##### Table of Contents



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
1934FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2006
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 COMMISSION FILE NUMBER: 0-11933
 AXCESS INTERNATIONAL INC.
  Delaware
    
    85-0294536(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 3208 Commander Drive
Carrollton, Texas 75006
(972) 407-6080
 þ o
 o þ
  o þ




---



##### 



AXCESS INTERNATIONAL INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets at March 31, 2006 and December 31, 2005Statements of Operations for the Three Months ended March 31, 2006 and 2005Statements of Cash Flows for the Three Months ended March 31, 2006 and 2005Notes 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-KSIGNATURESCertification Under to Section 302Certification Under to Section 302Certification Under to Section 906Certification Under to Section 906




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,379,343
    
    
    $
    236,869Accounts receivable  trade, net of allowance for doubtful accounts of
$17,389 for 2006 and 2005
    
    
    303,322
    
    
    
    141,200Inventory, net
    
    
    151,215
    
    
    
    112,270Prepaid expenses and other
    
    
    94,041
    
    
    
    72,628Total current assets
    
    
    1,927,921
    
    
    
    562,967Property, plant and equipment, net
    
    
    25,624
    
    
    
    29,387Deferred debt issuance costs
    
    
    295,685
    
    
    
    337,926Other assets
    
    
    2,810
    
    
    
    2,699Total assets
    
    $
    2,252,040
    
    
    $
    932,979LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    555,076
    
    
    $
    252,155Accrued liabilities
    
    
    983,714
    
    
    
    959,149Notes payable:Convertible notes payable (includes $80,000 with related parties in 2005)
    
    
    
    
    
    
    396,666Discounts on convertible debt
    
    
    
    
    
    
    (5,520
    )Dividends payable
    
    
    289,626
    
    
    
    208,780Total current liabilities
    
    
    1,828,416
    
    
    
    1,811,230Notes payable to stockholders
    
    
    3,620,429
    
    
    
    3,709,071Total liabilities
    
    
    5,448,845
    
    
    
    5,520,301Commitments and contingencies (Notes 1 and 2)Stockholders deficit:Convertible preferred stock, 7,000,000 shares authorizedWith liquidation preference; no shares issued and outstanding in 2006
and 2005, respectively;
    
    
    
    
    
    
    Without liquidation preference; $0.01 par value, 5,123,550 and 3,371,495
shares issued and outstanding in 2006 and 2005, respectively
    
    
    51,235
    
    
    
    33,715Common stock, $.01 par value, 50,000,000 shares authorized in 2006 and
2005; 28,203,138 shares issued and outstanding in 2006 and 27,437,111
shares issued and outstanding in 2005
    
    
    282,032
    
    
    
    274,371Shares of common stock to be issued, 5,333 shares as of December 31, 2005
    
    
    
    
    
    
    53Non-voting convertible common stock, $.01 par value, 2,250,000 shares
authorized; no shares issued and outstanding in 2006 or 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    155,515,072
    
    
    
    153,436,725Accumulated deficit
    
    
    (159,045,144
    )
    
    
    (158,332,186
    )Total stockholders deficit
    
    
    (3,196,805
    )
    
    
    (4,587,322
    )Total liabilities and stockholders deficit
    
    $
    2,252,040
    
    
    $
    932,979
  1




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF OPERATION
 (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Sales
    
    $
    453,563
    
    
    $
    241,158Cost of sales
    
    
    274,629
    
    
    
    124,348Gross profit
    
    
    178,934
    
    
    
    116,810Expenses:Research and development
    
    
    603,690
    
    
    
    184,181General and administrative
    
    
    461,410
    
    
    
    355,463Selling and marketing
    
    
    266,244
    
    
    
    255,097Depreciation and amortization
    
    
    4,826
    
    
    
    9,073Operating expenses
    
    
    1,336,170
    
    
    
    803,814Loss from operations
    
    
    (1,157,236
    )
    
    
    (687,004
    )Other income (expense):Interest expense, net
    
    
    (95,263
    )
    
    
    (165,138
    )Gain in vendor settlements
    
    
    20,389
    
    
    
    108,710Gain on sale of intellectual property
    
    
    600,000
    
    
    
    Other income (expense), net
    
    
    525,126
    
    
    
    (56,428
    )Net loss
    
    
    (632,110
    )
    
