**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIESEXCHANGE ACT OF 1934**

 
| **For the  quarterly period ended March 31, 2005** | ** ** | **Commission  File Number** | ** ** | **1-13591** |
|---------------------------------------------------------|------------|-----------------------------|------------|-------------|

 

**AXS-ONE INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     | ** ** | **13-2966911**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
| ** **                                                       | ** ** | ** **                            |
| **301  Route 17 North**                                          | ** ** | ** **                            |
| **Rutherford,  New Jersey**                                      | ** ** | **07070**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

**(201) 935-3400**

(Registrant’s telephone number,including area code)

 

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

 
|   | YES |   | ý |   | NO | o |   |
|--------|-----|--------|--------|--------|----|---|--------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
|   | YES |   | o |   | NO | ý |   |
|--------|-----|--------|---|--------|----|--------|--------|

 

Number of shares outstanding ofthe issuer’s common stock as of May 5, 2005

 
| **Class**                                | ** ** | **Number of Shares Outstanding** |
|------------------------------------------|------------|----------------------------------|
| Common  Stock, par value $0.01 per share |       | 29,495,116                       |

 

 

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**AXS-ONEINC.**

 

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION** | ** **                                                                                                           |
|------------------|---------------------------|----------------------------------------------------------------------------------------------------------------------|
| ** **       | ** **                | ** **                                                                                                           |
|             | Item 1.                   | Financial Statements                                                                                                 |   |
|             |                      |                                                                                                                 |   |
|             |                      | Consolidated Balance Sheets  March 31, 2005 (unaudited) and December 31, 2004                              |   |
|             |                      | Consolidated Statements of Operations  (unaudited)  Three months ended March 31, 2005 and 2004                  |   |
|             |                      | Consolidated Statements of Comprehensive  Income (Loss) (unaudited)  Three months ended March 31, 2005 and 2004 |   |
|             |                      | Consolidated Statements of Cash Flows  (unaudited)  Three months ended March 31, 2005 and 2004                  |   |
|             |                      | Notes to Consolidated Interim Financial  Statements (unaudited)                                                      |   |
|             |                      |                                                                                                                 |   |
|             | Item 2.                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                          |   |
|             |                      |                                                                                                                 |   |
|             | Item 3.                   | Quantitative and Qualitative Disclosures  About Market Risk                                                          |   |
|             |                      |                                                                                                                 |   |
|             | Item 4.                   | Controls and Procedures                                                                                              |   |
|             |                      |                                                                                                                 |   |
| **PART II** | **OTHER INFORMATION**     | ** **                                                                                                           |
|             |                      |                                                                                                                 |   |
|             | Item 1.                   | Legal Proceedings                                                                                                    |   |
|             |                      |                                                                                                                 |   |
|             | Item 6.                   | Exhibits                                                                                                             |   |
|             |                      |                                                                                                                 |   |
| **SIGNATURES**   | ** **                |
|             |                      |                                                                                                                 |   |
|             | Signatures                |                                                                                                                 |

 

2

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except per sharedata)**

 
| ** **                                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                 |       |               |       |                  |       |
| Current  assets:                                                                                                                                                           |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                 |       | $                  | 3,137      |                  | $          | 4,809 |   |
| Restricted  cash                                                                                                                                                           |       | 57                 |       | 62                    |       |
| Accounts  receivable, net of allowance for doubtful accounts of $566 and $577 at March 31,  2005 and December 31, 2004, respectively                             |       | 5,633              |       | 6,084                 |       |
| Due from  joint venture                                                                                                                                                    |       | 75                 |       | 68                    |       |
| Prepaid  expenses and other current assets                                                                                                                                 |       | 943                |       | 1,221                 |       |
| Total  current assets                                                                                                                                                      |       | 9,845              |       | 12,244                |       |
| Equipment  and leasehold improvements, at cost:                                                                                                                            |       |               |       |                  |       |
| Computer and  office equipment                                                                                                                                             |       | 11,626             |       | 11,606                |       |
| Furniture  and fixtures                                                                                                                                                    |       | 941                |       | 943                   |       |
| Leasehold  improvements                                                                                                                                                    |       | 867                |       | 865                   |       |
|                                                                                                                                                                       |       | 13,434             |       | 13,414                |       |
| Less-accumulated  depreciation and amortization                                                                                                                            |       | 12,948             |       | 12,905                |       |
|                                                                                                                                                                       |       | 486                |       | 509                   |       |
| Capitalized  software development costs, net of accumulated amortization of $10,609 and  $10,409 at March 31, 2005 and December 31, 2004, respectively           |       | 1,704              |       | 1,886                 |       |
| Other assets                                                                                                                                                               |       | 113                |       | 142                   |       |
|                                                                                                                                                                       |       | $                  | 12,148     |                  | $          | 14,781 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                      |       |               |       |                  |       |
| Accounts  payable                                                                                                                                                          |       | $                  | 1,493      |                  | $          | 1,901 |   |
| Accrued  expenses                                                                                                                                                          |       | 3,074              |       | 3,786                 |       |
| Due to joint  venture                                                                                                                                                      |       | —             |       | 29                    |       |
| Deferred  revenue                                                                                                                                                          |       | 10,641             |       | 9,786                 |       |
| Total  current liabilities                                                                                                                                                 |       | 15,208             |       | 15,502                |       |
| Long-term  liabilities:                                                                                                                                                    |       |               |       |                  |       |
| Long-term  deferred revenue                                                                                                                                                |       | 157                |       | 303                   |       |
| Commitments  and contingencies Stockholders’ deficit:                                                                                                                 |       |               |       |                  |       |
| Preferred  stock, $.01 par value, authorized 5,000 shares, no shares issued and  outstanding                                                                               |       | —             |       | —                |       |
| Common  stock, $.01 par value, authorized 50,000 shares; 29,375 and 28,341 shares  issued and outstanding at March 31, 2005 and December 31, 2004,  respectively |       | 294                |       | 283                   |       |
| Additional  paid-in capital                                                                                                                                                |       | 81,025             |       | 80,339                |       |
| Accumulated  deficit                                                                                                                                                       |       | (84,834            | )          | (81,665               | )          |
| Accumulated  other comprehensive income                                                                                                                                    |       | 115                |       | 19                    |       |
| Unamortized  stock compensation                                                                                                                                            |       | 183                |       | —                |       |
| Total  stockholders’ deficit                                                                                                                                          |       | (3,217             | )          | (1,024                | )          |
|                                                                                                                                                                       |       | $                  | 12,148     |                  | $          | 14,781 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except per sharedata)

