AXCESS INC/TX, 10KSB40, 2000-03-30

AXCESS INC/TX
10KSB40, 2000-03-30
MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES

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<PAGE> 1

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from __________ to __________

COMMISSION FILE NO. 0-11933

AXCESS INC.
(formerly Lasertechnics, Inc.)
(Name of small business issuer in its charter)

DELAWARE 85-0294536
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

3208 COMMANDER DRIVE 75006
CARROLLTON, TEXAS (Zip Code)
(Address of principal executive offices)

(972) 407-6080
(Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:

<TABLE>
<CAPTION>
<S> <C>
Title of Class: Name of exchange on which registered:
-------------- ------------------------------------
Voting Common Stock, par value $.01 Per Share NASDAQ SmallCap Market
</TABLE>

3,319,408
(Number of Shares Outstanding as of March 20, 2000)

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 X NO
--- ---

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. [X]

The issuer's revenues for the fiscal year ended December 31, 1999 were
$1,246,880. There were 112,492 shares of non-voting common stock outstanding as
of March 20, 2000.

On March 20, 2000, the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant was approximately $11,547,673.
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 20, 2000, as
reported on the over-the-counter NASDAQ SmallCap 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.

Transitional Small Business Disclosure Format (check one):

YES NO X
--- ---

Documents Incorporated by Reference

Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders, to be held on June 6, 2000, are incorporated by reference into
Part III.

<PAGE> 2

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," "believe," "expect," "intend,"
"plan," "seek," "anticipate," "estimate," 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 included in this annual report on Form 10-KSB.
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, changes from anticipated levels of sales, the ability to integrate
acquired product lines and related businesses, future national or regional
economic and competitive conditions, changes in relationships with customers,
customer acceptance of existing and new products, access to capital, validity of
patents, availability of key component parts, casualty to or other disruption of
the Company's production facility and equipment, delays and disruptions in the
shipment of the Company's products, government regulations 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 Inc., a Delaware
corporation ("AXCESS") and its subsidiaries.

ITEM 1. DESCRIPTION OF BUSINESS.

THE COMPANY

AXCESS provides computer network-based solutions for bettering the utilization
of corporate assets to improve operations productivity, physical security, asset
management, manufacturing logistics and enterprise resource planning (commonly
referred to as ERP), and financial reporting. The Company's products include
hands-free, long range radio frequency identification (RFID) technology used to
track and monitor people, assets, inventory and vehicles, as well as patented
digital video compression technology for enterprise multi-media transmission and
digital recording. The Company's products incorporate patented technologies in
wireless, automatic identification and multi-media. The Company's principal
offices are located at 3208 Commander Drive, Carrollton, Texas, 75006, and its
telephone number is 972-407-6080.

COMPANY EVOLUTION

The Company was formed in November 1982 (as Lasertechnics, Inc.). Prior to 1999,
the Company, through two subsidiaries, sold high-end dye-sublimation card
printers and high-speed laser marking equipment. During 1998 the Company
determined that it could not be consistently profitable selling these products.
Accordingly, in October 1998 the Company discontinued the operations of its 96%
owned subsidiary, Sandia Imaging Systems Corporation, which was engaged in
distributing and reselling high-end dye-sublimation card printers and
consumables. The Company sold this business in December 1998. A second
subsidiary, Lasertechnics Marking Corporation (LMC), was engaged in fabricating,
distributing and selling high-speed laser marking equipment. In April 1999 the
Company sold LMC to affiliates of Amphion Capital Management, a major
stockholder of the Company. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation." See also "Item 12. Certain
Relationships and Related Transactions."

In September 1998, the Company 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 the Company to manufacture and market RFID products to
the access control and asset management markets.

In July 1999, the Company acquired substantially all of the assets, including
the network video technology, of Prism Video, Inc. Prism Video, Inc. was engaged
in the design, manufacture and marketing of video security technology and video
storage products.

In July 1999, the Company hired new senior management, including a new
president and chief executive officer, chief financial officer, and vice
president of sales.

In September 1999, the Company was further reorganized to support the new
corporate direction.

MARKETS

For business organizations, the 1990s were characterized by dramatic efforts to
provide efficiencies such as organizational flattening, the use of the Internet
for more efficient sales channels (e-commerce), and a move towards
business-to-business Internet development to further provide efficiencies for
activities between companies. AXCESS is focused on the next phase of this
revolution, to leverage the corporate network to gain better utilization from
the personnel and hardware assets of the enterprise. The Company's initial focus
has been in the physical security and remote management markets, reducing asset
loss and providing management visibility into remote operations. The American
Society of Industrial Security estimated physical security to be an $11 billion
market including the fastest growing segment, corporate video (CCTV) estimated
to be $1.8 billion growing at 15% annually. According to an updated 1999 study
by Venture Development Corporation, the asset management and access control
markets are

<PAGE> 3

$1.3 billion and the use of RFID is predicted to be $800 million of that,
growing at 25% annually. The transportation market is sized at $200 million,
growing at greater than 20% annually. The Company has established distribution
channels in these markets and expects to enter the fast growing inventory and
warehouse management markets in 2000, currently sized at $112 million and
growing at 25% annually.

PRODUCTS AND SERVICES

RFID

The AXCESS(TM) ActiveTag(TM) RFID system is a high performance, active tag
system used to identify and track people, assets, inventory and vehicles. Based
on patented technology, the AXCESS(TM) RFID System provides users a convenient,
unobtrusive means of identifying people or objects without human interaction.

The flexibility of the ActiveTag(TM) system makes it well suited for a variety
of access control and monitoring applications, including:

o VEHICLE AND PERSONNEL ACCESS CONTROL

o ASSET AND INVENTORY MANAGEMENT

o PERSONNEL TIME AND ATTENDANCE

o FLEET MANAGEMENT

The ActiveTag(TM) system's unique features include:

o MULTI-USE - assets, people, and vehicle tagging all in one system;

o LONG RANGE - automatic hands-free tag reading at up to 70 feet outside
and 30 feet indoors;

o FLEXIBLE COVERAGE ZONES - site configurable for short range or wide
area coverage;

o MULTI-TAG READ - identifies multiple tags instantaneously;

o FUNCTIONAL LINKAGE(TM) - associates two or more tag readings as a
single event;

o READ/WRITE CAPABILITY - modifies and retrieves data stored in tag
memory; and

o TCP/IP NETWORK INTERFACE - for transmitting over the enterprise LAN or
the Internet.

The ActiveTag(TM) system is comprised of radio frequency tags, wake-up antennas
and networked readers. The tags are small transmitter/receivers that once
activated, communicate non-line-of-sight with a reader which passes I.D., time
and location data to Microsoft(R) Windows-based application software for
processing.

The type and tuning of the activator antenna determines the size and location of
each coverage zone, such as a vehicle gate, ingress/egress door, or hallway. As
the tag enters a coverage zone, it receives an activation command from an
antenna located in the ground, next to the doorway or inconspicuously installed
in a ceiling or wall. The tag interprets this command and transmits to a
receiver. In a typical installation, the reader communicates the tag's unique
identification number to the host computer or controller via an
industry-standard hardwired data interface. Currently the AXCESS(TM) RFID System
supports 26-bit Wiegand, RS-232 standard serial communications and Motorola
LonWorks(TM) for Ethernet, token ring and other LAN configurations.

<PAGE> 4

Several supporting software packages, including the Company's own ActiveTrac(TM)
software, provide customers the capability to link multiple tag reads using
Functional Linkage(TM). Tag reads can be linked together for decision and
control based on associated credentials, such as a laptop tag matched with its
owner's tag.

DIGITAL VIDEO

AXCESS' Prism Video line of video products provide digital video transmission
and recording solutions for the supervision of remote facilities and the
enterprise from desktop computers. Its core video compression technology is
based on a patented compression/decompression (CODEC) algorithm allowing live
motion video to be transmitted and recorded over various communications and
computer network systems, including telephone lines (POTS), ISDN, cellular phone
lines, very small aperture terminal (V-SAT), and TCP/IP for Local Area Networks
(LAN), Wide Area Networks (WAN) and the Internet. Prism Video products utilize
video, audio, and control signals for specific industry applications and
interface with existing CCTV networks or place the video directly on the
enterprise network.

Prism Video products' flexibility and ability to operate on narrow bandwidth
systems make them well suited for a wide array of applications including:

o REMOTE OPERATIONS MANAGEMENT

o ENTERPRISE-WIDE CCTV

o INTEGRATED VIDEO VALIDATION OF ASSET AND PERSONNEL TRACKING

o VIDEO ALARM VERIFICATION

o COVERT SURVEILLANCE

Prism Video's unique features include:

o PRE-ALARM(TM), EVENT AND LONG DURATION RECORDING - store and retrieve
digital video on any Microsoft(R) Windows 95, 98 or NT based PC;

o FAST FRAME RATES - video is a series of individual picture "fields" or
"frames" that create motion and the AXCESS patented video compression
technology provides the fastest frame rates or motion over a given
digital transmission link or storage facility;

o INTEGRATED CCTV PERIPHERALS - software to control standard CCTV
peripheral equipment;

o DYNAMIC BANDWIDTH THROTTLE - allows viewers to control bandwidth used
based on network capacity; and

o NETWORK INTERFACE - provide interface of existing CCTV to network or
directly hook up to existing LAN/WAN.

RESEARCH AND DEVELOPMENT

The Company plans to continually develop new products utilizing its existing
technology and plans to bring new products to market throughout the fiscal year
ended December 31, 2000. Additionally, the Company is developing new
applications for its technology outside of the security industry, including
inventory management and asset management applications. Development of these
applications requires additional software integration and network interface
capabilities for the Company's products. During 1999 and 1998 the Company spent
$1,733,119 and $2,939,107, respectively, for research and development and plans
to continue spending similar amounts in fiscal year 2000 to develop products to
support the Company's continued revenue growth.

3
<PAGE> 5

PATENTS AND PROPRIETARY TECHNOLOGY

The Company relies on a combination of patents, trade secrets, technology
licenses, and other intellectual property rights. The Company was awarded three
new patents in 1999, two in digital video compression and one in RFID automatic
identification. The Company has 12 patents in various stages of prosecution with
foreign patent authorities and several additional patents being prepared
for filing. The Company intends to protect and enforce its intellectual property
rights and to preserve its rights relating to its key product technologies to
the extent commercially reasonable. The Company has registered a number of trade
and service marks, including but not limited to the following: AXCESS Inc.(TM),
the AXCESS Inc. (logo)(TM), LANcam, ActiveTag(TM), onlineaccess.com(TM), and
LANcorder (TM).

COMPETITION

The security industry is a mature and very competitive market. Recently the
industry has been experiencing consolidation through several mergers and
acquisitions. The Company competes directly with much larger companies and the
price sensitive nature of the industry is an advantage to these higher volume
manufacturers. The Company believes that it has technological advantages in both
digital video and RFID that offset some of its size disadvantages. Specifically,
the Company's digital video compression/decompression technology is up to 30
times more efficient than certain competitive products and the Company offers
active RFID technology rather than passive RFID technology.

Outside of the security industry, the Company provides products that complement
traditional inventory and asset tracking, such as bar coding. The Company's
technology provides the customers a "hands-free" method to account for
stationary and mobile assets and inventory and provide data to ERP systems.

MANUFACTURING AND SUPPLIERS

The Company outsources the manufacturing of its products and consequently
depends on outside manufacturers to supply finished product. A large number of
manufacturers in the U.S. have the capability to produce the Company's products.
The Company periodically seeks bids for manufacturing and has multiple
manufacturing sources for each of its products.