    
    (743,432
    )Preferred stock dividend requirements:Recurring
    
    
    (80,847
    )
    
    
    (80,847
    )Warrant inducement
    
    
    
    
    
    
    (2,060,397
    )2005 Preferred equity offering
    
    
    (1,489,245
    )
    
    
    Preferred stock dividend requirements
    
    
    (1,570,092
    )
    
    
    (2,141,244
    )Net loss applicable to common stock
    
    $
    (2,202,202
    )
    
    $
    (2,884,676
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.11
    )Weighted average shares of common stock outstanding
    
    
    27,929,553
    
    
    
    25,728,563
  2




---



##### Table of Contents



AXCESS INTERNATIONAL INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (632,110
    )
    
    $
    (743,432
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation and amortization
    
    
    4,826
    
    
    
    9,073Amortization of financing discount and issuance costs
    
    
    47,761
    
    
    
    107,202Gain on vendor settlements and statutory write-off of payables
    
    
    (20,389
    )
    
    
    (108,710
    )Gain on sale of intellectual property
    
    
    (600,000
    )
    
    
    Stock based compensation expense
    
    
    188,235
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (162,122
    )
    
    
    31,412Inventory
    
    
    (38,945
    )
    
    
    (29,937
    )Prepaid expenses and other
    
    
    (21,413
    )
    
    
    (25,479
    )Other assets
    
    
    (112
    )
    
    
    1,232Accounts payable and accrued expenses
    
    
    367,984
    
    
    
    33,844Net cash used by operating activities
    
    
    (866,285
    )
    
    
    (724,795
    )Cash flow from investing activities:Capital expenditures
    
    
    (1,063
    )
    
    
    (758
    )Proceeds for sale of intellectual property
    
    
    600,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    598,937
    
    
    
    (758
    )Cash flow from financing activities:Net proceeds from issuance of common and preferred stock
    
    
    1,464,244
    
    
    
    Net proceeds from issuance of common stock from warrants
    
    
    32,500
    
    
    
    1,651,471Net proceeds from issuance of common stock from employee options
    
    
    1,720
    
    
    
    14,720Principal payments on financing agreements
    
    
    (88,642
    )
    
    
    (165,119
    )Net cash provided by financing activities
    
    
    1,409,822
    
    
    
    1,501,072Net change in cash and cash equivalents
    
    
    1,142,474
    
    
    
    755,519Cash and cash equivalents, beginning of period
    
    
    236,869
    
    
    
    461,101Cash and cash equivalents, end of period
    
    $
    1,379,343
    
    
    $
    1,236,620Supplemental Disclosure of Non-Cash Investing and Financing Activities:Conversions of notes payable into common stock
    
    $
    396,667
    
    
    $
    106,666Conversions of accrued interest into common stock
    
    
    20,110
    
    
    
    9,098Preferred stock dividends accrued
    
    
    80,847
    
    
    
    80,847
  3




---



##### Table of Contents



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
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    38,033
    
    
    $
    10,887Work-in-process
    
    
    109
    
    
    
    109Finished goods
    
    
    113,073
    
    
    
    101,274$
    151,215
    
    
    $
    112,270




---



##### Table of Contents



(d) Stock-Base Compensation
 Adoption of SFAS 123R
 Share-Based Payment
   Pro-Forma Stock Compensation Expense for the Quarterly Period Ended March 31, 2005
  Three Months EndedMarch 31, 2005Pro forma impact of fair value method (FAS 148)Reported net loss attributed to common stock
    
    $
    (2,884,676
    )Less: fair value of employee stock compensation
    
    
    (200,564
    )Pro forma net loss attributed to common stock
    
    
    (3,085,240
    )Loss per common shareBasic and
diluted net loss per share  as reported
    
    $
    (0.11
    )Basic and
diluted net loss per share  pro forma
    
    $
    (0.12
    )Weighted average Black-Scholes fair value assumptionsRisk free interest rate
    
    
    4.25
    %Expected life
    
    3 yearsExpected volatility
    
    
    164
    %Expected dividend yield
    
    
    0.0
    %
  March 31,
    
    
    March 31,2006
    
    
    2005Research and development expense
    
    $
    36,189
    
    
    $
    30,612General and administrative expense
    
    
    121,520
    
    
    
