net
    
    
    
    
    
    
    
    
    
    
    (6,328,527
    )Other expense, net
    
    
    (597,096
    )
    
    
    
    
    
    
    (7,134,877
    )Net loss
    
    
    (3,416,552
    )
    
    
    
    
    
    
    (9,571,659
    )Preferred stock dividend requirements
    
    
    (299,481
    )
    
    
    
    
    
    
    (1,841,670
    )Net loss applicable to common stock
    
    $
    (3,716,033
    )
    
    
    
    
    
    $
    (11,413,329
    )Basic and diluted net loss per share
    
    $
    (0.16
    )
    
    
    
    
    
    $
    (0.62
    )Weighted average shares of common stock outstanding
    
    
    23,848,676
    
    
    
    
    
    
    
    18,337,645
 See accompanying notes. F- 3




---



##### Table of Contents



AXCESS INTERNATIONAL
INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
YEARS ENDED DECEMBER 31, 2004 and 2003
 NON-VOTINGCONVERTIBLE
    
    
    
    
    
    
    
    
    
    
    CONVERTIBLEPREFERRED STOCK
    
    
    COMMON STOCK
    
    
    COMMON STOCKADDITIONALNUMBER OF
    
    
    PAR
    
    
    NUMBER OF
    
    
    PAR
    
    
    NUMBER OF
    
    
    PAR
    
    
    PAID-INSHARES
    
    
    VALUE
    
    
    SHARES
    
    
    VALUE
    
    
    SHARES
    
    
    VALUE
    
    
    CAPITALBalance at December 31, 2002
    
    
    11,976
    
    
    $
    4,872,847
    
    
    
    16,566,148
    
    
    $
    165,662
    
    
    
    
    
    
    $
    
    
    
    $
    123,768,261Shares issued in conjunction with
convertible debt offering
    
    
    
    
    
    
    
    
    
    
    272,500
    
    
    
    2,725
    
    
    
    
    
    
    
    
    
    
    
    81,697Shares issued in conjunction with 2003
Preferred equity offering
    
    
    2,050,001
    
    
    
    20,500
    
    
    
    315,000
    
    
    
    3,150
    
    
    
    
    
    
    
    
    
    
    
    1,436,975Preferred stock discount in conjunction with
2003 Preferred stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,460,230Conversion of Preferred Series 2003
    
    
    (2,050,001
    )
    
    
    (20,500
    )
    
    
    2,050,001
    
    
    
    20,500
    
    
    
    
    
    
    
    
    
    
    
    Shares issued for services rendered
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    78,000Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    30,750
    
    
    
    308
    
    
    
    
    
    
    
    
    
    
    
    51,968Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    11,629
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    20,050Shares issued in conjunction with 2003B
Preferred equity offering
    
    
    1,790,000
    
    
    
    17,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,662,236Preferred stock discount in conjunction with
2003 Preferred stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion and offset of Amphion Venture
notes receivable and payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,177,827Conversion of VennWorks demand notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,324,850JP Morgan conversion of promissory note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492,304Conversion of PV Proceeds Holdings, Inc.
Series 1999 preferred to common stock
    
    
    (152
    )
    
    
    (1,515,492
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,723,432Conversion of Antiope Partners Series I
preferred to common stock
    
    
    (65
    )
    
    
    (645,369
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756,861Conversion of Antiope Partners Series J
preferred to common stock
    
    
    (157
    )
    
    
    (1,566,675
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,809,452Conversion of Jackson Hole Series C
preferred to common stock
    
    
    (11,522
    )
    
    
    (347,869
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    432,906Conversion of Jackson Hole Series J
preferred to common stock
    
    
    (15
    )
    
    
    (146,629
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,838Conversion of JP Morgan Series I preferred
to common stock
    
    
    (9
    )
    
    
    (90,171
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,369Conversion of JP Morgan Series J preferred
to common stock
    
    
    (2
    )
    
    
    (24,019
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,906Warrants issued in conjunction with PV
Proceeds note extension
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    664,932Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    1,790,054
    
    
    $
    554,523
    
    
    
    19,446,028
    
    
    $
    194,461
    
    
    
    
    
    
    $
    
    
    
    $
    146,246,094Shares issued from issueable at December 31,
2003
    
    
    
    
    
    
    
    
    
    
    4,529,345
    
    
    
    45,293
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Ardinger Series I preferred to
common stock
    
    
    (52
    )
    
    
    (516,299
    )
    
    
    248,769
    
    
    
    2,488
    
    
    
    
    
    
    
    
    
    
    
    619,434Conversion of Ardinger Series J preferred to
common stock
    
    
    (2
    )
    
    
    (20,324
    )
    
    
    9,648
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    24,022Shares issued in conjunction with 2004
Preferred equity offering
    
    
    625,000
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,196,290Shares issued for services rendered
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    64,750Shares cancelled related to services rendered
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    1,000Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    476,349
    
    
    
    4,763
    
    
    
    
    
    
    
    
    
    
    
    713,548Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    85,800
    
    
    
    858
    
    
    
    
    
    
    
    
    
    
    
    33,462Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    2,415,000
    
    
    $
    24,150
    
    
    
    24,720,939
    
    
    $
    247,209
    
    
    
    
    
    
    $
    
    
    
    $
    149,898,600
 F- 4




---



##### Table of Contents



COMMON
    
    
    
    
    
    
    
    
    
    
    TOTALSTOCK
    
    
    DUE FROM
    
    
    ACCUMULATED
    
    
    STOCKHOLDERSISSUABLE
    
    
    STOCKHOLDERS
    
    
    DEFICIT
    
    
    EQUITY (DEFICIT)Balance at December 31, 2002
    
    $
    
    
    
    $
    (4,711,915
    )
    
    $
    (136,836,236
    )
    
    $
    (12,741,381
    )Shares issued in conjunction with
convertible debt offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,422Shares issued in conjunction with 2003
Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,460,625Preferred stock discount in conjunction with
2003 Preferred stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,460,230Conversion of Preferred Series 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued for services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,275Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,167Shares issued in conjunction with 2003B
Preferred equity offering
    
    
    1,570
    
    
    
    
    
    
    
    
    
    
    
    4,681,706Preferred 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
    
    
    
    
    
    
    
    5,892,687Conversion of VennWorks demand notes
    
    
    18,313
    
    
    
    
    
    
    
    
    
    
    
    7,343,163JP Morgan conversion of promissory note
    
    
    2,279
    
    
    
    
    
    
    
    
    
    
    
    494,583Conversion of PV Proceeds Holdings, Inc.
Series 1999 preferred to common stock
    
    
    6,921
    
    
    
    
    
    
    
    
    
    
    
    214,862Conversion of Antiope Partners Series I
preferred to common stock
    
    
    3,040
    
    
    