Although the Company depends on a number of outside suppliers for components of
its products, the Company has designed its current line of products so that it
is not dependent on a single source for any of its products' components.
Although the Company has generally been able to secure adequate suppliers, the
inability of the Company in the future to obtain sufficient suppliers of
component parts could have material adverse effects on the Company's results of
operations.

There are currently no long-term agreements between the Company and its
manufacturers or suppliers.

SALES AND MARKETING

The Company markets, sells and supports dealers, distributors, original
equipment manufacturers (OEMs), value added resellers(VARs) and systems
integrators who sell, install and support end users in applying digital video
and RFID systems and services to their particular application requirements. The
Company provides training and support to its distribution channel, thereby
leveraging the large sales teams used by integrators and distributors. The
Company markets to end users as part of its support of this distribution channel
and anticipates more direct end user sales as the industry moves to network
products and as the Company sells its asset and inventory tracking products.

EMPLOYEES

As of December 31, 1999, the Company had 49 full-time employees and 1 part-time
employee.

GOVERNMENT REGULATION

Government regulations have not had, nor are they expected to have, a material
effect on the Company's financial condition, results of operations or
competitive position.

4
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ENVIRONMENTAL FACTORS

There has been, and it is anticipated that there will continue to be, no
material effect upon the Company's 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.

Auditors' Report

Our auditors have included an explanatory paragraph in their audit opinion with
respect to our consolidated financial statements at December 31, 1999. 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.

Need for Additional Financing

Failure to obtain additional capital could cause delay or abandonment of our
business plans. The Company anticipates that it will depend on outside sources
of capital to fund operating losses. Additional capital may also be required for
a variety of other reasons, including unforeseen delays, unanticipated expenses,
increased capital requirements, engineering design changes and other technology
risks or other corporate purposes. These additional funds may not be available.
Even if those funds are available, we may not be able to obtain them on a
timely basis, on terms acceptable to us. Failure to obtain additional funds
could result in the delay or abandonment of our development and expansion plans
and we may be unable to fund our ongoing operations.

History of Losses and Expectation of Future Losses; Uncertainty of Future
Profitability

From our incorporation in 1982 through December 31, 1999, we have incurred an
accumulated loss of approximately $91.1 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.

Future Development of Products

Introducing new technology involves, without limitation, risks of "bugs", prior
release compatibility, customer modifications affecting standard interfaces, and
unanticipated application environment anomalies. Although we use rigorous
testing procedures and protocols, delays in new or modified product
introductions or shipments could have a material adverse effect on our results
of operation.

Much of our ability to compete in the security segment depends on trade secrets,
know-how and proprietary technical knowledge that is unprotected by patents.
Although we continue to implement protective measures and intend to defend our
proprietary rights vigorously when appropriate, there can be no assurance that
these efforts will be successful. Such protections may not preclude competitors
from developing products similar to ours. In addition, the laws of certain
foreign countries do not protect intellectual property rights to the same extent
as do the laws of the United States. There can also be no assurance that third
parties will not assert intellectual property infringement claims against us.
Any such infringement claim could result in protracted and costly litigation and
could have a material adverse effect on our results of operation regardless of
the outcome.

5
<PAGE> 7

Obsolete Technology

The technology we use may become obsolete or limit our ability to compete
effectively within the wireless, automatic identification and multi-media
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:

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

o we may experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products;
and

o 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.

Outsourcing; Dependence on Manufacturers and Suppliers to Produce Systems

Because we decided to outsource portions of our business, particularly for
manufacturing, we depend heavily on third-party vendors, suppliers, and
contractors. 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 the products, or develop alternative sources, delays in product
introductions or shipments could occur and could have a material adverse effect
on our results of operation.

NASDAQ Listing

Our common stock is listed on the NASDAQ SmallCap Market, which requires
maintenance of certain quantitative and other standards for continual listing
thereon.

On August 22, 1998, the Securities and Exchange Commission approved the new
NASDAQ listing requirements for continued listing on the NASDAQ SmallCap Market.
In particular, the new NASDAQ listing requirements require that a company
currently included in NASDAQ meet each of the following standards to maintain
its continued listing: (i) either (A) net tangible assets (defined as total
assets, minus goodwill, minus total liabilities) of $2 million, (B) total market
capitalization of $35 million, or (C) net income (in the latest fiscal year or
in two of the last three fiscal years) of $500,000; (ii) public float of at
least 500,000 shares, with a market value of at least $1 million; (iii) minimum
bid price of $1; (iv) at least two market makers; (v) at least 300 round lot
beneficial shareholders; and (vi) compliance with certain corporate governance
requirements. As of March 20, 2000, the closing bid price of our common stock
was $8.00 per share, which is in excess of the minimum bid price of $1.00 per
share established by the new NASDAQ listing requirements.

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<PAGE> 8

As of March 20, 2000, our net tangible assets were in excess of the $2 million
threshold established by the new NASDAQ listing requirements.

Although management believes that we will be able to preserve the listing of our
common stock on the NASDAQ SmallCap Market, there can be no assurance that we
will be able to do so. There can be no assurance that our continued losses or
other factors beyond our control will not cause us to fail to meet such
requirements.

If our common stock were delisted from the NASDAQ SmallCap Market, trading, if
any, would likely be conducted in the over-the-counter market on the National
Association of Securities Dealers' OTC Bulletin Board and/or on the pink sheets
of the National Quotation Bureau. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of our
common stock. In addition, our common stock would be subject to rules
promulgated under the Exchange Act applicable to penny stocks. The Commission
has adopted regulations that generally define a "penny stock" to be an equity
security that has a market price (as determined pursuant to regulations adopted
by the Commission) or exercise price of less than $5.00 per share, subject to
certain exceptions. By virtue of being listed on the NASDAQ SmallCap Market, our
common stock will be exempt from the definition of "penny stock." If, however,
our common stock is removed from the NASDAQ SmallCap Market, our securities may
become subject to the penny stock rules that impose additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Consequently, the penny stock
rules may adversely affect the ability of broker-dealers to sell our common
stock and may affect the ability of purchasers of our common stock to sell such
securities in the secondary market.

Small Trading Volume and Volatility of Stock Price

The weekly trading volume of our common stock in the over-the-counter market has
varied from a few thousand shares to 240,000 shares, which may tend to increase
the volatility of the price. Since January 1999 through December 31, 1999, the
closing bid price of our common stock in the over-the-counter market has varied
from a low of $1.25 to a high of $6.00 per share. There can be no assurance that
the price volatility will not continue in the future.

Dependence on Key Personnel

We believe that our ability to successfully implement our business strategy is
highly dependent on our management and product development team. The loss of
services of one or more of these individuals might hinder the achievement of our
development objectives. We cannot give any assurance that we will continue to be
able to hire and retain the qualified personnel needed for our business. The
loss of the services of or the failure to recruit key technical personnel could
adversely affect our business, operating results and financial condition.

Potential Adverse Effect of Shares Eligible for Future Sale; Outstanding
Convertible Securities and Warrants

Future sales of our common stock in the public market by existing stockholders,
warrant holders and holders of convertible securities subsequent to the date
hereof could adversely affect the market price of our common stock. At March 20,
2000, 3,319,408 shares of common stock were issued and outstanding with
approximately 1,400,000 shares freely tradable without restriction under the
Securities Act. If exercised, the convertible debt, convertible securities,
warrants and options outstanding at March 20, 2000, would result in over
12,000,000 additional shares of common stock issued and outstanding. See Notes
9, 10 and 11 in Notes to Consolidated Financial Statements.

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<PAGE> 9

ITEM 2. DESCRIPTION OF PROPERTIES.

The Company leases a 14,508 square foot facility in Carrollton, Texas used for
administrative, engineering and sales offices. This facility is rented under a
three-year agreement that terminates in November 2000. The Company leases 5,080
square feet in Irvine, California used for engineering and warehouse space. This
lease will terminate in August 2000. The Company has moved all inventory from
Irvine to Carrollton and will move to smaller facilities in California when the
current lease expires. The Company leases 3,614 of space in Dallas, Texas which
was formerly Prism Video, Inc.'s headquarters. This lease terminates in
September 2000 and the Company is currently subleasing the space for the
remaining lease term. The Company's facilities are suitable and adequate to
accommodate the Company's operations. The Company's management considers each of
these facilities to be in good condition and is of the opinion that the
facilities are adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock trades on the NASDAQ SmallCap Market tier of the
NASDAQ Stock Market under the symbol AXSI. The table below sets forth high and
low last sale prices for the common stock during each of the periods indicated,
as reported by the NASDAQ. Such price quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.

<TABLE>
<CAPTION>
1999 1998
---- ----
QUARTER ENDED LOW HIGH LOW HIGH
- ------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
March 31 $1.25 $2.94 $3.76 $6.26
June 30 2.31 3.06 2.19 5.00
September 30 2.19 3.44 1.44 3.38
December 31 2.69 6.00 1.22 2.69
</TABLE>

As of March 20, 2000, the Company had 1,339 holders of record of voting
common stock and one holder of record of non-voting common stock. The Company
estimates that there were approximately 5,600 beneficial owners of its common
stock as of the same date.

The Company has not paid dividends on its common stock and does not anticipate
the payment of cash dividends in the foreseeable future as it contemplates
retaining all earnings to finance the continued growth of the Company's
business.

RECENT SALE OF UNREGISTERED SECURITIES

During 1999 the Company issued unregistered securities in connection
with each of the transactions described below. The issuance of the preferred
stock, common stock and warrants were exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof as a transaction not
involving a public offering and an appropriate restrictive legend was affixed to
the stock certificates and warrants.

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<PAGE> 11

CONVERSION OF NOTES PAYABLE BY STOCKHOLDERS

Under the terms of a Note Purchase Agreement dated December 29, 1997 (the "Note
Purchase Agreement"), the Company borrowed a total of $3,020,233 from Amphion
Ventures L.P. ($400,000), Antiope Partners L.L.C. ($1,820,233) and J. P. Morgan
Investment Corporation ($800,000). In December 1998, Amphion Ventures L.P.,
Antiope Partners L.L.C. and J. P. Morgan Investment Corporation each elected to
Convert one-half of the outstanding indebtedness of the Company to each of them
under the Note Purchase Agreement, including all accrued, but unpaid interest
thereon through December 31, 1998, into shares of the Company's Series I
Convertible Preferred Stock, par value $.01 per share (the "Series I Preferred
Stock"), or Series J Convertible Preferred Stock, par value $.01 per share (the
"Series J Preferred Stock"). In addition, Amphion Ventures L.P. elected to
convert $100,000 of the accrued, but unpaid interest under the terms of its
$1.47 million note payable from the Company (the "Amphion Note Payable") into
shares of Series I Preferred Stock or Series J Preferred Stock.

As a result of the debt conversions described above, the Company issued: (a) 35
shares of Series J Preferred Stock to Amphion Partners L.P. for its conversion
of indebtedness of the Company in the aggregate amount of $350,000 ($200,000
under the terms of the Note Purchase Agreement plus $50,000 of accrued, but
unpaid interest thereon, and $100,000 of accrued, but unpaid interest on the
Amphion Note Payable); (b) 118 shares of Series J Preferred Stock to Antiope
Partners L.L.C. for its conversion of indebtedness of the Company in the
aggregate amount of $1,180,000 ($910,000 under the terms of the Note Purchase
Agreement plus $270,000 of accrued, but unpaid interest thereon); and (c) 50
shares of Series I Preferred Stock to J. P. Morgan Investment Corporation for
its conversion of indebtedness of the Company in the aggregate amount of
$500,000 ($400,000 under the terms of the Note Purchase Agreement plus $100,000
of accrued, but unpaid interest thereon).

