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UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWashington, DC20549

FORM 10-Q

QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

|                                             |  |  |                                                                                                      |
|---------------------------------------------|--|--|------------------------------------------------------------------------------------------------------|
| Forthe quarterly period ended June  30,2006 |  |  | Commission FileNumber            1-13591 |
|                                             |

AXS-ONEINC.(Exact name of registrant as specified in itscharter)

|                                                              |  |  |                                     |
|--------------------------------------------------------------|--|--|-------------------------------------|
| Delaware                                                     |  |  | 13-2966911                          |
| (Stateor other jurisdiction of incorporation ororganization) |  |  | (I.R.S. Employer IdentificationNo.) |
| 301Route 17 NorthRutherford, NewJersey                       |  |  | 07070                               |
| (Addressof principal executive offices)                      |  |  | (ZipCode)                           |
|                                                              |

(201)935-3400(Registrant’s telephone number,including area code)

Indicate by check markwhether the registrant: (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES        NO    

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.See definition of ‘‘accelerated filer and largeaccelerated filer’’ in Rule 12b-2 of the Exchange Act.(Check one):

    Large AcceleratedFiler                    AcceleratedFiler                    Non-AcceleratedFiler    

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

YES        NO    Numberof shares outstanding of the issuer’s common stock as ofAugust  2,2006

|                                       |  |  |                             |
|---------------------------------------|--|--|-----------------------------|
| Class                                 |  |  | Numberof Shares Outstanding |
| Common Stock, par value $0.01pershare |  |  | 34,963,127                  |
|                                       |

    

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AXS-ONEINC.

INDEX

|            |  |  |                                                                                                                                                                                                                                                |  |  |            |  |        |  |
|------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------|--|--------|--|
|       |  |  |                                                                                                                                                                                                                                           |  |  | PageNumber |
| PARTI      |  |  | FINANCIALINFORMATION                                                                                                                                                                                                                           |  |  |            |  |   |  |
|       |  |  | Item1.    FinancialStatements                                                                                                                                                                                              |  |  |            |  |   |  |
|       |  |  | ConsolidatedBalance SheetsJune 30, 2006 (unaudited) andDecember 31,2005.                                                                                                                                                                       |  |  |            |  | 3      |  |
|       |  |  | ConsolidatedStatements of Operations (unaudited)Three and six months endedJune 30, 2006 and2005                                                                                                                                                |  |  |            |  | 4      |  |
|       |  |  | ConsolidatedStatements of Comprehensive Loss (unaudited)Three and six monthsended June 30, 2006 and2005                                                                                                                                        |  |  |            |  | 5      |  |
|       |  |  | Consolidated Statements of Cash Flows (unaudited)Six months endedJune 30, 2006 and2005.                                                                                                                                                        |  |  |            |  | 6      |  |
|       |  |  | Notes toConsolidated Interim FinancialStatements.                                                                                                                                                                                              |  |  |            |  | 7      |  |
|       |  |  | Item2.    Management’s Discussion and Analysis of FinancialCondition and                    Results ofOperations |  |  |            |  | 20     |  |
|       |  |  | Item3.    Quantitative and Qualitative Disclosures About MarketRisk                                                                                                                                                        |  |  |            |  | 30     |  |
|       |  |  | Item 4.    Controls andProcedures                                                                                                                                                                                          |  |  |            |  | 31     |  |
| PARTII     |  |  | OTHERINFORMATION                                                                                                                                                                                                                               |  |  |            |  |   |  |
|       |  |  | Item4.    Submission of Matters to a Vote of SecurityHolders                                                                                                                                                               |  |  |            |  | 32     |  |
|       |  |  | Item 6.     Exhibits                                                                                                                                                                                                       |  |  |            |  | 32     |  |
| SIGNATURES |
|       |  |  | Signatures                                                                                                                                                                                                                                     |  |  |            |  | 33     |  |
|            |

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Table of Contents

PART I.    FINANCIALINFORMATION

|               |                     |
|---------------|---------------------|
| Item 1.  | FinancialStatements |

AXS-ONE INC. AND SUBSIDIARIESCONSOLIDATEDBALANCE SHEETS(In thousands. except per sharedata)

|                                                                                                                                                              |  |  |             |   |         |                  |  |        |  |   |         |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------|---|---------|------------------|--|--------|--|---|---------|---|
|                                                                                                                                                         |  |  | June30,2006 |   |         | December 31,2005 |
| ASSETS                                                                                                                                                       |  |  | (unaudited) |   |         |                  |  |   |  |
| Currentassets:                                                                                                                                               |  |  |             |   |    |                  |  |        |  |   |    |   |
| Cash and cashequivalents                                                                                                                                     |  |  |             | $ | 3,341   |                  |  |        |  | $ | 3,613   |   |
| Restrictedcash                                                                                                                                               |  |  |             |   | 44      |                  |  |        |  |   | 57      |   |
| Accountsreceivable, net of allowance for doubtful accounts of $195 and $167 atJune  30,  2006 and December  31,  2005,respectively                           |  |  |             |   | 4,300   |                  |  |        |  |   | 5,153   |   |
| Prepaid expenses andother currentassets                                                                                                                      |  |  |             |   | 914     |                  |  |        |  |   | 718     |   |
| Totalcurrent assets                                                                                                                                          |  |  |             |   | 8,599   |                  |  |        |  |   | 9,541   |   |
| Equipmentand leasehold improvements, atcost:                                                                                                                 |  |  |             |   |    |                  |  |        |  |   |    |   |
| Computer and officeequipment                                                                                                                                 |  |  |             |   | 2,563   |                  |  |        |  |   | 10,967  |   |
| Furniture andfixtures                                                                                                                                        |  |  |             |   | 846     |                  |  |        |  |   | 924     |   |
| Leaseholdimprovements                                                                                                                                        |  |  |             |   | 906     |                  |  |        |  |   | 865     |   |
|                                                                                                                                                         |  |  |             |   | 4,315   |                  |  |        |  |   | 12,756  |   |
| Less— accumulated depreciation and amortization                                                                                                        |  |  |             |   | 3,873   |                  |  |        |  |   | 12,361  |   |
|                                                                                                                                                         |  |  |             |   | 442     |                  |  |        |  |   | 395     |   |
| Capitalizedsoftware development costs, net of accumulatedamortization                                                                                        |  |  |             |   |    |                  |  |        |  |   |    |   |
| of $11,809 and$11,432 at June  30,  2006 and December  31,2005,respectively                                                                                  |  |  |             |   | 661     |                  |  |        |  |   | 1,038   |   |
| Otherassets                                                                                                                                                  |  |  |             |   | 97      |                  |  |        |  |   | 92      |   |
|                                                                                                                                                         |  |  |             | $ | 9,799   |                  |  |        |  | $ | 11,066  |   |
| LIABILITIESAND STOCKHOLDERS'DEFICIT                                                                                                                          |  |  |             |   |    |                  |  |        |  |   |    |   |
| Currentliabilities:                                                                                                                                          |  |  |             |   |    |                  |  |        |  |   |    |   |
| Accountspayable                                                                                                                                              |  |  |             | $ | 1,487   |                  |  |        |  | $ | 1,576   |   |
| Accruedexpenses                                                                                                                                              |  |  |             |   | 3,684   |                  |  |        |  |   | 3,267   |   |
| Due tojointventure.                                                                                                                                          |  |  |             |   | — |                  |  |        |  |   | 52      |   |
| Deferredrevenue                                                                                                                                              |  |  |             |   | 9,503   |                  |  |        |  |   | 8,224   |   |
| Totalcurrent liabilities                                                                                                                                     |  |  |             |   | 14,674  |                  |  |        |  |   | 13,119  |   |
| Long-termliabilities:                                                                                                                                        |  |  |             |   |    |                  |  |        |  |   |    |   |
| Long-termdeferredrevenue                                                                                                                                     |  |  |             |   | 2,213   |                  |  |        |  |   | 63      |   |
| Commitmentsandcontingencies                                                                                                                                  |  |  |             |   |    |                  |  |        |  |   |    |   |
| Stockholders'deficit:                                                                                                                                        |  |  |             |   |    |                  |  |        |  |   |    |   |
| Preferred stock,$.01 par value, authorized 5,000 shares, no shares issued andoutstanding                                                                     |  |  |             |   | — |                  |  |        |  |   | — |   |
| Commonstock, $.01 par value, authorized 50,000 shares; 34,956 and 34,316shares issued and outstanding at June  30,  2006 andDecember  31,  2005,respectively |  |  |             |   | 350     |                  |  |        |  |   | 343     |   |
| Additionalpaid-in capital                                                                                                                                    |  |  |             |   | 88,084  |                  |  |        |  |   | 87,884  |   |
| Accumulateddeficit                                                                                                                                           |  |  |             |   | (95,897 | )                |  |        |  |   | (90,663 | ) |
| Accumulatedother comprehensiveincome                                                                                                                         |  |  |             |   | 375     |                  |  |        |  |   | 497     |   |
| Unamortizedstockcompensation                                                                                                                                 |  |  |             |   | — |                  |  |        |  |   | (177    | ) |
| Totalstockholders' deficit                                                                                                                                   |  |  |             |   | (7,088  | )                |  |        |  |   | (2,116  | ) |
|                                                                                                                                                         |  |  |             | $ | 9,799   |                  |  |        |  | $ | 11,066  |   |
|                                                                                                                                                              |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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AXS-ONE INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Inthousands, except per sharedata)(Unaudited)

|                                                              |  |  |                            |   |         |                        |  |  |      |   |        |      |  |  |  |   |         |   |  |  |  |   |        |   |
|--------------------------------------------------------------|--|--|----------------------------|---|---------|------------------------|--|--|------|---|--------|------|--|--|--|---|---------|---|--|--|--|---|--------|---|
|                                                         |  |  | ThreeMonths EndedJune  30, |   |         | Six MonthsEndedJune30, |
|                                                         |  |  | 2006                       |   |         | 2005                   |  |  | 2006 |   |        | 2005 |
| Revenues:                                                    |  |  |                            |   |    |                        |  |  |      |   |   |      |  |  |  |   |    |   |  |  |  |   |   |   |
| Licensefees                                                  |  |  |                            | $ | 952     |                        |  |  |      | $ | 518    |      |  |  |  | $ | 1,917   |   |  |  |  | $ | 1,540  |   |
| Services                                                     |  |  |                            |   | 7,006   |                        |  |  |      |   | 6,944  |      |  |  |  |   | 13,494  |   |  |  |  |   | 13,960 |   |
| Other-relatedparties                                         |  |  |                            |   | 25      |                        |  |  |      |   | 17     |      |  |  |  |   | 64      |   |  |  |  |   | 37     |   |
| Totalrevenues                                                |  |  |                            |   | 7,983   |                        |  |  |      |   | 7,479  |      |  |  |  |   | 15,475  |   |  |  |  |   | 15,537 |   |
| Operatingexpenses:                                           |  |  |                            |   |    |                        |  |  |      |   |   |      |  |  |  |   |    |   |  |  |  |   |   |   |
| Cost of licensefees                                          |  |  |                            |   | 456     |                        |  |  |      |   | 406    |      |  |  |  |   | 899     |   |  |  |  |   | 770    |   |
| Costofservices                                               |  |  |                            |   | 3,922   |                        |  |  |      |   | 4,383  |      |  |  |  |   | 7,357   |   |  |  |  |   | 9,042  |   |
| Salesandmarketing                                            |  |  |                            |   | 2,481   |                        |  |  |      |   | 2,523  |      |  |  |  |   | 5,300   |   |  |  |  |   | 5,111  |   |
| Researchanddevelopment                                       |  |  |                            |   | 2,195   |                        |  |  |      |   | 2,034  |      |  |  |  |   | 4,421   |   |  |  |  |   | 4,135  |   |
| Generalandadministrative                                     |  |  |                            |   | 1,485   |                        |  |  |      |   | 1,437  |      |  |  |  |   | 2,747   |   |  |  |  |   | 2,785  |   |
| Restructuringcosts and othercosts                            |  |  |                            |   | — |                        |  |  |      |   | 863    |      |  |  |  |   | — |   |  |  |  |   | 863    |   |
| Totaloperatingexpenses                                       |  |  |                            |   | 10,539  |                        |  |  |      |   | 11,646 |      |  |  |  |   | 20,724  |   |  |  |  |   | 22,706 |   |
| Operatingloss                                                |  |  |                            |   | (2,556  | )                      |  |  |      |   | (4,167 | )    |  |  |  |   | (5,249  | ) |  |  |  |   | (7,169 | ) |
| Otherincome (expense):                                       |  |  |                            |   |    |                        |  |  |      |   |   |      |  |  |  |   |    |   |  |  |  |   |   |   |
| Interestincome                                               |  |  |                            |   | 55      |                        |  |  |      |   | 28     |      |  |  |  |   | 139     |   |  |  |  |   | 58     |   |
| Interestexpense                                              |  |  |                            |   | (29     | )                      |  |  |      |   | (1     | )    |  |  |  |   | (56     | ) |  |  |  |   | (1     | ) |
| Equityin losses of jointventures                             |  |  |                            |   | (43     | )                      |  |  |      |   | (3     | )    |  |  |  |   | (70     | ) |  |  |  |   | (27    | ) |
| Otherincome (expense),net                                    |  |  |                            |   | 85      |                        |  |  |      |   | (241   | )    |  |  |  |   | 2       |   |  |  |  |   | (414   | ) |
| Totalother income (expense),net                              |  |  |                            |   | 68      |                        |  |  |      |   | (217   | )    |  |  |  |   | 15      |   |  |  |  |   | (384   | ) |
| Lossbefore incometaxes                                       |  |  |                            |   | (2,488  | )                      |  |  |      |   | (4,384 | )    |  |  |  |   | (5,234  | ) |  |  |  |   | (7,553 | ) |
| Incometaxbenefit                                             |  |  |                            |   | — |                        |  |  |      |   | 25     |      |  |  |  |   | — |   |  |  |  |   | 25     |   |
| Netloss                                                      |  |  |                            | $ | (2,488  | )                      |  |  |      | $ | (4,359 | )    |  |  |  | $ | (5,234  | ) |  |  |  | $ | (7,528 | ) |
| Basic& diluted net loss pershare:                        |  |  |                            | $ | (0.07   | )                      |  |  |      | $ | (0.15  | )    |  |  |  | $ | (0.15   | ) |  |  |  | $ | (0.26  | ) |
| Weightedaverage basic & diluted common sharesoutstanding |  |  |                            |   | 34,354  |                        |  |  |      |   | 30,016 |      |  |  |  |   | 34,301  |   |  |  |  |   | 29,300 |   |
|                                                              |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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AXS-ONE INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(Inthousands)(Unaudited)

