UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

Washington,D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

| For the quarterly period ended June 30, 2005 | Commission FileNumber 1-13591 |
|----------------------------------------------|-------------------------------|

AXS-ONE INC.

(Exact name of registrant as specifiedin itscharter)

|                                                             |  |                                     |  |  |  |  |
|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Delaware                                                    |  | 13-2966911                          |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
| 301Route 17 NorthRutherford, NewJersey                      |  | 07070                               |
| (Address of principal executiveoffices)                     |  | (Zip Code)                          |
|                                                             |

(201) 935-3400

(Registrant's telephone number,including area code)

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES     X    NO         

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

YES           NO     X  

Number of sharesoutstanding of the issuer's common stock as of August 5,2005

|                                       |  |                             |  |  |  |  |
|---------------------------------------|--|-----------------------------|--|--|--|--|
| Class                                 |  | Numberof Shares Outstanding |
| Common Stock, par value$0.01 pershare |  | 33,593,631                  |
|                                       |

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AXS-ONE INC.

INDEX

|                                                     |  |                                                                                                                                  |        |            |  |    |  |  |  |  |  |  |  |  |
|-----------------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------------------|--------|------------|--|----|--|--|--|--|--|--|--|--|
| PARTI    FINANCIAL INFORMATION  |  |                                                                                                                             |        | PageNumber |
| Item1.                                              |  | FinancialStatements                                                                                                              |        |       |
|                                                |  | ConsolidatedBalance Sheets     June 30, 2005 (unaudited) and December 31,2004                                |        | 3          |
|                                                |  | Consolidated Statements ofOperations (unaudited)     Three and six months ended June 30,2005 and2004         |        | 4          |
|                                                |  | ConsolidatedStatements of Comprehensive Loss (unaudited)     Three and sixmonths ended June 30, 2005 and2004 |        | 5          |
|                                                |  | ConsolidatedStatements of Cash Flows (unaudited)     Six months ended June30, 2005 and2004                   |        | 6          |
|                                                |  | Notesto Consolidated Interim FinancialStatements                                                                                 |        | 7          |
| Item2.                                              |  | Management's Discussion and Analysis ofFinancial Condition and Results ofOperations                                              |        | 17         |
| Item3.                                              |  | Quantitative and Qualitative Disclosures About MarketRisk                                                                        |        | 30         |
| Item4.                                              |  | Controls andProcedures                                                                                                           |        | 30         |
| **PARTII    OTHER INFORMATION** |
| Item1.                                              |  | LegalProceedings                                                                                                                 |        | 31         |
| Item4.                                              |  | Submission of Matters to a Vote of SecurityHolders                                                                               |        | 31         |
| Item6.                                              |  | Exhibits                                                                                                                         |        | 31         |
| **SIGNATURES**                                      |
| Signatures                                          |  |                                                                                                                             |   |       |  | 32 |
|                                                     |

2

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PART I. FINANCIALINFORMATION

Item 1.    Financial Statements

AXS-ONEINC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Inthousands, except per sharedata)

|                                                                                                                                                           |  |             |         |                  |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|---------|------------------|--|--------|---------|---------|--|--|
|                                                                                                                                                      |  | June30,2005 |         | December 31,2004 |
|                                                                                                                                                      |  | (unaudited) |         |             |
| **ASSETS**                                                                                                                                                |  |
| Currentassets:                                                                                                                                            |  |        |    |             |  |   |    |    |
| Cash and cashequivalents                                                                                                                                  |  | $           | 7,022   |             |  | $      | 4,809   |    |
| Restricted cash                                                                                                                                           |  |        | 56      |             |  |   | 62      |    |
| Accounts receivable, net of allowance for doubtful accounts of$514 and $577 at June 30, 2005 and December 31, 2004,respectively                           |  |        | 3,216   |             |  |   | 6,084   |    |
| Due fromjoint venture                                                                                                                                     |  |        | 106     |             |  |   | 68      |    |
| Prepaidexpenses and other current assets                                                                                                                  |  |        | 700     |             |  |   | 1,221   |    |
| Total currentassets                                                                                                                                       |  |        | 11,100  |             |  |   | 12,244  |    |
| Equipment and leasehold improvements, atcost:                                                                                                             |  |        |    |             |  |   |    |    |
| Computer and officeequipment                                                                                                                              |  |        | 11,609  |             |  |   | 11,606  |    |
| Furnitureand fixtures                                                                                                                                     |  |        | 938     |             |  |   | 943     |    |
| Leaseholdimprovements                                                                                                                                     |  |        | 865     |             |  |   | 865     |    |
|                                                                                                                                                      |  |        | 13,412  |             |  |   | 13,414  |    |
| Less—accumulated depreciation andamortization                                                                                                       |  |        | 12,950  |             |  |   | 12,905  |    |
|                                                                                                                                                      |  |        | 462     |             |  |   | 509     |    |
| Capitalized software developmentcosts, net of accumulated amortization of $10,851 and $10,409 at June30, 2005 and December 31, 2004, respectively         |  |        | 1,462   |             |  |   | 1,886   |    |
| Otherassets                                                                                                                                               |  |        | 53      |             |  |   | 142     |    |
|                                                                                                                                                      |  | $           | 13,077  |             |  | $      | 14,781  |    |
|                                                                                                                                                      |  |        |    |             |  |   |    |    |
| **LIABILITIESAND STOCKHOLDERS'DEFICIT**                                                                                                                   |  |        |    |             |  |   |    |    |
| Currentliabilities:                                                                                                                                       |  |        |    |             |  |   |    |    |
| Accountspayable                                                                                                                                           |  | $           | 1,695   |             |  | $      | 1,901   |    |
| Accruedexpenses                                                                                                                                           |  |        | 3,667   |             |  |   | 3,786   |    |
| Due to jointventure                                                                                                                                       |  |        | — |             |  |   | 29      |    |
| Deferredrevenue                                                                                                                                           |  |        | 9,048   |             |  |   | 9,786   |    |
| Total currentliabilities                                                                                                                                  |  |        | 14,410  |             |  |   | 15,502  |    |
| Long-termliabilities:                                                                                                                                     |  |        |    |             |  |   |    |    |
| Long-term deferredrevenue                                                                                                                                 |  |        | 168     |             |  |   | 303     |    |
| Commitments andcontingencies                                                                                                                              |  |        |    |             |  |   |    |    |
| Stockholders'deficit:                                                                                                                                     |  |        |    |             |  |   |    |    |
| Preferred stock, $.01 parvalue, authorized 5,000 shares, no shares issued andoutstanding                                                                  |  |        | — |             |  |   | — |    |
| Commonstock, $.01 par value, authorized 50,000 shares; 33,594 and 28,341shares issued and outstanding at June 30, 2005 and December 31, 2004,respectively |  |        | 336     |             |  |   | 283     |    |
| Additionalpaid-in capital                                                                                                                                 |  |        | 87,114  |             |  |   | 80,339  |    |
| Accumulateddeficit                                                                                                                                        |  |        | (89,193 | )           |  |   | (81,665 | )  |
| Accumulated other comprehensive income                                                                                                                    |  |        | 352     |             |  |   | 19      |    |
| Unearned stockcompensation                                                                                                                                |  |        | (110    | )           |  |   | — |    |
| Total stockholders'deficit                                                                                                                                |  |        | (1,501  | )           |  |   | (1,024  | )  |
|                                                                                                                                                      |  | $           | 13,077  |             |  | $      | 14,781  |    |
|                                                                                                                                                           |

The accompanying notes are an integralpart of these consolidated financialstatements.

3

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

|                                                             |  |                   |        |                 |  |             |        |              |  |        |        |         |  |        |        |         |  |  |
|-------------------------------------------------------------|--|-------------------|--------|-----------------|--|-------------|--------|--------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                        |  | Three MonthsEnded |        | Six MonthsEnded |
|                                                        |  | June30,2005       |        | June 30,2004    |  | June30,2005 |        | June 30,2004 |
| Revenues:                                                   |  |
| Licensefees                                                 |  | $                 | 518    |            |  | $           | 1,004  |         |  | $      | 1,540  |    |  | $      | 3,464  |    |
| Services                                                    |  |              | 6,944  |            |  |        | 8,451  |         |  |   | 13,960 |    |  |   | 16,862 |    |
| Other - relatedparties                                      |  |              | 17     |            |  |        | 50     |         |  |   | 37     |    |  |   | 101    |    |
| Totalrevenues                                               |  |              | 7,479  |            |  |        | 9,505  |         |  |   | 15,537 |    |  |   | 20,427 |    |
| Operating expenses:                                         |  |
| Costof license fees                                         |  |              | 406    |            |  |        | 375    |         |  |   | 770    |    |  |   | 786    |    |
| Cost of services                                            |  |              | 4,383  |            |  |        | 4,528  |         |  |   | 9,042  |    |  |   | 8,797  |    |
| Sales andmarketing                                          |  |              | 2,523  |            |  |        | 2,455  |         |  |   | 5,111  |    |  |   | 4,425  |    |
| Research anddevelopment                                     |  |              | 2,034  |            |  |        | 2,037  |         |  |   | 4,135  |    |  |   | 3,936  |    |
| General andadministrative                                   |  |              | 1,437  |            |  |        | 1,530  |         |  |   | 2,785  |    |  |   | 3,097  |    |
| Restructuring and othercosts                                |  |              | 863    |            |  |        | 1,103  |         |  |   | 863    |    |  |   | 1,103  |    |
| Total operating expenses                                    |  |              | 11,646 |            |  |        | 12,028 |         |  |   | 22,706 |    |  |   | 22,144 |    |
| Operatingloss                                               |  |              | (4,167 | )          |  |        | (2,523 | )       |  |   | (7,169 | )  |  |   | (1,717 | )  |
| Other income(expense):                                      |  |
| Interest income                                             |  |              | 28     |            |  |        | 40     |         |  |   | 58     |    |  |   | 65     |    |
| Interestexpense                                             |  |              | (1     | )          |  |        | (2     | )       |  |   | (1     | )  |  |   | (14    | )  |
| Equity in losses of jointventure                            |  |              | (3     | )          |  |        | (49    | )       |  |   | (27    | )  |  |   | (82    | )  |
| Other expense,net                                           |  |              | (241   | )          |  |        | (18    | )       |  |   | (414   | )  |  |   | (51    | )  |
| Other expense,net                                           |  |              | (217   | )          |  |        | (29    | )       |  |   | (384   | )  |  |   | (82    | )  |
| Net loss before incometaxes                                 |  |              | (4,384 | )          |  |        | (2,552 | )       |  |   | (7,553 | )  |  |   | (1,799 | )  |
| Income tax benefit (expense)                                |  |              | 25     |            |  |        | (28    | )       |  |   | 25     |    |  |   | (28    | )  |
| Net loss                                                    |  | $                 | (4,359 | )          |  | $           | (2,580 | )       |  | $      | (7,528 | )  |  | $      | (1,827 | )  |
| Basic and diluted net loss per commonshare                  |  | $                 | (0.15  | )          |  | $           | (0.09  | )       |  | $      | (0.26  | )  |  | $      | (0.07  | )  |
| Weighted average basic and diluted common sharesoutstanding |  |              | 30,016 |            |  |        | 27,915 |         |  |   | 29,300 |    |  |   | 26,582 |    |
|                                                             |

The accompanying notesare an integral part of these consolidated financialstatements.