(Unaudited)

 
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenues:                                             |       |                                  |       |   |   |
| License fees                                          |       | $                                     | 1,022      |   | $ | 2,460 |   |
| Services                                              |       | 7,016                                 |       | 8,411 |   |
| Other-related  parties                                |       | 20                                    |       | 51 |   |
| Total  revenues                                       |       | 8,058                                 |       | 10,922 |   |
|                                                  |       |                                  |       |   |   |
| Operating  expenses:                                  |       |                                  |       |   |   |
| Cost of  license fees                                 |       | 364                                   |       | 411 |   |
| Cost of  services                                     |       | 4,659                                 |       | 4,269 |   |
| Sales and  marketing                                  |       | 2,588                                 |       | 1,970 |   |
| Research and  development                             |       | 2,101                                 |       | 1,899 |   |
| General and  administrative                           |       | 1,348                                 |       | 1,567 |   |
| Total operating  expenses                             |       | 11,060                                |       | 10,116 |   |
| Operating  income (loss)                              |       | (3,002                                | )          | 806 |   |
| Other income  (expense):                              |       |                                  |       |   |   |
| Interest  income                                      |       | 30                                    |       | 25 |   |
| Interest  expense                                     |       | —                                |       | (12 | ) |
| Equity in  losses of joint venture                    |       | (24                                   | )          | (33 | ) |
| Other  expense, net                                   |       | (173                                  | )          | (33 | ) |
| Other  expense, net                                   |       | (167                                  | )          | (53 | ) |
| Net income  (loss)                                    |       | $                                     | (3,169     | ) | $ | 753 |   |
|                                                  |       |                                  |       |   |   |
| Basic and  diluted net income (loss) per common share |       | $                                     | (0.11      | ) | $ | 0.03 |   |
|                                                  |       |                                  |       |   |   |
| Weighted  average basic common shares outstanding     |       | 28,576                                |       | 25,250 |   |
|                                                  |       |                                  |       |   |   |
| Weighted  average diluted common shares outstanding   |       | 28,576                                |       | 28,782 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

(Inthousands)

(Unaudited)

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31,**     | ** ** |
| ** **                               | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                     |       |                   |       |   |   |
| Net income  (loss)                       |       | $                      | (3,169     | ) | $ | 753 |   |
| Foreign  currency translation adjustment |       | 96                     |       | (80 | ) |
| Comprehensive  income (loss)             |       | $                      | (3,073     | ) | $ | 673 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**AXS-ONE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Inthousands)

(Unaudited)

 
| ** **                                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Cash flows  from operating activities:                                                                     |       |                                  |       |   |   |
| Net income  (loss)                                                                                         |       | $                                     | (3,169     | ) | $ | 753 |   |
| Adjustments  to reconcile net income (loss) to net cash flows provided by (used in)  operating activities: |       |                                  |       |   |   |
| Depreciation  and amortization                                                                             |       | 273                                   |       | 333 |   |
| Net  provision for (recovery of) doubtful accounts                                                         |       | 23                                    |       | (19 | ) |
| Equity in  losses of joint venture                                                                         |       | 24                                    |       | 33 |   |
| Consulting  services received (provided) in lieu of payment on accounts receivable, net                    |       | (14                                   | )          | 8 |   |
| Restricted  stock expense                                                                                  |       | 10                                    |       | — |   |
| Changes in  current assets and liabilities:                                                                |       |                                  |       |   |   |
| Restricted  cash                                                                                           |       | 4                                     |       | — |   |
| Accounts  receivable                                                                                       |       | 392                                   |       | (1,451 | ) |
| Due from  joint venture                                                                                    |       | (65                                   | )          | (6 | ) |
| Prepaid  expenses and other current assets                                                                 |       | 258                                   |       | (125 | ) |
| Accounts  payable and accrued expenses                                                                     |       | (1,075                                | )          | 47 |   |
| Deferred  revenue                                                                                          |       | 774                                   |       | 1,996 |   |
|                                                                                                       |       |                                  |       |   |   |
| Net cash  flows provided by (used in) operating activities                                                 |       | (2,565                                | )          | 1,569 |   |
|                                                                                                       |       |                                  |       |   |   |
| Cash flows  from investing activities:                                                                     |       |                                  |       |   |   |
| Change in  other assets                                                                                    |       | 27                                    |       | 20 |   |
| Loan to  joint venture                                                                                     |       | —                                |       | (6 | ) |
| Capitalized  software development costs                                                                    |       | (18                                   | )          | (334 | ) |
| Purchase of  equipment and leasehold improvements                                                          |       | (56                                   | )          | (116 | ) |
| Net cash  flows used in investing activities                                                               |       | (47                                   | )          | (436 | ) |
|                                                                                                       |       |                                  |       |   |   |
| Cash flows  from financing activities:                                                                     |       |                                  |       |   |   |
| Proceeds  from exercise of stock options and warrants                                                      |       | 870                                   |       | 264 |   |
| Payments of  long-term debt                                                                                |       | —                                |       | (547 | ) |
| Net cash  flows provided by (used in) financing activities                                                 |       | 870                                   |       | (283 | ) |
| Foreign  currency exchange rate effects on cash and cash equivalents                                       |       | 70                                    |       | (86 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                      |       | (1,672                                | )          | 764 |   |
| Cash and  cash equivalents, beginning of period                                                            |       | 4,809                                 |       | 2,946 |   |
| Cash and  cash equivalents, end of period                                                                  |       | $                                     | 3,137      |   | $ | 3,710 |   |
|                                                                                                       |       |                                  |       |   |   |
| Supplemental  disclosures of cash flow information:                                                        |       |                                  |       |   |   |
| Cash paid during  the period for—                                                                     |       |                                  |       |   |   |
| Interest                                                                                                   |       | $                                     | —     |   | $ | 17 |   |
| Income taxes                                                                                               |       | $                                     | —     |   | $ | 12 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**AXS-ONE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Inthousands, except per share data)**

**(Unaudited)**

 

**(1) OPERATIONS, BUSINESS CONDITIONS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

The Company designs,markets and supports records compliance management solutions that includedigital archiving, business process management, electronic document deliveryand integrated records disposition and discovery for e-mail, instant messaging,images, SAP and other corporate records, as well as financial managementapplications for global 2000 businesses, and scheduling and time and expensesolutions for professional services organizations.  The Company also offers consulting,implementation, training, technical support and maintenance services in supportof its customers’ use of its software products.