|                                       |  |  |                            |   |        |                        |  |  |      |   |        |      |  |  |  |   |        |   |  |  |  |   |        |   |
|---------------------------------------|--|--|----------------------------|---|--------|------------------------|--|--|------|---|--------|------|--|--|--|---|--------|---|--|--|--|---|--------|---|
|                                  |  |  | ThreeMonths EndedJune  30, |   |        | Six MonthsEndedJune30, |
|                                  |  |  | 2006                       |   |        | 2005                   |  |  | 2006 |   |        | 2005 |
| Netloss                               |  |  |                            | $ | (2,488 | )                      |  |  |      | $ | (4,359 | )    |  |  |  | $ | (5,234 | ) |  |  |  | $ | (7,528 | ) |
| Foreigncurrency translationadjustment |  |  |                            |   | (194   | )                      |  |  |      |   | 237    |      |  |  |  |   | (122   | ) |  |  |  |   | 333    |   |
| Comprehensiveloss                     |  |  |                            | $ | (2,682 | )                      |  |  |      | $ | (4,122 | )    |  |  |  | $ | (5,356 | ) |  |  |  | $ | (7,195 | ) |
|                                       |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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AXS-ONE INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Inthousands)(Unaudited)

|                                                                                     |  |  |                         |   |         |      |  |  |  |   |         |   |
|-------------------------------------------------------------------------------------|--|--|-------------------------|---|---------|------|--|--|--|---|---------|---|
|                                                                                |  |  | SixMonths Ended June30, |
|                                                                                |  |  | 2006                    |   |         | 2005 |
| Cashflows from operatingactivities:                                                 |  |  |                         |   |    |      |  |  |  |   |    |   |
| Netloss                                                                             |  |  |                         | $ | (5,234  | )    |  |  |  | $ | (7,528  | ) |
| Adjustmentsto reconcile net loss to net cash flows used in operatingactivities      |  |  |                         |   |    |      |  |  |  |   |    |   |
| Depreciationand amortization                                                        |  |  |                         |   | 504     |      |  |  |  |   | 591     |   |
| Netprovision for doubtfulaccounts                                                   |  |  |                         |   | 28      |      |  |  |  |   | 5       |   |
| Equity in losses ofjoint venture                                                    |  |  |                         |   | 70      |      |  |  |  |   | 27      |   |
| Loss on disposalof assets                                                           |  |  |                         |   | 31      |      |  |  |  |   | — |   |
| Stock optioncompensationexpense                                                     |  |  |                         |   | 107     |      |  |  |  |   | — |   |
| Restrictedstock compensationexpense                                                 |  |  |                         |   | 55      |      |  |  |  |   | 19      |   |
| Changesin current assets andliabilities                                             |  |  |                         |   |    |      |  |  |  |   |    |   |
| Accountsreceivable                                                                  |  |  |                         |   | 975     |      |  |  |  |   | 2,780   |   |
| Due to jointventure                                                                 |  |  |                         |   | (122    | )    |  |  |  |   | (102    | ) |
| Prepaid expensesand other currentassets                                             |  |  |                         |   | (205    | )    |  |  |  |   | 475     |   |
| Change in otherassets                                                               |  |  |                         |   | 43      |      |  |  |  |   | 87      |   |
| Accounts payable andaccrued expenses                                                |  |  |                         |   | 242     |      |  |  |  |   | (202    | ) |
| Deferredrevenue                                                                     |  |  |                         |   | 3,412   |      |  |  |  |   | (744    | ) |
| Netcash flows used in operatingactivities                                           |  |  |                         |   | (94     | )    |  |  |  |   | (4,592  | ) |
| Cashflows from investingactivities:                                                 |  |  |                         |   |    |      |  |  |  |   |    |   |
| Restrictedcash                                                                      |  |  |                         |   | 13      |      |  |  |  |   | 5       |   |
| Capitalized softwaredevelopment costs                                               |  |  |                         |   | — |      |  |  |  |   | (18     | ) |
| Cashpaid for acquisition of remaining interest in joint venture, net ofcashacquired |  |  |                         |   | (141    | )    |  |  |  |   | — |   |
| Purchase ofequipment and leaseholdimprovements                                      |  |  |                         |   | (200    | )    |  |  |  |   | (115    | ) |
| Netcash flows used in investingactivities                                           |  |  |                         |   | (328    | )    |  |  |  |   | (128    | ) |
| Cashflows from financingactivities:                                                 |  |  |                         |   |    |      |  |  |  |   |    |   |
| Proceeds from exerciseof stock options andwarrants                                  |  |  |                         |   | 222     |      |  |  |  |   | 924     |   |
| Net proceeds fromthe sale of commonstock                                            |  |  |                         |   | — |      |  |  |  |   | 5,775   |   |
| Debt issuancecosts                                                                  |  |  |                         |   | (31     | )    |  |  |  |   | — |   |
| Netcash flows provided by financingactivities                                       |  |  |                         |   | 191     |      |  |  |  |   | 6,699   |   |
| Foreigncurrency exchange rate effects on cash and cashequivalents                   |  |  |                         |   | (41     | )    |  |  |  |   | 234     |   |
| Net(decrease) increase in cash and cashequivalents                                  |  |  |                         |   | (272    | )    |  |  |  |   | 2,213   |   |
| Cash andcash equivalents, beginning ofperiod                                        |  |  |                         |   | 3,613   |      |  |  |  |   | 4,809   |   |
| Cashand cash equivalents, end ofperiod                                              |  |  |                         | $ | 3,341   |      |  |  |  | $ | 7,022   |   |
| Supplementaldisclosures of cash flowinformation:                                    |  |  |                         |   |    |      |  |  |  |   |    |   |
| Cashpaid during the period for–                                               |  |  |                         |   |    |      |  |  |  |   |    |   |
| Interest                                                                            |  |  |                         | $ | 51      |      |  |  |  | $ | — |   |
| Incometaxes                                                                         |  |  |                         | $ | — |      |  |  |  | $ | — |   |
|                                                                                     |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (In thousands, except per sharedata)(Unaudited)

(1)    OPERATIONS,BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTINGPOLICIES

The Company designs, markets and supportsrecords compliance management solutions that include digital archiving,business process management, electronic document delivery andintegrated records disposition and discovery for e-mail, instantmessaging, images, SAP and other corporate records, as well asfinancial management applications for global 2000 businesses, andscheduling and time and expense solutions for professional servicesorganizations. The Company also offers consulting, implementation,training, technical support and maintenance services in support of itscustomers’ use of its softwareproducts.

(a)    Basis ofPresentation

The accompanying Consolidated InterimFinancial Statements include the accounts of AXS-One Inc. and itswholly owned subsidiaries located in Australia, Singapore, SouthAfrica, and the United Kingdom (collectively, the‘‘Company’’). All intercompanytransactions and balances have been eliminated.

UntilMay  31,  2006, the Company had a 49% ownership in ajoint venture in its South African operation, AXS-One African Solutions(Pty) Ltd (‘‘African Solutions’’). Thejoint venture was considered to be a variable interest entity asdefined in FASB Interpretation No. 46R, ‘‘Consolidationof Variable Interest Entities’’ (FIN 46R). However, theCompany had determined that it was not the primary beneficiary.Accordingly, until May  31,  2006, the Company used theequity method of accounting for the joint venture whereby investments,including loans to the joint venture, were stated at cost plus or minusthe Company’s equity in undistributed earnings or losses. OnMay  31,  2006, the Company purchased the remaining51% of African Solutions from African Legends Technology for$161 less cash acquired of $20, to make it a wholly owned subsidiary.The Company applied purchase accounting to record the transaction. Thepurchase price was less than the fair value of assets acquired andtherefore the Company wrote-down the value of all long-term assets tozero and recorded a gain of $37. As of June  1,  2006,100% of the results of African Solutions are included in theconsolidated results of the Company.

The unauditedConsolidated Interim Financial Statements have been prepared by theCompany in accordance with U.S. generally accepted accountingprinciples and, in the opinion of management, contain all adjustments,consisting only of those of a normal recurring nature, necessary for afair presentation of these Consolidated Interim FinancialStatements.

The preparation of Consolidated InterimFinancial Statements in conformity with US generally acceptedaccounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of theConsolidated Interim Financial Statements and the reported amounts ofrevenues and expenses during the periods presented. Actual resultscould differ from those estimates. Some of the significant estimatesinvolve allowance for doubtful accounts, recoverability of capitalizedsoftware development costs, accrued expenses, provision for incometaxes in foreign jurisdictions, assessment of contingencies, andcompensation expense pursuant to SFAS No. 123R.

TheseConsolidated Interim Financial Statements should be read in conjunctionwith the consolidated financial statements and related notes includedin the Company’s 2005 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

The results ofoperations for the three and six months ended June  30,2006 are not necessarily indicative of results to be expected for thefull year 2006 or any future periods.

We generated a netloss of $5.2  million for the six months ended June30,  2006 and $9.0  million and $5.2  million for theyears ended December  31,  2005 and 2004, respectively. Weexperienced a decline in revenue as our business shifted to focus moreheavily on the records compliance management business. 

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (Continued) (In thousands, except per sharedata)(Unaudited)

Management’s initiatives over the lasttwo years, including the restructurings in June  2005 and 2004,the private placements of common stock in April  2004 andJune  2005 and 10% salary cuts of executive management formost of the second half of 2005, have been designed to improveoperating results and liquidity and better position AXS-One to competeunder current market conditions. As a result of these efforts, weexpect that our current cash balance, availability of borrowingcapacity under our bank line of credit, and operating cash flow shouldbe sufficient to meet the short-term requirements of the business.However, we may in the future be required to seek new sources offinancing or future accommodations from our existing lender or otherfinancial institutions, or we may seek equity infusions from privateinvestors or may seek to sell certain Company assets. We may also berequired to further reduce operating costs in order to meet ourobligations. Our ability to fund our operations is heavily dependent onthe growth of our revenues over current levels to achieve profitableoperations. If we are unable to achieve profitable operations or secureadditional sources of capital, there would be substantial doubt aboutour ability to fund future operations. Additionally, there is a riskthat cash held by our foreign subsidiaries may not be readily availablefor use in our U.S. operations to pay our obligations as the transferof funds is sometimes delayed due to various foreign governmentrestrictions. No assurance can be given that management’sinitiatives will be successful or that any such additional sources offinancing, lender accommodations or equity infusions will beavailable.

(b)    RevenueRecognition

The Company recognizes revenue inaccordance with Statement of Position 97-2, ‘‘SoftwareRevenue Recognition’’ (‘‘SOP97-2’’), and Statement of Position 98-9,‘‘Modification of SOP 97-2, Software Revenue Recognition,With Respect to Certain Transactions.’’ Revenue fromnon-cancelable software licenses, through both direct and indirectchannels, is recognized when the license agreement has been signed orthe customer purchase order has been received, delivery has occurred,the fee is fixed or determinable and collectibility is probable. TheCompany recognizes revenue from resellers when an end user has placedan order with the reseller and the above revenue recognition criteriahave been met with respect to the reseller. For the majority of licensesales the Company uses a signed license agreement as evidence of anarrangement. For maintenance fees, the Company uses a maintenanceagreement as evidence of the arrangement. The Company uses aprofessional services agreement as evidence of an arrangement fortraining, custom programming and consulting revenues. Occasionally,where a master license or services agreement with a customer alreadyexists, the Company accepts the customer’s purchase order asevidence of an arrangement.

Revenues from transactionfees associated with a hosting arrangement, billable on a pertransaction basis and included in services revenue on the unauditedConsolidated Statements of Operations, are recognized based on theactual number of transactions processed during the period.

In multiple element arrangements, the Company defers revenuebased on the vendor-specific objective evidence(‘‘VSOE’’) of fair value of the undeliveredelements and recognizes revenue on the delivered elements using theresidual method. The most commonly deferred elements are initialmaintenance and consulting services. Initial maintenance is recognizedon a straight-line basis over the initial maintenance term. The VSOE offair value for maintenance is determined by using a consistentpercentage of maintenance fees to discounted license fee based onrenewal rates. Maintenance fees in subsequent years are recognized on astraight-line basis over the life of the applicable agreement.Maintenance contracts entitle the customer to hot-line support and allunspecified product upgrades released during the term of themaintenance contract. Upgrades include any and all unspecified patchesor releases related to a licensed software product. Maintenance doesnot include implementation services to install these upgrades. The VSOEof fair value of services is determined by using an average consultingrate per hour for consulting services sold separately multiplied by theestimate of hours required to complete the consultingengagement.

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (Continued) (In thousands, except per sharedata)(Unaudited)

Delivery of software generallyoccurs when the product (on CDs) is delivered to a common carrier.Occasionally, delivery occurs through electronic means where thesoftware is made available through the Company’s secure FTP(File Transfer Protocol) site. The Company does not offer any customersor resellers a right of return.

For software license andmaintenance revenue, the Company assesses whether the fee is fixed anddeterminable and whether or not collection is probable. The Companyassesses whether the fee is fixed and determinable based on the paymentterms associated with the transaction. If a significant portion of afee is due after the Company’s normal payment terms, which are30 to 90 days from invoice date, the fee is not considered to be fixedand determinable. In these cases, the Company recognizes revenue as thefees become due.

The majority of the Company’straining and consulting services are billed based on hourly rates. TheCompany generally recognizes revenue as these services are performedwhen there is also evidence of an arrangement, the fee is fixed ordeterminable and collectibility is reasonably assured. However, whenthe Company enters into an arrangement that is based on a fixed fee,revenue is recognized using the percentage of completion method ofaccounting. When the Company enters into an arrangement that requiresit to perform significant work either to alter the underlying softwareor to build additional complex interfaces so that the software performsas the customer requests, the Company recognizes the license revenueand service revenue, using the percentage of completion method ofaccounting. This would apply to the Company’s custom programmingservices which are generally contracted on a fixed fee basis.Anticipated losses, if any, are charged to operations in the periodsuch losses are determined to be probable.

Prior to thepurchase of the remaining 51% of African Solutions on May31,  2006, revenues from the joint venture (included in Revenues:Other-Related Parties in the unaudited Consolidated Statements ofOperations) included consulting revenue for the joint venture’suse of the Company’s South African subsidiary’sconsultants in accordance with the joint venture agreement. Revenue wasrecognized upon performance of the services.

