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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    85-0294536
(I.R.S. Employer Identification No.)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
 o þ
  o þ




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##### Table of Contents



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at September 30, 2005 and December 31, 2004Statements of Operations for the Three Months ended September 30, 2005 and 2004 and for the Nine Months ended September 30, 2005 and 2004Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004Notes to Financial StatementsItem 2. Managements Discussion and Analysis or Plan of OperationItem 3. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESConvertible NotePatent Purchase AgreementCertification Under Section 302Certification Under Section 302Certification Under Section 906Certification Under Section 906




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PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    81,419
    
    
    $
    461,101Accounts receivable  trade, net of allowance for doubtful accounts of
$19,192 in 2005 and $8,859 in 2004
    
    
    96,211
    
    
    
    79,965Inventory, net
    
    
    204,381
    
    
    
    144,714Prepaid expenses and other
    
    
    113,425
    
    
    
    97,164Total current assets
    
    
    495,436
    
    
    
    782,944Property, plant and equipment, net
    
    
    34,301
    
    
    
    49,395Intellectual property, net
    
    
    
    
    
    
    133Deferred debt issuance costs
    
    
    380,167
    
    
    
    506,889Other assets
    
    
    2,691
    
    
    
    3,906Total assets
    
    $
    912,595
    
    
    $
    1,343,267LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    294,425
    
    
    $
    490,100Accrued liabilities
    
    
    932,830
    
    
    
    789,589Notes payable:Convertible notes payable (includes $80,000 and $66,667 with
related party in 2005 and 2004, respectively)
    
    
    430,000
    
    
    
    483,333Discounts on convertible debt
    
    
    (15,296
    )
    
    
    (289,482
    )Dividends payable
    
    
    127,045
    
    
    
    316,062Total current liabilities
    
    
    1,769,004
    
    
    
    1,789,602Notes payable to stockholders
    
    
    3,709,070
    
    
    
    3,932,092Convertible notes payable (includes $13,333 with related party in 2004)
    
    
    
    
    
    
    236,667Discount on convertible debt
    
    
    
    
    
    
    (34,084
    )Total liabilities
    
    
    5,478,074
    
    
    
    5,924,277Commitments and contingenciesStockholders deficit:Convertible preferred stock, 7,000,000 shares authorized, $0.01 par
value, 2,415,000 shares issued and outstanding in 2005 and 2004.
    
    
    24,150
    
    
    
    24,150Common stock, $.01 par value, 50,000,000 shares authorized in 2005 and
2004; 27,402,744 shares issued and outstanding in 2005 and 24,720,939
shares issued and outstanding in 2004
    
    
    274,028
    
    
    
    247,209Shares of common stock to be issued, 5,333 shares in 2005
    
    
    53
    
    
    
    Additional paid-in capital
    
    
    152,599,246
    
    
    
    149,898,600Accumulated deficit
    
    
    (157,462,956
    )
    
    
    (154,750,969
    )Total stockholders deficit
    
    
    (4,565,479
    )
    
    
    (4,581,010
    )Total liabilities and stockholders deficit
    
    $
    912,595
    
    
    $
    1,343,267
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Sales
    
    $
    204,711
    
    
    $
    301,889
    
    
    $
    652,687
    
    
    $
    733,695Cost of sales
    
    
    109,797
    
    
    
    141,313
    
    
    
    357,689
    
    
    
    364,986Gross profit
    
    
    94,914
    
    
    
    160,576
    
    
    
    294,998
    
    
    
    368,709Expenses:Research and development
    
    
    177,221
    
    
    
    176,791
    
    
    
    569,141
    
    
    
    528,683General and administrative
    
    
    341,286
    
    
    
    324,970
    
    
    
    1,032,269
    
    
    
    1,191,049Selling and marketing
    
    
    237,752
    
    
    
    238,278
    
    
    
    782,867
    
    
    
    585,022Depreciation and amortization
    
    
    5,734
    
    
    
    11,129
    
    
    
    22,718
    
    
    
    193,195Operating expenses
    
    
    761,993
    
    
    
    751,168
    
    
    
    2,406,995
    
    
    
    2,497,949Loss from operations
    
    
    (667,079
    )
    
    
    (590,592
    )
    
    
    (2,111,997
    )
    
    
    (2,129,240
    )Other income (expense):Interest expense
    
    
    (193,785
    )
    
    
    (157,012
    )
    
    
    (605,522
    )
    
    
    (814,565
    )Gain in vendor settlements
    
    
    75,144
    
    
    
    9,304
    
    
    
    248,960
    
    
    
    162,056Other
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    6,549Other expense, net
    
    
    (118,641
    )
    
    
    (147,668
    )
    
    
    (356,562
    )
    
    
    (645,960
    )Net loss
    
    
    (785,720
    )
    
    
    (738,260
    )
    
    
    (2,468,559
    )
    
    
    (2,775,200
    )Preferred stock dividend requirements:Recurring
    
    
    (81,735
    )
    
    
    (81,735
    )
    
    
    (243,428
    )
    
    
    (217,746
    )Warrant inducement
    
    
    
    
    
    
    
    
    
    
    (2,060,397
    )
    
    
    Preferred stock dividend requirements
    
    
    (81,735
    )
    
    
    (81,735
    )
    
    
    (2,303,825
    )
    
    
    (217,746
    )Net loss applicable to common stock
    
    $
    (867,455
    )
    
    $
    (819,995
    )
    
    $
    (4,772,384
    )
    
    $
    (2,992,946
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.18
    )
    
    $
    (0.13
    )Weighted average shares of common stock outstanding
    
    
    27,288,181
    
    
    
    24,691,500
    
    
    
    26,654,901
    
    
    