 

(a) *Basis of Presentation*

 

The accompanying 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*”).  Allsignificant intercompany transactions and balances have been eliminated.

 

The Company has a 49%ownership in a joint venture in its South African operation.  The joint venture is considered to be avariable interest entity as defined in FASB Interpretation No. 46R, “Consolidationof Variable Interest Entities” (FIN 46R). However, the Company has determined that it is not the primarybeneficiary.  Accordingly, the Companyuses the equity method of accounting for the joint venture whereby investments,including loans to the joint venture, are stated at cost plus or minus theCompany’s equity in undistributed earnings or losses.

 

The UnauditedConsolidated Interim Financial Statements have been prepared by the Company inaccordance with U.S. generally accepted accounting principles and, in theopinion of management, contain all adjustments, consisting only of those of anormal recurring nature, necessary for a fair presentation of theseConsolidated Interim Financial Statements.

 

The preparation of Consolidated Interim Financial Statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the Consolidated Interim FinancialStatements and the reported amounts of revenues and expenses during the periodspresented.  Actual results could differfrom those estimates.  Some of thesignificant estimates involve allowance for doubtful accounts, recoverabilityof capitalized software development costs, accrued expenses, provision forincome taxes in foreign jurisdictions, assessment of contingencies, and proforma compensation expense pursuant to SFAS No. 123.

 

These Consolidated Interim Financial Statements should be read inconjunction with the consolidated financial statements and related notesincluded in the Company’s 2004 Annual Report on Form 10-K filed withthe Securities and Exchange Commission.

 

The results of operationsfor the three-month period ended March 31, 2005 are not necessarilyindicative of results to be expected for the full year 2005 or any futureperiods.

 

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(b) *Revenue Recognition*

 

The Company recognizes revenue in accordance with Statement of Position97-2, “Software Revenue Recognition” (“SOP 97-2”), and Statement ofPosition 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions.”  Revenue from non-cancelable softwarelicenses, through both direct and indirect channels, is recognized when thelicense agreement has been signed or the customer purchase order has beenreceived, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.  Revenuesfrom resellers are recorded using the sell-through method whereby the Companyrecognizes revenue when the software has been licensed to the end user and theabove revenue criteria have been met. For the majority of license sales the Company uses a signed licenseagreement as evidence of an arrangement. For maintenance fees, the Company uses a maintenance agreement as evidenceof the arrangement.  The Company uses aprofessional services agreement as evidence of an arrangement for training,custom programming and consulting revenues. Occasionally, where a master license or services agreement with acustomer already exists, the Company accepts the customer’s purchase order asevidence of an arrangement.  Director feerevenue from the joint venture is evidenced by a master agreement governing therelationship.

 

Revenues from transaction fees associated with a hosting arrangement,billable on a per transaction basis and included in services revenue on theUnaudited Consolidated Statements of Operations, are recognized based on theactual number of transactions processed during the period.

 

In multiple element arrangements, the Company defers thevendor-specific objective evidence of fair value (“VSOE”) related to theundelivered elements and recognizes revenue on the delivered elements using theresidual method.  The most commonlydeferred element is initial maintenance, which is recognized on a straight-linebasis over the initial maintenance term. The VSOE of maintenance is determined by using a consistent percentageof maintenance fee to license fee based on renewal rates.  Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement.  Maintenance contracts entitlethe customer to hot-line support and all unspecified product upgrades releasedduring the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related toa licensed software product.  Maintenancedoes not 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 through electronic means where thesoftware is made available through the Company’s secure FTP (File TransferProtocol) site.  The Company does notoffer any customers or resellers a right of return.

 

For software license and maintenance revenue, the Company assesseswhether the fee is fixed and determinable and whether or not collection isprobable.  The Company assesses whetherthe fee is fixed and determinable based on the payment terms associated withthe transaction.  If a significantportion of a fee is due after the Company’s normal payment terms, which are 30to 90 days from invoice date, the fee is not considered to be fixed anddeterminable.  In these cases, theCompany recognizes revenue as the fees become due.

 

The majority of theCompany’s training and consulting services are billed based on hourlyrates.  The Company generally recognizesrevenue as these services are performed when there is also evidence of anarrangement, the fee is fixed or determinable and collectibility is reasonablyassured.  However, when the

 

8

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Company enters into anarrangement that requires it to perform significant work either to alter theunderlying software or to build additional complex interfaces so that thesoftware performs as the customer requests, the Company recognizes the entirefee using the percentage of completion method of accounting.  This would apply to the Company’s customprogramming services which are generally contracted on a fixed fee basis.  Anticipated losses, if any, are charged tooperations in the period such losses are determined to be probable.

 

Revenues from joint ventures (included in Revenues:Other-Related Parties in the Unaudited Consolidated Statements of Operations)includes consulting revenue for the joint ventures’ use of the Company’s SouthAfrican subsidiary’s consultants and for director’s fees for the Company’ssubsidiary providing director services to the joint venture (2004 period only)in accordance with the joint venture agreement. 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 transaction historywith the customer and the credit-worthiness of the customer.  The Company does not request collateral fromits customers.  If the Company determinesthat collection of a fee is uncertain, it defers the fee and recognizes revenueat the time the uncertainty is eliminated, which is generally upon receipt ofcash.

 

In accordance with EITFIssue No. 01-14, “Income Statement Characterization of ReimbursementReceived for ‘Out of Pocket’ Expenses Incurred,” reimbursements received forout-of-pocket expenses incurred are classified as services revenue in theUnaudited Consolidated Statements of Operations.