The Companyassesses assuredness of collection for its revenue transactions basedon a number of factors, including past transaction history with thecustomer and the credit-worthiness of the customer. The Company doesnot request collateral from its customers. If the Company determinesthat collection of a fee is uncertain, it defers the fee and recognizesrevenue at the time the uncertainty is eliminated, which is generallyupon receipt of cash.

Our arrangements do not generallyinclude acceptance clauses. However, if an arrangement includes anacceptance provision, acceptance occurs upon the earliest of receipt ofa written customer acceptance, expiration of the acceptance period orproductive use of the software by the customer.

Inaccordance with EITF Issue No. 01-14, ‘‘Income StatementCharacterization of Reimbursement Received for ‘Out ofPocket’ Expenses Incurred,’’ reimbursementsreceived for out-of-pocket expenses incurred are classified as servicesrevenue and the related expense recorded in cost of services in theunaudited Consolidated Statements of Operations.

(c)    Variable Interest Entity

TheCompany adopted FIN 46R as required on March  31,  2004.The Company had a 49% owned joint venture, African Solutions(Pty) Ltd (‘‘African Solutions’’), that wasconsidered to be a variable interest entity as defined in FIN 46R.However, the Company determined that the majority owner at the time,African Legends Technology, absorbed the majority of the expectedlosses and therefore, African Legends Technology, was the primarybeneficiary. Due to the fact that the Company was not the primarybeneficiary of African Solutions, the adoption of FIN 46R did not havean impact on the Company’s consolidated financial position orresults of operations.

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (Continued) (In thousands, except per sharedata)(Unaudited)

African Solutions acted as anon-exclusive authorized third party service provider to provideconsulting and implementation services, and as a non-exclusiverepresentative in providing marketing and promotional services directlyto the end users in regard to, among other things, AXS-One’ssoftware products. African Solutions conducts business throughout theAfrican continent where its target markets are the financial sector andgovernment departments.

On May  31,  2006, theCompany purchased the remaining 51% share of African Solutionsfrom African Legends Technology for $161 less cash acquired of $20, tomake it a wholly owned subsidiary. The Company applied purchaseaccounting to record the transaction. The purchase price was less thanthe fair value of assets acquired and therefore the Company wrote-downthe value of all long-term assets to zero and recorded a gain of $37.Results prior to May  31,  2006 were recorded using theequity method of accounting. As of June  1,  2006,100% of the results of African Solutions are included in theconsolidated results of the Company. At the time of the acquisition theinvestment in the joint venture was $122. Proforma results as ifAfrican Solutions has been acquired on January  1,  2006are not significantly different than the reported 2006 consolidatedresults.

Presented below is selected financial data forAfrican Solutions for the three and six months ended June30,  2006 and 2005,respectively.

|                                        |  |  |                            |   |      |                         |  |  |      |   |     |      |  |  |  |   |      |   |  |  |  |   |     |   |
|----------------------------------------|--|--|----------------------------|---|------|-------------------------|--|--|------|---|-----|------|--|--|--|---|------|---|--|--|--|---|-----|---|
|                                   |  |  | ThreeMonths Ended June 30, |   |      | Six Months EndedJune30, |
|                                   |  |  | 2006                       |   |      | 2005                    |  |  | 2006 |   |     | 2005 |
| Totalrevenues                          |  |  |                            | $ | 92   |                         |  |  |      | $ | 276 |      |  |  |  | $ | 345  |   |  |  |  | $ | 548 |   |
| Operating(loss)income                  |  |  |                            | $ | (87  | )                       |  |  |      | $ | 45  |      |  |  |  | $ | (91  | ) |  |  |  | $ | 50  |   |
| Netloss                                |  |  |                            | $ | (106 | )                       |  |  |      | $ | (5  | )    |  |  |  | $ | (161 | ) |  |  |  | $ | (54 | ) |
| Amountof net loss recognized byAXS-One |  |  |                            | $ | (61  | )                       |  |  |      | $ | (2  | )    |  |  |  | $ | (88  | ) |  |  |  | $ | (26 | ) |
|                                        |

(d)    Stock-BasedCompensation

Historically, the Company accounted forstock-based compensation under the recognition and measurementprinciples of Accounting Principles Board Opinion(‘‘APB’’) No. 25, ‘‘Accountingfor Stock Issued to Employees’’ (‘‘APB25’’), and related interpretations and disclosureprovisions of Statement of Accounting Standards SFAS 123‘‘Accounting For Stock-BasedCompensation’’. Under this pronouncement, no compensationexpense related to stock option plans was reflected in theCompany's Consolidated Statements of Operations as all optionshad an exercise price equal to the market value of the underlyingcommon stock on the date of grant. Compensation cost for non-vestedrestricted stock grants was recorded based on its market value on thedate of grant and was included in the Company's ConsolidatedStatements of Operations ratably over the vesting period. Upon thegrant of non-vested stock, unearned stock compensation was recorded asan offset to additional paid-in capital and was amortized on astraight-line basis as compensation expense over the vestingperiod.

On January  1,  2006, the start ofthe first quarter of fiscal 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123R (revised 2004),‘‘Share-Based Payment’’ (’’SFAS123R’’) which requires that the costs resulting from allshare-based payment transactions be recognized in the financialstatements at their fair values. The Company adopted SFAS 123R usingthe modified prospective application method under which the provisionsof SFAS 123R apply to new awards granted after the adoption date and toawards modified, repurchased, or cancelled after the adoption date.Additionally, compensation cost for the portion of the awards for whichthe requisite service has not been rendered that are outstanding as ofthe adoption date is recognized in the Consolidated Statement ofOperations over the remaining service period after the adoption datebased on the award's original estimate of fair value. Inconnection with the adoption of SFAS 123R, the unearned stockcompensation at December  31,  2005 of $177 relating toprevious grants of non-vested stock was offset against additional

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (Continued) (In thousands, except per sharedata)(Unaudited)

paid-in capital during the first quarter offiscal 2006. Results for prior periods have not been restated. Totalshare-based compensation expense recorded in the ConsolidatedStatements of Operations for the three and six months ended June30,  2006 is $101 and $162, respectively.

As aresult of adopting SFAS 123R on January  1,  2006, theCompany's loss before income taxes and net loss for the three andsix months ended June  30,  2006 are $55 and $107 higherthan if it had continued to account for share-based compensation underAPB No. 25. Basic and diluted earnings per share for the three and sixmonths ended June  30,  2006 did not change as a result ofthe Company adopting SFAS 123R. 

On November10,  2005, the FASB issued FASB Staff Position 123(R)-3(‘‘FSP 123R-3’’),’’Transition Election Related to Accounting for the TaxEffects of Share-based Payment Awards,’’ that provides anelective alternative transition method of calculating the pool ofexcess tax benefits available to absorb tax deficiencies recognizedsubsequent to the adoption of SFAS 123R (the ‘‘APICPool’’) to the method otherwise required by paragraph 81of SFAS 123R. The Company may take up to one year from the effectivedate of this FSP to evaluate its available alternatives and make itsone-time election. The Company is currently evaluating the alternativemethods; however, neither alternative would have an impact on theCompany's results of operations or financial condition for thesix months ended June  30,  2006, due to the fact that theCompany is currently using prior period net operating losses and hasnot realized any tax benefits under SFAS 123R. Until and unless theCompany elects the transition method described in this FSP, the Companywill follow the transition method described in paragraph 81 of SFAS123R.

On October  26,  2005, the Board ofDirectors of the Company approved the acceleration of vesting of allunvested ‘‘out-of-the money’’ stock optionspreviously awarded to current employees and directors under theCompany’s stock option plans. The accelerated options hadexercise prices ranging from $2.15 to $6.25 with a weighted averageexercise price of $2.99. Options to purchase approximately 2,200 sharesbecame exercisable immediately as a result of the vesting acceleration.To avoid any unintended personal benefits, the Company also imposed aholding period on the shares underlying the accelerated options in theform of a Resale Restriction Agreement. This agreement requires alloptionees to refrain from selling any shares acquired upon the exerciseof the accelerated options until the earlier of the date such shareswould have vested under the options’ original vesting terms orthe date of the employee’s or director’s termination fromthe Company. As a result of this acceleration, the Company reduced thestock compensation expense it otherwise would have been required torecord beginning in January  2006 upon adoption of SFAS 123R byapproximately $4,100 over approximately 2.5 years. In making thedecision to accelerate these options, the Board of Directors consideredthe interests of the Company’s stockholders, as thisacceleration will reduce compensation expense in futureperiods.

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AXS-ONEINC. AND SUBSIDIARIESNOTES TO CONSOLIDATED INTERIM FINANCIALSTATEMENTS (Continued) (In thousands, except per sharedata)(Unaudited)

The following table illustrates theeffect on net loss and net loss per common share applicable to commonstockholders for the three and six months ended June  30,2005, as if the Company had applied the fair value recognitionprovisions for stock-based employee compensation of SFAS 123, asamended:

|                                                                                                      |  |  |                                  |  |         |                                |  |  |  |  |         |   |
|------------------------------------------------------------------------------------------------------|--|--|----------------------------------|--|---------|--------------------------------|--|--|--|--|---------|---|
|                                                                                                 |  |  | ThreeMonths EndedJune  30,  2005 |  |         | Six MonthsEndedJune  30,  2005 |
| Net loss asreported                                                                                  |  |  |                                  |  | ($4,359 | )                              |  |  |  |  | ($7,528 | ) |
| Add:Stock based compensationexpense                                                                  |  |  |                                  |  | 10      |                                |  |  |  |  | 19      |   |
| Deduct: Total employeestock-based compensation determined under fair value based method forallawards |  |  |                                  |  | (451    | )                              |  |  |  |  | (919    | ) |
| Proforma netloss                                                                                     |  |  |                                  |  | ($4,800 | )                              |  |  |  |  | ($8,428 | ) |
| Netloss per commonshare:                                                                             |  |  |                                  |  |    |                                |  |  |  |  |    |   |
| Basic and diluted– asreported                                                                  |  |  |                                  |  | ($0.15  | )                              |  |  |  |  | ($0.26  | ) |
| Basicand diluted – proforma                                                                    |  |  |                                  |  | ($0.16  | )                              |  |  |  |  | ($0.29  | ) |
|                                                                                                      |

Thefair value of options granted is estimated on the date of grant using aBlack-Scholes option pricing model. Expected volatilities arecalculated in part based on the historical volatility of theCompany's stock. Management monitors share option exercise andemployee termination patterns to estimate forfeiture rates within thevaluation model. The expected holding period of options represents theperiod of time that options granted are expected to be outstanding. Therisk-free interest rate for periods within the expected life of theoption is based on the interest rate of a 5-year U.S. Treasury note ineffect on the date of the grant.

The table below presentsthe assumptions used to calculate the fair value of options grantedduring the three and six months ended June  30,  2006 and2005.

|                                                                           |  |  |                           |   |         |                         |  |  |        |   |         |        |  |  |  |   |         |   |  |  |  |   |         |   |
|---------------------------------------------------------------------------|--|--|---------------------------|---|---------|-------------------------|--|--|--------|---|---------|--------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                                      |  |  | ThreeMonths EndedJune 30, |   |         | Six Months EndedJune30, |
|                                                                      |  |  | 2006                      |   |         | 2005                    |  |  | 2006   |   |         | 2005   |
| Risk-freeinterestrate                                                     |  |  |                           |   | 4.90    | %                       |  |  |        |   | 4.22    | %      |  |  |  |   | 4.60    | % |  |  |  |   | 4.70    | % |
| Expecteddividendyield                                                     |  |  |                           |   | — |                         |  |  |        |   | — |        |  |  |  |   | — |   |  |  |  |   | — |   |
| Expectedlives                                                             |  |  | 5years                    |   |         | 5years                  |  |  | 5years |   |         | 5years |
| Expectedvolatility                                                        |  |  |                           |   | 85      | %                       |  |  |        |   | 101     | %      |  |  |  |   | 92      | % |  |  |  |   | 100     | % |
| Forfeiturerate                                                            |  |  |                           |   | 14.5    | %                       |  |  |        |   | na      |        |  |  |  |   | 14.5    | % |  |  |  |   | na      |   |
| Weighted-averagegrant date fair value of options granted during theperiod |  |  |                           | $ | 1.42    |                         |  |  |        | $ | 1.18    |        |  |  |  | $ | 1.37    |   |  |  |  | $ | 1.91    |   |
|                                                                           |

StockOption Plans

The Company has three stock incentive plans:the 1995 Stock Option Plan (the 1995 Plan), the 1998 Stock Option Plan(the 1998 Plan), and the 2005 Stock Incentive Plan (the 2005 Plan).Under the 1995 Plan, the Company could grant up to 4,500 shares ofcommon stock. The 1995 Plan has expired and no further options can beissued under this plan. Outstanding options under this plan willcontinue to vest. Under the 1998 Plan, the Company may grant stockoptions or stock appreciation rights to purchase an aggregate of up to5,000 shares of Common Stock. In accordance with a June  2004amendment, up to 300 shares of the total shares may be used fornon-vested stock awards. Under the 2005 Plan, the Company may grantstock options, stock appreciation rights and non-vested stock topurchase an aggregate of up to 1,500 shares of Common Stock. Alloptions granted under the forgoing plans expire ten years from the dateof grant (or five years for statutory options granted to 10%stockholders), unless terminated earlier. 

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Substantially all options vest over afour-year period. For a more detailed description of all stockincentive plans, refer to the Company’s 2005 Annual Report onForm 10-K.