Also in December 1998, Amphion Ventures L.P., Antiope Partners L.L.C. and J. P.
Morgan Investment Corporation agreed with the Company to extend the maturity
date of the balance remaining under the senior notes issued under the Note
Purchase Agreement for a period of one year. The balance of the indebtedness
under the senior notes issued under the Note Purchase Agreement was due in
full by the Company on December 31, 1999. The $400,000 note payable to J. P.
Morgan Investment was in default at December 31, 1999. The Company is in
negotiations with J. P. Morgan Investments to pay this note prior to April 15,
2000.

On September 30, 1999 the Company signed a 10% convertible note with Amphion
Ventures, L. P. under which the Company borrowed $5,986,395 through December 31,
1999. On December 31, 1999 Amphion Ventures, L.P. elected to convert $3,323,423
of these borrowings into 332 shares of the Company's Series 2000 Non-Voting
Preferred Stock, par value $.01 per share (the "Series 2000 Non-Voting Preferred
Stock"). The Company also issued warrants to purchase 180,362 shares of common
stock for $2.10 in connection with the issuance of the 10% convertible note.

EQUITY ISSUED TO PURCHASE TECHNOLOGY

In February 1999, the Company issued 300,000 shares of its common stock to XL
Vision, Inc. to purchase a license to use XL Vision, Inc.'s CombiReader
technology.

In July 1999, as part of the total consideration paid by the Company to Prism
Video, Inc. in connection with its acquisition of the digital video technology,
the Company issued 125 shares of its Series 1999 Voting Preferred Stock, par
$.01 per share (the "Series 1999 Voting Preferred Stock") and warrants to
purchase 500,000 shares of common stock for $2.50 per share.

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<PAGE> 12
EXERCISE OF PREFERRED STOCK RESET RIGHT BY STOCKHOLDERS

The Series I Preferred Stock and Series J Preferred Stock contain a reset
provision such that if at any time prior to December 31, 1999, the Company
completed an equity financing with third parties raising at least $1,000,000 in
cash, the initial holders of Series I Preferred Stock and Series J Preferred
Stock had the non-assignable right (the "Series I and J Reset Right"), but not
the obligation to exchange all or a portion of their shares of Series I
Preferred Stock or Series J Preferred Stock for shares of a new series of
preferred stock with substantially the same terms and conditions offered to the
participants in the new equity financing. Further, if the Company failed to
complete such an equity financing prior to December 31, 1999, the conversion
price of the Series I Preferred Stock and Series J Preferred Stock would have
been automatically reset to not less than the greater of $1.00 or one-half of
the average closing bid price of the Company's common stock on the NASDAQ
SmallCap Market during the last 20 consecutive trading days of 1999 (the "Series
I and J Conversion Price Reset Right"). The Company successfully raised over
$1,000,000 in equity prior to such date, thereby voiding the Series I and J
Conversion Price Reset Right.

PREFERRED STOCK CONVERSION TERMS

Each share of Series I Preferred Stock and Series 1999 Voting Preferred Stock is
convertible in whole or in part at any time at the option of the holder into
shares of voting common stock of the Company equal to the quotient of (a) the
aggregate original issue price of $10,000 per share divided by (b) the
conversion price of $4.00 and $2.50 per share respectively. The conversion
feature of the Series J Preferred Stock and the Series 2000 Non-Voting Preferred
Stock are substantially the same as the Series I Preferred Stock, except, among
other factors, they are both convertible in whole or in part at any time at the
option of the holder into shares of the Company's non-voting common stock of the
Company based on the same formula, and except that the conversion price of the
Series 2000 Non-Voting Preferred Stock is $3.50. For additional differences
among the Company's Series of Preferred Stock, see Note 10 to Notes to
Consolidated Financial Statements.

Series I Preferred Stock, Series J Preferred Stock, Series 1999 Voting Preferred
Stock and Series 2000 Non-Voting Preferred Stock are subject to the optional
redemption at any time by the Company, in whole or in part, at a redemption
price per share equal to the respective original issue price plus any accrued,
unpaid dividends thereon. The Company's optional right of redemption is subject
to each preferred stockholder's right to convert the 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 Series J Preferred Stock are 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 per share
of the Company's voting common stock on the NASDAQ SmallCap Market is at least
$10.00 per share for a period of at least 90 consecutive trading days. The
Series 1999 Voting Preferred Stock and Series 2000 Non-Voting 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 per share of the Company's common stock on the NASDAQ SmallCap Market
is at least $7.50 per share for a period of 20 consecutive trading days and the
average trading volume of the common stock on NASDAQ is at least

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<PAGE> 13

50,000 shares per day during that 20 day period. Although the Company's
non-voting common stock may be converted to common stock at any time by a holder
thereof, Amphion Ventures L.P. has agreed not to convert any shares of
non-voting common stock to voting common stock without the prior consent of the
Company.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

In September 1998, the Company acquired its active radio frequency
identification (RFID) technology. The Company determined this technology to be
its primary and core strategic focus, based on market demand, market size,
product differentiation, competitive environment and other factors.

On October 21, 1998, the Company's Board of Directors approved a plan to exit
the imaging business formerly operated by its Sandia subsidiary as part of the
Company's strategy to redeploy and refocus the Company's resources on its core
RFID asset, vehicle and personnel tracking business. The sale of the imaging
business was completed on December 15, 1998. The Company received a sales price
of $500,000 and reported a loss of $1,095,920 on the disposal in 1998.

In March 1999, the Company entered into a definitive agreement to sell its
Lasertechnics Marking Corporation (LMC) subsidiary to affiliates of Amphion
Capital Management, a major stockholder of the Company. The Company's rights and
interests in DataGlyph(TM) and the technology under development with XL Vision,
Inc. were also included in the sale. On April 30, 1999, the Company completed
the sale and received $500,000 in cash, $2,000,000 in debt cancellation, a
$4,000,000 note receivable due March 2002 (or 2004 under certain conditions), a
$500,000 demand note receivable and a warrant to purchase equity in the
Amphion-controlled enterprise to which Amphion transferred these businesses and
assets, with an exercise price of $2.50 per share, representing approximately 8%
of that enterprise. If LMC is sold by the Amphion-controlled enterprise prior to
April 2001, the Company has the option to exchange its warrant for 20% of the
excess profits (as defined in the acquisition agreement) from any such sale. The
gain from the disposition of LMC and the technology assets totaled approximately
$3,900,000 and was recorded in the quarter ended June 30, 1999.

On July 28, 1999, the Company completed its acquisition of substantially all of
the assets of Prism Video, Inc. The purchase price for the assets included a
note payable to Prism Video, Inc. in the amount of $4,000,000, 125 shares of a
new series of 8% convertible preferred stock and a warrant to acquire 500,000
shares of the Company's common stock. The Company will satisfy its obligations
under the purchase note through an assignment to Prism Video, Inc. of the
principal payments due the Company under its $4,000,000 note receivable from
Amphion Ventures L.P., which was issued to the Company as partial consideration
for the sale of its LMC subsidiary and certain unrelated technology assets. The
preferred stock has a stated value of $10,000 per share and is convertible into
500,000 shares of common stock at a conversion price of $2.50 per share. The
exercise price of the warrant is $2.50. Under the terms of the purchase
agreement, the common stock to be acquired by Prism Video, Inc. upon conversion
of the preferred stock or exercise of the warrant is subject to a three-year
lockup from the date of closing, which may be reduced to two years upon the
occurrence of certain events. Further, Prism Video, Inc. has agreed not to
convert the preferred stock or exercise the warrant until the Company obtains
stockholder approval to issue the common stock issuable upon either the
conversion or exercise thereof, as the case may be.

As a result of these transactions the Company has completely changed its core
technologies and products. The Company provides computer network-based solutions
for improving the utilization of corporate assets to improve operations
productivity, physical security, asset management, manufacturing logistics and
enterprise resource planning (commonly referred to as ERP), and financial
reporting. The Company's products include hands-free, long range RFID technology
used to track and monitor people, assets, inventory and vehicles as well as
patented digital video compression technology for enterprise multi-media
transmission and digital recording. The Company's products

12
<PAGE> 14

incorporate patented technologies in wireless, automatic identification and
multi-media.

RESULTS OF OPERATIONS

Sales and Gross Profit. Through December 31, 1998, the Company had not yet
shipped a significant volume of RFID systems. Sales and marketing efforts were
launched in the fourth quarter of 1998 and orders were being accepted. Initial
shipments began in 1999.

Sales for 1999 and 1998 were $1,246,880 and $43,146, respectively. The Company
realized gross profits of $490,689 in 1999 and $38,848 in 1998.

RFID product sales were $429,459 and $43,146 for 1999 and 1998, respectively.
Cost of sales were $214,309 in 1999 and $4,298 in 1998. In 1999 the Company made
significant upgrades in RFID products and decided to discontinue selling
previous product releases resulting in a $153,783 additional charge. As a result
gross profits from RFID products were $61,367 in 1999 and $38,848 in 1998.

Digital video product sales were $817,421 in 1999 resulting in gross profits of
$429,322. The Company began producing and selling digital video products in July
1999.

Operating Expenses. Operating expenses were $7,890,589 and $8,738,140, in 1999
and 1998, respectively.

Corporate general and administrative expenses were $2,639,166 and $4,384,513 in
1999 and 1998, respectively.

Research and development expenses were $1,733,119 in 1999 and $2,939,107 in
1998, including new product development costs in 1998 associated with the
Technology Development Agreement with XL Vision, Inc. of $2,550,000. Our rights
and obligations under the Technology Development Agreement was sold in the LMC
transaction.

Selling and marketing expenses were $2,560,739 in 1999 and $633,277 in 1998. The
Company's continuing operations were not initiated until September 1998.

Other income (expense), net was $1,291,332 and $(510,936) in 1999 and 1998,
respectively. A gain of $2,044,109 was realized in 1999 from the sale of the
Company's rights and interests in DataGlyph(TM) and the technology under
development with XL Vision, Inc.

Loss from continuing operations was $6,108,568 and $9,210,228 in 1999 and 1998,
respectively.

Gain (Loss) from discontinued operations was $1,708,545 and $(6,248,828) in 1999
and 1998, respectively. A gain on the disposal of the LMC subsidiary was
realized in 1999.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has utilized the proceeds from a number of public
and private sales of its equity securities, the exercise of options and warrants
and more recently, convertible debt and short-term bridge loans from
stockholders to meet its working capital requirements. At December 31, 1999, the
Company had a working capital deficit of $622,458.

The Company's operations continued to generate losses in 1999. The Company's
cash decreased $1,505,979 during 1999 with operating activities using $8,692,878
of cash. The Company funded operations primarily through debt offerings with
financing activities providing net cash of $5,263,077. The Company also realized
net cash of $1,121,000 from discontinued operations in 1999.

At December 31, 1999, the Company is in default on a $400,000 note payable to
J. P. Morgan Investment Corporation (JPMIC). The Company is currently in
negotiations with JPMIC to pay this note in cash or securities of the Company.
The default on this note does not impact the terms, including acceleration of
maturities, of the Company's other debt.

The Company's future working capital requirements will depend upon many factors,
including the extent and timing of the Company's product sales, the Company's
operating results and the status of competitive products. The Company
anticipates that its existing working capital resources and revenues from
operations will not be adequate to satisfy its funding requirements in 2000,
however the Company has agreed to the terms of a private equity placement that
should provide adequate working capital for the remainder of fiscal year 2000.
Under terms of the agreement, the Company will sell $5,000,000 of convertible
preferred stock to an affiliate of a major stockholder. Based on the Company's
existing business plan, the Company believes

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<PAGE> 15

this will provide adequate working capital for 2000. No additional funds are
available under the 10% convertible note. The Company's actual funding needs
will depend on numerous factors, including actual expenditures and revenues
generated from its operations compared to its business plan. If the Company's
losses continue, the Company may have to obtain sufficient funds to meet its
cash requirements through strategic or other financial transactions with
compatible entities having the resources to support its programs, the sale of
securities or other financing arrangements, or it will be required to curtail
its programs or seek a merger partner. Any additional funding 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.