4

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

|                                        |  |                   |        |                 |  |        |        |         |  |        |        |         |  |        |        |         |  |  |
|----------------------------------------|--|-------------------|--------|-----------------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                   |  | Three MonthsEnded |        | Six MonthsEnded |
|                                   |  | June30,           |        | June30,         |
|                                   |  | 2005              |        | 2004            |  | 2005   |        | 2004    |
| Net loss                               |  | $                 | (4,359 | )          |  | $      | (2,580 | )  |  | $      | (7,528 | )  |  | $      | (1,827 | )  |
| Foreign currency translationadjustment |  |              | 237    |            |  |   | 73     |    |  |   | 333    |    |  |   | (7     | )  |
| Comprehensiveloss                      |  | $                 | (4,122 | )          |  | $      | (2,507 | )  |  | $      | (7,195 | )  |  | $      | (1,834 | )  |
|                                        |

The accompanyingnotes are an integral part of these consolidated financialstatements.

5

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

|                                                                                |  |                         |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                           |  | SixMonths Ended June30, |
|                                                                           |  | 2005                    |         | 2004    |
| Cash flows from operatingactivities:                                           |  |
| Net loss                                                                       |  | $                       | (7,528  | )  |  | $      | (1,827  | )  |
| Adjustments to reconcile net lossto net cash flows used in operatingactivities |  |
| (Increase)decrease in cash surrender value of officers' lifeinsurance          |  |                    | 58      |    |  |   | (10     | )  |
| Depreciation andamortization                                                   |  |                    | 591     |    |  |   | 685     |    |
| Net provisionfor doubtful accounts                                             |  |                    | 5       |    |  |   | 88      |    |
| Equityin losses of joint venture                                               |  |                    | 27      |    |  |   | 82      |    |
| Consulting services received in lieu of payment on accountsreceivable, net     |  |                    | — |    |  |   | 67      |    |
| Non-cash stock compensation expense                                            |  |                    | 19      |    |  |   | — |    |
| Changes in currentassets and liabilities                                       |  |
| Restrictedcash                                                                 |  |                    | 5       |    |  |   |    |    |
| Accountsreceivable                                                             |  |                    | 2,780   |    |  |   | (2,163  | )  |
| Due fromjoint venture                                                          |  |                    | (73     | )  |  |   | 11      |    |
| Prepaidexpenses and other current assets                                       |  |                    | 475     |    |  |   | (169    | )  |
| Accounts payable and accruedexpenses                                           |  |                    | (202    | )  |  |   | 1,440   |    |
| Deferredrevenue                                                                |  |                    | (744    | )  |  |   | 1,406   |    |
| Net cash flows used in operatingactivities                                     |  |                    | (4,587  | )  |  |   | (390    | )  |
| Cash flows from investingactivities:                                           |  |
| Change in other assets                                                         |  |                    | 29      |    |  |   | 16      |    |
| Loan to jointventure                                                           |  |                    | (29     | )  |  |   | (25     | )  |
| Capitalizedsoftware development costs                                          |  |                    | (18     | )  |  |   | (542    | )  |
| Purchase of equipment and leaseholdimprovements                                |  |                    | (115    | )  |  |   | (212    | )  |
| Net cash flows used in investingactivities                                     |  |                    | (133    | )  |  |   | (763    | )  |
| Cash flows from financingactivities:                                           |  |
| Proceeds from exercise of stock optionsand warrants                            |  |                    | 924     |    |  |   | 370     |    |
| Net proceedsfrom the sale of common stock                                      |  |                    | 5,775   |    |  |   | 7,692   |    |
| Payments of long-term debt                                                     |  |                    | — |    |  |   | (547    | )  |
| Net cash flows provided by financingactivities                                 |  |                    | 6,699   |    |  |   | 7,515   |    |
| Foreign currency exchange rate effects on cash and cashequivalents             |  |                    | 234     |    |  |   | (145    | )  |
| Net increase in cash and cash equivalents                                      |  |                    | 2,213   |    |  |   | 6,217   |    |
| Cash and cash equivalents, beginning ofperiod                                  |  |                    | 4,809   |    |  |   | 2,946   |    |
| Cash and cash equivalents, end ofperiod                                        |  | $                       | 7,022   |    |  | $      | 9,163   |    |
| Supplemental disclosures of cash flowinformation:                              |  |
| Cash paid during theperiod for -                                               |  |
| Interest                                                                       |  | $                       | — |    |  | $      | 21      |    |
| Income taxes                                                                   |  | $                       | — |    |  | $      | 16      |    |
|                                                                                |

The accompanying notes are anintegral part of these consolidated financialstatements.

6

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

(1) OPERATIONS,BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTING POLICIES

TheCompany designs, markets and supports records compliance managementsolutions that include digital archiving, business process management,electronic document delivery and integrated records disposition anddiscovery for e-mail, instant messaging, images, SAP and othercorporate records, as well as financial management applications forglobal 2000 businesses, and scheduling and time and expense solutionsfor professional services organizations. The Company also offersconsulting, implementation, training, technical support and maintenanceservices in support of its customers' use of its softwareproducts.

(a) Basis of Presentation

Theaccompanying Consolidated Interim Financial Statements include theaccounts of AXS-One Inc. and its wholly owned subsidiaries located inAustralia, Singapore, South Africa, and the United Kingdom(collectively, the "Company"). Allintercompany transactions and balances have been eliminated.

TheCompany has a 49% ownership in a joint venture in its SouthAfrican operation. The joint venture is considered to be a variableinterest entity as defined in FASB Interpretation No. 46R,"Consolidation of Variable Interest Entities"(FIN 46R). However, the Company has determined that it is not theprimary beneficiary. Accordingly, the Company uses the equity method ofaccounting for the joint venture whereby investments, including loansto the joint venture, are stated at cost plus or minus theCompany's equity in undistributed earnings or losses.

TheUnaudited Consolidated Interim Financial Statements have been preparedby the Company 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 Interim FinancialStatements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at thedate of the Consolidated Interim Financial Statements and the reportedamounts of revenues and expenses during the periods presented. Actualresults could differ from those estimates. Some of the significantestimates involve allowance for doubtful accounts, recoverability ofcapitalized software development costs, accrued expenses, provision forincome taxes in foreign jurisdictions, assessment of contingencies, andpro forma compensation expense pursuant to SFAS No. 123.

TheseConsolidated Interim Financial Statements should be read in conjunctionwith the consolidated financial statements and related notes includedin the Company's 2004 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

The results of operationsfor the three and six months ended June 30, 2005 are not necessarilyindicative of results to be expected for the full year 2005 or anyfuture periods.

(b) Revenue Recognition

TheCompany recognizes revenue in accordance with Statement of Position97-2, "Software Revenue Recognition"("SOP 97-2"), 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.Revenues from resellers are recorded using the sell-through methodwhereby the Company recognizes revenue when an end user has placed anorder 

7

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

with the reseller and the above revenuerecognition criteria have been met with respect to the reseller. Forthe majority of license sales the Company uses a signed licenseagreement as evidence of an arrangement. For maintenance fees, theCompany uses a maintenance agreement as evidence of the arrangement.The Company uses a professional services agreement as evidence of anarrangement for training, custom programming and consulting revenues.Occasionally, where a master license or services agreement with acustomer already exists, the Company accepts the customer'spurchase order as evidence of an arrangement. Director fee revenue fromthe joint venture is evidenced by a master agreement governing therelationship.

Revenues from transaction fees associated with ahosting arrangement, billable on a per transaction basis and includedin services revenue on the Unaudited Consolidated Statements ofOperations, are recognized based on the actual number of transactionsprocessed during the period.

In multiple element arrangements,the Company defers the vendor-specific objective evidence of fair value("VSOE") related to the undelivered elementsand recognizes revenue on the delivered elements using the residualmethod. The most commonly deferred element is initial maintenance,which is recognized on a straight-line basis over the initialmaintenance term. The VSOE of maintenance is determined by using aconsistent percentage of maintenance fee to 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.

Delivery of software generally occurs when the product (on CDs) isdelivered to a common carrier. Occasionally, delivery occurs throughelectronic means where the software is made available through theCompany's secure FTP (File Transfer Protocol) site. The Companydoes not offer any customers or resellers a right of return.

Forsoftware license and maintenance revenue, the Company assesses whetherthe fee is fixed and determinable and whether or not collection isprobable. The Company assesses whether the fee is fixed anddeterminable based on the payment terms associated with thetransaction. If a significant portion of a fee is due after theCompany's normal payment terms, which are 30 to 90 days frominvoice date, the fee is not considered to be fixed and determinable.In these cases, the Company recognizes revenue as the fees becomedue.

The majority of the Company's training and consultingservices are billed based on hourly rates. The Company generallyrecognizes revenue as these services are performed when there is alsoevidence of an arrangement, the fee is fixed or determinable andcollectibility is reasonably assured. However, when the Company entersinto an arrangement that requires it to perform significant work eitherto alter the underlying software or to build additional complexinterfaces so that the software performs as the customer requests, theCompany recognizes the entire fee using the percentage of completionmethod of accounting. This would apply to the Company's customprogramming services which are generally contracted on a fixed feebasis. Anticipated losses, if any, are charged to operations in theperiod such losses are determined to be probable.

Revenues fromthe joint venture (included in Revenues: Other-Related Parties in theUnaudited Consolidated Statements of Operations) includes consultingrevenue for the joint ventures' use of the Company's SouthAfrican subsidiary's consultants and for director's feesfor the Company's subsidiary providing director services to thejoint venture (2004 period only) in accordance with the joint ventureagreement. Revenue is recognized upon performance of the services.

The Company assesses assuredness of collection for its revenuetransactions based on a number of factors, including past transactionhistory with the customer and the credit-worthiness of the customer.

8

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

The Company does not request collateral fromits customers. If the Company determines that collection of a fee isuncertain, it defers the fee and recognizes revenue at the time theuncertainty is eliminated, which is generally upon receipt of cash.

In accordance with EITF Issue No. 01-14, "IncomeStatement Characterization of Reimbursement Received for 'Out ofPocket' Expenses Incurred," reimbursements receivedfor out-of-pocket expenses incurred are classified as services revenuein the Unaudited Consolidated Statements of Operations.

(c)Variable Interest Entity

The Company adopted FIN 46R asrequired on March 31, 2004. The Company's 49% owned jointventure, African Solutions (Pty) Ltd ("AfricanSolutions"), is considered to be a variable interestentity as defined in FIN 46R. However, the Company has determined thatthe majority owner, African Legends Technology, absorbs the majority ofthe expected losses and therefore, African Legends Technology, is theprimary beneficiary. Due to the fact that the Company is not theprimary beneficiary of African Solutions, the adoption of FIN 46R didnot have an impact on the Company's consolidated financialposition or results of operations.

African Solutions is actingas a non-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.

As of June 30, 2005, AXS-One'stotal exposure to loss as a result of its involvement in AfricanSolutions is $106, representing the Company's net investment inAfrican Solutions as of June 30, 2005.

Presented below isselected financial data for African Solutions for the three and sixmonths ended June 30, 2005 and 2004,respectively.

|                       |  |                           |     |                         |  |      |     |         |  |   |     |         |  |   |      |         |  |  |
|-----------------------|--|---------------------------|-----|-------------------------|--|------|-----|---------|--|---|-----|---------|--|---|------|---------|--|--|
|                  |  | ThreeMonths EndedJune 30, |     | Six Months EndedJune30, |
|                  |  | 2005                      |     | 2004                    |  | 2005 |     | 2004    |
| Totalrevenues         |  | $                         | 276 |                    |  | $    | 381 |    |  | $ | 548 |    |  | $ | 714  |    |
| Operatingincome(loss) |  | $                         | 45  |                    |  | $    | (51 | )  |  | $ | 50  |    |  | $ | (78  | )  |
| Netloss               |  | $                         | (5  | )                  |  | $    | (99 | )  |  | $ | (54 | )  |  | $ | (167 | )  |
|                       |

Totalassets were $406 and $294 as of June 30, 2005 and 2004, respectively.Total stockholders' deficit was $(1,539) and $(1,765) as of June30, 2005 and December 31, 2004, respectively.