Stock option transactions for the six monthsended June  30,  2006 under all plans are as follows:

|                                             |  |  |                |  |       |                              |  |  |                                         |   |      |                                      |  |  |  |  |        |  |  |  |  |   |        |  |
|---------------------------------------------|--|--|----------------|--|-------|------------------------------|--|--|-----------------------------------------|---|------|--------------------------------------|--|--|--|--|--------|--|--|--|--|---|--------|--|
|                                        |  |  | NumberofShares |  |       | WeightedAverageExercisePrice |  |  | WeightedAverageRemainingContractualLife |   |      | AggregateIntrinsic Value asof6/30/06 |
| Balance, December  31,2005                  |  |  |                |  | 6,370 |                              |  |  |                                         | $ | 2.31 |                                      |  |  |  |  |   |  |  |  |  |   |   |  |
| Granted                                     |  |  |                |  | 254   |                              |  |  |                                         | $ | 1.91 |                                      |  |  |  |  |   |  |  |  |  |   |   |  |
| Exercised                                   |  |  |                |  | (255  | )                            |  |  |                                         | $ | 0.87 |                                      |  |  |  |  |   |  |  |  |  |   |   |  |
| Forfeited                                   |  |  |                |  | (44   | )                            |  |  |                                         | $ | 1.60 |                                      |  |  |  |  |   |  |  |  |  |   |   |  |
| Expired                                     |  |  |                |  | (495  | )                            |  |  |                                         | $ | 2.53 |                                      |  |  |  |  |   |  |  |  |  |   |   |  |
| Balance,June  30,2006                       |  |  |                |  | 5,830 |                              |  |  |                                         | $ | 2.34 |                                      |  |  |  |  | 6.25   |  |  |  |  | $ | 1,601  |  |
| Vestedand Expected to Vest at June  30,2006 |  |  |                |  | 5,647 |                              |  |  |                                         | $ | 2.36 |                                      |  |  |  |  | 0.17   |  |  |  |  | $ | 1,580  |  |
| Exercisableat June  30,2006                 |  |  |                |  | 4,960 |                              |  |  |                                         | $ | 2.48 |                                      |  |  |  |  | 5.81   |  |  |  |  | $ | 1,433  |  |
|                                             |

Thetotal intrinsic value of stock options exercised during the three andsix months ended June  30,  2006 was $325 and $505,respectively, as compared to $258 and $3,425 for the three and sixmonths ended June  30,  2005. As of June  30,2006, there was approximately $615 of total unrecognized compensationcost related to stock options granted under the plans. That cost isexpected to be recognized over a weighted-average period of 1.61years.

A summary of stock options outstanding andexercisable as of June  30,  2006 follows:

|                       |  |  |                    |  |       |                                       |  |  |                              |  |        |                   |  |  |                               |   |        |  |  |  |  |  |       |  |  |  |  |   |        |  |
|-----------------------|--|--|--------------------|--|-------|---------------------------------------|--|--|------------------------------|--|--------|-------------------|--|--|-------------------------------|---|--------|--|--|--|--|--|-------|--|--|--|--|---|--------|--|
|                  |  |  | OptionsOutstanding |  |       | OptionsExercisable                    |
| Rangeofexerciseprices |  |  | Numberoutstanding  |  |       | Weightedaverageremaining life (years) |  |  | Weightedaverageexerciseprice |  |        | Numberexercisable |  |  | Weightedaverageexercise price |
| $0.21 –$0.72    |  |  |                    |  | 1,211 |                                       |  |  |                              |  | 5.34   |                   |  |  |                               | $ | 0.54   |  |  |  |  |  | 1,114 |  |  |  |  | $ | 0.54   |  |
| $0.75–$1.73     |  |  |                    |  | 1,186 |                                       |  |  |                              |  | 4.95   |                   |  |  |                               | $ | 1.36   |  |  |  |  |  | 769   |  |  |  |  | $ | 1.28   |  |
| $1.75–$2.24     |  |  |                    |  | 1,259 |                                       |  |  |                              |  | 7.84   |                   |  |  |                               | $ | 2.08   |  |  |  |  |  | 918   |  |  |  |  | $ | 2.14   |  |
| $2.36–$4.21     |  |  |                    |  | 1,700 |                                       |  |  |                              |  | 7.31   |                   |  |  |                               | $ | 3.48   |  |  |  |  |  | 1,684 |  |  |  |  | $ | 3.49   |  |
| $6.00–$6.25     |  |  |                    |  | 474   |                                       |  |  |                              |  | 3.77   |                   |  |  |                               | $ | 6.02   |  |  |  |  |  | 475   |  |  |  |  | $ | 6.02   |  |
|                  |  |  |                    |  | 5,830 |                                       |  |  |                              |  |   |                   |  |  |                               |   |   |  |  |  |  |  | 4,960 |  |  |  |  |   |   |  |
|                       |

Non-VestedStock

Compensation expense for non-vested stock washistorically recorded based on its market value on the date of grantand recognized ratably over the associated service period, the periodin which restrictions are removed. Compensation expense for non-vestedstock was reported as unamortized stock compensation on theConsolidated Balance Sheets. With the adoption of SFAS 123R, effectiveJanuary  1,  2006, unamortized stock compensation has beenoffset against additional paid-in capital where it is reflected on theConsolidated Balance Sheet as of June  30,  2006. Duringthe three and six months ended June  30,  2006 there were30 and 410, respectively, shares of restricted stock granted. Allshares were issued to employees with 4-year vesting. In the year endedDecember  31,  2005, 120 shares of non-vested stock weregranted with a vesting term of five years subject to acceleration inaccordance with the grant stipulations. During fiscal 2005, 25 sharesissued were forfeited as a result of employee terminations and thecorresponding compensation expense and remaining unamortized stockcompensation amounts were reversed. During the three and six monthsended June  30,  2006, 25 shares were forfeited as a resultof employee terminations. As of June  30,  2006, 480 sharesare unvested.

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The following table summarizestransactions related to non-vested stock for the six months endedJune  30,  2006:

|                            |  |  |                 |  |     |                                |  |  |  |   |      |  |
|----------------------------|--|--|-----------------|--|-----|--------------------------------|--|--|--|---|------|--|
|                       |  |  | Numberof shares |  |     | Weighted average pricepershare |
| Balance, December  31,2005 |  |  |                 |  | 95  |                                |  |  |  | $ | 2.16 |  |
| Granted                    |  |  |                 |  | 410 |                                |  |  |  | $ | 2.45 |  |
| Forfeited                  |  |  |                 |  | (25 | )                              |  |  |  | $ | 2.58 |  |
| Balance,June  30,2006      |  |  |                 |  | 480 |                                |  |  |  | $ | 2.39 |  |
|                            |

Asof June  30,  2006, there was approximately $716 of totalunrecognized compensation cost related to non-vested stock grantedunder the plans. That cost is expected to be recognized over aweighted-average period of 2.5 years.

As of June30,  2006, the Company also had warrants to purchase 1,423 sharesof common stock outstanding at a weighted average price of $2.83. AtDecember  31,  2005, these warrants were exercisable;therefore, no expense has been recognized during 2006. 516 of thesewarrants expire in April  2007 and 907 of these warrants expirein June  2008.

Stock options and non-vested stockawards available for grant under all plans were 1,399 at June30,  2006. 

(2)    REVOLVING LINE OF CREDIT 

On August  11,  2004, theCompany entered into a two-year Loan and Security Agreement(‘‘Agreement’’) which contains a revolvingline of credit under which the Company has available the lesser of$4  million or 80% of eligible accounts, as defined.

On January  27,  2005, March  28,2005 and September  13,  2005, the Company entered intomodifications to the Agreement (the ‘‘AmendedAgreement’’) in order to revise certain terms of theAgreement including the loan fees, interest on the loan and thefinancial covenants. The Amended Agreement included a waiver of theCompany’s June  30,  2005 financial covenant defaultunder the Second Loan Modification.

Borrowings under therevolving line of credit, per the Amended Agreement, bear interest atprime rate plus one and one half percent (1.5%). Should,however, the Company fail to meet certain of the financial covenantsset forth in the Amended Agreement, the interest rate will increase tothe prime rate plus two and one half percent (2.5%). TheAgreement provided for a non-refundable commitment fee of $30 per yearand an unused revolving line facility fee of .25% per annum. TheAmended Agreement increased the second year commitment fee to $40 andthe unused line fee to 0.375% per annum. The Amended Agreementincludes a warrant waiver fee of $20 and upon the occurrence of certainevents, minimum monthly interest of $8 and an additional $20 warrantwaiver fee. The Agreement is secured by substantially all domesticassets of the Company. The maturity date of the loan was August9,  2006. As described in greater detail in the Loan Agreement,the loan is subject to acceleration upon breach of: (i) a covenanttested monthly regarding the ratio of unrestricted cash and net billedaccounts receivable to current liabilities minus deferred revenue,which is to be no less than 1.35 to 1.0 (‘‘adjusted quickratio covenant’’), (ii) a covenant tested quarterlyregarding the Company's EBITDAS (earnings before interest expense(excluding interest income), taxes, depreciation, amortization andstock compensation expense in accordance with GAAP), and (iii) othercustomary non-financial covenants. There is also a monthly transitionevent covenant which requires the Company to maintain an adjusted quickratio greater than or equal to 1.6 to 1.0.

On March14,  2006, the Company and the Bank agreed to extend the maturitydate of the loan to February  15,  2007. All other terms ofthe loan remain the same.

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As of March  31,  2006,the Company was in compliance with the monthly adjusted quick ratiocovenant and the transition event covenant, but was not in compliancewith the quarterly EBITDAS covenant, which requires the Company toachieve EBITDAS of the lesser of $1 better than the immediatelypreceding quarter EBITDAS or $1. On May  11,  2006, theBank granted a waiver on the EBITDAS covenant as of March31,  2006. The waiver was for the March  31,  2006date only.

As of June  30,  2006, there wereno amounts outstanding under the Amended Agreement and availabilityunder the Amended Agreement was $1,685 based on the lesser of $4,000 or80% of eligible accounts receivable. As of June30,  2006, the Company was in compliance with the quarterlyEBITDAS covenant and the monthly adjusted quick ratio covenant, but wasnot in compliance with the transition event covenant, which requiresthe Company to maintain an adjusted quick ratio covenant greater thanor equal to 1.60 to 1.00. The Company’s adjusted quick ratiocovenant on June  30,  2006 was 1.48 to 1.0. The Company iscurrently in discussions the Bank regarding this issue and expects thatit will be moved to the higher interest ratefacility.

(3)    BASIC AND DILUTED NET INCOME (LOSS)PER COMMON SHARE 

Basic and diluted netincome (loss) per common share is presented in accordance with SFAS No.128, ‘‘Earnings per Share’’(‘‘SFAS No. 128’’).

Basic netincome (loss) per common share is based on the weighted average numberof shares of common stock outstanding during the period. Diluted netloss per common share for the three and six months ended June30,  2006 and 2005 does not include the effects of outstandingoptions to purchase 5,830 and 6,580 shares of common stock,respectively, 480 and 50 shares of non-vested stock, respectively, andoutstanding warrants to purchase 1,423 and 1,332 shares of commonstock, respectively, as the effect of their inclusion is anti-dilutivefor the periods.

The following represents thereconciliation of the shares used in the basic and diluted net loss percommon share calculation for the three and six months ended June30,  2006 and 2005:

|                                                                     |  |  |                           |  |         |                         |  |  |      |  |         |      |  |  |  |  |         |  |  |  |  |  |         |  |
|---------------------------------------------------------------------|--|--|---------------------------|--|---------|-------------------------|--|--|------|--|---------|------|--|--|--|--|---------|--|--|--|--|--|---------|--|
|                                                                |  |  | ThreeMonths EndedJune 30, |  |         | Six Months EndedJune30, |
|                                                                |  |  | 2006                      |  |         | 2005                    |  |  | 2006 |  |         | 2005 |
| Weightedaverage basic commonshares                                  |  |  |                           |  |    |                         |  |  |      |  |    |      |  |  |  |  |    |  |  |  |  |  |    |  |
| Outstandingduring theperiods                                        |  |  |                           |  | 34,354  |                         |  |  |      |  | 30,016  |      |  |  |  |  | 34,301  |  |  |  |  |  | 29,300  |  |
| Dilutiveeffect of stock options andwarrants                         |  |  |                           |  | — |                         |  |  |      |  | — |      |  |  |  |  | — |  |  |  |  |  | — |  |
| Weightedaverage diluted common shares outstanding during theperiods |  |  |                           |  | 34,354  |                         |  |  |      |  | 30,016  |      |  |  |  |  | 34,301  |  |  |  |  |  | 29,300  |  |
|                                                                     |

(4)    OPERATINGSEGMENTS

The Company has two product lines that it offersto specific markets as part of its strategy to focus on marketopportunities. The two product lines are asfollows:

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a)  | AXS-One Enterprise Solutions providesan integrated suite of internet-enabled financial management andaccounting applications to global 2000 organizations, enabling them toachieve process transparency while maintaining secure access requiredto meet reporting, control and governance requirements. AXS-One has anextensive installed customer base for its core financial managementproducts as well as for its Time and Billing components, a full suiteof business solutions and services optimized to address therequirements of organizations that primarily sell professionals’time. |

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|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b)  | AXS-One RecordsCompliance Platform Solutions enable organizations to utilize documentsand data generated by their corporate applications as an asset whilereducing corporate risk and operational overheads and addressingrequirements for corporate governance, legal discovery and industryregulations associated with how corporate records are managed andretained. Utilizing AXS-One Compliance Platform Solutions,organizations can capture, archive, manage, search, supervise,integrate, share and audit their electronic records, regardless oforiginating platform. Disparate document and data types can be managedincluding e-mail, instant messages, images, voice and video, officedocuments, ERP-generated data such as SAP, and electronic print reportsgenerated by host systems. AXS-One Compliance Platform Solutions targetlarge information-centric organizations that can utilize self-serviceinformation systems to reduce costs, increase efficiency, improvecommunications with their customers and improve access to businessintelligence. |

The Company evaluates the performance ofits two product lines based on revenues and operating income.Summarized financial information concerning the Company’sreportable segments is shown in the following table. The ChiefExecutive Officer uses the information below in this format whilemaking decisions about allocating resources to each product line andassessing itsperformance.