    129,886Selling and marketing expense
    
    
    30,526
    
    
    
    40,066$
    188,235
    
    
    $
    200,564




---



##### Table of Contents



Stock Options as of the Quarterly Period Ended March 31, 2006
   Outstanding OptionsWeighted
    
    
    Weighted AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual Term
    
    
    IntrinsicShares


    Price


    (in years


    ValueOptions outstanding at January 1, 2006
    
    
    3,117,485
    
    
    $
    2.40Options granted
    
    
    1,323,000
    
    
    
    1.04Options exercised
    
    
    (4,300
    )
    
    
    0.40Options forfeited
    
    
    (16,000
    )
    
    
    1.04Options outstanding at March 31, 2006
    
    
    4,420,185
    
    
    
    2.00
    
    
    
    7.18
    
    
    $
    474,865Options exercisable at March 31, 2006
    
    
    2,343,745
    
    
    
    2.22
    
    
    
    7.75
    
    
    $
    461,795Options available for grants as of March 31, 2006
    
    
    3,693,000
   Options Outstanding
    
    
    Options ExercisableWeighted Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Of
    
    
    AverageOf
    
    
    Contractual Term
    
    
    Exercise
    
    
    Options
    
    
    ExerciseRange of Exercise Price
    
    Options


    (in years)


    Price


    Exercisable


    Price$0.00  $1.00
    
    
    710,300
    
    
    
    6.80
    
    
    $
    0.40
    
    
    
    710,300
    
    
    $
    0.40$1.01  $2.00
    
    
    2,451,170
    
    
    
    8.72
    
    
    
    1.42
    
    
    
    480,980
    
    
    
    1.78$2.01  $3.00
    
    
    789,375
    
    
    
    4.47
    
    
    
    2.64
    
    
    
    683,125
    
    
    
    2.56$3.01  $4.00
    
    
    201,340
    
    
    
    4.59
    
    
    
    3.88
    
    
    
    201,340
    
    
    
    3.88$4.01  $5.00
    
    
    20,000
    
    
    
    5.17
    
    
    
    4.55
    
    
    
    20,000
    
    
    
    4.55$5.01  $6.25
    
    
    248,000
    
    
    
    3.98
    
    
    
    5.80
    
    
    
    248,000
    
    
    
    5.80Total
    
    
    4,420,185
    
    
    
    7.18
    
    
    
    1.85
    
    
    
    2,343,745
    
    
    
    2.22
   March 31,
    
    
    March 31,2006
    
    
    2005Volatility
    
    
    134
    %
    
    
    Expected option term
    
    5 years
    
    
    Risk-free interest rate
    
    
    4.60
    %
    
    
    Expected dividend yield
    
    
    
    
    
    
    




---



##### Table of Contents



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




---



##### Table of Contents



(c) Series 2005 Preferred Stock
      (4) Convertible Notes Payable




---



##### Table of Contents



(5) Significant Customers
  
 Item 2. Managements Discussion and Analysis or Plan of Operation
 Forward-Looking Statements




---



##### Table of Contents



Recent Developments: Going Concern and Liquidity Problems
   Liquidity and Capital Resources
     2005 Preferred Equity
  Patent Sale




---



##### Table of Contents



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 and expect to hire additional sales
personnel.
  Results of Operations
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 Sales and Gross Profit
 Operating Expenses
     Other expenses, net
 Net Loss
 Preferred Stock dividend requirements.




---



##### Table of Contents



Other
 Inflation
 
 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




---



##### Table of Contents



2005 Preferred Equity
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Description31.1
    
    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.
  Date
    
    Description01/03/06
    
    On January 4, 2006, Axcess International Inc. filed an
8-K announcing they closed on $813,020 of the 2005
Preferred Equity round.03/16/06
    
    On March 16, 2006, Axcess International Inc. filed an 8-K
announcing they closed on $1,489,245 of the 2005
Preferred Equity round and the closing on the video
patent sale.




---



##### Table of Contents



SIGNATURES
  AXCESS INTERNATIONAL INC.,Registrant/s/ ALLAN GRIEBENOW

Allan Griebenow Director, President andChief Executive Officer (Principal Executive Officer)/s/ ALLAN L. FRANK

Allan L. FrankChief Financial Officer and Secretary(Principal Accounting and Financial Officer)May 15, 2006