    
    
    
    
    
    
    
    
    114,531Conversion of Antiope Partners Series J
preferred to common stock
    
    
    7,267
    
    
    
    
    
    
    
    
    
    
    
    250,044Conversion of Jackson Hole Series C
preferred to common stock
    
    
    1,739
    
    
    
    
    
    
    
    
    
    
    
    86,775Conversion of Jackson Hole Series J
preferred to common stock
    
    
    682
    
    
    
    
    
    
    
    
    
    
    
    23,891Conversion of JP Morgan Series I preferred
to common stock
    
    
    426
    
    
    
    
    
    
    
    
    
    
    
    16,624Conversion of JP Morgan Series J preferred
to common stock
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    3,999Warrants issued in conjunction with PV
Proceeds note extension
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    664,932Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (1,841,670
    )
    
    
    (1,841,670
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (9,571,659
    )
    
    
    (9,571,659
    )Balance at December 31, 2003
    
    $
    45,293
    
    
    $
    
    
    
    $
    (150,032,396
    )
    
    $
    (2,992,025
    )Shares issued from issueable at December 31,
2003
    
    
    (45,293
    )
    
    
    
    
    
    
    
    
    
    
    Conversion of Ardinger Series I preferred to
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,623Conversion of Ardinger Series J preferred to
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,794Shares issued in conjunction with 2004
Preferred equity offering
    
    
    
    
    
    
    
    
    
    
    (1,002,540
    )
    
    
    1,200,000Shares issued for services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,000Shares cancelled related to services rendered
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Convertible note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    718,311Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,320Preferred stock dividends
    
    
    
    
    
    

    
    
    
    
    (299,481
    )
    
    
    (299,481
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (3,416,552
    )
    
    
    (3,416,552
    )Balance at December 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    (154,750,969
    )
    
    $
    (4,581,009
    )
 See accompanying notes F- 5




---



##### Table of Contents



AXCESS INTERNATIONAL INC. 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 2004 and 2003
 2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (3,416,552
    )
    
    $
    (9,571,658
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    202,394
    
    
    
    440,573Gain on vendor settlements
    
    
    (177,787
    )
    
    
    (355,848
    )Loss on debt settlements, net
    
    
    
    
    
    
    6,328,527Amortization of financing discount and issuance costs
    
    
    525,854
    
    
    
    379,946Shares issued for services rendered
    
    
    65,000
    
    
    
    80,000Loss on sale of assets
    
    
    
    
    
    
    13,139Inventory impairment
    
    
    14,874
    
    
    
    148,866Changes in operating assets and liabilities:Accounts receivable
    
    
    5,283
    
    
    
    131Inventory
    
    
    (28,073
    )
    
    
    (49,302
    )Prepaid expenses and other
    
    
    51,326
    
    
    
    (60,679
    )Other assets
    
    
    (3,311
    )
    
    
    28,789Accounts payable and accrued liabilities
    
    
    (8,876
    )
    
    
    451,659Net cash used by operating activities
    
    
    (2,769,868
    )
    
    
    (2,165,857
    )Cash flow from investing activities:Capital expenditures
    
    
    (40,462
    )
    
    
    (4,133
    )Net cash used by investing activities
    
    
    (40,462
    )
    
    
    (4,133
    )Cash flow from financing activities:Borrowings under financing agreements
    
    
    
    
    
    
    611,603Principal payments on financing agreements
    
    
    (126,866
    )
    
    
    (697,662
    )Note payable extension fee
    
    
    
    
    
    
    (25,000
    )Net proceeds from issuance of common stock from employee options
    
    
    34,320
    
    
    
    52,277Net proceeds from issuance of common and preferred stock
    
    
    1,200,000
    
    
    
    4,359,500Net cash provided by financing activities
    
    
    1,107,454
    
    
    
    4,300,718Net increase in cash and cash equivalents
    
    
    (1,702,876
    )
    
    
    2,130,728Cash and cash equivalents, beginning of year
    
    
    2,163,977
    
    
    
    33,249Cash and cash equivalents, end of year
    
    $
    461,101
    
    
    $
    2,163,977Supplemental information:Cash paid during the year for interest
    
    $
    
    
    
    $
    4,780Supplemental disclosure of non-cash investing and financing activities:Value of equity instruments and beneficial conversion
feature recorded as preferred stock dividends
    
    $
    
    
    
    
    3,243,060Conversions of notes payable into common stock
    
    
    568,333
    
    
    
    6,071,901Conversions of accrued interest into common stock
    
    
    149,979
    
    
    
    1,350,173Record discounts on notes payable
    
    
    
    
    
    
    84,598Record debt issuance costs
    
    
    
    
    
    
    664,932Conversions of preferred stock into common stock
    
    
    536,623
    
    
    
    4,356,724Conversions of accrued interest into notes payable
    
    
    
    
    
    
    43,787Conversions of accrued dividends into common stock
    
    
    109,417
    
    
    
    710,727Preferred stock dividends accrued
    
    
    299,481
    
    
    