 

(c) *Variable Interest Entity*

 

The Company adopted FIN46R as required on March 31, 2004. The Company’s 49% owned joint venture, African Solutions (Pty) Ltd (“AfricanSolutions”), is considered to be a variable interest entity as defined in FIN46R.  However, the Company has determinedthat the majority owner, African Legends Technology, absorbs the majority ofthe expected losses and therefore, African Legends Technology, is the primarybeneficiary.  Due to the fact that the Companyis not the primary beneficiary of African Solutions, the adoption of FIN 46Rdid not have an impact on the Company’s consolidated financial position orresults of operations.

 

African Solutions isacting as a non-exclusive authorized third party service provider to provideconsulting and implementation services, and as a non-exclusive representativein providing marketing and promotional services directly to the end users inregard to, among other things, AXS-One’s software products.  African Solutions conducts businessthroughout the African continent where its target markets are the FinancialSector and Government Departments.

 

As of March 31, 2005, AXS-One’s total exposure to loss as a resultof its involvement in African Solutions is $75, representing the Company’s netinvestment in African Solutions as of March 31, 2005.

 

Presented below is selected financial data for African Solutions as of March 31,2005 and for the three months ended March 31, 2005 and 2004.

 

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| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Total  revenues          |       | $                                      | 273        |   | $ | 333 |   |
| Operating  income (loss) |       | $                                      | 5          |   | $ | (27 | ) |

 

Total assets were $355 and $535as of March 31, 2005 and December 31, 2004, respectively.  Total stockholders’ deficit was ($1,648) and($1,765) as of March 31, 2005 and December 31, 2004, respectively.

 

(d) *Stock-Based Compensation*

 

FASB Statement No. 148,“Accounting for Stock Based Compensation-Transition and Disclosure, anAmendment of FASB Statement No. 123” (“SFAS 148”) provides alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based compensation. However, it allows an entity to continue to measure compensation costfor stock instruments granted to employees using the intrinsic-value method ofaccounting prescribed by Accounting Principles Board Opinion No. 25 (“APB25”), “Accounting for Stock Issued to Employees,” provided it discloses theeffect of SFAS 123, as amended by SFAS 148, in the footnotes to the financialstatements.  In December 2004, theFASB issued SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123R), whichreplaces SFAS 123 and supercedes APB Opinion No. 25.  SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options and restricted stock grants,to be recognized as a compensation cost based on their fair values.  The pro forma disclosures previouslypermitted under SFAS 123 no longer will be an alternative to financialstatement recognition.  The Company isrequired to adopt SFAS 123R no later than January 1, 2006.  Until that time, the Company has chosen tocontinue to account for stock-based compensation using the intrinsic-valuemethod.  Accordingly, no stock optionrelated compensation expense has been recognized in the consolidated statementsof operations, as all options granted had an exercise price equal to the marketvalue of the underlying stock on the date of grant.

 

On January 3, 2005, the Company issued 75 shares of restrictedstock to certain employees with a vesting term of five years subject toacceleration in accordance with the grant stipulations.  The fair value of the restricted stock awardson the date of grant was $193 which was charged to stockholder’s deficit and isbeing amortized over the vesting period of the grants subject to accelerationshould the vesting period be accelerated. For the quarter ended March 31, 2005, the Company had recognized$10 as compensation expense leaving a net balance of deferred compensation of$183 as of March 31, 2005.

 

Had the Company, however,elected to recognize compensation cost based on fair value method at the dateof grant under SFAS 123, as amended by SFAS 148, such costs would have beenrecognized ratably over the vesting period of the underlying instruments andthe Company’s net income (loss) and net income (loss) per common share wouldhave changed to the pro forma amounts indicated in the table below.

 

10

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| ** **                                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                                                      |       |                                   |       |   |   |
| Net income  (loss) as reported                                                                            |       | $                                      | (3,169     | ) | $ | 753 |   |
| Add:  Restricted stock expense                                                                            |       | 10                                     |       | — |   |
| Deduct:  Total stock based employee compensation determined under fair value based  method for all awards |       | 469                                    |       | 180 |   |
| Pro forma  net income (loss)                                                                              |       | $                                      | (3,628     | ) | $ | 573 |   |
|                                                                                                      |       |                                   |       |   |   |
| Net income  (loss) per common share:                                                                      |       |                                   |       |   |   |
| Basic - as  reported                                                                                      |       | $                                      | (0.11      | ) | $ | 0.03 |   |
| Basic - pro  forma                                                                                        |       | (0.13                                  | )          | 0.02 |   |
|                                                                                                      |       |                                   |       |   |   |
| Diluted- as  reported                                                                                     |       | $                                      | (0.11      | ) | $ | 0.03 |   |
| Diluted -  pro forma                                                                                      |       | (0.13                                  | )          | 0.02 |   |

 

The Company has used the Black-Scholes option-pricing model incalculating the fair value of options granted. The assumptions used and the weighted average information for the threemonths ended March 31, 2005 and 2004 are as follows:

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**     | ** ** |
| ** **                                                                                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                                                   |       |                   |       |   |   |
| Risk-free interest  rate                                                                                               |       | 4.77                   | %          | 4.78 | % |
| Expected  dividend yield                                                                                               |       | —                 |       | — |   |
| Expected  lives                                                                                                        |       | 5 years                |       | 5 years |   |
| Expected  volatility                                                                                                   |       | 100                    | %          | 103 | % |
| Weighted-average  grant date fair value of options granted during the period                                           |       | $                      | 2.01       |   | $ | 2.08 |   |
| Weighted-average  remaining contractual life of options outstanding                                                    |       | 7.26 years             |       | 6.14 years |   |
| Weighted-average  exercise price of 3,240 and 3,911 options exercisable at March 31, 2005  and 2004, respectively |       | $                      | 1.86       |   | $ | 1.66 |   |

 

**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 the term loan at December 31, 2003 of $547was

 

11

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fully paid as of March 31,2004.  The Loan and Security Agreementterminated on May 28, 2004 in accordance with Amendment No. 15.