|                                               |  |  |                     |   |        |                                    |  |  |       |   |        |        |  |  |        |   |        |   |  |  |        |  |  |        |
|-----------------------------------------------|--|--|---------------------|---|--------|------------------------------------|--|--|-------|---|--------|--------|--|--|--------|---|--------|---|--|--|--------|--|--|--------|
|                                          |  |  | EnterpriseSolutions |   |        | RecordsCompliancePlatformSolutions |  |  | Total |   |        |   |  |  |   |
| ThreeMonths Ended June 30,2006                |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Revenues:                                     |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Licensefees                                   |  |  |                     | $ | 96     |                                    |  |  |       | $ | 856    |        |  |  |        | $ | 952    |   |  |  |   |  |  |   |
| Services                                      |  |  |                     |   | 4,646  |                                    |  |  |       |   | 2,360  |        |  |  |        |   | 7,006  |   |  |  |   |  |  |   |
| TotalRevenues, excluding related partyrevenue |  |  |                     |   | 4,742  |                                    |  |  |       |   | 3,216  |        |  |  |        |   | 7,958  |   |  |  |   |  |  |   |
| Operatingincome(loss)                         |  |  |                     |   | 2,553  |                                    |  |  |       |   | (3,030 | )      |  |  |        |   | (477   | ) |  |  |   |  |  |   |
| Totalassets                                   |  |  |                     |   | 2,385  |                                    |  |  |       |   | 7,414  |        |  |  |        |   | 9,799  |   |  |  |   |  |  |   |
| Capitalexpenditures                           |  |  |                     |   | 16     |                                    |  |  |       |   | 123    |        |  |  |        |   | 139    |   |  |  |   |  |  |   |
| Depreciationandamortization                   |  |  |                     |   | 57     |                                    |  |  |       |   | 180    |        |  |  |        |   | 237    |   |  |  |   |  |  |   |
| ThreeMonths Ended June  30,2005               |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Revenues:                                     |  |  |                     |   |   |                                    |
| Licensefees                                   |  |  |                     | $ | 256    |                                    |  |  |       | $ | 262    |        |  |  |        | $ | 518    |   |  |  |   |  |  |   |
| Services                                      |  |  |                     |   | 5,076  |                                    |  |  |       |   | 1,868  |        |  |  |        |   | 6,944  |   |  |  |   |  |  |   |
| TotalRevenues, excluding related partyrevenue |  |  |                     |   | 5,332  |                                    |  |  |       |   | 2,130  |        |  |  |        |   | 7,462  |   |  |  |   |  |  |   |
| Operatingincome(loss)                         |  |  |                     |   | 1,549  |                                    |  |  |       |   | (3,624 | )      |  |  |        |   | (2,075 | ) |  |  |   |  |  |   |
| Totalassets                                   |  |  |                     |   | 10,898 |                                    |  |  |       |   | 2,179  |        |  |  |        |   | 13,077 |   |  |  |   |  |  |   |
| Capitalexpenditures                           |  |  |                     |   | 53     |                                    |  |  |       |   | 6      |        |  |  |        |   | 59     |   |  |  |   |  |  |   |
| Depreciationandamortization                   |  |  |                     |   | 202    |                                    |  |  |       |   | 116    |        |  |  |        |   | 318    |   |  |  |   |  |  |   |
|                                               |

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|                                                |  |  |                     |   |        |                                    |  |  |       |   |        |        |  |  |        |   |        |   |  |  |        |  |  |        |
|------------------------------------------------|--|--|---------------------|---|--------|------------------------------------|--|--|-------|---|--------|--------|--|--|--------|---|--------|---|--|--|--------|--|--|--------|
|                                           |  |  | EnterpriseSolutions |   |        | RecordsCompliancePlatformSolutions |  |  | Total |   |        |   |  |  |   |
| SixMonths Ended June  30,2006                  |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Revenues:                                      |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Licensefees                                    |  |  |                     | $ | 657    |                                    |  |  |       | $ | 1,260  |        |  |  |        | $ | 1,917  |   |  |  |   |  |  |   |
| Services                                       |  |  |                     |   | 9,227  |                                    |  |  |       |   | 4,267  |        |  |  |        |   | 13,494 |   |  |  |   |  |  |   |
| TotalRevenues, excluding related partyrevenue  |  |  |                     |   | 9,884  |                                    |  |  |       |   | 5,527  |        |  |  |        |   | 15,411 |   |  |  |   |  |  |   |
| Operatingincome(loss).                         |  |  |                     |   | 5,245  |                                    |  |  |       |   | (6,625 | )      |  |  |        |   | (1,380 | ) |  |  |   |  |  |   |
| Totalassets                                    |  |  |                     |   | 2,385  |                                    |  |  |       |   | 7,414  |        |  |  |        |   | 9,799  |   |  |  |   |  |  |   |
| Capitalexpenditures                            |  |  |                     |   | 23     |                                    |  |  |       |   | 177    |        |  |  |        |   | 200    |   |  |  |   |  |  |   |
| Depreciationandamortization                    |  |  |                     |   | 223    |                                    |  |  |       |   | 281    |        |  |  |        |   | 504    |   |  |  |   |  |  |   |
| SixMonths Ended June  30,2005                  |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Revenues:                                      |  |  |                     |   |   |                                    |  |  |       |   |   |        |  |  |        |   |   |   |  |  |   |  |  |   |
| Licensefees                                    |  |  |                     | $ | 750    |                                    |  |  |       | $ | 790    |        |  |  |        | $ | 1,540  |   |  |  |   |  |  |   |
| Services                                       |  |  |                     |   | 10,141 |                                    |  |  |       |   | 3,819  |        |  |  |        |   | 13,960 |   |  |  |   |  |  |   |
| TotalRevenues, excluding related party revenue |  |  |                     |   | 10,891 |                                    |  |  |       |   | 4,609  |        |  |  |        |   | 15,500 |   |  |  |   |  |  |   |
| Operatingincome(loss)                          |  |  |                     |   | 3,420  |                                    |  |  |       |   | (6,609 | )      |  |  |        |   | (3,189 | ) |  |  |   |  |  |   |
| Totalassets                                    |  |  |                     |   | 10,898 |                                    |  |  |       |   | 2,179  |        |  |  |        |   | 13,077 |   |  |  |   |  |  |   |
| Capitalexpenditures                            |  |  |                     |   | 103    |                                    |  |  |       |   | 12     |        |  |  |        |   | 115    |   |  |  |   |  |  |   |
| Depreciationandamortization                    |  |  |                     |   | 377    |                                    |  |  |       |   | 214    |        |  |  |        |   | 591    |   |  |  |   |  |  |   |
|                                                |

Reconciliationof total segment operating income (loss) to consolidated operatingincome(loss):

|                                                  |  |  |                            |   |        |                          |  |  |      |   |        |      |  |  |  |   |        |   |  |  |  |   |        |   |
|--------------------------------------------------|--|--|----------------------------|---|--------|--------------------------|--|--|------|---|--------|------|--|--|--|---|--------|---|--|--|--|---|--------|---|
|                                             |  |  | ThreeMonths Ended June 30, |   |        | Six Months Ended June30, |
|                                             |  |  | 2006                       |   |        | 2005                     |  |  | 2006 |   |        | 2005 |
| Operatingloss from reportablesegments            |  |  |                            | $ | (477   | )                        |  |  |      | $ | (2,075 | )    |  |  |  | $ | (1,380 | ) |  |  |  | $ | (3,189 | ) |
| Unallocatedrevenue, other – relatedparties |  |  |                            |   | 25     |                          |  |  |      |   | 17     |      |  |  |  |   | 64     |   |  |  |  |   | 37     |   |
| Unallocatedgeneral and administrativeexpense     |  |  |                            |   | (1,485 | )                        |  |  |      |   | (1,437 | )    |  |  |  |   | (2,747 | ) |  |  |  |   | (2,785 | ) |
| Othercorporate unallocatedexpenses               |  |  |                            |   | (619   | )                        |  |  |      |   | (672   | )    |  |  |  |   | (1,186 | ) |  |  |  |   | (1,232 | ) |
| Totalconsolidated operatingloss                  |  |  |                            | $ | (2,556 | )                        |  |  |      | $ | (4,167 | )    |  |  |  | $ | (5,249 | ) |  |  |  | $ | (7,169 | ) |
|                                                  |

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(5)    CONTINGENCIES

Historically,the Company has been involved in disputes and/or litigation encounteredin its normal course of business. The Company believes that theultimate outcome of these proceedings will not have a material adverseeffect on the Company's business, consolidated financialcondition, results of operations or cash flows.

(6)    PRIVATEPLACEMENT

On June  17,  2005, the Companyentered into a definitive agreement with a number of investors as wellas members of AXS-One management and Board members to sell 4,534 sharesof its common stock for total consideration of $6,750. On June21,  2005, the initial closing date, the Company received netproceeds of approximately $5,775 from the investors and issued 4,081shares of common stock. This excluded amounts due from members of theCompany’s management and Board members which togetherrepresented 10% of the investment. The closing with respect tothe shares offered to members of the Company’s management andBoard members was subject to shareholder approval. The Company alsoissued, at the same time, warrants to purchase an aggregate of 408shares of common stock at $1.90 per share and warrants to purchase 408shares of common stock at $2.15 per share. These warrants areexercisable for a period of three years beginning June21,  2005. The warrants were classified within permanent equityin accordance with EITF 00-19, ‘‘Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in,a Company’s Own Stock.’’ Warrants to purchase anadditional 45 shares of common stock at $1.90 per share and45 shares of common stock at $2.15 per share were issuable to membersof the Company’s management and Board member investors uponapproval of the shareholders. This private placement and issuance ofwarrants was made pursuant to the terms of a Unit SubscriptionAgreement, dated as of June  17,  2005, among the Companyand several investors.

On September  20,2005, the shareholders approved the above sale of the Company’scommon stock and warrants to members of the Company’s managementand Board members. On September  21,  2005, the closingdate, the Company received net proceeds of $587, issued 453 shares ofcommon stock and warrants to purchase 45 shares of common stock at$1.90 per share and 45 shares of common stock at $2.15 pershare.

(7)    RESTRUCTURING AND OTHER COSTS

OnJune  30,  2005 the Company eliminated 22 positions in theUnited States and 6 positions in its foreign operations in order tofurther streamline the organization. The Company recorded a charge tooperations in the second quarter of 2005 totaling approximately $863related to involuntary termination benefits to be paid to theterminated employees. The remaining restructuring liability is recordedas accrued expenses on the June  30,  2006 balance sheetand will be paid in its entirety during 2006. The 2006 activity relatedto the restructuring is asfollows:

|                                    |  |  |      |   |         |   |
|------------------------------------|--|--|------|---|---------|---|
|                               |  |  | 2006 |
| Restructuringliability at January1 |  |  |      | $ | 319     |   |
| Involuntary termination costs      |  |  |      |   | — |   |
| Cash payments in2006               |  |  |      |   | (206    | ) |
| Restructuringliability at June  30 |  |  |      | $ | 113     |   |
|                                    |

(8) FINANCIALINFORMATION BY GEOGRAPHIC AREA

SFAS No. 131,‘‘Disclosure about Segments of an Enterprise and RelatedInformation,’’ establishes standards for the way publicbusiness enterprises report information about operating segments inannual financial statements and requires that those enterprises reportselected information about reporting 

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segments in interim financial reports issuedto shareholders. See Note (4). It also establishes standards forrelated disclosures about products and services, geographic areas andmajor customers.

Revenues and long-lived assets for theCompany's United States, United Kingdom, Australia and SoutheastAsia, and South Africa operations are asfollows:

|                            |  |  |                                  |   |       |                              |  |  |      |   |       |      |  |  |  |   |        |  |  |  |  |   |        |  |
|----------------------------|--|--|----------------------------------|---|-------|------------------------------|--|--|------|---|-------|------|--|--|--|---|--------|--|--|--|--|---|--------|--|
|                       |  |  | ThreeMonths EndedJune  30,  2006 |   |       | Six MonthsEndedJune  30,2006 |
| Revenues:(1)               |  |  | 2006                             |   |       | 2005                         |  |  | 2006 |   |       | 2005 |
| UnitedStates               |  |  |                                  | $ | 5,072 |                              |  |  |      | $ | 5,238 |      |  |  |  | $ | 10,008 |  |  |  |  | $ | 10,633 |  |
| UnitedKingdom              |  |  |                                  |   | 653   |                              |  |  |      |   | 536   |      |  |  |  |   | 1,162  |  |  |  |  |   | 1,724  |  |
| Australiaand SoutheastAsia |  |  |                                  |   | 1,118 |                              |  |  |      |   | 934   |      |  |  |  |   | 2,209  |  |  |  |  |   | 1,841  |  |
| SouthAfrica                |  |  |                                  |   | 1,140 |                              |  |  |      |   | 771   |      |  |  |  |   | 2,096  |  |  |  |  |   | 1,339  |  |
| TotalConsolidated          |  |  |                                  | $ | 7,983 |                              |  |  |      | $ | 7,479 |      |  |  |  | $ | 15,475 |  |  |  |  | $ | 15,537 |  |
|                            |

|  |
|--|
|  |  |
|  |

|  |                                                                                 |
|--|---------------------------------------------------------------------------------|
|  | (1)Revenues are attributed to geographic area based on location of salesoffice. |

|                             |  |  |             |   |        |                 |  |  |  |   |        |  |
|-----------------------------|--|--|-------------|---|--------|-----------------|--|--|--|---|--------|--|
|                        |  |  | June30,2006 |   |        | December31,2005 |
| Long-LivedAssets:           |  |  |             |   |   |                 |  |  |  |   |   |  |
| UnitedStates                |  |  |             | $ | 825    |                 |  |  |  | $ | 1,184  |  |
| UnitedKingdom               |  |  |             |   | 71     |                 |  |  |  |   | 75     |  |
| Australia andSoutheast Asia |  |  |             |   | 183    |                 |  |  |  |   | 151    |  |
| SouthAfrica                 |  |  |             |   | 24     |                 |  |  |  |   | 23     |  |
| TotalConsolidated           |  |  |             | $ | 1,103  |                 |  |  |  | $ | 1,433  |  |
|                             |

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|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| Item2.  | Management’s Discussion and Analysis ofFinancial Condition and Results of Operations |

Thefollowing discussion should be read in conjunction with theConsolidated Interim Financial Statements and Notes thereto and isqualified in its entirety by reference thereto.

ThisReport contains statements of a forward-looking nature within themeaning of the safe harbor provisions of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Actof 1934, as amended, relating to future events or the future financialperformance of AXS-One. Investors are cautioned that actual events orresults may differ materially. In evaluating such statements, investorsshould specifically consider the various factors identified in thisReport which could cause actual results to differ materially from thoseindicated by such forward-looking statements, in addition to thematters set forth in ‘‘Risk Factors’’ inour 2005 Annual Report on Form 10-K.

ExecutiveOverview

We are a leading provider of Records ComplianceManagement and Financial Management software solutions designed toreduce the inherent risks associated with retaining and managingcorporate records as well as to efficiently manage complex businessprocesses. We have implemented high-volume, interoperable, scalable andsecure business solutions for Global 2000 companies. Our WebServices-based technology has been critically acclaimed as best ofclass. Our Records Compliance Management software delivers anintegrated solution that enables organizations to manage growingvolumes of disparate electronic records, including e-mail and instantmessages, images, voice, office documents, ERP-generated data such asSAP and electronic print reports. All records are archived and managedaccording to corporate records policies from initial capture andindexing through archival, search and ultimate destruction. Theseproducts have been developed and optimized to address global issues ofregulatory compliance, corporate governance, supervision and privacy asthey relate to the retention and disposition of electronic records, aswell as to significantly reduce infrastructure costs (primarily storageand associated management costs). Patent-pending search technologyenables organizations to respond quickly and accurately to the growingpressures of e-discovery and litigation support.

Ourrevenues are derived mainly from license fees from software licenseagreements entered into with our customers, including throughresellers, for both our products and, to a lesser degree, third partyproducts resold by us and services revenues from software maintenanceagreements, training, consulting services including installation andcustom programming. We also derive a small amount of revenue (less than3% and 1% of total revenues for the first sixmonths of 2006 and 2005, respectively) from subscription revenuearrangements.