    381,440
 See accompanying notes F- 6




---



##### Table of Contents



AXCESS 
 NOTES TO FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies (a) Description of Business The Company provides advanced security and asset management systems, which locate, identify,
track, monitor and protect assets. The main applications of the Companys systems are security
video through closed circuit television (called CCTV), personnel and vehicle access control, and
automatic asset tracking and protection. The Company provides solutions in the recently identified
homeland security markets such as air and ground transportation, water treatment facilities, oil
and gas, power plants, as well as in the markets for data centers, retail / convenience stores,
education, healthcare, and corporate offices. AXCESS utilizes two patented and integrated
technologies: network-based radio frequency identification (RFID) and tagging and streaming video.
Both application and browser-based software options deliver critical real-time information tailored
to each end user via the enterprise network or Internet, also providing custom alerts in the form
of streaming video, e-mail, or messages delivered to wireless devices. The Companys business plan for 2005 is predicated principally upon the successful marketing
of its RFID and digital video products. During 2004, operating activities utilized approximately
$2.8 million of cash. During 2004 the Company raised a net of $1.2 million of additional working
capital through a Preferred Stock offering. The offering closed during the second quarter, raised
approximately $1.2 million and is designated as 2004 Preferred. The Company issued 625,000 shares
of Preferred Stock bearing a 7% dividend and 357,142 warrants to purchase the Companys common
stock exercisable for two years at $3.20 per share. The offering also included an automatic
conversion into common stock on a one for one basis when the Company achieves a full quarter of
profitability or if the closing twenty-day average stock price is over $4.00 per share. However,
even with the additional funding, the Company anticipates that its existing working capital
resources and revenues from operations will not be adequate to satisfy its funding requirements in
2005. The future results of operations and financial condition of the Company will be impacted by
the following factors, among others: changes from anticipated levels of sales, access to capital,
future national or regional economic and competitive conditions, changes in relationships with
customers, difficulties in developing and marketing new products, marketing existing products,
customer acceptance of existing and new products, validity of patents, technological change,
dependence on key personnel, availability of key component parts, dependence on third party
manufacturers, vendors, contractors, product liability, casualty to or other disruption of the
production facilities, delays and disruptions in the shipment of the Companys products, and the
ability of the Company to meet its stated business goals. If the Companys losses or lack of operating capital continue, the Company will have to obtain
funds to meet its cash requirements through business alliances, such as strategic or financial
transactions with third parties, the sale of securities or other financing arrangements, or the
Company may be required to curtail its operations, seek a merger partner, or seek protection under
federal bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to the Company
or disadvantageous to existing stockholders. In addition, no assurance may be given that the
Company will be successful in raising additional funds or entering into business alliances. (b) Company Organization and Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company 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 LLC, VennWorks LLC (formerly incuVest LLC), Amphion Capital Management LLC, and NVW, LLC
(collectively, the Amphion Group). Following the conversion of the 2003 preferred stock held by
the Amphion Group into common stock in 2003, the Amphion Group owns approximately 65% of the
outstanding voting stock of the Company. (c) Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that effect the
amounts reported in the financial statements and accompanying notes. As discussed below, the
Company makes significant assumptions in recording its allowance for doubtful accounts, inventory
valuation, impairment of long-lived assets, warranty costs and the valuation allowance for deferred
tax assets. Actual results could differ from those estimates, and the differences may be
significant. F- 7




---



##### Table of Contents



(d) Cash and Cash Equivalents The Company considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. (e) Inventory Inventory is valued at the lower of cost or market using the first-in, first-out method.
Inventory was comprised of the following at December 31, 2003 and December 31, 2002: December 31,
    
    
    December 31,2004
    
    
    2003Raw materials
    
    $
    56,701
    
    
    $
    36,682Work-in-process
    
    
    109
    
    
    
    10,513Finished goods
    
    
    87,904
    
    
    
    84,320$
    144,714
    
    
    $
    131,515
 The Company recorded a charge of $14,874 and $148,866 for inventory impairment during the
years ended December 31, 2004 and 2003, respectively. The amount reflects items that have not been
able to be used by our contract manufacturers in the building of additional products. The
impairment was as a result of the change in strategy to contract manufacturing. The components of cost of sales are summarized as follows: December 31,
    
    
    December 31,2004
    
    
    2003Product Cost
    
    $
    452,682
    
    
    $
    531,543Warranty Expense
    
    
    (13,467
    )
    
    
    30,517Inventory Impairment
    
    
    14,874
    
    
    
    148,866Cost of Sales
    
    $
    454,089
    
    
    $
    710,926
 (f) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method
over the estimated useful lives of the assets. The Company capitalizes costs associated with
software developed or obtained for internal use when both the preliminary project stage is
completed and management has authorized further funding for the project, which it deems completion
to be probable, and that the project will be used to perform the function intended. Capitalization
of such costs ceases no later than the point at which the project is substantially complete and
ready for its intended use. The Company currently has no capitalized software development on its
books. (g) Intangible Assets Intangible assets, which consist primarily of patents and developed technologies, have been
recorded as the result of acquisitions of business and developed technologies and are being
amortized on the straight-line basis over five years. (h) Impairment of Long-Lived Assets-and Long-Lived Assets to Be Disposed Of Long-lived assets and identifiable intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated-by the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the assets based on estimated
future cash flows. Assets to be disposed of are reported at the lower of-the carrying amount or
fair value less costs to sell. Revenues from the sale of products utilizing the Companys purchased
technologies have not grown according to our expectations and the Company has experienced operating
losses since the respective dates of acquisition. The Company believes that assumptions made in
projecting future cash flows for this evaluation are reasonable. However, if future actual results
do not meet expectations, the Company may be required to record an additional impairment charge,
the amount of which could be material to the results of its operations and financial position.
During the years ended December 31, 2004 and 2003 the Company recorded no impairment charges. (i) Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of trade accounts receivable and notes receivable. Products are sold to
customers, including distributors and integrators, located principally in the United States. The
Company continually evaluates the creditworthiness of its customers financial condition and
generally does not require collateral. The Company evaluates the collect ability of its accounts
receivable based on a F- 8




---



##### Table of Contents



combination of factors. In circumstances where the Company is aware of a specific customers
inability to meet its financial obligations to us, the Company records a specific reserve for bad
debts against amounts due. The Company has not experienced significant losses on uncollectible
accounts receivable. The carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued
liabilities and notes payable approximate fair value because of the short-term maturity of these
instruments. (j) Revenue Recognition The Company recognizes revenue on sales of its products when the products are shipped from the
Company. Company policy does not allow customers to return products for credit. The Company
currently provides a one-year warranty on all products. Provision is made at the time the related
revenue is recognized for estimated product repair costs. (k) Research and Development Costs Research and development costs are expensed as incurred. (l) Depreciation and Amortization Depreciation of property and equipment is recorded using the straight-line method over the
estimated useful lives of the respective assets. Internally developed software and purchased
technologies (Note 5) are amortized over the estimated useful lives of the respective
technology. (m) Stock-Based Compensation The Company accounts for its stock-based compensation plan under Accounting Principles Board
(ABP) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below
is based on provisions of Statement of Financial Accounting Standard (FAS) No. 123, Accounting
for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based
CompensationTransition and Disclosure, issued in December 2002. The Company does not have a history of paying cash dividends and none have been assumed in
estimating the fair value of its options. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including expected stock price
volatility. Because, among other things, changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to expense over the
options vesting periods. Twelve Months EndedDecember 31,2004
    
    
    2003Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (3,716,033
    )
    
    $
    (11,413,328
    )Less: fair value of employee stock compensation
    
    
    (568,994
    )
    
    
    (617,303
    )Pro forma net loss attributed to common stock
    
    
    (4,285,027
    )
    
    
    (12,030,631
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.16
    )
    
    $
    (0.62
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.18
    )
    
    $
    (0.66
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.25
    %
    
    
    4.25
    %Expected life
    
    
    3 years
    
    
    
    3 yearsExpected volatility
    
    
    164
    %
    
    
    142
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 (n) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the total of tax payable for the period and the change during the period in deferred
tax assets and liabilities. F- 9




