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The $2 million valuation allowance is not adequate.

ASC 740-10-3-initial measure states that the realization of deferred taxes should apply “more-likely-than-not” rule rather than “probable.” The criteria needs substantial judgment, indicating both positive and negative factors should be taken into account. ASC 740-10-30 paragraph 21 through 23 specifies some negative and positive factor examples, as well as conclusion basis. And all the evidence should be compared and objectively verified.

AxCess management’s estimate of valuation allowance is not appropriate due to the following reasons. * Estimate of future taxable income is based on historical information as well as some information of the future at hand. However, there’s no evidence showing the verifiability of the information about the future. Thus, the information used should not be considered as “objectively verified.” * According to 805-740-30-2, measurement of DTA and valuation allowance at the date of non-taxable business combination is allowed. However, the acquisition will not complete until April 30, 2008. As a result, the corresponding projection of future revenue should not be included in financial statements in 2007 year end. * The letter of intent signed with TargetCo is not concrete or objectively verified evidence. Consequently, there’s no guarantee that estimated future taxable income would be “more-likely-than-not” realized. * AxCess has cumulative pretax losses. Combined with the fact that the gross margin declined 3-year consecutively, management’s assessment of future revenue is not well-grounded.

Based on the analyses above, management’s estimated future taxable income does not meet the criteria of being “more-likely-than-not” realized. Thus, $2 million is not adequate. The amount should be: $6.4 million calculated as below:

Deferred tax benefits as of

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