We are based in Rutherford, New Jersey withapproximately 229 full-time employees, as of June  30,2006, in offices worldwide, including Asia, Australia, South Africa,the United Kingdom and the United States. Our foreign offices generatedapproximately 36.5% and 35.3% of our total revenues forthe three and six months ended June  30,  2006,respectively, as compared to 30.0% and 31.6%,respectively, for the corresponding prior year periods. We expect thatsuch revenues will continue to represent a significant percentage ofour total revenues in the future. Most of our international licensefees and services revenues are denominated in foreign currencies.Fluctuations in the value of foreign currencies relative to the USdollar in the future could result in fluctuations in ourrevenue.

Until May  31,  2006, the Company hada 49% ownership in a joint venture in its South Africanoperation, AXS-One African Solutions (Pty) Ltd (‘‘AfricanSolutions’’). African Solutions sells and services oursuite of products. The joint venture was considered to be a variableinterest entity as defined in FASB Interpretation No. 46R,‘‘Consolidation of Variable InterestEntities’’ (FIN 46R). However, the Company had determinedthat it was not the primary beneficiary. Accordingly, until May31,  2006, the Company used the equity method of accounting forthe joint venture whereby investments, including loans to the jointventure, were stated at cost plus or minus the Company’s equityin undistributed earnings or losses. On May  31,  2006, theCompany purchased the remaining 51% share of African Solutionsfrom African Legends Technology for a nominal amount to make it awholly owned subsidiary. As of June  1,  2006, the resultsof African Solutions are included in the consolidated results of theCompany.

We encounter competition for all of our productsin all markets and compete primarily based on the quality of ourproducts, our price, our customer service and our time to implement.The timing of the 

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release of new products is also important toour ability to generate sales. During the second half of 2003, welaunched our Records Compliance Management solution for e-mail andinstant messaging archival, supervision, and legal discovery inresponse to new regulatory requirements for financial institutions inthe United States as well as to address the need to reduce costs in theemail management area. During 2005, AXS-One announced furthersignificant development on the AXS-One Records Compliance Platform,focusing primarily on performance-based enhancements. Version 3.5,featuring Rapid-AXS, was launched in May  2005, and introducedpatent-pending search functionality. Rapid-AXS takes advantage of gridcomputing architecture and leverages commodity hardware to deliver whatAXS-One believes to be an unmatched price-performance ratio. Version3.5 also introduced a Search Wizard, reducing the potential complexityof searches for non-IT staff and ensuring error-proof searchcapabilities for legal discovery. Finally in 2005 AXS-One announcedAXS-Link for Desktop, a desktop archiving product available both as anintegrated component of the AXS-One Compliance Platform, as well as astand-alone solution. Our Records Compliance Management software,including this new solution, accounted for approximately 74% ofour total license fee revenues for the year ended December31,  2005 and 66% of total license revenue for the sixmonths ended June  30,  2006.

Our futureability to grow revenue will be directly affected by continued pricecompetition, success of our strategic partnerships and our ability tosustain an increasingly higher maintenance revenue base from which togrow. Our growth rate and total revenues depend significantly on futureservices for existing customers as well as our ability to expand ourcustomer base and to respond successfully to the pace of technologicalchange. If our maintenance renewal rate or pace of new customeracquisitions slows, our revenues and operating results would beadversely affected.

We have experienced, and may in thefuture experience, significant fluctuations in our quarterly and annualrevenues, results of operations and cash flows. We believe thatdomestic and international operating results and cash flows willcontinue to fluctuate significantly in the future as a result of avariety of factors. For a description of these factors that may affectour operating results, see ‘‘Risk Factors’’in our 2005 Annual Report on Form 10-K.

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Results of Operations

Thefollowing table sets forth for the periods indicated, certain operatingdata, and data as a percentage of totalrevenues:

|                             |  |  |                                  |   |         |                                  |  |  |            |  |         |                           |  |  |  |   |        |   |  |  |  |  |        |    |
|-----------------------------|--|--|----------------------------------|---|---------|----------------------------------|--|--|------------|--|---------|---------------------------|--|--|--|---|--------|---|--|--|--|--|--------|----|
|                        |  |  | ThreeMonths EndedJune  30,  2006 |   |         | ThreeMonths EndedJune  30,  2005 |
|  (inthousands)         |  |  | AsReported                       |   |         | Data asa% oftotalrevenue         |  |  | AsReported |  |         | Data asa% of totalrevenue |
|                        |  |  | (Unaudited)                      |   |         | (Unaudited)                      |
| Revenues:                   |  |  |                                  |   |    |                                  |  |  |            |  |    |                           |  |  |  |   |   |   |  |  |  |  |   |    |
| Licensefees                 |  |  |                                  | $ | 952     |                                  |  |  |            |  | 11.9    | %                         |  |  |  | $ | 518    |   |  |  |  |  | 6.9    | %  |
| Services                    |  |  |                                  |   | 7,006   |                                  |  |  |            |  | 87.8    |                           |  |  |  |   | 6,944  |   |  |  |  |  | 92.9   |    |
| Other-relatedparties        |  |  |                                  |   | 25      |                                  |  |  |            |  | 0.3     |                           |  |  |  |   | 17     |   |  |  |  |  | 0.2    |    |
| Totalrevenues               |  |  |                                  |   | 7,983   |                                  |  |  |            |  | 100.0   |                           |  |  |  |   | 7,479  |   |  |  |  |  | 100.0  |    |
| Operatingexpenses:          |  |  |                                  |   |    |                                  |  |  |            |  |    |                           |  |  |  |   |   |   |  |  |  |  |   |    |
| Costof licensefees          |  |  |                                  |   | 456     |                                  |  |  |            |  | 5.7     |                           |  |  |  |   | 406    |   |  |  |  |  | 5.4    |    |
| Costofservices              |  |  |                                  |   | 3,922   |                                  |  |  |            |  | 49.1    |                           |  |  |  |   | 4,383  |   |  |  |  |  | 58.6   |    |
| Salesandmarketing           |  |  |                                  |   | 2,481   |                                  |  |  |            |  | 31.1    |                           |  |  |  |   | 2,523  |   |  |  |  |  | 33.7   |    |
| Researchanddevelopment      |  |  |                                  |   | 2,195   |                                  |  |  |            |  | 27.5    |                           |  |  |  |   | 2,034  |   |  |  |  |  | 27.2   |    |
| Generalandadministrative    |  |  |                                  |   | 1,485   |                                  |  |  |            |  | 18.6    |                           |  |  |  |   | 1,437  |   |  |  |  |  | 19.2   |    |
| Restructuringand othercosts |  |  |                                  |   | — |                                  |  |  |            |  | — |                           |  |  |  |   | 863    |   |  |  |  |  | 11.6   |    |
| Totaloperatingexpenses      |  |  |                                  |   | 10,539  |                                  |  |  |            |  | 132.0   |                           |  |  |  |   | 11,646 |   |  |  |  |  | 155.7  |    |
| Operatingloss               |  |  |                                  |   | (2,556  | )                                |  |  |            |  | (32.0   | )                         |  |  |  |   | (4,167 | ) |  |  |  |  | (55.7  | )  |
| Otherincome (expense),net   |  |  |                                  |   | 68      |                                  |  |  |            |  | 0.8     |                           |  |  |  |   | (217   | ) |  |  |  |  | (2.9   | )  |
| Lossbeforetaxes             |  |  |                                  |   | (2,488  | )                                |  |  |            |  | (31.2   | )                         |  |  |  |   | (4,384 | ) |  |  |  |  | (58.6  | )  |
| Incometaxbenefit            |  |  |                                  |   | — |                                  |  |  |            |  | — |                           |  |  |  |   | 25     |   |  |  |  |  | 0.3    |    |
| Netloss                     |  |  |                                  | $ | (2,488  | )                                |  |  |            |  | (31.2   | )%                        |  |  |  | $ | (4,359 | ) |  |  |  |  | (58.3  | )% |
|                             |

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|                             |  |  |                                |   |         |                                |  |  |            |  |         |                           |  |  |  |   |        |   |  |  |  |  |        |    |
|-----------------------------|--|--|--------------------------------|---|---------|--------------------------------|--|--|------------|--|---------|---------------------------|--|--|--|---|--------|---|--|--|--|--|--------|----|
|                        |  |  | SixMonths EndedJune  30,  2006 |   |         | Six MonthsEndedJune  30,  2005 |
|  (inthousands)         |  |  | AsReported                     |   |         | Data asa% oftotalrevenue       |  |  | AsReported |  |         | Data asa% of totalrevenue |
|                        |  |  | (Unaudited)                    |   |         | (Unaudited)                    |
| Revenues:                   |  |  |                                |   |    |                                |  |  |            |  |    |                           |  |  |  |   |   |   |  |  |  |  |   |    |
| Licensefees                 |  |  |                                | $ | 1,917   |                                |  |  |            |  | 12.4    | %                         |  |  |  | $ | 1,540  |   |  |  |  |  | 9.9    | %  |
| Services                    |  |  |                                |   | 13,494  |                                |  |  |            |  | 87.2    |                           |  |  |  |   | 13,960 |   |  |  |  |  | 89.9   |    |
| Other-relatedparties        |  |  |                                |   | 64      |                                |  |  |            |  | 0.4     |                           |  |  |  |   | 37     |   |  |  |  |  | 0.2    |    |
| Totalrevenues               |  |  |                                |   | 15,475  |                                |  |  |            |  | 100.0   |                           |  |  |  |   | 15,537 |   |  |  |  |  | 100.0  |    |
| Operatingexpenses:          |  |  |                                |   |    |                                |  |  |            |  |    |                           |  |  |  |   |   |   |  |  |  |  |   |    |
| Costof licensefees          |  |  |                                |   | 899     |                                |  |  |            |  | 5.8     |                           |  |  |  |   | 770    |   |  |  |  |  | 4.9    |    |
| Costofservices              |  |  |                                |   | 7,357   |                                |  |  |            |  | 47.5    |                           |  |  |  |   | 9,042  |   |  |  |  |  | 58.2   |    |
| Salesandmarketing           |  |  |                                |   | 5,300   |                                |  |  |            |  | 34.2    |                           |  |  |  |   | 5,111  |   |  |  |  |  | 32.9   |    |
| Researchanddevelopment      |  |  |                                |   | 4,421   |                                |  |  |            |  | 28.6    |                           |  |  |  |   | 4,135  |   |  |  |  |  | 26.6   |    |
| Generalandadministrative    |  |  |                                |   | 2,747   |                                |  |  |            |  | 17.8    |                           |  |  |  |   | 2,785  |   |  |  |  |  | 17.9   |    |
| Restructuringand othercosts |  |  |                                |   | — |                                |  |  |            |  | — |                           |  |  |  |   | 863    |   |  |  |  |  | 5.6    |    |
| Totaloperatingexpenses      |  |  |                                |   | 20,724  |                                |  |  |            |  | 133.9   |                           |  |  |  |   | 22,706 |   |  |  |  |  | 146.1  |    |
| Operatingloss               |  |  |                                |   | (5,249  | )                              |  |  |            |  | (33.9   | )                         |  |  |  |   | (7,169 | ) |  |  |  |  | (46.1  | )  |
| Otherincome (expense),net   |  |  |                                |   | 15      |                                |  |  |            |  | 0.1     |                           |  |  |  |   | (384   | ) |  |  |  |  | (2.5   | )  |
| Lossbeforetaxes             |  |  |                                |   | (5,234  | )                              |  |  |            |  | (33.8   | )                         |  |  |  |   | (7,553 | ) |  |  |  |  | (48.6  | )  |
| Incometaxbenefit            |  |  |                                |   | — |                                |  |  |            |  | — |                           |  |  |  |   | 25     |   |  |  |  |  | 0.1    |    |
| Netloss                     |  |  |                                | $ | (5,234  | )                              |  |  |            |  | (33.8   | )%                        |  |  |  | $ | (7,528 | ) |  |  |  |  | (48.5  | )% |
|                             |

Comparisonof Three Months Ended June  30,  2006 to2005

Revenues

Total revenues increased$0.5  million or 6.8% for the three months endedJune  30,  2006 as compared to the corresponding prior yearperiod due to a $0.4  million or 83.8% increase in licensefees and a $0.1  million or 1.0% increase in servicesrevenues.

No one customer represented more than10% of our total revenues for the three months ended June30,  2006 or 2005.

The following table sets forth,for the periods indicated, each major category of our services revenuesas a percent of total servicesrevenues:

|                       |  |  |                             |   |       |          |  |  |        |  |       |           |  |  |  |   |       |  |  |  |  |  |       |   |
|-----------------------|--|--|-----------------------------|---|-------|----------|--|--|--------|--|-------|-----------|--|--|--|---|-------|--|--|--|--|--|-------|---|
|                  |  |  | Three Months EndedJune  30, |
| (dollars inthousands) |  |  | 2006                        |   |       | 2005     |
|                  |  |  | Amount                      |   |       | %ofTotal |  |  | Amount |  |       | % ofTotal |
| Maintenance           |  |  |                             | $ | 4,110 |          |  |  |        |  | 58.7  | %         |  |  |  | $ | 4,235 |  |  |  |  |  | 61.0  | % |
| Consulting            |  |  |                             |   | 2,629 |          |  |  |        |  | 37.5  | %         |  |  |  |   | 2,592 |  |  |  |  |  | 37.3  | % |
| Subscriptionrevenue   |  |  |                             |   | 267   |          |  |  |        |  | 3.8   | %         |  |  |  |   | 117   |  |  |  |  |  | 1.7   | % |
| Totalservicesrevenue  |  |  |                             | $ | 7,006 |          |  |  |        |  | 100.0 | %         |  |  |  | $ | 6,944 |  |  |  |  |  | 100.0 | % |
|                       |

Theincrease in services revenues is mainly a result of increases insubscription revenue in the Company’s records compliancemanagement segment from our E-delivery travel service in Europe.

Operating Expenses

Cost of license feesconsist primarily of amortization of capitalized software developmentcosts and amounts paid to third parties with respect to products weresell in conjunction with the licensing of our 

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products. The elements can vary substantiallyfrom period to period as a percentage of license fees. Cost of licensefees were essentially flat for the three months ended June30,  2006, as compared to the corresponding prior year period asincreased royalty fees for third party software used in conjunctionwith our software (which includes both embedded software and separatelysold software) were offset by decreased amortization of capitalizedsoftware development costs.