---



##### Table of Contents



(o) Net Loss Per Common Share Basic loss per share data is computed by dividing the net loss applicable to common stock by
the weighted average number of common shares outstanding during the year. Diluted earnings per
share, which includes the dilutive effect of the conversion of convertible preferred stock and the
convertible debt and exercise of options and warrants has not been presented because, due to the
net losses recorded by the Company for all periods presented, their inclusion would be
anti-dilutive. Conversion of convertible preferred stock, convertible debt and the exercise of
options and warrants would result in 37,920,763 and 36,205,589 common shares outstanding at
December 31, 2004 and 2003, respectively. (p) Segment Reporting The Company operates in one-industry segment selling two primary product lines, digital video
and RFID. Sales, cost of sales and gross profits for each product line are as follows: Digital Video
    
    
    RFIDTwelve Months Ended December 31:
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Sales
    
    $
    139,090
    
    
    $
    328,725
    
    
    $
    772,475
    
    
    $
    587,100Cost of Sales
    
    
    60,260
    
    
    
    187,333
    
    
    
    378,956
    
    
    
    374,727Inventory Impairment
    
    
    9,375
    
    
    
    113,120
    
    
    
    5,498
    
    
    
    35,746Gross Profit
    
    $
    69,455
    
    
    $
    28,272
    
    
    $
    388,021
    
    
    $
    176,627
 (q) Significant Customers During the twelve months ended December 31, 2004, the Company had one customer that accounted
for 14% of the Companys overall revenue, three customers that accounted for 65% of the digital
video product sales and one customer that accounted for 16% of the RFID product sales. During the
twelve months ended December 31, 2003, the Company had three customers that accounted for 28% of
the Companys overall revenue, three customers that accounted for 65% of the digital video product
sales and two customers accounted for 26% of the RFID product sales. (r) Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 123R (SFAS 123R), a revision of SFAS No. 123 (SFAS 123),
Accounting for Stock-Based Compensation.This statement requires an entity to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The compensation expense will be recognized over the period during which
an employee is required to provide service in exchange for the award. Public entities that file as
small business issuers will be required to apply SFAS 123R in the first interim or annual reporting
period that begins after December 15, 2005. The adoption of SFAS 123R will require us to record
compensation expense for the unvested fair value of our equity instruments given to our employees.
We are in the process of evaluating the impact of the adoption of SFAS 123R on our financial
position and results of operations. However, the adoption of SFAS 123R will have no effect on our
cash flows, but will have an adverse impact on our results of operations. (2) Operations, Liquidity and Going Concern Since inception, we have utilized the proceeds from a number of public and private sales of
our equity securities, the exercise of options and warrants and more recently, convertible debt,
short-term bridge loans from stockholders and preferred equity offerings to meet our working
capital requirements. At December 31, 2004, we had a working capital deficit of $1,006,658. Our operations continued to generate losses in 2004. Our cash decreased $1,702,876 during 2004
with operating activities using $2,769,868 of cash. We funded operations primarily through
borrowings and equity offerings with financing activities providing net cash of $1,107,454. No
assurance can be given that such activities will continue to be available to provide funding to us.
Our business plan for 2005 is predicated principally upon the successful marketing of our RFID and
digital video products. We anticipate that our existing working capital resources and revenues from
operations will not be adequate to satisfy our funding requirements in 2005. Our working capital requirements will depend upon many factors, including the extent and
timing of our product sales, our operating results, the status of competitive products, and actual
expenditures and revenues compared to our business plan. We are currently experiencing declining
liquidity, losses from operations and negative cash flows, which make it difficult for us to meet
our current cash requirements, including payments to vendors, and may jeopardize our ability to
continue as a going concern. We intend to address our liquidity problems by controlling costs,
seeking additional funding (through capital raising transactions and business alliances) and
maintaining focus on revenues and collections. Our auditors have included an explanatory paragraph in their audit opinion with respect to our
consolidated financial
statements at December 31, 2004. The paragraph states that our recurring losses from
operations and resulting continued dependence on access to external financing raise substantial
doubts about our ability to continue as a going concern. F- 10




---



##### Table of Contents



Furthermore, the factors leading to and
the existence of the explanatory paragraph may adversely affect our relationship with customers and
suppliers and have an adverse effect on our ability to obtain financing. Our business plan for 2005 is predicated principally upon the successful marketing of our RFID
products and the digital video products. We anticipate that our existing working capital resources
and revenues from operations will not be adequate to satisfy our funding requirements through 2004. If our losses continue, we will have to obtain funds to meet our cash requirements through
business alliances, such as strategic or financial transactions with third parties, the sale of
securities or other financing arrangements, or we may be required to curtail our operations, seek a
merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may 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 raising additional funds or entering into
business alliances. (3) Prepaid Expenses and Other Current Assets Prepaid expenses and other consists of the following: December 31, 2004
    
    
    December 31, 2003Prepaid insurance
    
    $
    49,270
    
    
    $
    115,673Prepaid trade shows
    
    
    32,750
    
    
    
    30,949Prepaid other
    
    
    15,144
    
    
    
    1,868$
    97,164
    
    
    $
    148,490
 (4) Property, Plant and Equipment Property, plant and equipment consist of the following: Amortization/DepreciationDecember 31, 2004
    
    
    December 31, 2003
    
    
    PeriodLeasehold improvements
    
    $
    66,435
    
    
    $
    66,435
    
    
    Lease termMachinery and equipment
    
    
    1,785,466
    
    
    
    1,744,467
    
    
    5 yearsFurniture and fixtures
    
    
    128,675
    
    
    
    128,675
    
    
    
    5 to 10 years1,980,576
    
    
    
    1,939,577Accumulated depreciation and amortization
    
    
    (1,931,181
    )
    
    
    (1,877,821
    )Property, plant and equipment, net
    
    $
    49,395
    
    
    $
    61,756
 Depreciation totaled $52,823 and $143,032 during 2004 and 2003, respectively. (5) Intellectual property Intellectual property consists of the following: WeightedAverageRemainingUsefulLives atDecember 31,
    
    
    December 31,
    
    
    Useful
    
    
    December 31,2004
    
    
    2003
    
    
    Lives
    
    
    2004Purchased RFID technology
    
    $
    1,714,449
    
    
    $
    1,714,449
    
    
    5 years
    
    
    Purchased video technology
    
    
    5,087,483
    
    
    
    5,087,483
    
    
    5 years
    
    0.1 yearsInternally developed software
    
    
    350,337
    
    
    
    350,337
    
    
    5 years
    
    
    7,152,269
    
    
    
    7,152,269Accumulated amortization and impairment
    
    
    (7,152,136
    )
    
    
    (7,002,565
    )Intellectual property, net
    
    $
    133
    
    
    $
    149,704
 The following table sets forth the estimated amortization expense on the intellectual property
for the fiscal years ended December 31: 2005
    