(d) Stock-BasedCompensation

FASB Statement No. 148,"Accounting for Stock Based Compensation-Transition andDisclosure, an Amendment of FASB Statement No. 123"("SFAS 148") provides alternative methods oftransition for a voluntary change to the fair value method ofaccounting for stock-based compensation. However, it allows an entityto continue to measure compensation cost for stock instruments grantedto employees using the intrinsic-value method of accounting prescribedby Accounting Principles Board Opinion No. 25 ("APB25"), "Accounting for Stock Issued toEmployees," provided it discloses the effect of SFAS 123,as amended by SFAS 148, in the footnotes to the financial statements.In December 2004, the FASB issued SFAS 123 (revised 2004),"Share-Based Payment" (SFAS 123R), whichreplaces SFAS 123 and supercedes APB Opinion No. 25. SFAS 123R requiresall share-based payments to employees, including grants of employeestock options and restricted stock grants, to be recognized as acompensation cost based on their fair values. The pro forma disclosurespreviously permitted under SFAS 123 no longer will be an alternative tofinancial statement recognition. The Company is required to adopt SFAS123R no later than January 1, 2006. Until that time, the Company haschosen to continue to account for stock-based compensation using theintrinsic-value 

9

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

method. Accordingly, no stock option relatedcompensation expense has been recognized in the consolidated statementsof operations as all options granted had an exercise price equal to themarket value of the underlying stock on the date of grant.

OnJanuary 3, 2005, the Company issued 75 shares of restricted stock tocertain employees with a vesting term of five years subject toacceleration in accordance with the grant stipulations. The fair valueof the restricted stock awards on the date of grant was $193 which wasrecorded as Unearned Stock Compensation, a component ofstockholder's deficit, and is being amortized over the vestingperiod of the grants, subject to acceleration based on Companyperformance. On June 30, 2005, 25 shares were forfeited and the relatedunearned stock compensation in the amount of $64 was reversed.Compensation expense related to the forfeitures of these shares wasimmaterial. For the three and six months ended June 30, 2005, theCompany recognized $10 and $19, respectively, as compensation expenseleaving a net balance of deferred compensation of $110 as of June 30,2005.

Had the Company, however, elected to recognizecompensation cost based on fair value method at the date of grant underSFAS 123, as amended by SFAS 148, such costs would have been recognizedratably over the vesting period of the underlying instruments and theCompany's net loss and net loss per common share would havechanged to the pro forma amounts indicated in the table below.

|                                                                                                      |  |                           |        |                         |  |        |         |         |  |        |        |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------------|--|---------------------------|--------|-------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                                                                                 |  | ThreeMonths EndedJune 30, |        | Six Months EndedJune30, |
|                                                                                                 |  | 2005                      |        | 2004                    |  | 2005   |         | 2004    |
| Net loss asreported                                                                                  |  | $                         | (4,359 | )                  |  | $      | (2,580  | )  |  | $      | (7,528 | )  |  | $      | (1,827  | )  |
| Add: Restricted stock expense                                                                        |  |                      | 10     |                    |  |   | — |    |  |   | 19     |    |  |   | — |    |
| Deduct: Total employeestock-based compensation determined under fair value based method forallawards |  |                      | (451   | )                  |  |   | (323    | )  |  |   | (919   | )  |  |   | (560    | )  |
| Pro forma net loss                                                                                   |  | $                         | (4,800 | )                  |  | $      | (2,903  | )  |  | $      | (8,428 | )  |  | $      | (2,387  | )  |
| Net loss per commonshare:                                                                            |  |
| Basic and diluted — asreported                                                                 |  | $                         | (0.15  | )                  |  | $      | (0.09   | )  |  | $      | (0.26  | )  |  | $      | (0.07   | )  |
| Basic and diluted — proforma                                                                   |  |                      | (0.16  | )                  |  |   | (0.11   | )  |  |   | (0.29  | )  |  |   | (0.09   | )  |
|                                                                                                      |

10

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

The Company has used the Black-Scholesoption-pricing model in calculating the fair value of options granted.The assumptions used and the weighted average information for the threeand six months ended June 30, 2005 and 2004 are as follows:

|                                                                                                               |  |                           |  |                         |  |           |  |           |  |  |  |  |  |  |  |  |  |  |
|---------------------------------------------------------------------------------------------------------------|--|---------------------------|--|-------------------------|--|-----------|--|-----------|--|--|--|--|--|--|--|--|--|--|
|                                                                                                          |  | ThreeMonths EndedJune 30, |  | Six Months EndedJune30, |
|                                                                                                          |  | 2005                      |  | 2004                    |  | 2005      |  | 2004      |
| Risk-free interestrate                                                                                        |  | 4.22%                     |  | 5.31%                   |  | 4.70%     |  | 5.25%     |
| Expected dividend yield                                                                                       |  | —                   |  | —                 |  | —   |  | —   |
| Expectedlives                                                                                                 |  | 5 years                   |  | 5 years                 |  | 5 years   |  | 5years    |
| Expectedvolatility                                                                                            |  | 101%                      |  | 103%                    |  | 100%      |  | 103%      |
| Weighted-average grant date fair value of options grantedduring the period                                    |  | $1.18                     |  | $3.23                   |  | $1.91     |  | $3.11     |
| Weighted-average remaining contractuallife of options outstanding                                             |  | 7.0 years                 |  | 6.5years                |  | 7.0 years |  | 6.5 years |
| Weighted-average exercise price of 3,407 and 4,038 optionsexercisable at June 30, 2005 and 2004, respectively |  | $2.06                     |  | $1.79                   |  | $2.06     |  | $1.79     |
|                                                                                                          |  |                      |  |                    |  |      |  |      |
|                                                                                                               |

(2)REVOLVING LINE OF CREDIT AND LONG-TERM DEBT

On March 31, 1998,the Company entered into a Loan and Security Agreement that contained arevolving line of credit and a term loan. The unpaid principal on theterm loan at December 31, 2003 of $547 was fully paid as of March 31,2004. The Loan and Security Agreement terminated on May 28, 2004 inaccordance with Amendment No. 15.

On August 11, 2004, theCompany entered into a two-year Loan and Security Agreement("Agreement") which contains a revolving lineof credit under which the Company has available the lesser of $4million or 80% of eligible accounts, as defined. There was noamount available under the revolving line of credit at June 30, 2005due to a covenant default as of June 30, 2005. No amounts wereoutstanding under the Agreement as of June 30, 2005.

Borrowingsunder the revolving line of credit bear interest at prime rate plus onehalf of one percent (0.5%). The Agreement provides for anon-refundable commitment fee of $30 per year and an unused revolvingline facility fee of .25% per annum. The unused revolving linefacility fee can be reduced if the Company maintains cash in anon-interest bearing checking account with the lender during the termof the Agreement. The Agreement is secured by substantially alldomestic assets of the Company and contains certain financialrestrictive covenants based on adjusted quick ratio, as defined, andearnings before interest, taxes and depreciation and amortization(EBITDA).

On January 27, 2005, the Company amended the Agreement(First Loan Modification) to revise the financial covenant based onEBITDA for the six months ended December 31, 2004. The Company was incompliance with this revised covenant and all other covenants as ofDecember 31, 2004.

On March 28, 2005, the Company furtheramended the Agreement (Second Loan Modification) in order to set theEBITDA and adjusted quick ratio quarterly covenants for 2005. TheCompany was not in compliance with the EBITDA covenant as of June 30,2005 and no borrowings were outstanding at that time. The Company iscurrently in the process of amending the Agreement with its lendinginstitution.

11

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

(3) BASIC AND DILUTED NET LOSS PER COMMONSHARE

Basic and diluted net loss per common share is presentedin accordance with SFAS No. 128, "Earnings perShare" ("SFAS No. 128").

Basic net loss per common share is based on the weighted averagenumber of shares of common stock outstanding during the period. Dilutednet loss per common share for the three and six months ended June 30,2005 does not include the effects of outstanding options to purchase6,580 shares of common stock, 50 shares of restricted stock andoutstanding warrants to purchase 1,332 shares of common stock for eachperiod as the effect of their inclusion is anti-dilutive for theperiods. Diluted net loss per common share for the three and six monthsended June 30, 2004 does not include the effects of outstanding optionsto purchase 6,320 shares of common stock and outstanding warrants topurchase 616 shares of common stock for each period as the effect oftheir inclusion is anti-dilutive for the periods.

(4) OPERATINGSEGMENTS

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

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a)  | AXS-One EnterpriseSolutions provide an integrated suite of internet-enabled financialmanagement and accounting applications to global 2000 organizations,enabling them to achieve process transparency while maintaining secureaccess required to meet reporting, control and governance requirements.AXS-One has an extensive installed customer base for its core financialmanagement products as well as for its Time and Billing components, afull suite of business solutions and services optimized to address therequirements of organizations that primarily sell professionals'time. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b)  | AXS-One Records CompliancePlatform Solutions enable organizations to utilize documents and datagenerated by their corporate applications as an asset while reducingcorporate risk and operational overheads and addressing requirementsfor corporate governance, legal discovery and industry regulationsassociated with how corporate records are managed and retained.Utilizing the AXS-One Compliance Platform Solutions, organizations cancapture, archive, manage, search, supervise, integrate, share and audittheir electronic records, regardless of originating platform. Disparatedocument and data types can be managed including e-mail, instantmessages, images, voice and video, office documents, ERP-generated datasuch as SAP, and electronic print reports generated by host systems.AXS-One Compliance Platform solutions target large information-centricorganizations that can utilize self-service information systems toreduce costs, increase efficiency, improve communications with theircustomers and improve access to business intelligence. |

12

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

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 its performance.

|                                                |  |                            |        |                             |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------|--|----------------------------|--------|-----------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                           |  | AXS-OneEnterpriseSolutions |        | CompliancePlatformSolutions |  | Total  |
| Three MonthsEnded June 30,2005                 |
| Revenues:                                      |
| Licensefees                                    |  | $                          | 256    |                        |  | $      | 262    |    |  | $      | 518    |    |
| Services                                       |  |                       | 5,076  |                        |  |   | 1,868  |    |  |   | 6,944  |    |
| Total Revenues, excluding related partyrevenue |  |                       | 5,332  |                        |  |   | 2,130  |    |  |   | 7,462  |    |
| Operating income(loss)                         |  |                       | 1,549  |                        |  |   | (3,624 | )  |  |   | (2,075 | )  |
| Totalassets.                                   |  |                       | 10,898 |                        |  |   | 2,179  |    |  |   | 13,077 |    |
| Capital expenditures                           |  |                       | 53     |                        |  |   | 6      |    |  |   | 59     |    |
| Depreciation andamortization                   |  |                       | 202    |                        |  |   | 116    |    |  |   | 318    |    |
| ThreeMonths Ended June 30,2004                 |
| Revenues:                                      |  |                       |
| Licensefees                                    |  | $                          | 228    |                        |  | $      | 776    |    |  | $      | 1,004  |    |
| Services                                       |  |                       | 6,923  |                        |  |   | 1,528  |    |  |   | 8,451  |    |
| Total Revenues, excluding related partyrevenue |  |                       | 7,151  |                        |  |   | 2,304  |    |  |   | 9,455  |    |
| Operating income (loss)                        |  |                       | (644   | )                      |  |   | 444    |    |  |   | (200   | )  |
| Totalassets.                                   |  |                       | 18,235 |                        |  |   | 2,358  |    |  |   | 20,593 |    |
| Capitalexpenditures                            |  |                       | 86     |                        |  |   | 10     |    |  |   | 96     |    |
| Depreciation and amortization                  |  |                       | 345    |                        |  |   | 7      |    |  |   | 352    |    |
| SixMonths Ended June 30,2005                   |
| Revenues:                                      |  |                       |
| Licensefees                                    |  | $                          | 750    |                        |  | $      | 790    |    |  | $      | 1,540  |    |
| Services                                       |  |                       | 10,141 |                        |  |   | 3,819  |    |  |   | 13,960 |    |
| Total Revenues, excluding related partyrevenue |  |                       | 10,891 |                        |  |   | 4,609  |    |  |   | 15,500 |    |
| Operating income (loss)                        |  |                       | 3,420  |                        |  |   | (6,609 | )  |  |   | (3,189 | )  |
| Totalassets.                                   |  |                       | 10,898 |                        |  |   | 2,179  |    |  |   | 13,077 |    |
| Capitalexpenditures                            |  |                       | 103    |                        |  |   | 12     |    |  |   | 115    |    |
| Depreciation and amortization                  |  |                       | 377    |                        |  |   | 214    |    |  |   | 591    |    |
| SixMonths Ended June 30,2004                   |
| Revenues:                                      |  |                       |
| Licensefees                                    |  | $                          | 868    |                        |  | $      | 2,596  |    |  | $      | 3,464  |    |
| Services                                       |  |                       | 14,136 |                        |  |   | 2,726  |    |  |   | 16,862 |    |
| Total Revenues, excluding related partyrevenue |  |                       | 15,004 |                        |  |   | 5,322  |    |  |   | 20,326 |    |
| Operating income                               |  |                       | 436    |                        |  |   | 1,943  |    |  |   | 2,379  |    |
| Totalassets.                                   |  |                       | 18,235 |                        |  |   | 2,358  |    |  |   | 20,593 |    |
| Capitalexpenditures                            |  |                       | 190    |                        |  |   | 22     |    |  |   | 212    |    |
| Depreciation and amortization                  |  |                       | 672    |                        |  |   | 13     |    |  |   | 685    |    |
|                                                |