Cost of services consistsprimarily of personnel and third party costs for product qualityassurance, training, installation, consulting and customer support.Cost of services decreased $0.5  million or 10.5% for thethree months ended June  30,  2006, as compared to thecorresponding prior year period. The decrease for the three-monthperiod was mainly due to decreases of $0.3  million in personnelrelated expenses resulting from lower headcount and lower variablecompensation expense, cost of third party royalties and other expensestotaling $0.2  million. Service margins improved to 44.2%for the three months ended June  30,  2006 from37.1% for the corresponding prior year period. This improvementis primarily the result of reduced operatingexpenses.

Sales and marketing expenses consist primarilyof salaries, commissions and bonuses related to sales and marketingpersonnel, as well as travel and promotional expenses. Sales andmarketing expenses were flat for the three months ended June30,  2006, as compared to the corresponding prior year period.Decreased employee related cost and variable compensation were offsetby increased cost for marketing programs, third party consultants andother expenses.

Research and development expenses consistprimarily of personnel costs, costs of equipment, facilities and thirdparty software development costs. Research and development expenses aregenerally charged to operations as incurred. However, certain softwaredevelopment costs are capitalized in accordance with Statement ofFinancial Accounting Standards No. 86 (‘‘SFAS86’’). Such capitalized software development costs aregenerally amortized to cost of license fees on a straight-line basisover periods not exceeding three years. There was no significant costcapitalized over the periods ended June  30,  2006 and2005.

Research and development expenses (net ofcapitalized software development costs) increased $0.2  millionor 7.9% for the three months ended June  30,  2006,as compared to the comparable prior year period. The increase isprimarily the result an increased employee related cost and increase inthe use and cost of third party consultants.

General andadministrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outsideprofessional fees. General and administrative expenses were flat forthe three months ended June  30,  2006 as compared to thecorresponding prior year period. Decreases in personnel relatedexpenses were offset by increased professional services and bad debtreserves.

On June  30,  2005, in order toreduce operating costs to better position ourselves in the currentmarket, we eliminated 22 positions in the United States and 6 positionsin our foreign operations. We recorded a charge to operations in thesecond quarter of 2005 totaling $0.9  million related toinvoluntary termination benefits to be paid to the terminatedemployees. Approximately $0.8  million of these restructuringcosts have been paid. The remaining liability at June  30,2006 is $0.1  million and is expected to be paid in 2006. Therewas no restructuring cost incurred in 2006.

OperatingLoss

Operating loss decreased $1.6  million forthe three months ended June  30,  2006 as compared to thecorresponding prior year period due mainly to a decrease of $1.1million in operating expenses and an increase in license revenue of$0.4  million.

Other Income (Expense),Net

Other income (expense), net improved $0.3million for the three months ended June  30,  2006, ascompared to the same period in 2005. The improvement is principallyrelated to foreign currency exchange rate fluctuations.

NetLoss

Net loss decreased $1.9  million to$2.5  million or $(0.07) per diluted share for the three monthsended June  30,  2006, as compared to $4.4  millionor $(0.15) per diluted share for the same period in 2005 primarily forthe reasons stated above.

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Comparison of Six Months EndedJune  30,  2006 to2005

Revenues

Total revenues decreased$0.1  million or 0.4% for the six months ended June30,  2006 as compared to the corresponding prior year period dueto a $0.5  million or 3.3% decrease in services revenueoffset by a $0.4  million or 24.5% increase in licensefees.

No one customer represented more than 10% ofour total revenues for the three months ended June  30,2006 or 2005.

The following table sets forth, for theperiods indicated, each major category of our services revenues as apercent of total servicesrevenues:

|                       |  |  |                          |   |        |          |  |  |        |  |       |           |  |  |  |   |        |  |  |  |  |  |       |   |
|-----------------------|--|--|--------------------------|---|--------|----------|--|--|--------|--|-------|-----------|--|--|--|---|--------|--|--|--|--|--|-------|---|
|                  |  |  | Six Months Ended June30, |
| (dollars inthousands) |  |  | 2006                     |   |        | 2005     |
|                  |  |  | Amount                   |   |        | %ofTotal |  |  | Amount |  |       | % ofTotal |
| Maintenance           |  |  |                          | $ | 8,194  |          |  |  |        |  | 60.7  | %         |  |  |  | $ | 8,364  |  |  |  |  |  | 59.9  | % |
| Consulting            |  |  |                          |   | 4,833  |          |  |  |        |  | 35.8  | %         |  |  |  |   | 5,375  |  |  |  |  |  | 38.5  | % |
| Subscriptionrevenue   |  |  |                          |   | 467    |          |  |  |        |  | 3.5   | %         |  |  |  |   | 221    |  |  |  |  |  | 1.6   | % |
| Totalservicesrevenue  |  |  |                          | $ | 13,494 |          |  |  |        |  | 100.0 | %         |  |  |  | $ | 13,960 |  |  |  |  |  | 100.0 | % |
|                       |

Thedecrease in services revenues is mainly a result of decreases of$0.5  million in consulting revenue from our enterprisefinancials product line, offset partially by an increase of $0.2million in subscription revenue in the Company’s recordscompliance management segment from our E-delivery travel service inEurope.

Operating Expenses

Cost of licensefees consist primarily of amortization of capitalized softwaredevelopment costs and amounts paid to third parties with respect toproducts we resell in conjunction with the licensing of our products.The elements can vary substantially from period to period as apercentage of license fees. Cost of license fees increased $0.1million or 16.8% for the six months ended June  30,2006, as compared to the corresponding prior year period mainly as aresult of an increase in royalty fees for third party software used inconjunction with our software (which includes both embedded softwareand separately sold software) offset somewhat by decreased amortizationof capitalized software development costs.

Cost ofservices consists primarily of personnel and third party costs forproduct quality assurance, training, installation, consulting andcustomer support. Cost of services decreased $1.7  million or18.6% for the six months ended June  30,  2006, ascompared to the corresponding prior year period. The decrease for thesix-month period was mainly due to decreases of $1.2  million inpersonnel related expenses resulting from lower headcount and$0.3  million in third party services expenses, each primarily inthe UK and US operations, $0.1  million in lower variablecompensation cost and $0.1  million in lower other cost. Servicemargins improved to 45.7% for the six months ended June30,  2006 from 35.4% for the corresponding prior yearperiod. This improvement is primarily the result of reduced operatingexpenses.

Sales and marketing expenses consist primarilyof salaries, commissions and bonuses related to sales and marketingpersonnel, as well as travel and promotional expenses. Sales andmarketing expenses increased $0.2  million or 3.7% for thesix months ended June  30,  2006, as compared to thecorresponding prior year period. The increase is primarily the resultof an increase of $0.1  million in marketing programs and$0.1  million in employee related expenses.

Research and development expenses consist primarily ofpersonnel costs, costs of equipment, facilities and third partysoftware development costs. Research and development expenses aregenerally charged to operations as incurred. However, certain softwaredevelopment costs are capitalized in accordance with Statement ofFinancial Accounting Standards No. 86 (‘‘SFAS86’’). Such capitalized software development costs aregenerally amortized to cost of license fees on a straight-line basisover periods not exceeding three years. There was no significant costcapitalized over the periods ended June  30,  2006 and2005.

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Research and development expenses(net of capitalized software development costs) increased $0.3million or 6.9% for the six months ended June  30,2006, as compared to the comparable prior year period. The increase isprimarily the result an increase in the use and cost of third partyconsultants and increased employee related cost.

Generaland administrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outsideprofessional fees. General and administrative expenses were flat forthe six months ended June  30,  2006 as compared to thecorresponding prior year period. Decreases in personnel relatedexpenses were offset by increased rent cost.

OnJune  30,  2005, in order to reduce operating costs tobetter position ourselves in the current market, we eliminated 22positions in the United States and 6 positions in our foreignoperations. We recorded a charge to operations in the second quarter of2005 totaling $0.9  million related to involuntary terminationbenefits to be paid to the terminated employees. Approximately$0.8  million of these restructuring costs have been paid. Theremaining liability at June  30,  2006 is $0.1million and is expected to be paid in 2006. There was no restructuringcost incurred in 2006.

OperatingLoss

Operating loss decreased $1.9  million forthe six months ended June  30,  2006 as compared to thecorresponding prior year period due mainly to a decrease of $2.0million in operating expenses offset slightly by a decrease in totalrevenue of $0.1  million.

Other Expense,Net

Other income (expense), net improved $0.4million for the six months ended June  30,  2006, ascompared to the same period in 2005. The improvement is principallyrelated to foreign currency exchange rate fluctuations.

NetLoss

Net loss decreased $2.3  million to$5.2  million or $(0.15) per diluted share for the six monthsended June  30,  2006, as compared to $7.5  millionor $(0.26) per diluted share for the same period in 2005 due to thereasons stated above.

Liquidity and CapitalResources

On June  21,  2005 andSeptember  21,  2005 we completed a private placement ofshares of common stock that resulted in the receipt of net proceeds ofapproximately $5.8  million and $0.6  million,respectively. (See Note 6 to the Consolidated Interim FinancialStatements).

On August  11,  2004, theCompany entered into a two-year Loan and Security Agreement (the‘‘Agreement’’) which contains a revolvingline of credit under which the Company has available the lesser of$4.0  million or 80% of eligible accounts, as defined (SeeNote 2 to the Consolidated Interim Financial Statements).

On January  27,  2005, March  28,2005 and September  13,  2005, the Company entered intomodifications to the Agreement (the ‘‘AmendedAgreement’’) in order to revise certain terms of theAgreement including the loan fees, interest on the loan and thefinancial covenants. The Amended Agreement included a waiver of theCompany’s June  30,  2005 financial covenant defaultunder the Second Loan Modification.

Borrowings under therevolving line of credit, per the Amended Agreement, bear interest atprime rate plus one and one half percent (1.5%). Should,however, the Company fail to meet certain of the financial covenantsset forth in the Amended Agreement, the interest rate will increase tothe prime rate plus two and one half percent (2.5%). TheAgreement provided for a non-refundable commitment fee of $30 per yearand an unused revolving line facility fee of .25% per annum. TheAmended Agreement increased the second year commitment fee to $40 andthe unused line fee to 0.375% per annum. The Amended

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Agreement includes a warrant waiver fee of$20 and upon the occurrence of certain events, minimum monthly interestof $8 and an additional $20 warrant waiver fee. The Agreement issecured by substantially all domestic assets of the Company. Thematurity date of the loan was August  9,  2006. Asdescribed in greater detail in the Amended Agreement, the loan issubject to acceleration upon breach of: (i) a covenant tested monthlyregarding the ratio of unrestricted cash and net billed accountsreceivable to current liabilities minus deferred revenue, which is tobe no less than 1.35 to 1.0 (‘‘adjusted quick ratiocovenant’’), (ii) a covenant tested quarterly regardingthe Company's EBITDAS (earnings before interest expense(excluding interest income), taxes, depreciation, amortization andstock compensation expense in accordance with GAAP), and (iii) othercustomary non-financial covenants. There is also a monthly transitionevent covenant which requires the Company to maintain an adjusted quickratio covenant greater than or equal to 1.60 to 1.0.

As ofMarch  31,  2006, the Company was in compliance with themonthly adjusted quick ratio covenant and the transition eventcovenant, but was not in compliance with the quarterly EBITDAScovenant, which requires the Company to achieve EBITDAS of the lesserof $1 better than the immediately preceding quarter EBITDAS or $1. OnMay  11,  2006, the Bank granted a waiver on the EBITDAScovenant as of March  31,  2006. The waiver was for theMarch  31,  2006 date only.

As of June30,  2006, there were no amounts outstanding under the AmendedAgreement and availability under the Amended Agreement was $1,685 basedon the lesser of $4,000 or 80% of eligible accounts receivable.As of June  30,  2006, the Company was in compliance withthe quarterly EBITDAS covenant and the monthly adjusted quick ratiocovenant, but was not in compliance with the transition event covenant,which requires the Company to maintain an adjusted quick ratio covenantgreater than or equal to 1.60 to 1.00. The Company’s adjustedquick ratio covenant on June  30,  2006 was 1.48 to 1.0.The Company is currently in discussions the Bank regarding this issueand expects that it will be moved to the higher interest ratefacility.

Our operating activities used cash of$0.1  million for the six months ended June  30,2006 and $4.6  million for the six months ended June30,  2005. Net cash used in operating activities during the sixmonths ended June  30,  2006 is primarily the result of thenet loss, an increase in prepaid expenses and other current assets anda decrease in due to joint venture, offset partially by an increase indeferred revenue, a decrease in accounts receivable and non-cashdepreciation and amortization. The decrease in accounts receivable in2006, mainly in US operations, resulted from better collections fromcustomers in 2006 compared to 2005. The increase in deferred revenue ismainly the result of a three year prepayment of maintenance fees by alarge customer in US operations.

Our investing activitiesused cash of $0.3  million and $0.1  million for the sixmonths ended June  30,  2006 and 2005, respectively. Theuse of cash for 2006 was primarily for the purchase of computerequipment for the Company’s internal operations and theacquisition of the remaining interest in the Company’s jointventure in South Africa. The use of cash for 2005 was primarily for thepurchase of computer equipment for the Company’s internaloperations. During the second quarter of 2006, the Company inventoriedall fixed assets in the US operations and determined that a gross fixedasset write-off of $7.9  million, with an identical value foraccumulated depreciation, was appropriate. These assets had zero netbook value as these assets had been fully depreciated.

Cash provided by financing activities was $0.2  millionand $6.7  million for the six months ended June  30,2006 and 2005, respectively. For the six months ended June30,  2006, cash was provided by the exercise of stock optionsduring the period offset by debt issuance cost. For the six monthsended June  30,  2005, cash was primarily provided by netproceeds received from the private placement and the exercise of stockoptions during the period.