    
    133Total
    
    $
    133
 F- 11




---



##### Table of Contents



The video technology was acquired in 1999 and consists of proprietary digital video
compression technology used in video and CCTV products as well as the related U.S. and
international patent rights. The RFID technology was acquired in 1998 and includes a patent, trade secret rights software,
hardware, product designs and all other technical information necessary for the Company to
manufacture and market radio frequency identification products in the areas of access control and
asset management. Up to an aggregate of an additional $6,000,000 is payable by the Company to the
sellers of the RFID technology only if certain net operating profit targets are realized during
each of the five years following the acquisition date. Such payments would be treated as additional
cost of the RFID technology, if and when paid, and amortized over the remaining economic life of
the technology. At December 31, 2004 and December 31, 2003, no additional consideration was due to
the sellers. Internally developed software costs were capitalized once the technological feasibility was
achieved. These costs are reviewed for recoverability based on the expected future cash flows to be
generated. Amortization expense of intellectual property totaled $149,571 and $297,541 during 2004 and
2003, respectively. (6) Accrued Liabilities Accrued liabilities consist of the following: December 31, 2004
    
    
    December 31, 2003Accrued vacation
    
    $
    161,919
    
    
    $
    147,404Accrued interest payable
    
    
    431,449
    
    
    
    314,751Accrued professional fees, litigation settlements and other
    
    
    196,221
    
    
    
    340,200$
    789,589
    
    
    $
    802,355
 (8) Lease Obligations The Company leases its office space and certain equipment under operating leases. Annual
rental expense recorded for operating leases was $80,610 and $106,813 for the years ended December
31, 2004 and 2003, respectively. The Companys Carrollton, Texas facility is on a one year lease
through October 31, 2005 and the California lease runs through September 2005. At December 31,
2004, future minimum lease payments on operating leases were $66,065 all due in 2005. (9) Notes Payable to Stockholders (including convertible notes payable) Notes payable consist of the following: December 31, 2004
    
    
    December 31, 2003Due to stockholders:5.00% PV Proceeds Holdings, Inc., due December 31, 2007
    
    $
    3,538,305
    
    
    $
    3,665,1695.00% Amphion Investment LLC note, due December 31, 2007
    
    
    393,787
    
    
    
    393,7877.00% convertible debt
    
    
    720,000
    
    
    
    1,288,333
    )Discount relating to 7.00% convertible debt
    
    
    (323,566
    )
    
    
    (680,457
    )4,328,526
    
    
    
    4,666,832Less current maturities including discount amortization
    
    
    (193,851
    )
    
    
    Non-current notes payable to stockholders
    
    $
    4,134,675
    
    
    $
    4,666,832
 The following table sets forth the maturities for notes payable for the fiscal years ended
December 31: 2005
    
    $
    483,3332006
    
    
    236,6672007
    
    
    3,932,092$
    4,652,092
 Amphion Ventures LP Axcess reached an agreement with Amphion Ventures LP with regards to a note payable between
the Parties. Axcess was indebted to Amphion Ventures LP for $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 off against each other there by reducing the debt owed Amphion
Ventures LP by Axcess to $818,722. Amphion Ventures LP also agreed to convert the remaining amount
of demand notes and accrued interest into 294,476 common shares and an equal number of warrants
priced at $2.75 that will expire on November 30, 2005. These shares and warrants were issued
during 2004. As a result of the above-described F- 12




---



##### Table of Contents



transactions, Axcess recorded a loss on debt settlement charge of $362,050 for the excess of
the value of the shares and warrants issued over the book value of the notes during the year ended
December 31, 2003. PV Proceeds Holdings, Inc. On July 28, 1999, the Company acquired substantially all of the assets of PV Proceeds
Holdings, Inc. (formerly Prism Video), a privately held corporation, and agreed 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. note issued was due in full by the Company on December 31, 2002 and was in
default during 2003 until extended by PV Proceeds Holdings, Inc. The note payable had an original
face amount of $4,000,000 and was collateralized by the Companys note receivable from Amphion
Ventures, LP (Amphion Ventures) (Note 7). Pursuant to the Asset Purchase Agreement between AXCESS
and PV Proceeds Holdings, Inc., AXCESS assigned PV Proceeds Holdings, Inc. all payments of
principal to be made by Amphion Ventures under the note receivable until the balance of the note
receivable was paid in full or the balance due under the note payable to PV Proceeds Holdings, Inc.
was paid in full, whichever occurred first. In addition, the shares of common stock, which PV
Proceeds Holdings, Inc. may acquire upon conversion of preferred stock or by exercise of the
warrant, were subject to a three-year lockup from the date of the closing, which could be reduced
to two years upon the occurrence of certain events. The warrant was exercisable on or before July
28, 2004. Axcess reached an Agreement to Amend Purchase Note and Payment Term with PV Proceeds Holdings,
Inc. the holders of a $4.0 million non-interest bearing note that was due December 31, 2002 and was
in default. PV Proceeds consented to a five-year extension of the note with an interest rate of 5%
per annum from January 1, 2003 payable in full at maturity of December 31, 2007. As further
consideration for entering into the agreement Axcess granted to PV Proceeds Holdings, Inc. a
warrant to purchase up to 500,000 shares of common stock of Axcess. The warrants have an exercise
price of $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 are paid. Axcess has also agreed to reduce the
principal amount due first for 10% of equity proceeds and second 20% of proceeds from options
exercised. Axcess also recorded deferred debt issuance costs of $689,932 for the value of the
warrants, which will be amortized over the life of the loan. The deferred debt issuance costs had
an amortized value of $506,889 and 675,852 at December 31, 2004 and 2003, respectively. VennWorks LLC In December 2003, VennWorks agreed to convert the entire amount of their outstanding demand
notes ($1,130,233) plus all accrued unpaid interest ($171,240) into 1,831,332 common shares and an
equal number of warrants priced at $2.75 that will expire on November 3, 2005. The shares and
warrants were issued during 2004. As a result of the above-described transaction, Axcess recorded
a loss on debt settlement charge of $6,041,691 for the excess of the value of the shares and
warrants issued over the book value of the notes during the year ended December 31, 2003. JP Morgan SBIC LLC (formerly known as J.P. Morgan Investment Corporation) Axcess issued to JP Morgan a Senior Promissory Note (Note) originally entered on June 25,
1997 and the last amendment was on April 12, 2002. The Note was due on December 31, 2003 and as of
December 31, 2003 had an outstanding principal balance of $400,000 and unpaid interest thereon of
$169,796. JP Morgan agreed to convert that amount of notes and accrued interest into 227,918
common shares. As a result of the above-described transaction, Axcess recorded a restructuring
gain on debt settlement of $75,213 during the year ended December 31, 2003. Amphion Investment LLC Axcess entered into a 6.75% convertible note with Amphion Investments, LLC, dated January 25,
2002. The principal outstanding under this note may be converted into securities of Axcess at the
option of Amphion Investments on terms yet to be specified. The borrowings are unsecured and are
due and payable on demand by Amphion Investments. As of November 30, 2003, there was an outstanding
balance of $350,000 on this note and accrued interest of $43,787. Axcess reached an agreement with Amphion Investment LLC with regards to the above-described
note executed between them for $393,787 of principal and accrued interest. Amphion Investment
LLC consented to a five-year extension of the note with an interest rate of 5% per annum from
January 1, 2003 payable in full at maturity of December 31, 2007. 7% Convertible Note On July 30, 2002, the Company entered into a bridge financing agreement with ten accredited
investors for the sale and issuance of 10 units to the investors for an aggregate purchase price
of $1,000,000. Each unit consists of a convertible promissory note in the amount of $100,000 and
25,000 unregistered shares of the Companys common stock. Pursuant to the bridge financing agreement, the Company registered the shares of common stock
comprising the units in December 2003. Each investor has agreed to not sell more than one-third of
the common stock comprising the units during any calendar month. The convertible promissory notes
comprising the units bear interest at an annual rate of 7% and mature on July F- 13