OTHER

Inflation. Inflation has not had and is not expected to have a material impact
on the operations and financial condition of the Company.

Impact of Year 2000. In prior years, the Company discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems or the products and
services of third parties upon whom the Company relies. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.

ITEM 7. FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-1
Report of KPMG LLP, Independent Auditors............................. F-2

Consolidated Financial Statements:

Consolidated Balance Sheets at December 31, 1999 and 1998......... F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999 and 1998.................. F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999 and 1998.......................... F-6
Notes to Financial Statements..................................... F-7
</TABLE>

14
<PAGE> 16

FINANCIAL STATEMENT SCHEDULE

Schedule II--Valuation and Qualifying Accounts

The Company has not presented Schedule II "Valuation and Qualifying Accounts" as
all such accounts relate to assets and liabilities of the discontinued
operations, which were presented as "Net assets of discontinued operations" on
the accompanying consolidated balance sheets. Net assets of discontinued
operations are recorded at estimated net realizable value.

All other financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements and notes thereto.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

KPMG LLP resigned as the Company's independent auditor on October 13, 1999. At a
meeting held on October 19, 1999, the audit committee of the Company's board of
directors approved the engagement of Ernst & Young LLP, as its independent
auditor for the fiscal year ending December 31, 1999, to replace the firm of
KPMG LLP.

The audit reports of KPMG LLP on the Company's financial statements for the past
two fiscal years did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles, except for a statement in the audit reports that KPMG LLP
believed the Company's recurring losses from operations and resulting continued
dependence upon access to additional external financing raised substantial doubt
about the Company's ability to continue as a going concern. In connection with
the audits of the Company's financial statements for each of the two fiscal
years ended December 31, 1998, and December 31, 1997, and the subsequent interim
period through October 12, 1999, there were no disagreements with KPMG LLP on
any matter of accounting principles or practices, financial statement
disclosures, or auditing scope procedure which, if not resolved to the
satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the
subject matter in its reports.

A copy of the disclosures made herein has been provided to KPMG LLP. The
response of KPMG LLP, indicating agreement with the disclosures, is attached as
an exhibit to the Company's annual report and is hereby incorporated by
reference herein.

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<PAGE> 17

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

The information regarding Directors, Executive Officers, Promoters and Control
Persons is incorporated by reference in this Form 10-KSB to the sections
entitled "Principal Shareholders," "Management," and "General" in the Company's
Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 6, 2000.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference in this Form
10-KSB to the section entitled "Management" in the Company's Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated by reference in this Form
10-KSB to the sections entitled "Principal Shareholders" and "Management" in the
Company's Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference in this Form
10-KSB to the section entitled "Management" in the Company's Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

3.1 --Certificate of Incorporation of the Company. Incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 2-80946).

3.2 --By-laws of the Company. Incorporated herein by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (Registration
No. 2-80946).

3.3 --First Amendment to Certificate of Incorporation of the Company dated
June 6, 1986. Incorporated herein by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1987.

3.4 --Second Amendment to Certificate of Incorporation of the Company dated
May 27, 1987. Incorporated herein by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1987.

3.5 --Third Amendment to Certificate of Incorporation of the Company dated
November 11, 1994. Incorporated herein by reference to Exhibit 4.4 to
the Company's Registration Statement on Form S-3 (Registration No. 333-
10665).

3.6 --Fourth Amendment to Certificate of Incorporation of the Company dated
July 28, 1995. Incorporated herein by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-3 (Registration No. 333-
10665).

3.7 --Fifth Amendment to Certificate of Incorporation of the Company dated
June 25, 1997. Incorporated herein by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-3 (Registration No.
333-10665).

3.8 --Sixth Amendment to Certificate of Incorporation of the Company dated
March 31, 1998. Incorporated herein by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated April 13, 1998.

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<PAGE> 18

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.*

4.1 --Certificate of Designation of the Company's Series A, B and C
Preferred Stock, dated December 27, 1995. Incorporated herein by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (Registration No. 333-10665).

4.2 --Certificate of Designation of the Company's Series I Preferred Stock.
Incorporated herein by reference to Exhibit 4.2 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.

4.3 --Certificate of Designation of the Company's Series J Preferred Stock.
Incorporated herein by reference to Exhibit 4.3 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.

4.4 --Certificate of Designation of the Company's Series 1999 Preferred
Stock. Incorporated herein by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1999.

4.5 --Certificate of Designation of the Company's Series 1999 Non-Voting
Preferred Stock. Incorporated herein by reference to Exhibit 4.5 to
the Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1999.

4.6 --Certificate of Designation of the Company's Series 2000 Non-Voting
Preferred Stock.*

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 --Purchase of common stock and Convertible Note Agreement between the
Company and J. P. Morgan Investment Corporation, dated July 8, 1994.
Incorporated herein by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1994.

10.3 --Note Purchase Agreement dated June 25, 1997, by and among the
Company, J. P. Morgan Investment Corporation and Wolfensohn Associates
L.P. Incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-QSB for the period ended September 30,
1997.

10.4 --Amendment to Notes and Note Purchase Agreement dated December 31,
1998, by and among the Company, Antiope Partners L.L.C. and J. P.
Morgan Investment Corporation. Incorporated herein by reference to
Exhibit 10.16 to Amendment No. 1 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.

10.5 --Series H Preferred Stock Purchase Agreement dated December 29, 1997,
by and among the Company and Amphion Ventures L.P. Incorporated herein
by reference to Exhibit 10.17 to Amendment No. 1 to the Company's
Annual Report on Form 10-KSB for the 10.1 year ended December 31, 1997.

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<PAGE> 19

10.6 --Preferred Stock Purchase Agreement dated October 21, 1998 by and
between the Company and Amphion Ventures L.P. Incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.

10.7 --Form of Warrant to purchase shares of the Company's common stock
issued to Antiope Partners L.L.C. and Amphion Ventures L.P.
Incorporated herein by reference to Exhibit 10.20 to Amendment No. 1 to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.

10.8 --Settlement Agreement dated as of April 21, 1998, by and between the
Company and Xerox Corporation. Incorporated herein by reference to
Exhibit 10.21 to Amendment No. 1 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.

10.9 --Note Payable Conversion Agreement dated December 31, 1998, by and
between the Company and Amphion Ventures L.P. Incorporated herein by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998.

10.10 --Note Payable Conversion Agreement dated December 31, 1998, by and
between the Company and Antiope Partners L.L.C. Incorporated herein by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998.

10.11 --Note Payable Conversion Agreement dated December 31, 1998, by and
between the Company and J. P. Morgan Investment Corporation.
Incorporated herein by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.

10.12 --Stock and Asset Purchase Agreement dated March 30, 1999, by and
between the Company and Amphion Ventures L.P. Incorporated herein by
reference to Exhibit 10.15 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998.

10.13 --Asset Purchase Agreement dated July 15, 1999, by and between the
Company and Prism Video, Inc. Incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 28,
1999.

10.14 --Convertible Note Payable dated September 30, 1999, executed by the
Company payable to Amphion Ventures L.P. in the stated principal
amount of up to $6,000,000. Incorporated herein by reference to Exhibit
10.12 to the Company's Quarterly Report Form 10-QSB for the period
ended September 30, 1999.

10.15 --Form of Dividend Conversion Agreement by and between the Company and
Amphion Ventures L.P. and Jackson Hole Management Co. Incorporated
herein by reference to Exhibit 10.13 to the Company's Quarterly Report
on Form 10-QSB for the period ended September 30, 1999.

10.16 --Registration Rights Agreement dated September 30, 1999 by and
between the Company and Amphion Ventures L.P. Incorporated herein by
reference to Exhibit 10.14 to the Company's Quarterly Report on Form
10-QSB for the period ended September 30, 1999.

10.17 --Letter Agreement dated December 30, 1999, by and between the Company
and Amphion Ventures L.P. regarding the Convertible Note Payable dated
September 30, 1999.*

10.18 --Non-Voting Common Stock Purchase Warrant dated September 30, 1999,
to purchase 180,362 shares of the Company's non-voting common stock
issued to Amphion Ventures L.P.*

10.19 - Employment Agreement dated July 16, 1999, by and between the Company
and Allan Griebenow.*

10.20 --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).

10.21 --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).

10.22 --Stock Purchase Agreement dated March 29, 2000, by and between the
Company and incuVest, LLC.*

10.23 --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).

16.1 --Letter regarding the change in accountant from KPMG LLP. Incorporated
herein by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated October 20, 1999.

21.1 --Subsidiaries of the Company.*

23.1 --Consent of Ernst & Young LLP.*

23.2 --Consent of KPMG LLP.*

27.1 --Financial Data Schedule.*

- --------------

*Filed herewith

(b) Reports on Form 8-K.

The Company filed a Form 8-K/A on October 12, 1999, which amended the
Company's Form 8-K filed on August 12, 1999, to report the financial
statements of Prism Video, Inc. and the pro forma financial information
required by Item 7 of Form 8-K.

The Company filed a Form 8-K on October 20, 1999 to report the change
in the Company's accountant under Item 4.

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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 30th day of March, 2000.

AXCESS INC.

By: /s/ RICHARD C.E. MORGAN
----------------------------------
Richard 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 30th day of March, 2000.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ RICHARD C.E. MORGAN Chairman of the Board
- ------------------------------------
Richard C.E. Morgan

/s/ ALLAN GRIEBENOW Director, President and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
Allan Griebenow

/s/ JAMES R. CRAIG Chief Financial Officer and Secretary (Principal
- ------------------------------------ Accounting and Financial Officer)
James R. Craig

/s/ PAUL J. COLEMAN, JR. Director
- ------------------------------------
Paul J. Coleman, Jr.

/s/ C. SETH CUNNINGHAM Director
- ------------------------------------
C. Seth Cunningham

/s/ RICHARD M. CLARKE Director
- ------------------------------------
Richard M. Clarke

/s/ GREGORY W. HASKELL Director
- ------------------------------------
Gregory W. Haskell
</TABLE>

<PAGE> 21

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
AXCESS, Inc.

We have audited the accompanying consolidated balance sheet of AXCESS, Inc. (the
Company) as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
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 audit provides 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, Inc., at December 31,
1999, and the results of its operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States.

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 an ongoing
concern. 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.

ERNST & YOUNG LLP

March 29, 2000

F-1

<PAGE> 22
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
AXCESS Inc.:

We have audited the accompanying consolidated balance sheet of AXCESS, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AXCESS, Inc. and
subsidiaries as of December 31, 1998, and the results of its operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.