13

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

Reconciliation of total segment operatingincome (loss) to consolidated operating income (loss):

|                                                  |  |                           |        |                          |  |        |        |         |  |        |        |         |  |        |        |         |  |  |
|--------------------------------------------------|--|---------------------------|--------|--------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                             |  | ThreeMonths EndedJune 30, |        | Six Months Ended June30, |
|                                             |  | 2005                      |        | 2004                     |  | 2005   |        | 2004    |
| Operating income (loss) from reportablesegments  |  | $                         | (2,075 | )                   |  | $      | (200   | )  |  | $      | (3,189 | )  |  | $      | 2,379  |    |
| Unallocatedrevenue, other – relatedparties |  |                      | 17     |                     |  |   | 50     |    |  |   | 37     |    |  |   | 101    |    |
| Unallocated general and administrativeexpense    |  |                      | (1,437 | )                   |  |   | (1,514 | )  |  |   | (2,785 | )  |  |   | (3,066 | )  |
| Other corporate unallocatedexpenses              |  |                      | (672   | )                   |  |   | (859   | )  |  |   | (1,232 | )  |  |   | (1,131 | )  |
| Total consolidated operatingloss                 |  | $                         | (4,167 | )                   |  | $      | (2,523 | )  |  | $      | (7,169 | )  |  | $      | (1,717 | )  |
|                                                  |

(5) CONTINGENCIES

Historically, the Company has been involved in disputes and/orlitigation encountered in its normal course of business. The Companybelieves that the ultimate outcome of these proceedings will not have amaterial adverse effect on the Company's business, consolidatedfinancial condition, results of operations or cash flows.

(6)PRIVATE PLACEMENTS

On April 5, 2004, the Company completed anoffer and sale of 2,581 shares of common stock for $3.10 per share in aprivate placement for total consideration of $8,000. Upon closing, theCompany received net proceeds of approximately $7,700. The Company alsoissued, at the same time, warrants to purchase an aggregate of 258shares of common stock at $3.98 per share and warrants to purchase 258shares of common stock at $4.50 per share. These warrants areexercisable for a period of three years beginning April 5, 2004. Thisprivate placement and issuance of warrants were made pursuant to theterms of a Unit Subscription Agreement, dated as of April 1, 2004,among the Company and several investors.

The common stock andwarrants in the private placement were not registered under theSecurities Act of 1933 ("the Act") inreliance upon Section 4(2) of the Act based on the fact that the sharesof common stock and the warrants were issued to a small number ofaccredited investors.

On April 8, 2004, the Company filed a Form8-K with the SEC disclosing details of the private placement andissuance of warrants. On May 4, 2004, the Company filed a Form S-3registration statement with the SEC covering the resale of thesecurities issued and securities issuable upon exercise of thewarrants. The Form S-3 registration statement, as amended, was declaredeffective by the SEC on September 28, 2004.

On June 17, 2005,the Company entered into a definitive agreement with a number ofinvestors as well as AXS-One Management and Board members to sell 4,534shares of its common stock for total consideration of $6,750. On June21, 2005, the closing date, the Company received net proceeds ofapproximately $5,775 from the investors and issued 4,081 shares ofcommon stock. This excluded amounts due from the Company'smanagement and Board members which together represent 10% of theinvestment. The closing with respect to the shares being offered to theCompany's management and Board members is subject to shareholderapproval. The Company also issued, at the same time, warrants topurchase an aggregate of 408 shares of common stock at $1.90 per shareand warrants to purchase 408 shares of common stock at $2.15 per share.These warrants are exercisable for a period of three years beginningJune 21, 2005. The warrants were classified within permanent equity inaccordance with EITF 00-19, "Accounting for DerivativeFinancial Instruments Indexed to and Potentially Settled in, aCompany's Own Stock." Warrants to purchase anadditional 45 shares of 

14

----

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

common stock at $1.90 per share and 45 sharesof common stock at $2.15 per share are issuable to the Company'smanagement and Board members upon approval of the shareholders. Thisprivate placement and issuance of warrants were made pursuant to theterms of a Unit Subscription Agreement, dated as of June 17, 2005,among the Company and several investors.

The common stock andwarrants in the private placement were not registered under theSecurities Act of 1933 ("the Act") inreliance upon Section 4(2) of the Act based on the fact that the sharesof common stock and the warrants were issued to a small number ofaccredited investors.

On June 23, 2005, the Company filed a Form8-K with the SEC disclosing details of the private placement andissuance of warrants. On July 13, 2005, the Company filed a Form S-3registration statement with the SEC covering the resale of 4,081 sharesof the common stock issued and 816 shares of the common stock issuableupon exercise of the warrants. The remainder of the shares,representing those issuable to the Company's executive officersand directors, will be registered upon approval of the shareholders.The Form S-3 registration statement, as amended, was declared effectiveby the SEC on August 3, 2005.

(7) RESTRUCTURING AND OTHERCOSTS

On June 30, 2004, in order to streamline and reorganizethe Company to better meet its long-term goals, the Company eliminated25 positions in the United States and 11 positions in its foreignoperations. The Company recorded a charge to operations in the secondquarter totaling approximately $786 related to involuntary terminationbenefits to be paid to the terminated employees. The severance accrualwas adjusted down by approximately $83 in the third quarter mainly dueto the re-assignment of two people previously scheduled fortermination. All amounts related to this restructuring had been paid asof December 31, 2004.

In addition, in June 2004, the Companyrecognized an expense of approximately $317 related to a retirementagreement with the Company's former CEO. The liability for theretirement agreement is included in accrued expenses on theaccompanying December 31, 2004 Consolidated Balance Sheet. The Companypaid the retirement benefits in January 2005.

On June 30, 2005the Company eliminated 22 positions in the United States and 6positions in its foreign operations in order to further streamline theorganization. The Company recorded a charge to operations in the secondquarter totaling approximately $863 million related to involuntarytermination benefits to be paid to the terminated employees. Theactivity related to the restructuring is as follows:

|                                                    |  |        |         |        |  |  |
|----------------------------------------------------|--|--------|---------|--------|--|--|
| Involuntarytermination costs recorded in June 2005 |  | $      | 863     |   |
| Cash payments through June 30,2005                 |  |   | — |   |
| Restructuring liability at June 30,2005            |  | $      | 863     |   |
|                                                    |

(8)FINANCIAL INFORMATION 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 segments in interim financialreports issued to shareholders. See Note (4). It also establishesstandards for related disclosures about products and services,geographic areas and major customers.

15

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

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

|                             |  |                            |       |                          |  |        |       |        |  |        |        |        |  |        |        |        |  |  |
|-----------------------------|--|----------------------------|-------|--------------------------|--|--------|-------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                        |  | ThreeMonths Ended June 30, |       | Six Months Ended June30, |
| Revenues:(1)                |  | 2005                       |       | 2004                     |  | 2005   |       | 2004   |
| United States               |  | $                          | 5,238 |                     |  | $      | 6,619 |   |  | $      | 10,633 |   |  | $      | 14,329 |   |
| UnitedKingdom               |  |                       | 536   |                     |  |   | 1,178 |   |  |   | 1,724  |   |  |   | 2,365  |   |
| Australia and SoutheastAsia |  |                       | 934   |                     |  |   | 1,165 |   |  |   | 1,841  |   |  |   | 2,359  |   |
| SouthAfrica                 |  |                       | 771   |                     |  |   | 543   |   |  |   | 1,339  |   |  |   | 1,374  |   |
| TotalConsolidated           |  | $                          | 7,479 |                     |  | $      | 9,505 |   |  | $      | 15,537 |   |  | $      | 20,427 |   |
|                             |

|  |
|--|
|  |  |
|  |

|     |                                                                            |
|-----|----------------------------------------------------------------------------|
| (1) | Revenues areattributed to geographic area based on location of salesoffice |

|                             |  |             |       |                 |  |        |       |        |  |  |  |  |  |  |  |  |  |  |
|-----------------------------|--|-------------|-------|-----------------|--|--------|-------|--------|--|--|--|--|--|--|--|--|--|--|
| LongLived Assets:           |  | June30,2005 |       | December31,2004 |  |   |       |   |
| UnitedStates                |  | $           | 1,648 |            |  | $      | 2,094 |   |  |
| UnitedKingdom               |  |        | 89    |            |  |   | 87    |   |  |
| Australia andSoutheast Asia |  |        | 166   |            |  |   | 185   |   |  |
| SouthAfrica                 |  |        | 21    |            |  |   | 29    |   |  |
| TotalConsolidated           |  | $           | 1,924 |            |  | $      | 2,395 |   |  |
|                             |

16

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Item2.    Management's Discussion and Analysis of FinancialCondition and Results of Operations

The following discussionshould be read in conjunction with the Consolidated Interim FinancialStatements and Notes thereto and is qualified in its entirety byreference thereto.

This Report contains statements of aforward-looking nature within the meaning of the safe harbor provisionsof Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended, relating tofuture events or the future financial performance of AXS-One. Investorsare cautioned that such statements are only predictions and that actualevents or results may differ materially. In evaluating such statements,investors should specifically consider the various factors identifiedin this Report which could cause actual results to differ materiallyfrom those indicated by such forward-looking statements, including thematters set forth in "Business—RiskFactors" in our 2004 Annual Report on Form 10-K.

Executive Overview

We are a leading provider of RecordsCompliance Management and Financial Management software solutionsdesigned to reduce the inherent risks associated with retaining andmanaging corporate records as well as to efficiently manage complexbusiness processes. We have implemented high-volume, interoperable,scalable and secure business solutions for global 2000 companies. OurWeb Services-based technology has been critically acclaimed as best ofclass. Our Records Compliance Management solutions deliver anintegrated platform providing content management-based solutions fordisparate electronic record types. This includes e-mail and instantmessaging, SAP, electronic print report (Books and Records) archivaland records management, as well as supervision and legal discoveryfunctionality for regulatory compliance and corporate governance, andfor operational efficiency. See "Item 1.Business" in our 2004 Annual Report on Form 10-K.