---



##### Table of Contents



30, 2005. On each of July 30, 2003, July 30, 2004 and July 30, 2005, the investors have the
option to convert one-third of the principal amount of the notes into common stock of the Company.
The conversion price of the notes is initially 65% of the average closing price of a share of the
Companys common stock for the 20 trading days preceding the given 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. The conversion price will be subject to adjustment from time to time to reflect
any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split or similar change in the Companys shares of common stock. The Company without premium or
penalty may prepay the notes in whole or in part. In July 2003, one holder elected to convert one-third of his note plus accrued interest into
11,629 shares of Axcess common stock. During 2004, nine holders elected to convert $500,000 of
their notes plus $122,313 of accrued interest into 399,721 shares of Axcess common stock, which
were issued during 2004. In connection with this bridge financing, the Company recorded a $1,000,000 debt discount due
to the value of the equity consideration and beneficial conversion of the financing, pursuant to
the guidance issued by the Emerging Issues Task Force. The debt discount is being amortized using
the effective interest method over the three-year life of the agreement. On January 17, 2003, Axcess entered into a bridge financing agreement with ten accredited
investors for the sale and issuance of 3.05 units to the investors for an aggregate purchase
price of $305,000. Each unit consists of a convertible promissory note in the amount of $100,000
and 50,000 unregistered shares of our common stock. Pursuant to the bridge financing agreement, the Company registered the shares of common stock
comprising the units of the bridge financing agreement. By agreement, each investor may not sell
more than one-third of the common stock comprising the units during any calendar month. The
convertible promissory notes comprising the units bear interest at an annual rate of 7% and mature
on January 31, 2006. On each of January 31, 2004, January 31, 2005 and January 31, 2006, the
investors have the option to convert one-third of the principal amount of the notes into common
stock of Axcess. The conversion price of the notes is initially 65% of the average closing price of
a share of our common stock for the twenty (20) trading days preceding the given 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. The conversion price will be subject to adjustment from time to
time to reflect any reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or similar change in our shares of common stock. The notes may be
prepaid in whole or in part by us without premium or penalty. In connection with this bridge financing, the Company recorded an $84,598 debt discount due to
the value of the equity consideration of the financing, pursuant to the guidance issued by the
Emerging Issues Task Force. The debt discount is being amortized using the effective interest
method over the three-year life of the agreement. During 2004 nine holders elected to convert $68,333 of their note plus $18,646 of accrued
interest into 72,947 shares of Axcess common stock, which were issued during 2004. During 2004
the Board elected to convert $9,018 of accrued and unpaid interest into 3,681 shares of Axcess
common stock. (10) Preferred Stock The Company has authorized 7,000,000 shares of convertible preferred stock, of which shares
designated in five series have been issued. Information with respect to the series of preferred
stock outstanding at each balance sheet date is summarized below. Series I
    
    
    Series J
    
    
    2003B Series
    
    
    Series 2004Number of shares authorized
    
    
    2,500
    
    
    
    2,500
    
    
    
    2,750,000
    
    
    
    625,000Stated value
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    0.01
    
    
    $
    0.01Number of shares issued
and outstanding:December 31, 2003
    
    
    52
    
    
    
    2
    
    
    
    1,790,000
    
    
    
    December 31, 2004
    
    
    
    
    
    
    
    
    
    
    1,790,000
    
    
    
    625,000Conversion ratio (or
conversion price) of
preferred shares into
    
    $2.51 into voting
    
    $2.51 into voting
    
    
    1 to 1 into voting
    
    
    