 

On August 11, 2004, the Company entered into a two-year Loan andSecurity Agreement (“Agreement”) which contains a revolving line of creditunder which the Company has available the lesser of $4 million or 80% ofeligible accounts, as defined.  Theavailable amount under the revolving line of credit at March 31, 2005 wasapproximately $2.1 million of which no amounts were outstanding.

 

Borrowings under the revolving line of credit bear interest at primerate plus one half of one percent (0.5%). The Agreement provides for a non-refundable commitment fee of $30 peryear and an unused revolving line facility fee of .25% per annum.  The unused revolving line facility fee can bereduced if the Company maintains cash in a non-interest bearing checkingaccount with the lender during the term of the agreement.  The Agreement is secured by substantially alldomestic assets of the Company and contains certain financial restrictivecovenants based on adjusted quick ratio, as defined, and earnings beforeinterest, taxes and depreciation and amortization (EBITDA).

 

On January 27, 2005, the Company amended the Agreement (First LoanModification) to revise the financial covenant based on EBITDA for the sixmonths ended December 31, 2004.  TheCompany was in compliance with this revised covenant and all other covenants asof December 31, 2004.

 

On March 28, 2005, the Company further amended the Agreement(Second Loan Modification) in order to set the EBITDA and adjusted quick ratioquarterly covenants for 2005.  TheCompany was in compliance with these covenants as of March 31, 2005.

 

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

 

Basic and diluted net income (loss) per common share is presented inaccordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).

 

Basic net income (loss) per common share is based on the weightedaverage number of shares of common stock outstanding during the period.  Diluted net income (loss) per common sharefor the three months ended March 31, 2005 and 2004 does not include theeffects of outstanding options to purchase 6,888 and 654 shares of commonstock, respectively, and outstanding warrants to purchase 516 and zero sharesof common stock, respectively, as the effect of their inclusion isanti-dilutive for the periods.

 

The following represents the calculations of the basic and diluted netincome (loss) per common share for the three months ended March 31, 2005and 2004:

 

12

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| ** **                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                    |       |                                  |       |   |   |
| Net income  (loss).                                                     |       | $                                     | (3,169     | ) | $ | 753 |   |
|                                                                    |       |                                  |       |   |   |
| Weighted  average basic common shares outstanding during the periods    |       | 28,576                                |       | 25,250 |   |
|                                                                    |       |                                  |       |   |   |
| Dilutive  effect of stock options and warrants                          |       | —                                |       | 3,532 |   |
|                                                                    |       |                                  |       |   |   |
| Weighted  average diluted common shares outstanding during the periods. |       | 28,576                                |       | 28,782 |   |
|                                                                    |       |                                  |       |   |   |
| Basic net  income (loss) per common share.                              |       | $                                     | (0.11      | ) | $ | 0.03 |   |
|                                                                    |       |                                  |       |   |   |
| Diluted net  income (loss) per common share                             |       | $                                     | (0.11      | ) | $ | 0.03 |   |
|                                                                         |            |                                       |            |  |  |  |  |  |  |

 

**(4) OPERATING SEGMENTS**

 

The Company has two productlines that it offers to specific markets as part of its strategy to focus onmarket opportunities.  The two productlines are as follows:

 

a)              AXS-OneEnterprise Solutions provide an integrated suite of internet-enabled financialmanagement and accounting applications to global 2000 organizations, enablingthem to achieve process transparency while maintaining secure access requiredto meet reporting, control and governance requirements.  AXS-One has an extensive installed customerbase for its core financial management products as well as for its Time andBilling components, a full suite of business solutions and services optimizedto address the requirements of organizations that primarily sell professionals’time.

 

b)             AXS-OneRecords Compliance Platform Solutions enable organizations to utilize documentsand data generated by their corporate applications as an asset while reducingcorporate risk and operational overheads and addressing requirements forcorporate governance, legal discovery and industry regulations associated withhow corporate records are managed and retained. Utilizing the AXS-One Compliance Platform Solutions, organizations cancapture, archive, manage, search, supervise, integrate, share and audit theirelectronic records, regardless of originating platform.  Disparate document and data types can bemanaged including e-mail, instant messages, images, voice and video, officedocuments, ERP-generated data such as SAP, and electronic print reportsgenerated by host systems.  AXS-OneCompliance Platform solutions target large information-centric organizationsthat can utilize self-service information systems to reduce costs, increaseefficiency, improve communications with their customers and improve access tobusiness intelligence.

 

The Company evaluates the performance of itstwo product lines based on revenues and operating income.  Summarized financial information concerningthe Company’s reportable segments is shown in the following table.  The Chief Executive Officer uses theinformation below in this format while making decisions about allocatingresources to each product line and assessing its performance.

 

13

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| ** **                                       | ** ** | **AXS-One**    | ** ** | **Compliance** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                       | ** ** | **Enterprise** | ** ** | **Platform**   | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Solutions**  | ** ** | **Solutions**  | ** ** | **Total**  | ** ** |
|                                             |       |           |       |           |       |       |       |
| **Three  Months Ended March 31, 2005**      |       |           |       |           |       |       |       |
| Revenues:                                        |       |           |       |           |       |       |       |
| License fees                                     |       | $              | 495        |           | $          | 527        |       | $ | 1,022 |   |
| Services                                         |       | 5,064          |       | 1,952          |       | 7,016      |       |
| Total  revenues, excluding related party revenue |       | 5,559          |       | 2,479          |       | 8,038      |       |
| Operating  income (loss)                         |       | 1,871          |       | (2,985         | )          | (1,114     | )          |
| Total assets                                     |       | 8,813          |       | 3,335          |       | 12,148     |       |
| Capital  expenditures                            |       | 50             |       | 6              |       | 56         |       |
| Depreciation  and amortization                   |       | 175            |       | 98             |       | 273        |       |
|                                             |       |           |       |           |       |       |       |
| **Three  Months Ended March 31, 2004**      |       |           |       |           |       |       |       |
| Revenues:                                        |       |           |       |           |       |       |       |
| License fees                                     |       | $              | 640        |           | $          | 1,820      |       | $ | 2,460 |   |
| Services                                         |       | 7,213          |       | 1,198          |       | 8,411      |       |
| Total  revenues, excluding related party revenue |       | 7,853          |       | 3,018          |       | 10,871     |       |
| Operating  income                                |       | 1,080          |       | 1,499          |       | 2,579      |       |
| Total assets                                     |       | 12,347         |       | 2,340          |       | 14,687     |       |
| Capital  expenditures                            |       | 104            |       | 12             |       | 116        |       |
| Depreciation  and amortization                   |       | 327            |       | 6              |       | 333        |       |