Our revenues are derived mainly from license fees from softwarelicense agreements 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 than2% of total revenues in 2004 and less than 1% of totalrevenues for the three and six months ended June 30, 2005) from hostingarrangements.

We are based in Rutherford, New Jersey withapproximately 214 full-time employees, as of June 30, 2005, in officesworldwide, including Asia, Australia, South Africa, the United Kingdomand the United States. Our foreign offices generated approximately30.0% and 31.6% of our total revenues for the three andsix months ended June 30, 2005, respectively, as compared to30.4% and 29.9%, respectively, for the correspondingprior year periods. We expect that such revenues will continue torepresent a significant percentage of our total revenues in the future.Most of our international license fees and services revenues aredenominated in foreign currencies. Fluctuations in the value of foreigncurrencies relative to the US dollar in the future could result influctuations in our revenue.

We have a 49% ownership in ajoint venture in our South African operation, AXS-One African Solutions(Pty) Ltd ("African Solutions"). AfricanSolutions sells and services our suite of products. We use the equitymethod of accounting for our investment whereby the investment,including loans to the joint venture, is stated at cost plus or minusour equity in undistributed earnings or losses.

We encountercompetition for all of our products in all markets and competeprimarily based on the quality of our products, our price, our customerservice and our time to implement. The timing of the release of newproducts is also important to our ability to generate sales. During thesecond half of 2003, we launched our Records Compliance Managementsolution for e-mail and Instant Messaging Archival, Supervision, andLegal Discovery in response to new regulatory requirements forfinancial institutions in the United States as well as to address theneed to reduce costs in the email management area. Our RecordsCompliance Management software, including this new solution, accountedfor approximately 67% of our total license fee revenues for theyear ended December 31, 2004. We have increased our research anddevelopment, sales and services teams in this area in order to meet theneeds of this growing market and capitalize on this opportunity.However, there is no assurance that these efforts will achieve thedesired results.

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Our future ability to grow revenue will bedirectly affected by continued price competition 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 the futureexperience, 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 "Business-RiskFactors" in our 2004 Annual Report on Form 10-K.

OnJune 21, 2005, we completed a private placement of shares of commonstock that resulted in net proceeds of approximately $5.8 millionthrough June 30, 2005. Additional proceeds of $0.7 million are expectedto be received from Company executive officers and board memberspending approval of the shareholders. A special meeting of theshareholders has been called for September 20, 2005 for this purpose.We expect to use the proceeds from the private placement to strengthenour balance sheet and to develop and continue the business activitiesof AXS-One. (See Note 6 to the Consolidated Interim FinancialStatements.)

On June 21, 2005, Edwin T. Brondo resigned from ourBoard of Directors and Anthony H. Bloom was elected to fill the vacancycreated by Mr. Brondo's resignation. Mr. Bloom will assume Mr.Brondo's position on the Nominating Committee. Allan Weingarten,a current board member, will step down from the Nominating Committeeand assume Mr. Brondo's position on the Compensation Committee.All other committee members remain unchanged.

On June 30, 2005,we eliminated 22 positions in our US operations and 6 positions in ourforeign operations in order to reduce our fixed operating costs andimprove the organization's competitive position. Changes in keymanagement positions in association with this reduction included theelimination of the positions of Chief Marketing Officer held by Mr.Richard Dym and Executive Vice President of Business Development heldby Mr. Gennaro Vendome. Mr. Vendome will retain his current position onthe Board of Directors. (See Note 7 to the Consolidated InterimFinancial Statements.)

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Results of Operations

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

|                                  |  |                                |        |                                |  |            |       |                             |  |        |        |         |  |        |       |          |  |  |
|----------------------------------|--|--------------------------------|--------|--------------------------------|--|------------|-------|-----------------------------|--|--------|--------|---------|--|--------|-------|----------|--|--|
|                             |  | Three MonthsEndedJune 30, 2005 |        | Three Months EndedJune 30,2004 |
| (dollars inthousands)            |  | AsReported                     |        | Dataas apercent of revenue     |  | AsReported |       | Dataas a percent of revenue |
|                             |  | (Unaudited)                    |        | (Unaudited)                    |
| Revenues:                        |  |
| Licensefees                      |  | $                              | 518    |                           |  |       | 6.9   | %                      |  | $      | 1,004  |    |  |   | 10.6  | %   |
| Services                         |  |                           | 6,944  |                           |  |       | 92.9  |                        |  |   | 8,451  |    |  |   | 88.9  |     |
| Other-relatedparties             |  |                           | 17     |                           |  |       | 0.2   |                        |  |   | 50     |    |  |   | 0.5   |     |
| Totalrevenues                    |  |                           | 7,479  |                           |  |       | 100.0 |                        |  |   | 9,505  |    |  |   | 100.0 |     |
| Operatingexpenses:               |  |
| Cost of license fees             |  |                           | 406    |                           |  |       | 5.5   |                        |  |   | 375    |    |  |   | 4.0   |     |
| Cost ofservices                  |  |                           | 4,383  |                           |  |       | 58.6  |                        |  |   | 4,528  |    |  |   | 47.6  |     |
| Sales and marketing              |  |                           | 2,523  |                           |  |       | 33.7  |                        |  |   | 2,455  |    |  |   | 25.8  |     |
| Research anddevelopment          |  |                           | 2,034  |                           |  |       | 27.2  |                        |  |   | 2,037  |    |  |   | 21.4  |     |
| General andadministrative        |  |                           | 1,437  |                           |  |       | 19.2  |                        |  |   | 1,530  |    |  |   | 16.1  |     |
| Restructuring and othercosts     |  |                           | 863    |                           |  |       | 11.5  |                        |  |   | 1,103  |    |  |   | 11.6  |     |
| Total operating expenses         |  |                           | 11,646 |                           |  |       | 155.7 |                        |  |   | 12,028 |    |  |   | 126.5 |     |
| Operatingloss                    |  |                           | (4,167 | )                         |  |       | (55.7 | )                      |  |   | (2,523 | )  |  |   | (26.5 | )   |
| Otherincome (expense):           |  |
| Equity in losses of jointventure |  |                           | (3     | )                         |  |       | (0.0  | )                      |  |   | (49    | )  |  |   | (0.5  | )   |
| Otherincome (expense),net        |  |                           | (214   | )                         |  |       | (2.9  | )                      |  |   | 20     |    |  |   | 0.2   |     |
| Other expense,net                |  |                           | (217   | )                         |  |       | (2.9  | )                      |  |   | (29    | )  |  |   | (0.3  | )   |
| Netloss before incometaxes       |  |                           | (4,384 | )                         |  |       | (58.6 | )                      |  |   | (2,552 | )  |  |   | (26.8 | )   |
| Incometax benefit (expense)      |  |                           | 25     |                           |  |       | 0.3   |                        |  |   | (28    | )  |  |   | (0.3  | )   |
| Netloss                          |  | $                              | (4,359 | )                         |  |       | (58.3 | )%                     |  | $      | (2,580 | )  |  |   | (27.1 | )%  |
|                                  |

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|                                          |  |                              |        |                              |  |            |        |                          |  |        |         |         |  |        |         |          |  |  |
|------------------------------------------|--|------------------------------|--------|------------------------------|--|------------|--------|--------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                     |  | Six Months EndedJune30, 2005 |        | Six Months EndedJune 30,2004 |
| (dollars inthousands)                    |  | AsReported                   |        | Data asapercent ofrevenue    |  | AsReported |        | Data asapercentofrevenue |
|                                     |  | (Unaudited)                  |        | (Unaudited)                  |
| Revenues:                                |  |                         |   |                         |  |       |   |                     |  |   |    |    |  |   |    |     |
| Licensefees                              |  | $                            | 1,540  |                         |  |       | 9.9    | %                   |  | $      | 3,464   |    |  |   | 17.0    | %   |
| Services                                 |  |                         | 13,960 |                         |  |       | 89.9   |                     |  |   | 16,862  |    |  |   | 82.5    |     |
| Other-relatedparties                     |  |                         | 37     |                         |  |       | 0.2    |                     |  |   | 101     |    |  |   | 0.5     |     |
| Totalrevenues                            |  |                         | 15,537 |                         |  |       | 100.0  |                     |  |   | 20,427  |    |  |   | 100.0   |     |
| Operatingexpenses:                       |  |                         |   |                         |  |       |   |                     |  |   |    |    |  |   |    |     |
| Costof licensefees                       |  |                         | 770    |                         |  |       | 5.0    |                     |  |   | 786     |    |  |   | 3.8     |     |
| Costofservices                           |  |                         | 9,042  |                         |  |       | 58.2   |                     |  |   | 8,797   |    |  |   | 43.1    |     |
| Salesandmarketing                        |  |                         | 5,111  |                         |  |       | 32.9   |                     |  |   | 4,425   |    |  |   | 21.7    |     |
| Researchanddevelopment                   |  |                         | 4,135  |                         |  |       | 26.6   |                     |  |   | 3,936   |    |  |   | 19.3    |     |
| Generalandadministrative                 |  |                         | 2,785  |                         |  |       | 17.9   |                     |  |   | 3,097   |    |  |   | 15.1    |     |
| Restructuringand othercosts              |  |                         | 863    |                         |  |       | 5.5    |                     |  |   | 1,103   |    |  |   | 5.4     |     |
| Totaloperatingexpenses                   |  |                         | 22,706 |                         |  |       | 146.1  |                     |  |   | 22,144  |    |  |   | 108.4   |     |
| Operatingloss                            |  |                         | (7,169 | )                       |  |       | (46.1  | )                   |  |   | (1,717  | )  |  |   | (8.4    | )   |
| Otherincome(expense):                    |  |                         |   |                         |  |       |   |                     |  |   |    |    |  |   |    |     |
| Equityin income (losses) of jointventure |  |                         | (27    | )                       |  |       | (0.2   | )                   |  |   | (82     | )  |  |   | (0.4    | )   |
| Otherexpense,net                         |  |                         | (357   | )                       |  |       | (2.3   | )                   |  |   | — |    |  |   | — |     |
| Otherexpense,net                         |  |                         | (384   | )                       |  |       | (2.5   | )                   |  |   | (82     | )  |  |   | (0.4    | )   |
| Netloss beforetaxes                      |  |                         | (7,553 | )                       |  |       | (48.6  | )                   |  |   | (1,799  | )  |  |   | (8.8    | )   |
| Incometax benefit(expense)               |  |                         | 25     |                         |  |       | 0.2    |                     |  |   | (28     | )  |  |   | (0.1    | )   |
| Netloss                                  |  | $                            | (7,528 | )                       |  |       | (48.4  | )%                  |  | $      | (1,827  | )  |  |   | (8.9    | )%  |
|                                          |

Comparison of Three Months Ended June30, 2005 to 2004

Revenues

Total revenues decreased$2.0 million or 21.3% for the three months ended June 30, 2005as compared to the corresponding prior year period due to a decrease inboth license fees and services revenue of 48.4% and17.8%, respectively. The decrease in license fees is mainly theresult of a decrease of $0.5 million in our U.S. operations due toslower growth of our Records Compliance Management software productline.

No one customer represented more than 10% of ourtotal revenues for the three months ended June 30, 2005. For thethree-month period ended June 30, 2004, we had a concentration of totalrevenues from one customer of approximately $1.9 million or20.1% of total revenues.