    1 to 1 into voting commoncommon
    
    common stock
    
    common stock
    
    common stock
    
    stockLiquidation preference
    
    Stated value plus
    
    Stated value plusaccrued dividends
    
    accrued dividends
    
    None
    
    NoneDividend rights
    

    8% per annum,
    
    8% per annum,
    
    7% per
    
    7% percumulative
    
    cumulative
    
    annum, cumulative
    
    annum, cumulative
 F- 14




---



##### Table of Contents



(a)     Series
A, Series B and Series C Convertible Preferred Stock As of December 31, 2004 and December 31, 2003, the Company had no Series A or Series B
Convertible Preferred shares outstanding. The holders of the Companys Series C Preferred Stock are
entitled to receive quarterly dividends on each such share held at the annual rate of 10% of the
original issue price of each share payable in arrears, when, as and if declared by the Companys
board of directors, in cash or additional shares of preferred stock at the option of the holder. During 2003, Jackson Hole converted 11,522 shares of Series C Preferred Stock plus accrued
dividends into an aggregate of 173,858 shares of the Companys common stock. As of December 31,
2004 and 2003, the Company had no Series C Convertible Preferred shares outstanding. The holders of the Companys Series C Preferred Stock were entitled to receive quarterly
dividends on each such share held at the annual rate of 10% of the original issue price of each
share payable in arrears, when, as and if declared by the Companys board of directors, in cash or
additional shares of preferred stock at the option of the holder. (b) Series I and J Convertible Preferred Stock Each Share of Series I Preferred Stock and Series J Preferred Stock are convertible in whole
or in part at any time at the option of the holder into a number of shares of voting or non-voting
common stock of the Company, respectively, equal to the quotient of (a) the aggregate original
issue price of $10,000 per share divided by (b) the conversion price of $2.51 per share. The Series
I Preferred Stock and the Series J Preferred Stock are both subject to optional redemption at any
time by the Company, in whole or in part, at a redemption price per share equal to the stated
value, plus any accrued, but unpaid dividends thereon. The Companys optional right of redemption
is subject to each Series I Preferred Stock or Series J Preferred Stockholders right to convert
such Series I Preferred Stock or Series J Preferred Stock into voting or non-voting common stock,
as the case may be, within ten business days after the Companys notice of redemption. The Series I Preferred Stock and the Series J Preferred Stock are also subject to the
mandatory conversion by the Company into shares of the Companys voting or non-voting common stock,
as the case may be, if the closing bid price of the Companys common stock on the NASDAQ SmallCap
Market is at least $10.00 per share for a period of at least ninety (90) consecutive trading days. The holders of Series I Preferred Stock and Series J Preferred Stock are entitled to receive
semi-annual dividends on each such share at the annual rate of 8% of the original issue price of
each share payable in arrears, when, as and if declared by the Companys board of directors, in
cash or additional shares of preferred stock. Shares of Series I Preferred Stock and Series J
Preferred Stock are convertible into shares of common stock at a conversion price of $2.51 per
share. The Company has accrued $0 and $95,182 of dividends payable for Series I Preferred Stock at
December 31, 2004 and December 31, 2003, respectively. The Company has also accrued $0 and $3,384
of dividends payable for Series J Preferred Stock at December 31, 2004 and December 31, 2003,
respectively. During December 2003, the Company reached an agreement with the Antiope Partners LLC that
converted 65 shares of Preferred Series I (plus accrued dividends) and 157 shares of Preferred
Series J (plus accrued dividends) into 1,030,648 shares of common stock of Axcess. During December 2003, the Company reached an agreement with the Jackson Hole that converted 15
shares of the Preferred Series J (plus accrued dividends) into 68,208 shares of common stock of
Axcess. During December 2003, the Company reached an agreement with the JP Morgan SBIC LLC that
converted 9 shares of Preferred Series I (plus accrued dividends) and 2 shares of Preferred Series
J (plus accrued dividends) into 53,763 shares of common stock of Axcess. During December 2004, the Company reached an agreement with the Ardinger that converted 52
shares of Preferred Series I (plus accrued dividends) and 2 shares of Preferred Series J (plus
accrued dividends) into 258,417 shares of common stock of Axcess. As of December 31, 2004, the Company had no shares of Preferred Series I and no shares of
Preferred Series J outstanding. (c) Series 1999 and 2000 Preferred Stock In connection with the purchase of the Prism video assets during 1999, the Company issued 125
shares of Series 1999 Preferred Stock (Series 1999 Preferred Stock). Dividends are
payable-semi-annually on each share at the annual rate of 8% in cash or in additional shares of
Series 1999 Preferred Stock at the option of the Company. Shares of 1999 Preferred Stock are
convertible into shares of Common Stock at a conversion price of $2.51 per share. F- 15




---



##### Table of Contents



The shares of common stock which Prism acquired upon conversion of the Series 1999 Preferred
Stock are subject to a three-year lockup from the date of the closing, which may be reduced to two
years upon the occurrence of certain events Prior to 2003, all but 152 shares of the Companys Series 1999 Preferred Stock were converted
into common stock. During December 2003, the Company reached an agreement with the holder of the preferred series
1999 that converted 152 shares of Preferred Series 1999 (plus accrued dividends) into 692,142
shares of common stock of Axcess. As of December 31, 2004, the Company had no Series 1999 or 2000
Preferred shares outstanding. (d) Series 2003 Preferred Stock The Company completed a $1,537,500 Preferred Stock Offering during May of 2003. The Preferred
Stock is designated as 2003 Preferred and 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 purchase the Companys common stock exercisable for two years at $1.00 per share. The
offering also included an automatic conversion into Common Stock on a one for one basis if the
closing twenty-day average stock price is over $2.00. On June 5, 2003 the closing twenty-day
average was at $2.02 and the 2003 Preferred converted to 2,050,001 shares of Common Stock. As of
December 31, 2004, the Company had no Series 2003 Preferred shares outstanding. In connection with the issuance of the 2003 Preferred Stock, the Company recorded preferred
stock dividends of $1,460,625 which are reflected in the income statement. (e) Series 2003B Preferred Stock The Company completed a $3,132,500 Preferred Stock Offering during the fourth quarter of 2003.
The Preferred Stock is designated as 2003B Preferred and each $70,000 unit consisted of 40,000
shares of Preferred Stock bearing a 7% dividend, approximately 2,000 shares of common stock and
40,000 warrants to purchase the Companys common stock exercisable for two years at $2.75 per
share. The offering also included an automatic conversion into Common Stock on a one for one basis
if the closing twenty-day average stock price is over $3.75. The Company has also accrued $247,309
of dividends payable for Series 2003B Preferred Stock at December 31, 2004. As of December 31,
2004, the Company had 1,790,000 shares of Series 2003B Preferred shares outstanding. In connection with the issuance of the 2003B Preferred Stock, the Company recorded preferred
stock dividend requirements of $1,782,831 that will be reflected as preferred stock dividends as
the underlying preferred stock converts to common stock. As of December 31, 2004 that amount is
reflected in accumulated deficit on the balance sheet. (f) Series 2004 Preferred Stock During the second quarter of 2004 the Company raised a net of $1,200,000 of additional working
capital through a Preferred Stock Offering. The Preferred Stock is designated as 2004 Preferred and
consisted of 625,000 shares of Preferred Stock bearing a 7% dividend and 357,142 warrants to
purchase the Companys common stock exercisable for two years at $3.20 per share. The offering also
included an automatic conversion into Common Stock on a one for one basis if the closing twenty-day
average stock price is over $4.00. The Company has also accrued $68,753 of dividends payable for
Series 2004 Preferred Stock at December 31, 2004. As of December 31, 2004, the Company had 625,000
shares of Series 2004 Preferred shares outstanding. In connection with the issuance of the 2004 Preferred Stock, the Company recorded preferred
stock dividend requirements of $1,002,540 that will be reflected as preferred stock dividends as
the underlying preferred stock converts to common stock. As of December 31, 2004 that amount is
reflected in accumulated deficit on the balance sheet. The Series I and the Series J Preferred Stock rank senior in right of payment to the Companys
common stock. (11) Employee Benefit Plans The Company sponsors a 401(k) retirement plan. The Company, at its discretion, matches a
portion of the participants contribution. Participants are vested in the Companys matching
contribution after 4 years of full time service and may join the plan January or July of each year.
The Company suspended its matching contribution on February 28, 2001. (12) Stock Options and Warrants (a) Stock Option Plans. Under the Companys 2001 Equity Incentive Plan, the Company may grant up to 2,000,000 shares
of common stock to its employees. The exercise price of each option is not less than the market
price of the Companys stock on the date of grant and an options maximum term is ten years. The
Company has issued stock options to various members of the Board of Directors and officers of the
Company under this plan. Options are generally granted each year and have various vesting
requirements. Options granted typically vest over a four-year period. During 2004 and 2003, the
Company made grants of 190,000 and 0 options, F- 16