KPMG LLP

Dallas, Texas
March 19, 1999

F-2
<PAGE> 23

AXCESS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents .............................................. $ 69,450 $ 1,575,429
Note receivable from stockholder ....................................... -- 1,030,624
Accounts receivable - trade ............................................ 459,654 30,987
Inventory .............................................................. 845,400 256,216
Prepaid expenses and other ............................................. 695,334 160,087
------------ ------------

Total current assets ............................................... 2,069,838 3,053,343

Net assets of discontinued operations ...................................... -- 3,186,253
Property, plant and equipment, net ......................................... 544,441 574,499
Long-term note receivable - stockholder .................................... 3,902,375 --
Purchased technologies, net ................................................ 6,043,142 1,714,449
Deferred license fee and other assets ...................................... -- 542,804
------------ ------------

Total assets ....................................................... $ 12,559,796 $ 9,071,348
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable:
Stockholder .......................................................... $ 980,000 $ 1,966,900
Other ................................................................ 22,309 90,882
Dividends payable ...................................................... 8,448 481,339
Accounts payable ....................................................... 447,889 466,940
Other accrued liabilities .............................................. 1,233,650 1,985,002
------------ ------------

Total current liabilities .......................................... 2,692,296 4,991,063

Non-current notes payable:
Stockholders ........................................................... 5,921,999 1,470,000
Other .................................................................. -- 535,205
------------ ------------

Total liabilities .................................................. 8,614,295 6,996,268
------------ ------------

Stockholders' equity:
Convertible preferred stock, 7,000,000 shares authorized; 148,889 shares
outstanding in 1999 and 148,247 in 1998; $33,598,919 aggregate
liquidation preference in 1999 and $27,179,880 in 1998 ............... 33,598,919 27,179,880
Common stock, $.01 par value, 12,000,000 shares authorized; 3,298,368
issued and outstanding in 1999 and 2,879,368 in 1998 ................. 32,984 28,794
Non-voting convertible common stock, $0.1 par value, 112,500 shares
authorized; 112,492 shares issued and outstanding in 1999 and 1998,
convertible into common stock on a one share for one share basis ..... 1,125 1,125
Additional paid-in capital ............................................. 61,387,968 58,515,848
Accumulated deficit .................................................... (91,075,495) (83,650,567)
------------ ------------
Total stockholders' equity ......................................... 3,945,501 2,075,080
------------ ------------

Total liabilities and stockholders' equity ......................... $12,559,796 $ 9,071,348
============ ============
</TABLE>

F-3

<PAGE> 24

AXCESS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Sales ...................................................... $ 1,246,880 $ 43,146
Cost of sales .............................................. 756,191 4,298
------------ ------------
Gross profit ....................................... 490,689 38,848
Expenses:
Research and development ............................... 1,733,119 2,939,107
General and administrative ............................. 2,639,166 4,384,513
Selling and marketing .................................. 2,560,739 633,277
Depreciation and amortization .......................... 957,565 781,243
------------ ------------
Operating expenses ................................. 7,890,589 8,738,140
------------ ------------
Loss from operations ............................... (7,399,900) (8,699,292)
Other income (expenses):
Interest expense ....................................... (624,494) (532,797)
Interest income ........................................ 233,370 2
Other .................................................. 1,682,456 21,861
------------ ------------
Other expense, net ................................. 1,291,332 (510,936)
------------ ------------
Loss from continuing operations .................... (6,108,568) (9,210,228)

Discontinued operations:
Loss from operations ................................... (148,080) (5,152,908)
Gain (loss) on disposal of discontinued operations ..... 1,856,625 (1,095,920)
------------ ------------
Gain (loss) from discontinued operations ........... 1,708,545 (6,248,828)
------------ ------------
Net loss ........................................... (4,400,023) (15,459,056)
Preferred stock dividend requirements ...................... (3,024,905) (1,500,422)
------------ ------------
Net loss applicable to common stock ................ $ (7,424,928) $(16,959,478)
============ ============

Basic and diluted net loss per share:
Continuing operations .................................. $ (2.90) $ (3.99)
Discontinued operations ................................ 0.54 (2.33)
Net loss applicable to per common share ................ (2.36) (6.32)

Weighed average shares of common stock outstanding ......... 3,146,846 2,681,456
============ ============
</TABLE>

F-4
<PAGE> 25

AXCESS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
NON-VOTING
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------------- -------------------------- ---------------------------
NUMBER NUMBER NUMBER
OF PAR OF PAR OF PAR
SHARES VALUE SHARES VALUE SHARES VALUE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .......... 146,726 $ 11,967,233 2,331,748 $ 23,318 112,492 $ 1,125
Issuance of common stock ............ -- -- 12,500 125 -- --
Issuance of restricted common
stock in connection with Xerox
settlement ....................... -- -- 120,000 1,200 -- --
Issuance of preferred stock ......... -- 2,647 -- -- -- --
Issuance of detachable warrants and
restricted common stock in
connection with notes payable to
stockholders ..................... -- -- 15,120 151 -- --
Restricted common stock issued in
connection with RFID asset
purchase ......................... -- -- 400,000 4,000 -- --
Issuance of Series G Preferred
Stock and exchanged for Series I
Preferred Stock .................. 205 2,050,000 -- -- -- --
Issuance of Series H Preferred
Stock and exchanged for Series J
Preferred stock .................. 792 7,920,000 -- -- -- --
Issuance of Series J Preferred 213 2,130,000 -- -- -- --
Stock Conversion of stockholders' notes
payable into Series J Preferred
Stock ............................ 153 1,530,000 -- -- -- --
Conversion of stockholders' notes
payable into Series I Preferred
Stock ............................ 50 500,000 -- -- -- --
Issuance of Series I and Series J
Preferred Stock for dividends
payable .......................... 108 1,080,000 -- -- -- --
Preferred stock dividends ........... -- -- -- -- -- --
Purchase of treasury stock .......... -- -- -- -- -- --
Other ............................... -- -- -- -- -- --
Net loss ............................ -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 .......... 148,247 27,179,880 2,879,368 28,794 112,492 1,125
Issuance of Series 1999 Preferred
Stock ............................ 125 1,250,000 -- -- -- --
Conversion of convertible notes
payable to stockholders' into
Series 2000 Preferred Stock ...... 332 3,323,423 -- -- -- --
Issuance of Series I, Series J and
Series 1999 Preferred stock for
dividends payable ................ 185 1,845,616 -- -- -- --
Warrant issued in connection with
acquisition of Prism Video, Inc.
assets ........................... -- -- -- -- -- --
Warrants issued with convertible
debt ............................. -- -- -- -- -- --
Issuance of common stock in
connection with technology
license acquisition .............. -- -- 300,000 3,000 -- --
Issuance of common stock upon 119,000 1,190 -- --
exercise of stock options ........ -- -- -- -- -- --
Preferred stock dividends ........... -- -- -- -- -- --
Other ............................... -- -- -- -- -- --
Net loss ............................ -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 .......... 148,889 $ 33,598,919 3,298,368 $ 32,984 112,492 $ 1,125
============ ============ ============ ============ ============ ============
<CAPTION>

ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1997 .......... $ 57,168,716 $(66,691,089) $ 2,469,303
Issuance of common stock ............ 49,875 -- 50,000
Issuance of restricted common
stock in connection with Xerox
settlement ....................... 561,300 -- 562,500
Issuance of preferred stock ......... (2,647) -- --
Issuance of detachable warrants and
restricted common stock in
connection with notes payable to
stockholders ..................... 99,923 -- 100,074
Restricted common stock issued in
connection with RFID asset
purchase ......................... 621,200 -- 625,200
Issuance of Series G Preferred
Stock and exchanged for Series I
Preferred Stock .................. -- -- 2,050,000
Issuance of Series H Preferred
Stock and exchanged for Series J
Preferred stock .................. -- -- 7,920,000
Issuance of Series J Preferred -- -- 2,130,000
Stock Conversion of stockholders' notes
payable into Series J Preferred
Stock ............................ -- -- 1,530,000
Conversion of stockholders' notes
payable into Series I Preferred
Stock ............................ -- -- 500,000
Issuance of Series I and Series J
Preferred Stock for dividends
payable .......................... -- -- 1,080,000
Preferred stock dividends ........... -- (1,500,422) (1,500,422)
Purchase of treasury stock .......... (50,000) -- (50,000)
Other ............................... 67,481 -- 67,481
Net loss ............................ -- (15,459,056) (15,459,056)
------------ ------------ ------------
Balance at December 31, 1998 .......... 58,515,848 (83,650,567) 2,075,080
Issuance of Series 1999 Preferred
Stock ............................ -- -- 1,250,000
Conversion of convertible notes
payable to stockholders' into
Series 2000 Preferred Stock ...... -- -- 3,323,423
Issuance of Series I and Series J
Preferred Stock for dividends
payable .......................... -- -- 1,845,616
Warrant issued in connection with
acquisition of Prism Video, Inc.
assets ........................... 1,035,000 -- 1,035,000
Warrants issued with convertible
debt ............................. 422,011 -- 422,011
Issuance of common stock in
connection with technology
license acquisition .............. 372,000 -- 375,000
Issuance of common stock upon
exercise of stock options ........ 370,930 -- 372,120
Preferred stock dividends ........... 672,179 (3,024,905) (2,352,726)
Other ............................... -- -- --
Net loss ............................. -- (4,400,023) (4,400,023)
------------ ------------ ------------
Balance at December 31, 1999 .......... $ 61,387,968 $(91,075,495) $ 3,945,501
============ ============ ============
</TABLE>

F-5
<PAGE> 26

AXCESS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations .................................. $ (6,108,568) $ (9,210,228)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization ................................ 957,565 781,243
Amortization of financing discount and issuance costs ........ 158,302 188,486
(Gain) loss on sale of assets ................................ (2,027,983) --
Non-cash compensation ........................................ -- 50,000
Changes in operating assets and liabilities:
Accounts receivables ....................................... (302,192) (30,987)
Inventory .................................................. (176,782) (256,216)
Prepaid expenses and other ................................. (158,984) (5,853)
Other assets ............................................... 10,061 101,737
Accounts payable ........................................... (377,938) (978,478)
Other liabilities .......................................... (666,359) 1,787,916
------------ ------------
Net cash used by operating activities ................... (8,692,878) (7,572,380)
Cash flow from investing activities:

Technology purchase .............................................. -- (404,249)
Capital expenditures ............................................. (197,954) (46,450)
Proceeds from sale of assets ..................................... 902,527 --
Principal payments on note receivable ............................ 98,249 --
------------ ------------
Net cash provided (used) by investing activities ........ 802,822 (450,699)
Cash flow from financing activities:
Borrowings under financing agreements ............................ 6,079,139 1,611,685
Principal payments on financing agreements ....................... (1,188,182) (3,591,631)
Net proceeds from issuance of common and preferred stock ......... 372,120 12,245,542
------------ ------------
Net cash provided by financing activities ............... 5,263,077 10,265,596
Net cash provided (used) by discontinued operations ..... 1,121,000 (1,769,429)
------------ ------------
Net increase (decrease) in cash and cash equivalents .... (1,505,979) 473,088
Cash and cash equivalents, beginning of period ....................... 1,575,429 1,102,341
------------ ------------
Cash and cash equivalents, end of period ............................. $ 69,450 $ 1,575,429
============ ============
Supplemental information:
Cash paid during the year for interest ........................... $ 78,677 $ 112,446
============ ============
</TABLE>

F-6
<PAGE> 27

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

AXCESS Inc. (the Company) provides computer network-based solutions for
improving the utilization of corporate assets to improve operations
productivity, physical security, asset management, manufacturing logistics and
enterprise resource planning (commonly referred to as ERP), and financial
reporting. The Company's products include hands-free, long range RFID (radio
frequency identification) technology used to track and monitor people, assets,
inventory and vehicles as well as patented digital video compression technology
for enterprise multi-media transmission and digital recording. The Company's
products incorporate patented wireless, automatic identification and multi-media
technologies.

The future results of operations and financial condition of the Company
will be impacted by the following factors, among others: technological change,
dependence on identifying, developing and marketing product enhancements and new
products, dependence on third party manufactures, vendors, suppliers and
contractors, dependence on key personnel, intellectual property rights, and
product liability.