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

|                        |  |                            |        |          |  |        |        |            |  |        |        |        |  |        |        |         |  |  |
|------------------------|--|----------------------------|--------|----------|--|--------|--------|------------|--|--------|--------|--------|--|--------|--------|---------|--|--|
|                   |  | Three Months Ended June30, |
| (dollars inthousands)  |  | 2005                       |        | 2004     |
|                   |  | Amount                     |        | %ofTotal |  | Amount |        | % of Total |
| Maintenance            |  | $                          | 4,235  |     |  |   | 61.0   | %     |  | $      | 4,270  |   |  |   | 50.5   | %  |
| Consulting             |  |                       | 2,648  |     |  |   | 38.1   | %     |  |   | 4,090  |   |  |   | 48.4   | %  |
| Training               |  |                       | 4      |     |  |   | 0.1    | %     |  |   | 20     |   |  |   | 0.2    | %  |
| Customprogramming      |  |                       | 57     |     |  |   | 0.8    | %     |  |   | 71     |   |  |   | 0.9    | %  |
| Total services revenue |  | $                          | 6,944  |     |  |   | 100.0  | %     |  | $      | 8,451  |   |  |   | 100.0  | %  |
|                   |  |                       |   |     |  |   |   |       |  |   |   |   |  |   |   |    |
|                        |

Thedecrease in services revenues is mainly a result of a decrease of $1.4million in consulting revenue due partially to the decrease in newlicense agreements that typically generate consulting implementationservices. In addition, the latest version of our enterprise financialsoftware, version 9.0, was not released until March 31, 2005. We arejust now starting the implementation of this upgrade at variouscustomer locations. There was also a large consulting project with onecustomer in the first half of 2004 and there is no similar project inthe 2005 period. Maintenance revenue has remained fairly consistentwith the prior year. Decreases in maintenance fees due to customercancellations have been offset by maintenance from new licenseagreements and customary annual increases for existing agreements.

Other-Related Parties revenue, as shown in the table below, includesdirectors' fees and consulting revenue from AfricanSolutions.

|                           |  |                            |         |        |  |        |    |        |  |  |
|---------------------------|--|----------------------------|---------|--------|--|--------|----|--------|--|--|
| (dollarsin thousands)     |  | Three Months Ended June30, |
|                      |  | 2005                       |         | 2004   |
| Management/Directors'fees |  | $                          | — |   |  | $      | 9  |   |
| Consultingrevenue         |  |                       | 17      |   |  |   | 41 |   |
| Totalrevenues             |  | $                          | 17      |   |  | $      | 50 |   |
|                           |

Thedecrease in directors' fee revenue for the three months endedJune 30, 2005 as compared to the same period in 2004 resulted from ourdecision in the fourth quarter of 2004 to temporarily stop chargingdirectors' fees until African Solutions becomes profitable. Thedecrease in consulting revenue resulted from decreased use ofconsultants from African Solutions, choosing instead to utilize our owninternal staff.

Expenses

Cost of license fees consistprimarily of amortization of capitalized software development costs andamounts paid to third parties with respect to products we resell inconjunction with the licensing of our products. The elements can varysubstantially from period to period as a percentage of license fees.Cost of license fees increased slightly for the three months ended June30, 2005, as compared to the corresponding prior year period. Anincrease of $63,000 in third party royalties for third party softwareused in conjunction with our software (includes both embedded softwareand separately sold modules) was mostly offset by a $31,000 decrease inamortization of capitalized software costs as a result of certain costsbecoming fully amortized in 2004.

Cost of services consistsprimarily of personnel and third party costs for product qualityassurance, training, installation, consulting and customer support.Cost of services decreased $0.1 million or 3.2% for the threemonths ended June 30, 2005 as compared to the corresponding prior yearperiod. The decrease for the three-month period is mainly due todecreases of $130,000 in cost of third party services due to decreaseduse of independent consultants, mostly in the U.S. operations, for newsoftware implementations, $115,000 in billable expenses related toconsulting projects, $59,000 in 

21

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travel and living expenses and $98,000 infacilities related charges. These decreases were mostly offset by anincrease of $292,000 in outside consulting expense due to increased useof outside consultants to supplement our internal employees on a largeproject in our South African operation.

Sales and marketingexpenses consist primarily of salaries, commissions and bonuses relatedto sales and marketing personnel, as well as travel and promotionalexpenses. Sales and marketing expenses increased approximately $0.1million or 2.8% for the three months ended June 30, 2005, ascompared to the corresponding prior year period. The increase isprimarily the result of an increase of $0.4 million in salaries due toincreased headcount and related benefits prior to the restructuring,partially offset by decreases of $0.1 million in variable compensationdue to lower revenue and $0.1 million in marketing programs expense duemostly to a decrease in trade shows attended.

Research anddevelopment expenses consist primarily of personnel costs, costs ofequipment, facilities and third party software development costs.Research and development expenses are generally charged to operationsas incurred. However, certain software development costs arecapitalized in accordance with Statement of Financial AccountingStandards No. 86 ("SFAS 86"). Suchcapitalized software development costs are generally amortized to costof license fees on a straight-line basis over periods not exceedingthree years.

Research and development expenses (net ofcapitalized software development costs) remained flat for the threemonths ended June 30, 2005 as compared to the comparable prior yearperiod. An increase in research and development expense due mainly to adecrease in capitalized software development costs was offset bydecreases in temporary and outside consulting expense and bonusexpense. We capitalized approximately $208,000 in software developmentcosts in the second quarter of 2004 as compared to none in the secondquarter of 2005. The rate of capitalization of software developmentcosts may fluctuate depending on the mix and stage of development ofour product development and engineering projects.

General andadministrative expenses consist primarily of salaries foradministrative, executive and financial personnel, and outsideprofessional fees. General and administrative expenses decreased $0.1million or 6.1% for the three months ended June 30, 2005 ascompared to the corresponding prior year period. The decrease for thethree months is primarily as a result of a $0.1 million provision forbad debt in the U.S. and South African operations that was recorded inthe second quarter of 2004. There was no similar charge in the 2005period and a $0.1 million decrease in salaries expense due to decreasedheadcount. These decreases were partially offset by increases of$48,000 in consulting expense due to the use of an outside consultingfirm to assist with compliance with Sarbanes-Oxley Section 404, relatedto Internal Control over Financial Reporting, and $66,000 in otherexpenses mostly resulting from the decision to increase thecompensation to non-employee board members for the year 2005.

OnJune 30, 2005, in order to reduce operating costs to better positionourselves in the current market, we eliminated 22 positions in theUnited States and 6 positions in our foreign operations. We recorded acharge to operations in the second quarter totaling $0.9 millionrelated to involuntary termination benefits to be paid to theterminated employees. On June 30, 2004, we eliminated 25 positions inthe United States and 11 positions in our foreign operations andrecorded a charge to operations in the second quarter totalingapproximately $0.8 million related to involuntary termination benefitswhich were subsequently paid to the terminated employees. (See Note 7to the Consolidated Interim Financial Statements.)

In addition,as of June 30, 2004, we recognized approximately $0.3 million relatedto a retirement agreement with our former CEO. The retirement benefitswere paid in the first quarter of 2005.

Operating Loss

Operating loss increased $1.6 million for the three months endedJune 30, 2005 as compared to the corresponding prior year period duemainly to a $2.0 million decrease in total revenues partially offset bya $0.4 million decrease in operating expenses.

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Other Expense, Net

Other expense,net increased $188,000 to a net expense of $217,000 for the threemonths ended June 30, 2005, as compared to $29,000 in the same periodin 2004. The increased expense is primarily due to foreign exchangelosses of approximately $219,000 partially offset by a decrease of$46,000 in equity in losses of joint venture.

Income TaxBenefit (Expense)

The income tax benefit of $25,000 for thethree months ended June 30, 2005 represents a refund of prior yeartaxes paid by our U.K. subsidiary. The income tax provision of $28thousand for the three months ended June 30, 2004 represented foreigntaxes due in our South African subsidiary.

Comparison of SixMonths Ended June 30, 2005 to 2004

Revenues

Totalrevenues decreased $4.9 million or 23.9% for the six monthsended June 30, 2005, as compared to the corresponding prior yearperiod. The decrease for the six-month period is mainly attributable todecreases of $1.9 million in license fee revenue mainly in our U.S. andSouth African operations and $2.9 million in services revenues in bothour U.S. and foreign operations. The decrease in license revenues inour U.S. operations is mainly the result of a longer sales cycle thananticipated of our Records Compliance Management software as a numberof pending sales were not closed until July. Our South Africanoperation had a $0.3 million contract from one customer in the firsthalf of 2004 and no similar contract in 2005.

Total revenues forthe six months ended June 30, 2004 included a concentration of $3.8million or 18.8% of total revenues from one customer. For thesix months ended June 30, 2005, no one customer represented more than10% of total revenues.

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

|                        |  |                          |        |          |  |        |        |            |  |        |        |        |  |        |        |         |  |  |
|------------------------|--|--------------------------|--------|----------|--|--------|--------|------------|--|--------|--------|--------|--|--------|--------|---------|--|--|
|                   |  | Six Months Ended June30, |
| (dollars inthousands)  |  | 2005                     |        | 2004     |
|                   |  | Amount                   |        | %ofTotal |  | Amount |        | % of Total |
| Maintenance            |  | $                        | 8,364  |     |  |   | 59.9   | %     |  | $      | 8,590  |   |  |   | 50.9   | %  |
| Consulting             |  |                     | 5,460  |     |  |   | 39.1   | %     |  |   | 7,866  |   |  |   | 46.7   | %  |
| Training               |  |                     | 9      |     |  |   | 0.1    | %     |  |   | 37     |   |  |   | 0.2    | %  |
| Customprogramming      |  |                     | 127    |     |  |   | 0.9    | %     |  |   | 369    |   |  |   | 2.2    | %  |
| Total services revenue |  | $                        | 13,960 |     |  |   | 100.0  | %     |  | $      | 16,862 |   |  |   | 100.0  | %  |
|                   |  |                     |   |     |  |   |   |       |  |   |   |   |  |   |   |    |
|                        |

Thedecrease in services revenues is primarily due to a decrease inconsulting revenue. During the first half of 2004 we were engaged in aworldwide consulting project with one customer which generated asignificant percentage of our consulting revenue during that period.This project was substantially completed in the third quarter of 2004and there has been no similar project in the 2005 period. The majorityof our consulting revenue has historically been generated fromimplementations of new licenses and upgrades to newer versions of ourexisting software. With new license agreements that have signed in Julyand existing customers requesting implementation services related toupgrades to the latest version of enterprise financials, we expect animprovement in our consulting revenue over the next six months.

Maintenance revenues decreased slightly due mainly to customercancellations in our U.K. and South African operations mostly offset bynew maintenance agreements and customary annual increases of existingagreements worldwide. There was a $0.2 million decrease in customprogramming due to a large agreement with one customer in the U.S.operation in the 2004 period that did not recur in the 2005 period.

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The following table sets forth, for theperiods indicated, each category of other related partyrevenue:

|                                  |  |                          |         |        |  |        |     |        |  |  |
|----------------------------------|--|--------------------------|---------|--------|--|--------|-----|--------|--|--|
| (dollarsin thousands)            |  | Six Months Ended June30, |         |   |
|                             |  | 2005                     |         | 2004   |
| Management/Directors'fee revenue |  | $                        | — |   |  | $      | 18  |   |
| Consultingrevenue                |  |                     | 37      |   |  |   | 83  |   |
| Totalrevenues                    |  | $                        | 37      |   |  | $      | 101 |   |
|                                  |

Other-relatedparties revenue for the six months ended June 30, 2005 includeddecreases of $18 thousand and $46 thousand, respectively, indirectors' fee revenues and consulting revenue due to the samereasons as those indicated above in the comparison of the quartersended June 30, 2005 and 2004.

Expenses

Cost of licensefees remained relatively flat for the six months ended June 30, 2005,as compared to the corresponding prior year period. An increase of$80,000 in third party software royalty fees for software used inconjunction with our software was mostly offset by a decrease of$96,000 in amortization of capitalized software development costs as aresult of certain costs becoming fully amortized in 2004.