---



##### Table of Contents



respectively, as an inducement for the employment of certain employees and officers of the
Company, which does not reduce the 2,000,000 options available for grant under the stock option
plan. In 1998, the Company adopted a director compensation plan pursuant to which it pays each
director who is not employed by the Company and who does not beneficially own more than 5% of the
shares of common stock outstanding an annual grant of 5,000 options to acquire common stock of the
Company at an exercise price equal to the fair market value per share of the common stock at the
time the option is granted (the Annual Grant). The Annual Grant customarily occurs on the date of
the Companys annual meeting. The director compensation plan also provided for a one-time initial
grant of 15,000 to each director of the Company as of July 21, 1998, the date the director
compensation plan was approved by the Companys stockholders (the Initial Grant). The Company has
authorized 150,000 shares for issuance under this plan. Stock option transactions for the years ended December 31, 2004 and 2003 are summarized below: 2004
    
    
    2003WEIGHTED
    
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    PRICEOPTIONS
    
    
    PRICE
    
    
    OPTIONS
    
    
    EXERCISEOptions outstanding at beginning of year
    
    
    2,468,465
    
    
    $
    2.40
    
    
    
    2,175,999
    
    
    $
    3.20Options granted
    
    
    905,749
    
    
    
    2.10
    
    
    
    1,000,000
    
    
    
    0.40Options exercised
    
    
    (85,800
    )
    
    
    0.40
    
    
    
    (30,750
    )
    
    
    1.70Options forfeited
    
    
    
    
    
    
    
    
    
    
    (676,784
    )
    
    
    2.04Options outstanding at end of year
    
    
    3,288,414
    
    
    
    2.37
    
    
    
    2,468,465
    
    
    
    2.40Options exercisable at end of year
    
    
    2,113,755
    
    
    
    2.10
    
    
    
    1,840,670
    
    
    
    1.94Options available for grant at the end of the year
    
    
    1
    
    
    
    
    
    
    
    715,750Fair value of options granted during the year
    
    
    1,552,141
    
    
    
    
    
    
    
    270,000
 The options outstanding at December 31, 2004 have exercise prices as indicated in the table below. Number of
    
    
    Weighted AverageOption Price
    
    Options
    
    
    Remaining Life$0.00 - $1.00
    
    
    769,700
    
    
    
    8.95$1.01 - $2.00
    
    
    1,159,999
    
    
    
    8.79$2.01 - $3.00
    
    
    889,375
    
    
    
    6.19$3.01 - $4.00
    
    
    201,340
    
    
    
    5.84$4.01 - $5.00
    
    
    20,000
    
    
    
    6.42$5.01 - $6.25
    
    
    248,000
    
    
    
    5.22Total
    
    
    3,288,414
    
    
    
    7.66
 The Company has issued warrants to purchase common stock in connection with issuance of notes
payable to stockholders, convertible debentures, and preferred stock. The following table
summarizes warrants outstanding at December 31: 2004
    
    
    
    
    
    
    
    
    
    
    2003WARRANTS
    
    EXERCISE PRICE
    
    
    EXPIRATION
    
    
    WARRANTS
    
    
    EXERCISE PRICE
    
    
    EXPIRATION7,918,947
    
    $
    0.65-3.20
    
    
    
    05/05 - 02/08
    
    
    
    8,242,167
    
    
    $
    0.65-3.00
    
    
    
    07/04 - 02/087,918,947
    
    
    
    
    
    
    
    
    
    
    8,242,167
 During the twelve months ended December 31, 2004 the Company issued an additional 357,142
warrants in conjunction with the 2004 preferred equity offering. The warrant price is $3.20 and
they expire on May 6, 2006. (13) Contingencies Pioneer Standard Electronics, Incorporated (Pioneer), filed a lawsuit against the Company in
the county court in Dallas County, Texas on September 28, 2001. Pioneer was a vendor to the
Company and seeks damages of $81,533 for non-payment for services provided. During the first
quarter of 2003, Pioneer was granted a judgment for the entire amount. The Company reached a
settlement with Pioneer in 2003 and is making payments under the settlement agreement. Axcess is also engaged in a number of lawsuits with approximately eight vendors who claim they
are owed amounts from $500 to $45,000, which aggregates in total $104,205. We are currently
defending or seeking to settle each of the vendors claims. At December 31, 2004, we had accrued
the delinquent amounts we expect to be liable for, for the claims described in
this paragraph. F- 17




---



##### Table of Contents



(14) Income Taxes There was no provision for income taxes for the years ended December 31, 2004 and 2003 due to
the net loss incurred for each year. The Company had no material deferred tax liabilities at
December 31, 2004. The Company had the following deferred tax assets at December 31, 2003 as follows: Net operating loss
    
    $
    16,254,000Property and equipment
    
    
    1,738,000Other
    
    
    82,000Valuation allowance
    
    
    (18,074,000
    )$
    
 The valuation allowance increased by approximately $1,474,000 and $1,400,000 during the years
ended December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, the Company had a net operating loss carry forward of
approximately $43,811,000 and $39,300,000, respectively for U.S. federal income tax purposes. The
net operating loss will expire from 2005 through 2018. A change in ownership, as defined for purposes of the Internal Revenue Code, occurred in 1996
and the Company believes that a subsequent ownership change occurred during 1998, each of which
limit the annual utilization of the U.S. federal net operating loss carry forward under the
applicable Internal Revenue Service. Other portions of the net operating loss may also be limited
due to subsequent ownership changes. (15) Subsequent Event During the first quarter of 2005 the Company received a net of $1,626,684 of additional
working capital from the exercise of 1,700,001 warrants. The Company offered to all warrant holders
that held warrants expiring on May 15, 2005 an inducement to exercise those warrants prior to
February 1, 2005. The Company offered an additional warrant with an exercise price of $1.50 with
an expiration date of January 28, 2010 for each warrant exercised. Therefore the Company issued an
additional 1,700,001 warrants during the first quarter of 2005. In February 2005, one holder of the July 30, 2002 Convertible Note elected to convert $33,333
of his original note plus $4,004 of accrued interest into 37,791 shares of Axcess common stock,
which were issued during the first quarter of 2005. In February 2005, two holders of the January 17, 2003 Convertible Note elected to convert
$73,334 of their notes plus $5,093 of accrued interest into 79,301 shares of Axcess common stock,
which were issued during the first quarter of 2005. During the first quarter of 2005, four employees exercised 36,800 stock options. F- 18