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. Certain
reclassifications have been made to the 1998 consolidated financial statements
to conform to the 1999 presentation.

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 and Antiope Partners ("Amphion Group"). As a
result the Amphion Group owns approximately 15% of the Company's voting common
stock currently outstanding and approximately 64% of the Company's voting common
stock on a diluted basis, assuming the exercise of warrants and options and the
conversion of preferred stock and convertible debt. See Notes 9, 10 and 11.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Statements of Cash Flows

The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

F-7
<PAGE> 28

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Raw materials ............................... $ 585,608 $ 98,010
Work-in-process ............................. 113,447 137,124
Finished goods .............................. 146,345 21,082
------------ ------------
$ 845,400 $ 256,216
============ ============
</TABLE>

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short-term
maturity of these instruments.

The carrying value of the company's note receivable from stockholder
approximates fair value as it bears interest at rates approximating current
market rates.

The outstanding borrowings under the Company's long-term notes payable bear
interest at current market rates, and therefore, the carrying amount of debt
approximates estimated fair value at December 31, 1999 and 1998.

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 and maintains a warranty reserve.

Depreciation and Amortization

Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the respective assets.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairments have been
recorded by the Company as a result of such reviews. 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

F-8
<PAGE> 29

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

carrying amount of the asset exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

Stock Compensation Plans

The Company accounts for stock based awards to employees under Accounting
Principles Board Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued to
Employees". Generally, under APB No. 25, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price at the date of the grant.

Income Taxes

The Company accounts for income taxes under the asset and liability method.
Under this method, 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.

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 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 antidilutive.
Conversion of convertible preferred stock, convertible debt and the exercise of
options and warrants would result in 15,617,476 common shares outstanding at
December 31, 1999.

Segment Reporting

The Company operates in one industry segment selling two primary product
lines, digital video and RFID. Digital video product sales were $817,421 in
1999. RFID product sales were $429,459 and $43,146 for 1999 and 1998
respectively. The Company began producing and selling digital video products in
July 1999.

Recent Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), was
issued. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives") and for hedging
activities. It requires that all derivatives be recognized as either assets or
liabilities at fair value. The accounting for gains and losses from changes in
fair value of a derivative depends on the intended use of the derivative and its
resulting classification as one of three designated types of hedges or as a
non-hedging instrument. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption

F-9
<PAGE> 30

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

of this statement is not expected to have a material impact on the Company's
financial statements and related disclosures.

2. OPERATIONS, LIQUIDITY AND GOING CONCERN

The Company's operations in 1999 and 1998 generated operating losses of
$6,108,568 and $9,210,228 respectively. Although the Company raised gross
proceeds of approximately $6 million and $15 million during 1999 and 1998,
through equity and debt financing transactions, the Company's operations,
capital expenditures and debt service requirements have utilized substantially
all of such proceeds through March 2000. These factors raise substantial doubt
about the Company's ability to continue as a going concern.

The Company's business plan for 2000 is predicated principally upon the
successful marketing of its RFID products and the video security and stage
products acquired from Prism Video, Inc. in June 1999. The Company anticipates
that its existing working capital resources and revenues from operations will
not be adequate to satisfy its funding requirements in 2000. However on March
29, 2000 the Company has agreed to the terms of a private equity placement it
believes will provide adequate working capital for 2000. Under terms of the
agreement, the Company will sell $5,000,000 of convertible preferred stock to an
affiliate of the Amphion Group. The Company will issue 500 shares of Series 2000
Preferred Stock with a stated value of $10,000 per share which is convertible to
non-voting common stock based at a conversion price of $3.50 per non-voting
common share.

3. ACQUISITIONS

Purchased technologies, net consists of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
RFID technology $ 1,714,449 $ 1,714,449
Video technology 5,079,483 --
------------ ------------
6,793,932 1,714,449
Accumulated amortization (750,790) --
------------ ------------
Purchased technologies, net $ 6,043,142 $ 1,714,449
============ ============
</TABLE>

Prism Video Assets

On July 28, 1999, the Company acquired substantially all of the assets,
including the network video technology, of Prism Video, Inc. ("Prism"), a
privately held corporation engaged in the design, manufacture and marketing of
video security technology and video storage products.

F-10

<PAGE> 31

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

3. ACQUISITIONS (CONTINUED)

The purchase price, which is subject to adjustment in accordance with the
terms of the purchase agreement, consisted of:

<TABLE>
<S> <C>
Non-interest bearing note payable, due December 31, 2002
discounted at 10% .................................................. $ 3,100,725
125 shares of Series 1999 Voting Preferred Stock, $10,000 per
share stated value, convertible into 500,000 shares of common
stock at a conversion price of $2.50 per share ..................... 1,250,000
arrant to purchase 500,000 shares of common stock at $2.50 per
share .............................................................. 1,035,000
Assumption of accounts payable ....................................... 358,887
------------
$ 5,744,612
============
</TABLE>

The note payable has a face amount of $4,000,000 and is secured by the
Company's $3,902,375 note receivable from Amphion Ventures, L.P. ("Amphion
Ventures"). In addition the shares of common stock which Prism may acquire upon
conversion of preferred stock or by exercise of the warrant 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. The warrant is exercisable on or
before July 28, 2004. Prism has agreed not to convert the preferred stock or
exercise the warrant until the Company obtains stockholder approval to issue the
common stock. The Company intends to submit this proposal at its 2000 annual
meeting of stockholders.

The purchase price has been allocated to the assets and liabilities
acquired based on preliminary estimates of fair value as follows:

<TABLE>
<S> <C>
Accounts receivable ......................... $ 138,443

Inventory ................................... 412,402

Purchased technology ........................ 5,079,483

Other assets, net ........................... 114,284
------------
Total purchase price ........................ $ 5,744,612
============
</TABLE>

The purchased technology consists of proprietary digital video compression
technology used in security video and closed circuit television (CCTV) products
as well as the related U.S. and international patent rights. The purchased
technology is being amortized over an average life of five years.

The following unaudited pro forma information presents the Company's
results of operations as if the acquisition of the Prism assets had occurred as
of January 1, 1998. The pro forma information has been prepared by combining the
results of operations of the Company and Prism for the years ended December 31,
1999 and 1998, adjusted for the additional amortization of the purchase
technology. This pro forma information does not purport to be indicative of what
would have occurred had the acquisition occurred as of that date, or of results
of operations that may occur in the future.

F-11

<PAGE> 32

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

3. ACQUISITIONS (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Revenue ..................................... $ 1,793,347 $ 1,177,492
Net loss .................................... $ (8,916,785) $(15,364,706)
Basic and diluted net loss per common
share ..................................... $ (2.83) $ (5.73)
</TABLE>

RFID Technology

In September 1998, the Company consummated the acquisition of the RFID
based (Radio Frequency Identification) intellectual property assets of ASGI,
Inc., and Nauta, Inc. (collectively, the "Sellers"). The intellectual property
assets acquired included 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. At closing, the Company made a cash payment
of $415,000, signed a one-year promissory note for $685,000, interest at the
prime rate, and delivered 400,000 shares of its common stock. The note was paid
in full in 1999. Up to an aggregate of an additional $6,000,000 is payable by
the Company to the Sellers only if certain net operating profit targets are
realized during each of the next five years. Such amounts will 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, 1999 no additional
consideration was due to the Sellers.

4. DISCONTINUED OPERATIONS

On October 21, 1998 the Company's Board of Directors approved a plan to
exit the Company's existing imaging business as part of the strategy to redeploy
and refocus the Company's resources on its core RFID asset, vehicle and
personnel tracking business. The sale of the assets of the imaging business was
completed on December 15, 1998. The Company received a sales price of $500,000
and recorded a loss of $1,095,920 on the disposal in 1998.

On April 30, 1999, the Company completed the sale of its Lasertechnics
Marketing Corporation ("LMC") subsidiary to companies included in the Amphion
Group. The Company's rights and interests in DataGlyph(TM) and certain
technology under development with XL Vision, Inc. were also included in the
sale. The Company received $0.5 million in cash, $2.0 million in debt
cancellation, a $4.0 million note receivable due March 2002 (or 2004 under
certain conditions), a $0.5 million demand note receivable and a warrant to
purchase equity in the Amphion Group controlled enterprise to which these
business and assets were transferred with an exercise price of $2.50 per share,
representing approximately 8% of that enterprise. If LMC is subsequently sold
prior to April 2001 by the Amphion Group controlled enterprise, the Company has
the option to exchange its warrant for 20% of the excess profits (as defined in
the acquisition agreements) from any such sale. The Company realized a gain of
$3,900,734 from the disposition of LMC and the technology assets in the quarter
ended June 30, 1999. Of the gain, $1,856,625 resulted from the sale of LMC and
was reported as a gain from discontinued operations. The remainder of the gain,
$2,044,109, was attributable to the sale of the technology assets and was
included in continuing operations. The

F-12
<PAGE> 33

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

4. DISCONTINUED OPERATIONS (CONTINUED)

results of the imaging business and LMC are presented as discontinued operations
in the accompanying statements of operations for the years ended December 31,
1999 and 1998 and are comprised of the following:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Sales ....................................... $ -- $ 8,509,940
Costs and expenses .......................... -- 13,662,848
------------ ------------
Loss from operations ........................ -- (5,152,908)
Gain on disposal ............................ 1,856,625 (1,095,920)
------------ ------------
Gain (loss) from discontinued operation ..... $ 1,856,625 $ (6,248,828)
============ ============
</TABLE>

A claim has been made by the Amphion Group controlled enterprize regarding
representations and warranties contained in the purchase and sale agreement. The
Company is vigorously contesting this matter and believes that their ultimate
resolution of this matter will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows. The
purchaser's ability to assert additional claims for indemnification expired on
December 31, 1999.

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other consists of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Prepaid insurance ........................... $ 66,325 $ 91,500
Prepaid interest ............................ 316,508 --
Prepaid other ............................... 151,850 68,587
Interest receivable ......................... 160,651 --
------------ ------------
$ 695,334 $ 160,087
============ ============
</TABLE>

Prepaid interest results from the warrants issued in connection with the 10%
convertible note payable to the Amphion Group. See Note 9. Interest receivable
results from the note receivable from the Amphion Group. See Note 4.