Costof services increased $0.2 million or 2.8% for the six monthsended June 30, 2005 as compared to the corresponding prior year period.The increase is mainly due to an increase of $0.4 million in outsideconsulting expense due to the use of outside consultants to supplementour internal employees on a large project in our South Africanoperation. This increase was partially offset by decreases of $0.1million in salaries expense due to a decrease in headcount and $0.1million in variable compensation resulting from the decrease inrevenue.

Sales and marketing expenses increased $0.7 million or15.5% for the six months ended June 30, 2005 as compared to thecorresponding prior year period. The increase is primarily a result ofincreases of $0.7 million in salaries and related benefits due toincreased headcount and $0.2 million in travel and living expenses.These increases were partially offset by a decrease of $0.2 million incommission and bonuses expense as a direct result of decreasedrevenues.

Research and development expenses (net of capitalizedsoftware development costs) increased $0.2 million or 5.1% forthe six months ended June 30, 2005, as compared to the correspondingprior year period. The increase is primarily the result of a decreaseof $0.5 million in capitalized software development costs partiallyoffset by decreases of $0.2 million in salaries due to lower headcountand $0.1 million in outside consultants expense due to completion of amajor project in the 2004 period. We capitalized $18,000 in softwaredevelopment costs in the first half of 2005 as compared to $0.5 millionin the first half of 2004. The rate of capitalization of softwaredevelopment costs may fluctuate depending on the mix and stage ofdevelopment of our product development and engineering projects.

General and administrative expenses decreased $0.3 million or10.1% for the six months ended June 30, 2005 as compared to thecorresponding prior year period. The decrease is primarily the resultof decreases of approximately $0.2 million in salary expense andrelated benefits due to lower headcount, $0.1 million in recruitingexpenses, $0.1 million in variable compensation due to reduced revenuesand $0.1 million in bad debt expense. There was a bad debt provisionrecorded in the second quarter of 2004 and no similar provisionrecorded in 2005. These decreases were partially offset by increases of$0.1 million in outside consultants expense due to the consulting firmhired to assist with Sarbanes-Oxley regulations (see thequarter-to-quarter comparison above) and $0.1 million in other expensesresulting mostly from an increase in fees paid to the non-employeedirectors.

For a discussion of the restructuring and othercharges see the quarter-to-quarter comparison above and Note 7 to theConsolidated Interim Financial Statements.

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Operating Loss

Operating lossincreased $5.5 million for the six months ended June 30, 2005 ascompared to the same period in 2004 due to a decrease of $4.9 millionin total revenues and an increase of $0.6 million in operatingexpenses.

Other Expense, Net

Other expense, netincreased $0.3 million for the six months ended June 30, 2005 ascompared to the same period in 2004 due primarily to foreign exchangelosses in our U.K. and South African subsidiaries. Equity in losses ofjoint venture decreased $55,000 for the six months ended June 30, 2005as compared to the same period in 2004.

Income Tax Benefit(Provision)

The income tax benefit of $25,000 for the sixmonths ended June 30, 2005 represents a refund of prior year taxes paidby our U.K. subsidiary. The income tax provision of $28,000 for the sixmonths ended June 30, 2004 represented foreign taxes due in our SouthAfrican subsidiary.

Liquidity and Capital Resources

OnJune 21, 2005 we completed a private placement of shares of commonstock that resulted in the receipt of net proceeds of approximately$5.8 million. On April 5, 2004, we completed a private placement ofshares of common stock that resulted in the receipt of net proceeds ofapproximately $7.7 million (See Note 6 to the Consolidated InterimFinancial Statements). Prior to that we had a Loan and SecurityAgreement ("Agreement") that contained arevolving line of credit and a term loan (See Note 2 to theConsolidated Interim Financial Statements). The term loan was paid infull as of March 31, 2004, and no amounts remain outstanding. TheAgreement terminated on May 28, 2004 as per the agreement. On August11, 2004, the Company entered into a two-year Loan and SecurityAgreement which contains a revolving line of credit under which theCompany has available the lesser of $4 million or 80% ofeligible accounts, as defined (See Note 2 to the Consolidated InterimFinancial Statements).

On January 27, 2005, we amended theAgreement (First Loan Modification) to revise the financial covenantbased on EBITDA for the six months ended December 31, 2004. We were incompliance with this revised covenant and all other covenants as ofDecember 31, 2004.

On March 28, 2005, we further amended theAgreement (Second Loan Modification) in order to set the EBITDA andadjusted quick ratio quarterly covenants for 2005. We were out ofcompliance with the EBITDA covenant as of June 30, 2005, but arecurrently negotiating new covenants and expect to execute an amendedloan agreement prior to the end of the third quarter that would restoreour $4 million bank facility.

Our operating activities used cashof $4.6 million and $0.4 million for the six months ended June 30, 2005and 2004, respectively. Net cash used by operating activities duringthe six months ended June 30, 2005 is primarily the result of the netloss and a decrease in deferred revenue partially offset by decreasesin accounts receivable, prepaid expenses and other current assets andnon-cash depreciation and amortization. The decrease in deferredrevenue is mainly the result of the amortization of annual supportcontracts previously billed. The decrease in accounts receivable ismainly the result of the collection of amounts due and a decrease innew billings.

Net cash used by operating activities during thesix months ended June 30, 2004 was primarily the result of the net lossand an increase in accounts receivable partially offset by non-cashdepreciation and amortization and an increase in deferred revenue andaccounts payable and accrued expenses. The increase in deferred revenuewas mainly the result of new agreements executed in the first half of2004 as well as annual maintenance renewal increases. The increase inaccounts receivable was mainly the result of new license billings atthe end of the second quarter and an increase in consulting billingsrelated to the increase in revenue. The increase in accounts payableand accrued expenses was mainly due to the accrual for therestructuring and other charges.

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Our investing activities used cash of$0.1 million and $0.8 million for the six months ended June 30, 2005and 2004, respectively. The use of cash for the six months ended June30, 2005 was primarily for the purchase of computer equipment. The useof cash for the six months ended June 30, 2004 was primarily forcapitalized software development costs related to development of newproducts as well as significant enhancements to certain existingproducts and for the purchase of computer equipment.

Cashprovided by financing activities was $6.7 million and $7.5 million forthe six months ended June 30, 2005 and 2004, respectively. For bothperiods cash was primarily provided by the net proceeds received fromthe private placements and the exercise of stock options and warrantsduring the periods. For the six months ended June 30, 2004, netproceeds received from the private placement was partially offset bythe payment of the remaining balance of the outstanding term loan.

We have no significant capital commitments. Planned capitalexpenditures for the year 2005 total approximately $0.5 million,including any software development costs that may qualify forcapitalization under SFAS 86. Our aggregate minimum operating leasepayments for 2005 will be approximately $1.9 million. Our aggregateminimum royalties payable to third party software providers inaccordance with 2005 agreements for third party software used inconjunction with our software is approximately $0.2 million for theremainder of 2005. Future commitments to third party software providersare as follows:

(inthousands)

|       |  |        |     |        |  |  |
|-------|--|--------|-----|--------|--|--|
| Year  |  | Amount |
| 2006  |  | $      | 400 |   |
| 2007  |  |   | 125 |   |
| 2008  |  |   | 50  |   |
| 2009  |  |   | 50  |   |
| Total |  | $      | 625 |   |
|       |

Wegenerated a net loss of ($5.2) million for the year ended December 31,2004 after generating net income of $2.3 million and $1.9 million forthe years ended December 31, 2003 and 2002, respectively. For the yearended December 31, 2004, we experienced a decline in revenue as ourbusiness shifted to focus more heavily on the records compliancemanagement business. Management's initiatives over the last twoyears, including the restructurings in June of 2005 and 2004, theprivate placements of common stock in April of 2004 and June of 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, restored availability of borrowing capacity underour bank line of credit, if amended by the bank, and operating cashflow should be sufficient to fund our working capital requirementsthrough 2005. However, we may in the future be required to seek newsources of financing or future accommodations from our existing lenderor other financial institutions, or we may seek equity infusions fromprivate investors. We may also be required to further reduce operatingcosts in order to meet our obligations. Our ability to fund ouroperations beyond 2005 is heavily dependent on the growth of ourrevenues over 2004 and the first half of 2005 levels. There is noassurance that we will be successful in negotiating new financialcovenants that will be acceptable to our lending institution.Additionally, there is a risk that cash held by our foreignsubsidiaries may not be readily available for use in our U.S.operations to pay our obligations as the transfer of funds is sometimesdelayed due to various foreign government restrictions. No assurancecan be given that management's initiatives will be successful orthat any such additional sources of financing, lender accommodations orequity infusions will be available.

Segment Information

AXS-One Enterprise Solutions

For the three and six monthsended June 30, 2005, license fee revenues were $0.3 million and $0.8million, respectively, compared to $0.2 million and $0.9 million,respectively, for the comparable prior 

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year period. License fees have remainedfairly consistent, as we have continued to license new software modulesand additional users for previously licensed modules to our existingcustomers. Service revenues for the three and six months ended June 30,2005 were $5.1 million and $10.1 million, respectively, compared to$6.9 million and $14.1 million, respectively, for the comparable prioryear period. In 2004 we had a large consulting project with onecustomer that was substantially completed by the end of the thirdquarter of 2004. There is no similar project in 2005. EnterpriseSolutions had operating income (loss) of $1.5 million and $3.4 million,respectively, for the three and six months ended June 2005 as comparedto ($0.6) million and $0.4 million, respectively, for the comparableprior year periods. Operating income increased primarily as a result ofreductions of expenses in all areas relative to this operating segmentas the focus has shifted to the development of Compliance PlatformSolutions. We continue to maintain a qualified staff to develop,enhance, support and maintain our financial modules for our customerbase.

Compliance Platform Solutions

Compliance PlatformSolutions had license fee revenues of $0.3 million and $0.8 million,respectively, for the three and six months ended June 30, 2005,compared to $0.8 million and $2.6 million, respectively for thecomparable prior year periods. The decrease in license fee revenues wasprimarily due to a slower sales cycle than anticipated. A number ofcontracts expected to sign during the second quarter were delayed untilthe third quarter. Services revenues for the three and six months endedJune 30, 2005 were $1.9 million and $3.8 million, respectively,compared to $1.5 million and $2.7 million, respectively, for thecomparable prior year periods. The increase in services revenues wasfrom implementation projects resulting from licenses entered intoduring the fourth quarter of 2004. Compliance Platform Solutionsgenerated operating losses for the three and six months ended June 30,2005 of $3.6 million and $6.6 million, respectively, as compared tooperating income of $0.4 million and $1.9 million, respectively, forthe comparable prior year periods. The operating losses are the resultof increased expenses in all areas to develop, market and support thisgrowing operating segment. A reconciliation of segment operating incometo consolidated operating income is provided in Note 4 of theConsolidated Interim Financial Statements provided herin.

Critical Accounting Policies

Our critical accountingpolicies are as follows:

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

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | Capitalized softwaredevelopment costs. |

Revenue Recognition

We deriveour revenue primarily from two sources: (i) software licenses and (ii)services and support revenue, which includes software maintenance,hosting services, training, consulting and custom programming revenue.We also derive a limited amount of consulting revenue anddirectors' fees from the related party joint venture in SouthAfrica (less than 1% of total revenue in 2004). As describedbelow, significant management judgments and estimates must be made andused in connection with the revenue recognized in any accountingperiod. Material differences may result in the amount and timing of ourrevenue for any period if our management made different judgments orutilized different estimates.