 

Reconciliation oftotal segment operating income (loss) to consolidated operating income (loss):

 
| ** **                                        | ** ** | **Three Months Ended**  | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|                                              |       |                    |       |   |   |
| Operating  income (loss) from reportable segments |       | $                       | (1,114     | ) | $ | 2,579 |   |
| Unallocated  revenue, other-related parties       |       | 20                      |       | 51 |   |
| Unallocated  general and administrative expenses  |       | (1,348                  | )          | (1,552 | ) |
| Other  corporate unallocated expenses             |       | (560                    | )          | (272 | ) |
| Total  consolidated operating income (loss)       |       | $                       | (3,002     | ) | $ | 806 |   |

 

**(6) CONTINGENCIES**

 

Historically, the Company has been involved in disputes and/orlitigation encountered in its normal course of business.  The Company believes that the ultimateoutcome of these proceedings will not have a material adverse effect on theCompany’s business, consolidated financial condition, results of operations orcash flows.

 

**(7) PRIVATE PLACEMENT**

 

On April 5, 2004, the Company completed an offer and sale of 2,581shares of common stock for $3.10 per share in a private placement for totalconsideration of $8,000.  Upon closing,the Company received net proceeds of approximately $7,700.  The Company also issued, at the same time,warrants to purchase an aggregate of 258 shares of common stock at $3.98 pershare and warrants to purchase 258 shares of common stock at $4.50 pershare.  These warrants are exercisablefor a period of three years beginning

 

14

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April 5, 2004.  This privateplacement and issuance of warrants were made pursuant to the terms of a UnitSubscription Agreement, dated as of April 1, 2004, among the Company andseveral investors.

 

Issuanceof the common stock and warrants in the private placement was not registeredunder the Securities Act of 1933 (“the Act”) in reliance upon Section 4(2) ofthe Act based on the fact that the shares of common stock and the warrants wereissued to a small number of sophisticated investors who had extensive knowledgeof the Company at the time of the issuance.

 

On April 8,2004, the Company filed a Form 8-K with the SEC disclosing detailsof the private placement and issuance of warrants.  On May 4, 2004, the Company filed a Form S-3registration statement with the SEC covering the resale of the securitiesissued and securities issuable upon exercise of the warrants.  The Form S-3 registrationstatement, as amended, was declared effective by the SEC on September 28,2004.

 

**(8) RESTRUCTURING ANDOTHER COSTS**

 

On June 30, 2004, inorder to streamline and reorganize the Company to better meet its long-termgoals, the Company eliminated 25 positions in the United States and 11positions in its foreign operations.  TheCompany recorded a charge to operations in the second quarter totalingapproximately $0.8 million related to involuntary termination benefits to bepaid to the terminated employees.  Theseverance accrual was adjusted down by approximately $0.1 million in the thirdquarter mainly due to the re-assignment of two people previously scheduled fortermination.  All amounts related to thisrestructuring had been paid as of December 31, 2004.

 

In addition, in June 2004,the Company recognized an expense of approximately $0.3 million related to aretirement agreement with the Company’s former CEO.  The liability for the retirement agreement isincluded in accrued expenses on the accompanying December 31, 2004Consolidated Balance Sheet.  The Companypaid the retirement benefits in January 2005.

 

**(9) FINANCIAL INFORMATION BY GEOGRAPHIC AREA**

 

SFAS No. 131, “Disclosure about Segments of an Enterprise andRelated Information,” establishes standards for the way public businessenterprises report information about operating segments in annual financialstatements and requires that those enterprises report selected informationabout reporting segments in interim financial reports issued toshareholders.  It also establishesstandards for related disclosures about products and services, geographic areasand major customers.

 

Revenues and long-lived assets for the Company’s United States, UnitedKingdom, Australia and Southeast Asia and South Africa operations are asfollows:

 

15

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| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| **Revenues: (1)**             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                          |       |                                  |       |   |   |
| United  States                |       | $                                     | 5,395      |   | $ | 7,710 |   |
| United  Kingdom               |       | 1,188                                 |       | 1,187 |   |
| Australia  and Southeast Asia |       | 907                                   |       | 1,194 |   |
| South Africa                  |       | 568                                   |       | 831 |   |
| Total  Consolidated           |       | $                                     | 8,058      |   | $ | 10,922 |   |

 

----

(1) Revenuesare attributed to geographic area based on location of sales office

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Long Lived Assets:**        | ** ** | **2005**           | ** ** | **2004**              | ** ** |
|                          |       |               |       |                  |       |
| United  States                |       | $                  | 1,902      |                  | $          | 2,094 |   |
| United  Kingdom               |       | 86                 |       | 87                    |       |
| Australia  and Southeast Asia |       | 178                |       | 185                   |       |
| South Africa                  |       | 24                 |       | 29                    |       |
| Total  Consolidated           |       | $                  | 2,190      |                  | $          | 2,395 |   |

 

16

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition 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 by referencethereto.

 

This Reportcontains statements of a forward-looking nature within the meaning of the safeharbor provisions of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended, relating to future events or the future financial performance ofAXS-One.  Investors are cautioned thatsuch statements are only predictions and that actual events or results maydiffer materially.  In evaluating suchstatements, investors should specifically consider the various factorsidentified in this Report which could cause actual results to differ materiallyfrom those indicated by such forward-looking statements, including the mattersset forth in “Business—Risk Factors” in our 2004 Annual Report on Form 10-K.