F-13
<PAGE> 34

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
AMORTIZATION/
DEPRECIATION
1999 1998 PERIOD
------------ ------------ -------------
<S> <C> <C> <C>
Leasehold improvements ...................... $ 64,189 $ 55,752 Lease term
Machinery and equipment ..................... 1,151,651 1,060,255 5 to 8 years
Furniture and fixtures ...................... 99,362 70,461 5 years
------------ ------------
1,315,202 1,186,648
Accumulated depreciation and
amortization............................... (770,761) (612,149)
------------ ------------

Property, plant and
equipment, net ............................ $ 544,441 $ 574,499
============ ============
</TABLE>

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Accrued payroll and payroll taxes ..................... $ -- $ 152,257
Accrued vacation ...................................... 151,005 82,407
Accrued interest ...................................... 224,911 36,303
Accrued legal, litigation settlements and other ....... 857,734 1,714,035
------------ ------------
$ 1,233,650 $ 1,985,002
============ ============
</TABLE>

8. LEASE OBLIGATIONS

The Company leases its office space and certain equipment under operating
leases. The rental expense recorded for operating leases was $235,668 and
$162,431 for the years ended December 31, 1999 and 1998, respectively. At
December 31, 1999, future minimum lease payments on operating leases were as
follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------
<S> <C>
2000.............................. $ 227,954
2001.............................. 16,220
2002.............................. 5,407
---------
$ 249,581
=========
</TABLE>

F-14
<PAGE> 35

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

9. NOTES PAYABLES

Note payables consist of the following at December 31, 1999:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Due to stockholders:
Amphion Convertible Note ................................ $ 2,662,972 $ --
Non interest bearing note, due December 31, 2002,
discounted at 10% ..................................... 3,259,027 --
Note Purchase Agreement ................................. 400,000 1,966,900
Amphion Note Payable .................................... 580,000 1,470,000
------------ ------------
6,901,999 3,436,900
Less current maturities ................................. 980,000 1,966,900
------------ ------------
Non-current notes payable to stockholders ............... $ 5,921,999 $ 1,470,000
============ ============

Other notes payable:
8% promissory note due January 15, 2000 ................. -- 535,205
Other ................................................... 22,309 90,882
------------ ------------
22,309 626,087
Less current maturities ................................. 22,309 90,882
------------ ------------
Other non-current notes payable ......................... $ -- $ 535,205
============ ============
</TABLE>

At December 31, 1997, the Company owed a $2,100,000 note payable to Xerox
Corporation ("Xerox") in connection with a license agreement for certain
technology. In the first quarter of 1998, the Company agreed to pay Xerox $1.47
million in license fees for certain technology and issued Xerox 120,000 shares
of the Company's common stock. Xerox agreed not to sell any of these shares
before December 1999, at which time their shares may be subject to certain
limitations. The difference between the original note and the sum of cash and
stock ultimately issued to Xerox was $292,458, which was applied as a reduction
of the deferred license fee. The Company funded the payment to Xerox from
proceeds received from Amphion Ventures under the terms of a two-year loan (the
"Amphion Note Payable") with interest at the rate of 10% per annum. Amphion
Ventures received, as a loan origination fee, (i) 15,120 shares of restricted
common stock and (ii) 3-year warrants to purchase 14,700 shares of common stock
with an exercise price of $5.00 per share The license fee of $2,100,000 was
recorded as a deferred license fee and was being amortized over the three year
term of the license agreement. Accordingly, the Company has reflected the
unamortized balance of $532,881 at December 31, 1998 as a noncurrent asset. The
Company's rights and interests in the technology were included in the sale of
LMC and certain assets to Amphion Ventures in March 1999.

At December 31, 1997, borrowings of $3,000,000 were outstanding under the
terms of a bridge loan financing provided to the Company by Antiope Partners and
J. P. Morgan Investment Corporation ("JPMIC") pursuant to a note purchase
agreement dated June 25, 1997 (the "Note Purchase Agreement"). The Note Purchase
Agreement provided the Company with additional bridge financing up to a total of
$3,000,000 to be funded 60% by Antiope Partners and 40% by JPMIC. The Note
Purchase Agreement provided for an interest rate of 10% per annum for advances
by Antiope Partners and 6.64% per annum for advances by JPMIC.

In December 1997, JPMIC, Antiope Partners and Amphion Ventures, extended
the maturity of the Note

F-15
<PAGE> 36

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

9. NOTES PAYABLE (CONTINUED)

Purchase Agreement from December 31, 1997 to December 31, 1998 in exchange for
5,647 restricted shares of the Company's common stock and warrants to purchase
30,000 shares of common stock at an exercise price of $5.00. The Company
recorded a debt discount of $88,412 representing the estimated fair value of the
warrants and restricted stock provided under this arrangement. The debt discount
was accreted to interest expense through the extended maturity date of December
31, 1998.

In December 1998, the Amphion Group and JPMIC elected to convert one-half
of the outstanding indebtedness of the Company under the Note Purchase
Agreement, including all accrued, but unpaid interest thereon through December
31, 1998, into shares of the Company's Series I Preferred Stock or Series J
Preferred Stock. In addition, the Amphion Group elected to convert $100,000 of
the accrued, but unpaid interest under the Amphion Note Payable into shares of
Series I Preferred Stock and Series J Preferred Stock.

As a result of the conversions described above, the Company issued: (a) 35
shares of Series J Preferred Stock to the Amphion Group for its conversion of
indebtedness of the Company in the aggregate amount of $350,000 ($200,000 under
the terms of the Note Purchase Agreement plus $50,000 of accrued, but unpaid
interest thereon, and $100,000 of accrued, but unpaid interest on the Amphion
Note Payable); (b) 118 shares of Series J Preferred Stock to Antiope Partners
for its conversion of indebtedness of the Company in the aggregate amount of
$1,180,000 ($910,000 under the terms of the Note Purchase Agreement plus
$270,000 of accrued, but unpaid interest thereon); and (c) 50 shares of Series I
Preferred Stock to JPMIC for its conversion of indebtedness of the Company in
the aggregate amount of $500,000 ($400,000 under the terms of the Note Purchase
Agreement plus $100,000 of accrued, but unpaid interest thereon).

Also in December 1998, Amphion Ventures, Antiope Partners and JPMIC agreed
with the Company to extend the maturity date of the balance remaining under the
Note Purchase Agreement for a period of one year. The $400,000 note payable to
JPMIC is in default at December 31, 1999. The Company is currently in
negotiations with JPMIC to pay this note in cash or securities of the Company
prior to April 15, 2000. The default on this obligation does not impact the
terms of the Company's other obligations.

On September 30, 1999, the Company signed a 10% convertible note maturing
September 30, 2002 ("Amphion Convertible Note"), under which the Company can
borrow up to $6,000,000 from Amphion Ventures. Amphion Ventures may convert all
or any portion of the indebtedness into Series 1999 Non-Voting Preferred Stock
of the Company. Initial borrowings totaling $3,787,275 were used to refinance a
portion of the outstanding borrowings and accrued interest under the Note
Purchase Agreement and the Amphion Note Payable. In consideration for the
financing arrangement, the Company issued a warrant to acquire 180,362 shares of
the Company's non-voting common stock at a exercise price of $2.10 per share.
The Company may be required to issue additional warrants covering up to an
aggregate of 533,923 shares of non-voting common stock based on the outstanding
balance of the convertible notes on each of the first two anniversary dates. The
outstanding warrant was valued at $422,011 and recorded as prepaid interest
which the Company is amortizing over 12 months. On December 31, 1999 the Amphion
Group elected to convert $3,323,423 of borrowings into 332 shares of Series 2000
Non-Voting Preferred Stock. See Note 10. No additional borrowings are available
to the Company under the Amphion Convertible Note at December 31, 1999.

F-16
<PAGE> 37
AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

10. PREFERRED STOCK

The Company has authorized 7,000,000 shares of convertible preferred stock,
of which shares designated in eight series were outstanding during 1999 and
1998. Information with respect to the series of preferred stock outstanding at
each balance sheet date is summarized below:

Series A Series B Series C Series G
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Number of shares authorized.... 1,500,000 1,500,000 1,500,000 2,500

Stated value................... $ 26.00 $ 28.40 $ 30.20 $ 10,000

Number of shares issued and
outstanding:

December 31, 1997......... 57,692 52,817 35,427 790

December 31, 1998......... 57,692 52,817 35,427 -

December 31, 1999......... 57,692 52,817 35,427 -

Conversion ratio (or
conversion price) of
preferred shares into
common....................... 1 to 1 into 1 to 1 into 1 to 1 into $.50 into
voting voting voting voting
common common common common
stock stock stock stock

Liquidation preference......... Stated value Stated value Stated value Stated value
plus accrued plus accrued plus accrued plus accrued
dividends dividends dividends dividends

Dividend rights................ 10% per 10% per 10% per 8% per
annum, annum, annum, annum,
cumulative cumulative cumulative cumulative
</TABLE>

<TABLE>
<CAPTION>
Series Series
Series I Series J 1999 2000
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Number of shares authorized... 2,500 2,500 2,500 2,500

Stated value.................. $ 10,000 $ 10,000 $ 10,000 $ 10,000

Number of shares issued and
outstanding:

December 31, 1997........ - - - -

December 31, 1998........ 623 1,688 - -

December 31, 1999........ 635 1,857 129 332

Conversion ratio (or
conversion price) of
preferred shares into
common...................... $4.00 into $4.00 into $2.50 into $3.50 into
voting non-voting voting non-voting
common common common common
stock stock stock stock

Liquidation preference........ Stated value Stated value Stated value Stated value
plus accrued plus accrued plus accrued plus accrued
dividends dividends dividends dividends

Dividend rights............... 8% per 8% per 8% per 8% per
annum, annum, annum, annum,
cumulative cumulative cumulative cumulative
</TABLE>

Series 1999 Non-Voting Preferred Stock was authorized in 1999 in connection
with the Amphion Convertible Debt. At December 31, 1999 no shares had been
issued.

All series of preferred stock rank senior in right of payment to the
Company's common stock and on a party with all series of preferred stock as to
dividends or upon a liquidation or dissolution of the Company.

Series A, B and C Convertible Preferred Stock

Each share of Series A, B, and C Convertible Preferred Stock is convertible
at the option of the holders into voting common stock on a share-for-share basis
and entitled to vote as if converted into voting common stock. The Company may
redeem the Series A, B and C Convertible Preferred Stock at any time at stated
value plus accrued dividends.

Dividends are payable quarterly in cash or additional shares of preferred
stock at the option of the holders. There were no dividends in arrears on the
Series A, B, and C Convertible Preferred Stock at December 31, 1999 and 1998.
Dividends payable of $8,448 and $481,339 were accrued at December 31, 1999 and
1998, respectively.

F-17
<PAGE> 38

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

10. PREFERRED STOCK (CONTINUED)

Series G, H, I and J Convertible Preferred Stock

During 1998, Amphion Ventures purchased 205 shares and 792 shares of the
Company's Series G Convertible Preferred Stock ("Series G Preferred Stock") and
Series H Convertible Preferred Stock ("Series H Preferred Stock"), respectively,
for a total purchase price of $9,970,000. In October 1998, the Company obtained
a formal commitment from Amphion Ventures to purchase up to an additional $2.3
million of shares of either the Company's Series G Preferred Stock, Series H
Preferred Stock, Series I Convertible Preferred Stock ("Series I Preferred
Stock") or Series J Convertible Preferred Stock ("Series J Preferred Stock"),
raising their commitment to a total of $6.3 million, to fund the Company's
operations (the "1998 Amphion Commitment"). In connection with this commitment,
Amphion Ventures received common stock warrants to purchase 264,998 shares of
the Company's common stock at an exercise price of $2.50 per share.

In connection with the issuance of the Company's Series G Preferred Stock
and the Series H Preferred Stock during 1997 and 1998, the Company agreed with
the initial holders of the Series G Preferred Stock and the Series H Preferred
Stock, that if, at any time prior to December 31, 1999, the Company were to
complete an equity financing raising at least $3,000,000 in new equity, such
initial holders would have the non-assignable right (the "Reset Right"), but not
the obligation to exchange all or a portion of their shares of Series G
Preferred Stock or Series H Preferred Stock for shares of a new series of
preferred stock with substantially the same terms and conditions offered to the
participants in the new equity financing.

The 1998 Amphion Commitment triggered the reset right held by the holders
of the Series G Preferred Stock and the Series H Preferred Stock. As a result,
all of the holders of the Series G Preferred Stock and the Series H Preferred
Stock elected to exercise their rights to exchange all shares of Series G
Preferred Stock held by such holders for shares of Series I Preferred Stock, as
well as all shares of Series H Preferred Stock held by such holders for shares
of Series J Preferred Stock.