We normally license our softwareproducts on a perpetual basis. Each license agreement generallyincludes a provision for initial post-contract support (maintenance).For the majority of license sales we use a signed license agreement asevidence of an arrangement. For maintenance fees, we use a maintenanceagreement as evidence of the arrangement. We use a professionalservices agreement as evidence of an arrangement for our training,custom programming and consulting revenues. Occasionally, where amaster license or services agreement with a customer already exists, weaccept the customer's purchase order as evidence of anarrangement. Director fee revenues from our joint venture are evidencedby a master agreement governing the relationship.

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We recognize revenue in accordance withStatement of Position 97-2, "Software RevenueRecognition" ("SOP 97-2"), andStatement of Position 98-9, "Modification of SOP 97-2,Software Revenue Recognition, With Respect to CertainTransactions." Revenue from non-cancelable softwarelicenses is recognized when the license agreement has been signed,delivery has occurred, the fee is fixed or determinable andcollectibility is probable. Revenues from resellers are recorded usingthe sell-through method whereby we recognize revenue when an end userhas placed an order with the reseller and the above revenue recognitioncriteria have been met with respect to the reseller. In multipleelement arrangements, we defer the vendor-specific objective evidenceof fair value ("VSOE") related to theundelivered elements and recognize revenue on the delivered elementsusing the residual method. The most commonly deferred element isinitial maintenance, which is recognized on a straight-line basis overthe initial maintenance term. The VSOE of maintenance is determined byusing a consistent percentage of maintenance fee to license fee basedon renewal rates. Maintenance fees in subsequent years are recognizedon a straight-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.

Delivery of software generally occurs when the product (on CDs) isdelivered to a common carrier. Occasionally, delivery occurs throughelectronic means where the software is made available through oursecure FTP (File Transfer Protocol) site. The Company does not offerany customers or resellers a right of return.

For softwarelicense and maintenance revenue, we assess whether the fee is fixed anddeterminable and whether or not collection is probable. We assesswhether the fee is fixed and determinable based on the payment termsassociated with the transaction. If a significant portion of a fee isdue after our normal payment terms, which are 30 to 90 days frominvoice date, we account for the fee as not being fixed anddeterminable. In these cases, we recognize revenue as the fees becomedue.

The majority of our training and consulting services arebilled based on hourly rates. We generally recognize revenue as theseservices are performed. However, when we enter into an arrangement thatrequires us to perform significant work either to alter the underlyingsoftware or to build additional complex interfaces so that the softwareperforms as the customer requests, we recognize the entire fee usingthe percentage of completion method of accounting. This would apply toour custom programming services, which are generally contracted on afixed fee basis. Anticipated losses, if any, are charged to operationsin the period such losses are determined to be probable.

Revenues from transaction fees associated with a hostingarrangement, billable on a per transaction basis and included inservices revenue on the Unaudited Consolidated Statements ofOperations, are recognized based on the actual number of transactionsprocessed during the period.

Revenues from joint ventures(included in Revenues: Other-Related Parties in our ConsolidatedStatements of Operations) includes consulting revenue for the jointventures' use of our South African subsidiary's consultantsand directors' fees (2004 period only) in accordance with thejoint venture agreement. Revenue is recognized upon performance of theservices.

We assess assuredness of collection based on a numberof factors, including past transaction history with the customer andthe credit-worthiness of the customer. We do not request collateralfrom our customers. If we determine that collection of a fee is notprobable, we defer the fee and recognize revenue at the time collectionbecomes probable, which is generally upon receipt of cash.

Ourarrangements do not generally include acceptance clauses. However, ifan arrangement includes an acceptance provision, acceptance occurs uponthe earliest of receipt of a written customer acceptance, expiration ofthe acceptance period or productive use of the software by thecustomer.

Capitalized Software Development Costs

Our policy is to capitalize certain software development costs inaccordance with Statement of Financial Accounting Standards No. 86,"Accounting for the Costs of Computer Software to Be Sold,

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Leased, or Otherwise Marketed"("SFAS 86"). Under SFAS 86, costs incurred todevelop or significantly enhance computer software products are chargedto research and development expense as incurred until technologicalfeasibility has been established. We establish technologicalfeasibility upon completion of a working model or completion of adetailed program design. Generally costs related to projects that reachtechnological feasibility upon completion of a working model are notcapitalized as the time period between establishment of the workingmodel and general availability is of short duration. For projects thatmeet technological feasibility upon completion of a detailed programdesign, all research and development costs for that project arecapitalized from that point until the product is available for generalrelease to customers. The establishment of technological feasibilityand the ongoing 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 three years.

Recently Issued Accounting Standards

In December 2004, theFASB issued SFAS No. 123 (revised 2004), "Share-BasedPayment" (SFAS No. 123R), which replaces SFAS No. 123 andsupersedes APB Opinion No. 25. SFAS No. 123R addresses the accountingfor transactions in which an enterprise receives employee services inexchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise'sequity instruments or that may be settled by the issuance of suchequity instruments. SFAS No. 123R requires all share-based payments toemployees, including grants of employee stock options and restrictivestock grants, to be recognized as a compensation cost based on theirfair values. The pro forma disclosures previously permitted under SFASNo. 123 no longer will be an alternative to financial statementrecognition. We are required to adopt SFAS No. 123R no later thanJanuary 1, 2006. Under SFAS No. 123R, we must determine the appropriatefair value model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method tobe used at date of adoption. The transition methods include prospectiveand retroactive adoption options. Under the retroactive option, priorperiods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requiresthat compensation expense be recorded for all unvested stock optionsand restricted stock at the beginning of the first quarter of adoptionof SFAS No. 123R, while the retroactive methods would recordcompensation expense for all unvested stock options and restrictedstock beginning with the first period presented. We are evaluating therequirements of SFAS No. 123R and expect that the adoption of SFAS No.123R will have a material impact on our consolidated results ofoperations and net income (loss) per common share.

On December16, 2004, the FASB issued Statement No. 153, "Exchanges ofNon-monetary Assets," an amendment of APB Opinion No. 29.Statement No. 153 addresses the measurement of exchanges ofnon-monetary assets and redefines the scope of transactions that shouldbe measured based on the fair value of the assets exchanged. TheStatement is effective for non-monetary asset exchanges occurring infiscal periods beginning after June 15, 2005. We do not believeadoption of Statement No. 153 will have a material effect on ourconsolidated financial position, results of operations or cashflows.

On December 21, 2004, the FASB issued FASB Staff PositionNo. FAS 109-2 (FAS 109-2), "Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004." The American JobsCreation Act introduces a special one-time dividends received deductionon the repatriation of certain foreign earnings to a U.S. taxpayer(repatriation provision), provided certain criteria are met. FAS 109-2provides accounting and disclosure guidance for the repatriationprovision. FAS 109-2 is effective immediately, though the 

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Treasury Department or Congress is expectedto provide additional clarifying language on key elements of therepatriation provision. The adoption of FAS 109-2 did not have amaterial effect on our consolidated financial position, results ofoperations or cash flows as we do not currently have foreign earningsavailable for repatriation.

On May 5, 2005, the FASB issued SFASNo. 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 for theaccounting 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 beginning January 1,2006.

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

See our2004 Annual Report on Form 10K for a discussion of risk factors.

Item 3.    Quantitative and Qualitative Disclosures About MarketRisk

In the normal course of business, we are exposed tofluctuations in interest rates and equity market risks as we seek debtand equity capital to sustain our operations. We are also exposed tofluctuations in foreign currency exchange rates as the financialresults and financial conditions of our foreign subsidiaries aretranslated into U.S. dollars in consolidation. We do not use derivativeinstruments or hedging to manage our exposures and do not currentlyhold any market risk sensitive instruments for trading purposes.

Item 4.    Controls and Procedures

Evaluation ofdisclosure controls and procedures

The Company maintainsdisclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company's ExchangeAct reports is recorded, processed, summarized and reported within thetime periods specified in the SEC's rules and forms, and thatsuch information is accumulated and communicated to the Company'smanagement, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure based on the definition of "disclosure controlsand procedures" 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.

The Companycarried 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 of June 30,2005. Based upon the foregoing, the Company's Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective as of June 30,2005.

Internal controls over financial reporting

There have been no changes in the Company's internal controlover financial reporting during the quarter ended June 30, 2005 thathave materially affected, or are reasonably likely to materiallyaffect, the Company's internal control over financialreporting.

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AXS-ONE INC.Part II Other Information

Item 1.    LegalProceedings

Historically, we have been involved in disputesand/or litigation encountered in our normal course of business. Webelieve that the ultimate outcome of these proceedings will not have amaterial adverse effect on our business, consolidated financialcondition, results of operations or cash flows.

Item4.    Submission of Matters to a Vote of Security Holders

Atour Annual Meeting of Stockholders on May 25, 2005, the followingdirectors were nominated and elected by the votes indicated:

|                  |  |          |            |                |  |        |           |        |  |  |
|------------------|--|----------|------------|----------------|--|--------|-----------|--------|--|--|
|             |  | VotesFor |            | Votes Withheld |
| Elias Typaldos   |  |     | 24,160,529 |           |  |   | 925,825   |   |
| William P.Lyons  |  |     | 23,614,989 |           |  |   | 1,471,365 |   |
| Gennaro Vendome  |  |     | 24,215,209 |           |  |   | 871,145   |   |
| Daniel H. Burch  |  |     | 24,249,238 |           |  |   | 837,116   |   |
| RobertMigliorino |  |     | 21,969,750 |           |  |   | 3,116,604 |   |
| William E. Vogel |  |     | 24,195,138 |           |  |   | 891,216   |   |
| Edwin T. Brondo  |  |     | 24,090,352 |           |  |   | 996,002   |   |
| AllanWeingarten  |  |     | 24,248,338 |           |  |   | 838,016   |   |
|                  |

Inaddition, the stockholders ratified the appointment of KPMG LLP as theCompany's independent auditors for 2005 by the followingvote:

|            |  |               |         |             |  |        |        |        |  |  |
|------------|--|---------------|---------|-------------|--|--------|--------|--------|--|--|
| VotesFor   |  | Votes Against |         | Abstentions |
| 24,664,147 |  |          | 392,008 |        |  |   | 30,199 |   |
|            |

The stockholders alsoapproved the 2005 Stock Option Plan by the following vote:

|            |  |               |           |             |  |                 |        |        |  |        |            |        |  |  |
|------------|--|---------------|-----------|-------------|--|-----------------|--------|--------|--|--------|------------|--------|--|--|
| VotesFor   |  | Votes Against |           | Abstentions |  | BrokerNon-votes |
| 10,694,317 |  |          | 2,978,344 |        |  |            | 56,093 |   |  |   | 11,357,600 |   |
|            |

Item 6.    Exhibits

|              |  |                                                                 |  |  |  |  |
|--------------|--|-----------------------------------------------------------------|--|--|--|--|
| Exhibit31.1  |  | Rule 13a-14(a)/15d-14(a) Certifications – WilliamP. Lyons |
| Exhibit 31.2 |  | Rule13a-14(a)/15d-14(a) Certifications – Joseph Dwyer     |
| Exhibit 32   |  | Officer Certifications under 18 USC1350                         |
|              |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

|  | AXS-ONE INC. |
|--|--------------|

|                                                |  |        |        |        |  |                                                                                                                                 |  |  |  |  |
|------------------------------------------------|--|--------|--------|--------|--|---------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| **Date:**    August12,2005 |  |   | By:    |   |  | /s/William P. Lyons                                                                                                             |
|                                           |  |   |   |   |  | William P.LyonsChief Executive Officer andChairman of theBoard                                                                  |
|                                           |  |   | By:    |   |  | /s/ JosephDwyer                                                                                                                 |
|                                           |  |   |   |   |  | JosephDwyerExecutive Vice President,Chief Financial Officer andTreasurer(Duly Authorized Officer andPrincipal FinancialOfficer) |
|                                                |

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