 

**Executive Overview**

 

We are a leading provider of Records Compliance Management andFinancial Management software solutions designed to reduce the inherent risksassociated with retaining and managing corporate records as well as toefficiently manage complex business processes. We have implemented high-volume, interoperable, scalable and securebusiness solutions for global 2000 companies. Our Web Services-based technology has been critically acclaimed as bestof class.  Our Records ComplianceManagement solutions deliver an integrated platform providing contentmanagement-based solutions for disparate electronic record types.  This includes e-mail and instant messaging,SAP, electronic print report (Books and Records) archival and recordsmanagement, as well as supervision and legal discovery functionality forregulatory compliance and corporate governance, and for operationalefficiency.  See “Item 1.  Business” in our 2004 Annual Report on Form 10-K.

 

Our revenues are derived mainly from license fees from software licenseagreements entered into with our customers, including through resellers, forboth our products and, to a lesser degree, third party products resold by usand services revenues from software maintenance agreements, training,consulting services including installation and custom programming.  We also derive a small amount of revenue(less than 2% of total revenues in 2004) from hosting arrangements.

 

We are based inRutherford, New Jersey with 247 full-time employees as of March 31, 2005,in offices worldwide, including Australia, Singapore, South Africa, the UnitedKingdom and the United States.  Ourforeign offices generated approximately 36.7% and 36.4% of our total revenuesfor the three months ended March 31, 2005 and 2004, respectively.  We expect that such revenues will continue torepresent a significant percentage of our total revenues in the future.  Most of our international license fees andservices revenues are denominated in foreign currencies.  Fluctuations in the value of foreigncurrencies relative to the U.S. dollar in the future could result in fluctuationsin our revenue.

 

We have a 49% ownership in a joint venture in our South Africanoperation, AXS-One African Solutions (Pty) Ltd (“African Solutions”).  African Solutions sells and services oursuite of products.  We use the equitymethod of accounting for our investment whereby the investment, including loansto the joint venture, is stated at cost plus or minus our equity inundistributed earnings or losses.

 

We encounter competition for all of our products in all markets andcompete primarily based on the quality of our products, our price, our customerservice and our time to implement.  Thetiming of the release of new products is also important to our ability togenerate sales.  During the second halfof 2003, we launched our Records Compliance Management solution for e-mail andInstant Messaging Archival,

 

17

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Supervision, and Legal Discovery in response to new regulatoryrequirements for financial institutions in the United States as well as toaddress the need to reduce costs in the email management area.  Our Records Compliance Management software,including this new solution, accounted for approximately 67% of our totallicense fee revenues for the year ended December 31, 2004.  We have increased our research anddevelopment, sales and services teams in this area in order to meet the needsof this growing market and capitalize on this opportunity.  However, there is no assurance that theseefforts will achieve the desired results.

 

Our futureability to grow revenue will be directly affected by continued pricecompetition and our ability to sustain an increasingly higher maintenancerevenue base from which to grow.  Ourgrowth rate and total revenues depend significantly on future services forexisting customers as well as our ability to expand our customer base and torespond successfully to the pace of technological change.  If our maintenance renewal rate or pace ofnew customer acquisitions slows, our revenues and operating results would beadversely affected.

 

In order to expand our customer base, we have beenactively seeking partnerships with resellers to supplement our direct salesforce.  During the first quarter of 2005,these efforts resulted in our announcement of alliances with Sun Microsystemsand StorageTek.  We have signed a TechnologyDevelopment and License Agreement with Sun Microsystems.  Under the terms of the agreement, Sun willlicense the AXS-One Compliance Platform Solutions and integrate it as a keycomponent of the Sun Compliance and Content Management Solution.  The new solution, with the AXS-One CompliancePlatform, is intended to replace Sun’s current e-mail archiving solution,Infinite Mailbox. AXS-One and Sun are collaborating on developing additionalfeatures to ensure that the new offering seamlessly provides existing andfuture customers with a single, scalable framework that can archive and manageall electronic records, including e-mail, while addressing storage, compliance,and content management challenges.  TheSun Compliance and Content Management Solution is sold (including throughresellers), serviced and supported by Sun worldwide.  We also have joined StorageTek’s TekAlliancePartner Program as a result of completing certification and interoperabilitytesting of the AXS-One Compliance Platform (TM) with StorageTek offerings.  Mutual customers now have access to jointlysupported storage solutions to better meet their specific ILM and storageneeds.  Under the terms of the alliance,StorageTek will offer its customers a total information lifecycle managementsolution that provides an e-mail and document archive infrastructure.

 

We have experienced, and may in the future experience, significantfluctuations in our quarterly and annual revenues, results of operations andcash flows.  We believe that domestic andinternational operating results and cash flows will continue to fluctuatesignificantly in the future as a result of a variety of factors.  For a description of these factors that mayaffect our operating results, see “Business—Risk Factors” in our 2004 AnnualReport on Form 10-K.

 

In September 2004, we announced that the fourlargest UK-based tour operators (Thomas Cook, MyTravel, First Choice and TUI)had signed three year subscription agreements with AXS-One for our e-deliveryservice – based on the AXS-One Central archive – which has been endorsed by theCAA, the UK-based Civil Aviation Authority. The same month, we also signed a similar agreement with one of thelargest European ferry companies.  In March 2005,we completed extensive testing of this Travel Bill Presentment application andin April, we began to process live transactions that will generate recurringrevenue over the term of the agreements.

 

We continue to make progress growing our customer base for our e-mailarchival and electronic retention management-based solutions.  This includes both extending opportunitieswithin existing customers as well as securing new customers.

 

18

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On March 31, 2005, we announced the generalrelease of our Enterprise Financials Version 9.0 – Compliance Edition and havebegun to schedule upgrades at a number of our current customers.