In connection with its exercise of the Reset Right, Amphion Ventures
exchanged all 405 shares of Series G Preferred Stock held by it for 405 shares
of Series I Preferred Stock and all 792 shares of Series H Preferred Stock held
by it for 792 shares of Series J Preferred Stock. Also, Antiope Partners
converted all 50 shares of Series G Preferred Stock held by it for 50 shares of
Series I Preferred Stock and the other holder converted all 40 shares of Series
G Preferred Stock held by it for 40 shares of Series I Preferred Stock. The
Series I Preferred Stock and Series J Preferred Stock also contain a similar
reset provision such that if at any time prior to December 31, 1999, the Company
were to complete an equity financing with third parties raising at least
$1,000,000 in new equity, the initial holders would have the non-assignable
right (the "Series I and J Reset Right"), but not the obligation to exchange all
or a portion of their shares of Series I Preferred Stock or Series J Preferred
Stock for shares of a new series of preferred stock with substantially the same
terms and conditions offered to the participants in the new equity financing.
Further, if the Company failed to complete such an equity financing prior to
December 31, 1999, the conversion price of the Series I Preferred Stock and
Series J Preferred Stock would automatically be reset to not less than the
greater of $1.00 or one-half of the average closing bid price of the Company's
common stock on the NASDAQ SmallCap Market during the last twenty (20)
consecutive trading days of 1999. Because the Company successfully raised over
$1,000,000 in equity prior to such date, the Series I and J conversion price
reset clause was voided.

Under the terms of the Amphion Commitment, 213 shares of Series J
Convertible Preferred Stock were purchased during the three month period ended
December 31, 1998, for an aggregate purchase price of $2,130,000. In addition,
the Company issued 98 shares of Series J Preferred Stock to Amphion Ventures on
December 31, 1998, for a total purchase price of $980,000 and 5 shares of Series
J Preferred Stock to Antiope Partners for a total

F-18
<PAGE> 39

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

10. PREFERRED STOCK (CONTINUED)

purchase price of $50,000.

Each Share of Series I Preferred Stock and Series J Preferred Stock is
convertible in whole or in part at any time at the option of the holder into
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 $4.00 per share. The Series I Preferred
Stock and the Series J Preferred Stock are both subject to the 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 Stock holder'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.
Although the Company's non-voting common stock may be converted to common stock
at any time by a holder thereof, Amphion Ventures has agreed not to convert any
shares of non-voting common stock to voting common stock without the prior
consent of the Company.

The dividends on the Series I Preferred Stock and the Series J Preferred
Stock are payable semi-annually in cash or additional shares of preferred stock
at the Company's option. During 1999 the Company offset accrued dividends
payable to the Amphion Group against a $1,030,624 note receivable from the
Amphion Group. The Company issued 185 shares of preferred stock in 1999 and 108
shares of preferred stock in 1998 as payment for accrued dividends. Accrued
dividends payable totaled $8,448 at December 31, 1999.

On December 31, 1999, the Company issued 109 and 4 shares of Series J and
Series 1999 Preferred Stock, respectively, to its preferred stockholders for
payment of accrued dividends on the Series A, B, C, I, J and 1999 Preferred
Stock. As the shares of Series J and 1999 Preferred Stock granted were
convertible into shares of common stock at a price less than the fair market
value of the common stock at December 31, 1999, the Company recorded additional
preferred stock dividends of $672,179.

Series 1999 and 2000 Preferred Stock

In connection with the purchase of the Prism video assets, the Company
issued 125 shares of Series 1999 Preferred Stock ("Series 1999 Preferred
Stock"). Dividends are payable semi-annually in cash or in additional shares of
Series 1999 Preferred Stock at the option of the Company.

The shares of common stock which Prism may acquire 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. Prism agreed not to convert the Series 1999 Preferred Stock until the
Company obtains stockholder approval to issue the common stock.

As described in Note 9, the Company borrowed a total of $5,986,395
from Amphion under the terms of the Amphion Convertible Note. In December 1999,
Amphion elected to convert $3,323,423 of the outstanding indebtedness of the
Company under the Amphion Convertible Note into shares of Series 2000 Non-Voting
Preferred Stock.

F-19
<PAGE> 40

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

10. PREFERRED STOCK (CONTINUED)

As a result of this debt conversion, the Company issued 332 shares of Series
2000 Preferred Stock to Amphion.

The dividends on the Series 1999 Preferred Stock and the Series 2000
Preferred Stock are payable semi-annually in cash or in additional shares of
Series 1999 Preferred Stock or the Series 2000 Preferred Stock, as the case may
be, at the Company's option.

The Series 1999 Preferred Stock and the Series 2000 Preferred Stock are
both subject to the 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 1999 Preferred Stock or Series 2000
Preferred Stock holder's right to convert such Series 1999 Preferred Stock or
Series 2000 Preferred Stock, as the case may be, into voting or non-voting
common stock, as the case may be, within ten business days after the Company's
notice of redemption.

Prism Video and the Amphion Group agreed not to convert the Series 1999
Preferred Stock and the Series 2000 Non-Voting Preferred Stock, respectively,
until the Company obtains stockholder approval to issue the common stock.

The Series 1999 Preferred Stock and the Series 2000 Non-Voting 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 (a) the
closing bid price of the Company's common stock on the NASDAQ SmallCap Market is
at least $7.50 per share for a period of at least twenty (20) consecutive
trading days and (b) the trading volume of the common stock on the NASDAQ
SmallCap Market is at least 50,000 shares per day as measured by NASDAQ during
each of such twenty (20) consecutive trading days.

11. STOCK OPTIONS AND WARRANTS

The Company has two stock-based compensation plans.

Under the Company's Stock Option Plan, the Company may grant up to 900,000
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. Options granted vest over a four-year
period. The Company has issued stock options to various members of the Board of
Directors and officers of the Company under this plan. (The exercise price of
each option is not less than the average market price of the Company's stock
during the thirty trading days immediately prior to the date of grant and the
option term is ten years.) Options are generally granted each year and have
various vesting requirements. During 1998, 27,698 options outstanding under this
plan and a terminated employee stock option plan were canceled and the Company
granted new options to purchase 27,698 shares at an exercise price of $3.00.
Further, the Company canceled options outstanding under a terminated key
employee stock option plan and granted new options primarily with an exercise
price of $3.00. During 1999, the Company made grants of 750,000 options as an
inducement for the employment of certain officers of the Company, which do not
reduce the 900,000 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 an 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. In 1998, the
Company issued a total of 87,500 options pursuant to the terms of the director
compensation plan. The Company issued 60,000 options at an exercise price of
$4.00 for the Initial Grant, 20,000 options at an exercise price of $3.00 for
the Annual Grant and 7,500 options at an exercise price of $4.00 to the one new
director in 1998.

F-20
<PAGE> 41

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

11. STOCK OPTIONS AND WARRANTS (CONTINUED)

Stock option transactions for the years ended December 31, 1999 and 1998
are summarized below:

<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year ......................... 684,891 $ 3.00 27,698 $ 25.80
Options granted ............................. 1,034,500 2.60 743,241 3.00
Options exercised ........................... (119,040) 3.13 -- --
Options forfeited ........................... (366,224) 2.97 (58,350) 3.00
Options canceled ............................ (18,000) 3.00 (27,698) 25.80
------------ ------------

Options outstanding at
end of year ............................... 1,216,127 2.66 684,891 3.00
============ ============

Options exercisable at
end of year ............................... 119,750 3.00 182,556 3.00
============ ============

Options available for
grant at the end of
the year .................................. 340,710 215,109
============ ============
</TABLE>

At December 31, 1999 the Company had 1,216,127 options outstanding with
exercise prices from $2.50 to $4.00 with 9.5 years weighted average remaining
life and a weighted average exercise price of $2.66. 119,750 shares were
exercisable with a $3.00 weighted average exercise price.

Statement of Financial Accounting Standard No. 123 ("FAS 123")

FAS 123 requires disclosure of pro forma net earnings and net earnings per
common share information computed as if the Company had accounted for its
employee stock options under the fair value method set forth in FAS 123. The
fair value of the Company's outstanding stock options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Expected option life in years ............... 5.00 5.00
Risk-free interest rate ..................... 5.00% 5.00%
Volatility factor ........................... 1.05% 0.99%
</TABLE>

The Company does not have a history of paying cash dividends and none have
been assumed in estimating the fair value of its options.

F-21
<PAGE> 42

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

11. STOCK OPTIONS AND WARRANTS (CONTINUED)

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.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Pro forma net loss applicable
to common stock ........................................... $ (7,424,928) $ (17,239,562)
Pro forma basic and diluted
net loss per share ........................................ (2.36) (6.43)
Weighted average fair value of options granted during the
year ...................................................... 2.10 3.00
</TABLE>

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:

<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------- --------------------------------------------------
EXERCISE EXERCISE
WARRANTS PRICE EXPIRATION WARRANTS PRICE EXPIRATION
- --------------- ------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
1,063,391 $2.10 - 10.00 12/00 - 10/05 393,781 $2.10 - 10.00 12/00 - 10/05
119,866 10.01 - 20.00 08/00 - 12/02 119,866 10.01 - 20.00 08/00 - 12/02
70,784 20.01 - 56.25 08/00 - 12/01 70,784 20.01 - 56.25 08/00 - 12/01
- --------------- ----------------
1,254,041 584,431
=============== ================
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

On February 28, 1996, an investor group filed suit against the Company.
This lawsuit arose out of the Company's refusal to recognize the investor
group's attempt to exercise an option to purchase 70,000 shares of common stock
at $9.90 per share. The option had been granted to the Company's former
president and chief executive officer that attempted to transfer his option to
an investor group on the last day of the option term in September 1995. On that
same day, the investor group attempted to exercise the option. The Company
refused to recognize the attempted transfer of the option to the investor group
on the primary grounds that the option was granted personally to the Company's
former president and chief executive officer and the Company believed that it
was not transferable to third parties. The lawsuit sought monetary damages that
the investor group alleged to be not less than $2,800,000. In March 1999, the
parties agreed to the principal terms under which the lawsuit would be

F-22
<PAGE> 43

AXCESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)

settled and dismissed, with prejudice. Under a settlement reached in the third
quarter of 1999, the Company paid out $1,000,000 to the investor group with an
additional $750,000 payable in 2000.

The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is vigorously contesting all
such matters and believes that their ultimate resolution will not have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.

13. INCOME TAXES

Due to the Company's losses, no income tax expense was recorded for the years
ended December 31, 1999 and 1998. At December 31, 1999, the Company had a net
operating loss carryforward of approximately $18,000,000 for U.S. federal income
tax purposes, which will begin expiring in 2000. The tax benefit of the
Company's federal net operating loss carryforward (approximately $6,200,000) has
been fully offset by a valuation allowance, because the Company cannot currently
conclude that it is more likely than not that the benefit will be realized. The
valuation allowance increased by approximately $1,200,000 and $5,000,000 during
1999 and 1998, respectively. 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 carryforward under the
applicable Internal Revenue Service regulations.

F-23
<PAGE> 44

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 --Certificate of Incorporation of the Company. Incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
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).

<PAGE> 45

<TABLE>
<S> <C>
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.

3.11 --Ninth Amendment to Certificate of Incorporation of the Company dated
June 9, 1999.*

4.4 -Certificate of Designation of the Company's Series 1999 Preferred
Stock. Incorporated herein by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1999.

4.5 -Certificate of Designation of the Company's Series 1999 Non-Voting
Preferred Stock. Incorporated herein by reference to Exhibit 4.5 to
the Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1999.

4.6 -Certificate of Designation of the Company's Series 2000 Non-Voting
Preferred Stock.*

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.

<PAGE> 46

<TABLE>
<S> <C>
10.6 --Preferred Stock Purchase Agreement dated October 21, 1998 by and
between the Company and Amphion Ventures L.P. Incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.