    23,535,807
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AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (2,468,559
    )
    
    $
    (2,775,200
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    22,718
    
    
    
    193,195Amortization of financing discount and issuance costs
    
    
    434,992
    
    
    
    618,790Shares issued for services rendered
    
    
    
    
    
    
    65,000Gain on vendor settlements
    
    
    (248,960
    )
    
    
    (162,056
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (16,246
    )
    
    
    3,968Inventory
    
    
    (59,667
    )
    
    
    11,030Prepaid expenses and other
    
    
    (16,261
    )
    
    
    38,507Other assets
    
    
    1,215
    
    
    
    (1,032
    )Accounts payable
    
    
    245,783
    
    
    
    (186,853
    )Accounts payable and accrued expenses
    
    
    
    
    
    
    120,127Net cash used by operating activities
    
    
    (2,104,985
    )
    
    
    (2,074,524
    )Cash flow from investing activities:Capital expenditures
    
    
    (7,491
    )
    
    
    (33,040
    )Net cash used by investing activities
    
    
    (7,491
    )
    
    
    (33,040
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    1,933,775
    
    
    
    1,200,000Net proceeds from issuance of common stock from employee options
    
    
    22,040
    
    
    
    25,440Principal payments on financing agreements
    
    
    (223,021
    )
    
    
    (125,088
    )Net cash provided by financing activities
    
    
    1,732,794
    
    
    
    1,100,352Net change in cash and cash equivalents
    
    
    (379,682
    )
    
    
    (1,007,212
    )Cash and cash equivalents, beginning of period
    
    
    461,101
    
    
    
    2,163,977Cash and cash equivalents, end of period
    
    $
    81,419
    
    
    $
    1,156,765Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    290,000
    
    
    $
    568,333Conversions of accrued interest into common stock
    
    
    49,257
    
    
    
    149,978Conversions of preferred stock into common stock
    
    
    
    
    
    
    536,623Conversion of accrued dividends into common stock
    
    
    432,446
    
    
    
    109,417Preferred stock dividends accrued
    
    
    243,429
    
    
    
    217,746
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AXCESS
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Description of Business
     (b) Company Organization and Basis of Presentation
   (c) Inventory
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    57,987
    
    
    $
    56,701Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    146,285
    
    
    
    87,904$
    204,381
    
    
    $
    144,714




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(d) Stock Options
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (867,455
    )
    
    $
    (819,995
    )
    
    $
    (4,772,384
    )
    
    $
    (2,992,946
    )Less: fair value of employee stock compensation
    
    
    (158,935
    )
    
    
    (167,488
    )
    
    
    (531,383
    )
    
    
    (384,541
    )Pro forma net loss attributed to common stock
    
    
    (1,026,390
    )
    
    
    (987,483
    )
    
    
    (5,303,767
    )
    
    
    (3,377,487
    )Loss per common shareBasic and diluted net loss per share  as reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.18
    )
    
    $
    (0.13
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.20
    )
    
    $
    (0.14
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.25
    %
    
    
    4.62
    %
    
    
    4.25
    %
    
    
    4.67
    %Expected life
    
    3 years
    
    6.5 years
    
    3 years
    
    6.7 yearsExpected volatility
    
    
    164
    %
    
    
    134
    %
    
    
    164
    %
    
    
    129
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 (e) Recent Accounting Pronouncements
 Accounting for Stock-Based Compensation.
 (2) Contingencies




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(3) Preferred Stock
  2003B
    
    SeriesSeries
    
    2004Number of shares authorized
    
    
    2,750,000
    
    
    
    625,000Stated value
    
    $
    0.01
    
    
    $
    0.01Number of shares issued and outstanding:December 31, 2004
    
    
    1,790,000
    
    
    
    625,000September 30, 2005
    
    
    1,790,000
    
    
    
    625,000Conversion ratio (or
    
    
    1 to 1
    
    
    
    1 to 1conversion price) of
    
    into voting
    
    into votingpreferred shares into
    
    common
    
    commoncommon
    
    stock
    
    stockLiquidation preference
    
    None
    
    NoneDividend rights
    
    7% per
    
    7% perannum, cumulative
    
    annum, cumulative
 (a) Series 2003B Preferred Stock
   (b) Series 2004 Preferred Stock




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(4) Convertible Notes Payable
     (5) Significant Customers




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Item 2. Managements Discussion and Analysis or Plan of Operation
 Forward-Looking Statements
     Recent Developments: Going Concern and Liquidity Problems
   Liquidity and Capital Resources




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Patent Sale
  Warrants Exercised
   Sales and Marketing Initiatives
  1.
    
    We modified our indirect approach to more of a direct approach to gain visibility into
the sales cycle;2.
    
    We continue to add integrators and partners to our sales channel;3.
    
    We are searching for a new Vice President of Sales.
  Results of Operations
 Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
 Sales and Gross Profit




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Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
 Sales and Gross Profit




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Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.
 Other
 Inflation




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Item 3. Controls and Procedures
 Controls and Procedures
      
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities
  Common Stock
  Warrants
  Convertible Notes
  SB-2 Registration Statement




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 Subsequent Event
     
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description10.1
    
    Axcess International Inc. Convertible Note.10.2
    
    Patent Purchase Agreement between Axcess International,
Inc. and Paolo Visual Data LLC entered on November 10,
2005.31.1
    
    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.




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SIGNATURES
  AXCESS INTERNATIONAL INC.,Registrant/s/ ALLAN GRIEBENOWAllan Griebenow Director, President andChief Executive Officer (Principal Executive Officer)/s/ ALLAN L. FRANKAllan L. FrankChief Financial Officer and Secretary(Principal Accounting and Financial Officer)