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We have no significant capitalcommitments. Planned capital expenditures for the year 2006 areexpected to be less than $0.5  million, including any softwaredevelopment costs that may qualify for capitalization under SFAS 86.Our aggregate minimum operating lease payments for 2006 will beapproximately $1.9  million. We have $0.3  millionremaining aggregate minimum royalties payable to third party softwareproviders in accordance with 2006 agreements for third party softwareused in conjunction with our software. Future commitments to thirdparty software providers are asfollows:

|               |  |  |        |   |     |  |
|---------------|--|--|--------|---|-----|--|
| (inthousands) |
| Year          |  |  | Amount |
| 2006          |  |  |        | $ | 250 |  |
| 2007          |  |  |        |   | 150 |  |
| 2008          |  |  |        |   | 75  |  |
| 2009          |  |  |        |   | 75  |  |
| Total         |  |  |        | $ | 550 |  |
|               |

Wegenerated a net loss of $5.2  million for the six months endedJune  30,  2006 and $9.0  million and $5.2million for the years ended December  31,  2005 and 2004,respectively. We experienced a decline in revenue as our businessshifted to focus more heavily on the records compliance managementbusiness. Management’s initiatives over the last two years,including the restructurings in June  2005 and 2004, the privateplacements of common stock in April  2004 and June  2005and 10% salary cuts of executive management for most of thesecond half of 2005, have been designed to improve operating resultsand liquidity and better position AXS-One to compete under currentmarket conditions. As a result of these efforts, we expect that ourcurrent cash balance, availability of borrowing capacity under our bankline of credit, and operating cash flow should be sufficient to meetthe short-term requirements of the business. However, we may in thefuture be required to seek new sources of financing or futureaccommodations from our existing lender or other financialinstitutions, or we may seek equity infusions from private investors ormay seek to sell certain Company assets. We may also be required tofurther reduce operating costs in order to meet our obligations. Ourability to fund our operations is heavily dependent on the growth ofour revenues over current levels to achieve profitable operations. Ifwe are unable to achieve profitable operations or secure additionalsources of capital, there would be substantial doubt about our abilityto fund future operations. Additionally, there is a risk that cash heldby our foreign subsidiaries may not be readily available for use in ourU.S. operations to pay our obligations as the transfer of funds issometimes delayed due to various foreign government restrictions. Noassurance can be given that management’s initiatives will besuccessful or that any such additional sources of financing, lenderaccommodations or equity infusions will be available.

CriticalAccounting Estimates

Our critical accounting policies areas follows:

|  |              |                        |
|--|--------------|------------------------|
|  | •  | Revenue recognitionand |

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | Capitalized software developmentcosts. |

Revenue Recognition

We derive ourrevenue primarily from two sources: (i) software licenses and (ii)services and support revenue, which includes software maintenance,subscription services, training, consulting and custom programmingrevenue. As described below, significant management judgments andestimates must be made and used in connection with the revenuerecognized in any accounting period. Material differences may result inthe amount and timing of our revenue for any period if our managementmade different judgments or utilized differentestimates.

We normally license our software products on aperpetual basis. Each license agreement generally includes a provisionfor initial post-contract support (maintenance). For the majority oflicense sales we use a signed license agreement as evidence of anarrangement. For maintenance fees, we use a 

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maintenance agreement as evidence of thearrangement. We use a professional services agreement as evidence of anarrangement for our training, subscription, custom programming andconsulting revenues. Occasionally, where a master license or servicesagreement with a customer already exists, we accept thecustomer’s purchase order as evidence of an arrangement.

We recognize revenue in accordance with Statement of Position97-2, ‘‘Software Revenue Recognition’’(‘‘SOP 97-2’’), and Statement of Position98-9, ‘‘Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions.’’Revenue from non-cancelable software licenses is recognized when thelicense agreement has been signed, delivery has occurred, the fee isfixed or determinable and collectibility is probable. The Companyrecognizes revenue from resellers when an end user has placed an orderwith the reseller and the above revenue recognition criteria have beenmet with respect to the reseller. In multiple element arrangements, wedefer revenue based on the vendor-specific objective evidence(’’VSOE’’) of fair value for theundelivered elements and recognize revenue on the delivered elementsusing the residual method. The most commonly deferred elements areinitial maintenance and consulting services. Initial maintenance isrecognized on a straight-line basis over the initial maintenance term.The VSOE of fair value for maintenance is determined by using aconsistent percentage of maintenance fees to discounted license feebased on renewal rates. Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement. Maintenance contracts entitle the customer to hot-linesupport and all unspecified product upgrades released during the termof the maintenance contract. Upgrades include any and all unspecifiedpatches or releases related to a licensed software product. Maintenancedoes not include implementation services to install these upgrades. TheVSOE of fair value of services is determined by using an averageconsulting rate per hour for consulting services sold separatelymultiplied by the estimate of hours required to complete the consultingengagement.

Delivery of software generally occurs when theproduct (on CDs) is delivered to a common carrier. Occasionally,delivery occurs through electronic means where the software is madeavailable through our secure FTP (File Transfer Protocol) site. TheCompany does not offer any customers or resellers a right ofreturn.

For software license, services and maintenancerevenue, we assess whether the fee is fixed and determinable andwhether or not collection is probable. We assess whether the fee isfixed and determinable based on the payment terms associated with thetransaction. If a significant portion of a fee is due after our normalpayment terms, which are 30 to 90 days from invoice date, we accountfor the fee as not being fixed and determinable. In these cases, werecognize revenue as the fees become due.

The majority ofour training and consulting services are billed based on hourly rates.We generally recognize revenue as these services are performed.However, when we enter into an arrangement that is based on a fixedfee, revenue is recognized using the percentage of completion method ofaccounting. When the Company enters into an arrangement that requiresit to perform significant work either to alter the underlying softwareor to build additional complex interfaces so that the software performsas the customer requests, the Company recognizes the license revenueand service revenue using the percentage of completion method ofaccounting. This would apply to our custom programming services, whichare generally contracted on a fixed fee basis. Anticipated losses, ifany, are charged to operations in the period such losses are determinedto be probable.

Revenues from transaction fees associatedwith our subscription arrangements, billable on a per transaction basisand included in services revenue on the Consolidated Statements ofOperations, are recognized based on the actual number of transactionsprocessed during the period.

We assess assuredness ofcollection based on a number of factors, including past transactionhistory with the customer and the credit-worthiness of the customer. Wedo not request collateral from our customers. If we determine thatcollection of a fee is not probable, we defer the fee and recognizerevenue at the time collection becomes probable, which is generallyupon receipt of cash.

Our arrangements do not generallyinclude acceptance clauses. However, if an arrangement includes anacceptance provision, acceptance occurs upon the earliest of receipt ofa written customer acceptance or expiration of the acceptanceperiod.

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Capitalized Software DevelopmentCosts

Our policy is to capitalize certain softwaredevelopment costs in accordance with Statement of Financial AccountingStandards No. 86, ‘‘Accounting for the Costs of ComputerSoftware to Be Sold, Leased, or Otherwise Marketed’’(‘‘SFAS 86’’). Under SFAS 86, costs incurredto develop or significantly enhance computer software products arecharged to research and development expense as incurred untiltechnological feasibility has been established. We establishtechnological feasibility upon completion of a working model orcompletion of a detailed program design. Generally costs related toprojects that reach technological feasibility upon completion of aworking model are not capitalized as the time period betweenestablishment of the working model and general availability is of shortduration. For projects that meet technological feasibility uponcompletion of a detailed program design, all research and developmentcosts for that project are capitalized from that point until theproduct is available for general release to customers. The nature ofour current development for RCM products is generally such that we canmeasure technological feasibility most effectively using the workingmodel method where the time between establishment of a working modeland general availability is of short duration which results in verylittle or no costs that qualify for capitalization. We historicallyused a detailed program design model to measure technologicalfeasibility for our enterprise financial products. This shift indevelopment of our product lines will result in lower capitalized costsin the future. The establishment of technological feasibility and theongoing assessment of recoverability of capitalized softwaredevelopment costs require considerable judgment by management withrespect to certain external factors, including, but not limited to,anticipated future revenues, estimated economic life and changes intechnology. It is reasonably possible that estimates of anticipatedfuture revenues, the remaining estimated economic life of the products,or both will be reduced in the future due to competitive pressures. Asa result, the carrying amount of the capitalized software costs may bereduced through a charge to operations in the near term. Upon thegeneral release of the software product to customers, capitalizationceases and such costs are amortized (using the straight-line method)over the estimated life, which is generally threeyears.

Recently Issued Accounting Standards

OnMay  5,  2005, the FASB issued SFAS No. 154,‘‘Accounting Changes and ErrorCorrections’’ (’’SFAS No.154’’), which replaces Accounting Principles Board(‘‘APB’’) Opinion No. 20‘‘Accounting Changes,’’ and SFAS No. 3‘‘Reporting Accounting Changes in Interim FinancialStatements.’’ SFAS No. 154 changes the requirements forthe accounting and reporting of a change in accounting principle, andapplies to all voluntary changes in accounting principles, as well aschanges required by an accounting pronouncement in the unusual instancethat it does not include specific transition provisions. Specifically,SFAS No. 154 requires retrospective application to prior periods'financial statements unless it is impracticable to determine the periodspecific effects or the cumulative effect of the change. SFAS No. 154does not change the transition provisions of any existingpronouncement. SFAS No. 154 is effective for the Company for allaccounting changes and corrections of errors made beginningJanuary  1,  2006.

In July  2006, theFASB issued FIN 48 ‘‘Accounting for Uncertainty in IncomeTaxes.’’ This interpretation requires that we recognizein our financial statements, the impact of a tax position, if thatposition is more likely than not of being sustained on audit, based onthe technical merits of the position. The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006. Weare currently evaluating the impact of adopting FIN 48 on our financialstatements.

Certain Factors That May Affect Future Results andFinancial Condition and the Market Price ofSecurities

See our 2005 Annual Report on Form 10K for adetailed discussion of risk factors.

|              |                                                           |
|--------------|-----------------------------------------------------------|
| Item3.  | Quantitative and Qualitative Disclosures aboutMarket Risk |

In the normal course of business, we areexposed to fluctuations in interest rates and equity market risks as weseek debt and equity capital to sustain our operations. We are alsoexposed to fluctuations in foreign currency exchange rates as thefinancial results and financial conditions of our foreign subsidiariesare translated into U.S. dollars in consolidation. We do not usederivative instruments or hedging to manage our exposures and do notcurrently hold any market risk sensitive instruments for tradingpurposes.

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|               |                        |
|---------------|------------------------|
| Item 4.  | Controls andProcedures |

Evaluation of disclosure controls andprocedures

The Company maintains disclosure controlsand procedures that are designed to ensure that information required tobe disclosed in the Company's Exchange Act reports is recorded,processed, summarized and reported within the time periods specified inthe SEC's rules and forms, and that such information isaccumulated and communicated to the Company's management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosurebased on the definition of ‘‘disclosure controls andprocedures’’ in Rule 13a-15(e). In designing andevaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

TheCompany carried out an evaluation, under the supervision and with theparticipation of the Company's management, including theCompany's Chief Executive Officer and the Company's ChiefFinancial Officer, of the effectiveness of the design and operation ofthe Company's disclosure controls and procedures as ofJune  30,  2006. Based upon the foregoing, theCompany's Chief Executive Officer and Chief Financial Officerconcluded that the Company's disclosure controls and procedureswere effective as of June  30,  2006.

Internalcontrols over financial reporting

There have been nochanges in the Company's internal control over financialreporting during the quarter ended June  30,  2006 thathave materially affected, or are reasonably likely to materiallyaffect, the Company's internal control over financialreporting.

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PARTII.    OTHER INFORMATION

|              |                                                    |
|--------------|----------------------------------------------------|
| Item4.  | Submission of Matters to a Vote of SecurityHolders |

At our Annual Meeting of Stockholders onMay  24,  2006, the following directors were nominated andelected by the votesindicated:

|                  |  |  |          |  |            |                |  |  |  |  |           |  |
|------------------|--|--|----------|--|------------|----------------|--|--|--|--|-----------|--|
|             |  |  | VotesFor |  |            | Votes Withheld |
| William P.Lyons  |  |  |          |  | 28,431,469 |                |  |  |  |  | 1,448,565 |  |
| AnthonyBloom     |  |  |          |  | 28,644,269 |                |  |  |  |  | 1,235,765 |  |
| Daniel H.Burch   |  |  |          |  | 28,667,269 |                |  |  |  |  | 1,212,765 |  |
| HaroldCopperman  |  |  |          |  | 28,667,269 |                |  |  |  |  | 1,212,765 |  |
| RobertMigliorino |  |  |          |  | 28,640,769 |                |  |  |  |  | 1,239,265 |  |
| EliasTypaldos    |  |  |          |  | 28,606,831 |                |  |  |  |  | 1,273,203 |  |
| GennaroVendome   |  |  |          |  | 28,642,566 |                |  |  |  |  | 1,237,468 |  |
| AllanWeingarten  |  |  |          |  | 28,674,269 |                |  |  |  |  | 1,205,765 |  |
|                  |

Inaddition, the stockholders ratified the appointment of Amper,Politziner & Mattia as the Company’s independent auditorsfor 2006 by the followingvote:

|            |  |  |              |  |         |             |  |  |  |  |        |  |
|------------|--|--|--------------|--|---------|-------------|--|--|--|--|--------|--|
| VotesFor   |  |  | VotesAgainst |  |         | Abstentions |
| 29,226,382 |  |  |              |  | 623,620 |             |  |  |  |  | 30,031 |  |
|            |

Thestockholders also approved the amendment of the 2005 Stock IncentivePlan by the followingvote:

|            |  |  |              |  |           |             |  |  |                 |  |        |  |  |  |  |  |            |  |
|------------|--|--|--------------|--|-----------|-------------|--|--|-----------------|--|--------|--|--|--|--|--|------------|--|
| VotesFor   |  |  | VotesAgainst |  |           | Abstentions |  |  | BrokerNon-votes |
| 15,543,815 |  |  |              |  | 2,222,849 |             |  |  |                 |  | 62,796 |  |  |  |  |  | 12,050,574 |  |
|            |

|              |          |
|--------------|----------|
| Item6.  | Exhibits |

|              |  |  |                                                                |
|--------------|--|--|----------------------------------------------------------------|
| Exhibit31.1  |  |  | Rule 13a-14(a)/15d-14(a) Certification – William P.Lyons |
| Exhibit 31.2 |  |  | Rule 13a-14(a)/15d-14(a)Certification – Joseph Dwyer     |
| Exhibit32    |  |  | Officer Certifications under 18 USC1350                        |
|              |

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf bythe undersigned thereunto dulyauthorized.

|                                             |  |  |             |  |  |                                                                                                      |
|---------------------------------------------|--|--|-------------|--|--|------------------------------------------------------------------------------------------------------|
|                                        |  |  | AXS-ONEINC. |
| Date:    August9,  2006 |  |  | By:         |  |  | /s/ William P.Lyons                                                                                  |
|                                        |  |  |        |  |  | William P. Lyons ChiefExecutive Officer and Chairman of theBoard                                     |
|                                        |  |  | By:         |  |  | /s/Joseph Dwyer                                                                                      |
|                                        |  |  |        |  |  | JosephDwyerExecutive Vice President,Chief Financial Officer andTreasurer(Principal FinancialOfficer) |
|                                             |

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