 

**Results of Operations**

 

The followingtable sets forth for the periods indicated, certain operating data, and data asa percentage of total revenues:

 
| ** **                          | ** ** | **Three Months Ended**  | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| ** **                          | ** ** | ** **              | ** ** | **Data as a**           | ** ** | ** ** | ** ** | **Data as a** | ** ** |
| ** **                          | ** ** | **As**                  | ** ** | **percent of**          | ** ** | **As** | ** ** | **percent of** | ** ** |
| **(in thousands)**                  | ** ** | **Reported**            | ** ** | **revenue**             | ** ** | **Reported** | ** ** | **revenue** | ** ** |
| ** **                          | ** ** | **Unaudited**           | ** ** | **Unaudited**           | ** ** |
| Revenues:                           |       |                    |       |                    |       |   |   |   |   |
| License fees                        |       | $                       | 1,022      |                    | 12.7       | % | $ | 2,460 |   | 22.5 | % |
| Services                            |       | 7,016                   |       | 87.1                    |       | 8,411 |   | 77.0 |   |
| Other-related  parties              |       | 20                      |       | 0.2                     |       | 51 |   | 0.5 |   |
| Total  revenues                     |       | 8,058                   |       | 100.0                   |       | 10,922 |   | 100.0 |   |
|                                |       |                    |       |                    |       |   |   |   |   |
| Operating  expenses:                |       |                    |       |                    |       |   |   |   |   |
| Cost of license  fees               |       | 364                     |       | 4.5                     |       | 411 |   | 3.8 |   |
| Cost of  services                   |       | 4,659                   |       | 57.8                    |       | 4,269 |   | 39.1 |   |
| Sales and  marketing                |       | 2,588                   |       | 32.1                    |       | 1,970 |   | 18.0 |   |
| Research and  development           |       | 2,101                   |       | 26.1                    |       | 1,899 |   | 17.4 |   |
| General and  administrative         |       | 1,348                   |       | 16.7                    |       | 1,567 |   | 14.3 |   |
| Total  operating expenses           |       | 11,060                  |       | 137.2                   |       | 10,116 |   | 92.6 |   |
| Operating  income (loss)            |       | (3,002                  | )          | (37.2                   | )          | 806 |   | 7.4 |   |
| Other income  (expense):            |       |                    |       |                    |       |   |   |   |   |
| Equity in  losses of joint ventures |       | (24                     | )          | (0.3                    | )          | (33 | ) | (0.3 | ) |
| Other  expense, net                 |       | (143                    | )          | (1.8                    | )          | (20 | ) | (0.2 | ) |
| Other  expense, net                 |       | (167                    | )          | (2.1                    | )          | (53 | ) | (0.5 | ) |
| Net income  (loss)                  |       | $                       | (3,169     | )                       | (39.3      | )% | $ | 753 |   | 6.9 | % |

 

**Comparison of 2005 to 2004 First QuarterResults**

 

*Revenues*

 

Total revenues decreased$2.9 million or 26.2% for the three months ended March 31, 2005, ascompared to the three months ended March 31, 2004 due to decreases of58.5% and 16.6% in license fees and services revenues, respectively.  The decrease in license fees was mainlyattributable to a decrease of $1.1 million in our U.S. operations resultingfrom slower sales of our new Records Compliance Management Product to new andexisting customers and a longer sales cycle than expected with respect to anumber of potential customers.  There wasalso a $0.3 million license fee in the first quarter of 2004 from one customerin our South Africa operation and no similar contract in the 2005 period.

 

19

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The following table sets forth for the periodsindicated each major category of our services revenues as a percent of totalservices revenues:

 
| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **(in thousands)**      | ** ** | **Amount**                            | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| Maintenance             |       | $                                     | 4,129      |   | 58.8 | % | $ | 4,320 |   | 51.4 | % |
| Consulting              |       | 2,812                                 |       | 40.1 | % | 3,776 |   | 44.9 | % |
| Training                |       | 5                                     |       | 0.1 | % | 17 |   | 0.2 | % |
| Custom  programming     |       | 70                                    |       | 1.0 | % | 298 |   | 3.5 | % |
| Total  services revenue |       | $                                     | 7,016      |   | 100.0 | % | $ | 8,411 |   | 100.0 | % |

 

The decrease in servicesrevenues resulted mainly from a decrease of $1.0 million in consulting revenueas many customers, by the end of 2004, had completed upgrades to previouslyreleased supported versions of our enterprise financials product and the newestversion, version 9.0, was not released until March 31, 2005.  The majority of our consulting revenue hashistorically been generated from implementations and upgrades of our enterprisefinancial customers.  We expect that aswe grow our customer base from new licenses of our records compliancemanagement software, we will generate a higher level of consulting revenuesfrom these products.  Maintenance revenuewas lower by $0.2 million in 2005 compared to 2004 mainly due to recognition ofamounts in 2004 that had been deferred from prior periods in the U.S. operationbecause of their past due payment status. There were also customer cancellations of maintenance contracts at theend of 2004 in the U.K. operation which impacted the first quarter of2005.  There was a $0.2 million decreasein custom programming 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.

 

The following table sets forth the breakdown of other-related partyrevenue:

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**           | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Directors’  fee revenue |       | $                                     | —     |   | $ | 9 |   |
| Consulting  revenue          |       | 20                                    |       | 42 |   |
| Total  revenues              |       | $                                     | 20         |   | $ | 51 |   |

 

Other-Related Partyrevenues include directors’ fee revenue and consulting revenue from AfricanSolutions.  The decrease in directors’fee revenue for the three months ended March 31, 2005 as compared to thesame period in 2004 resulted from our decision in the fourth quarter of 2004 totemporarily stop charging directors’ fees until African Solutions becomesprofitable.  The decrease in consultingrevenue resulted from decreased use of consultants by African Solutions,choosing instead to utilize their own internal staff.

 

For both periods, we hada concentration of total revenues with one customer.  Total revenues included $0.9 million or 11.3%and $1.9 million or 17.6% of total revenues from one customer for the threemonths ended March 31, 2005 and 2004, respectively.

 

*Expenses*

 

Cost of license fees consist primarily of amortization of capitalizedsoftware development costs and amounts paid to third parties with respect toproducts we resell in conjunction with the licensing of our

 

20

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products.  The elements can varysubstantially from period to period as a percentage of license fees.  Cost of license fees decreased $47,000 or11.4% for the three months ended March 31, 2005 as compared to the sameperiod in 2004.  A $65,000 decrease inamortization of capitalized software costs as a result of certain costsbecoming fully amortized in 2004 was partially offset by an $18,000 increase inthird party royalties for third party software used in conjunction with oursoftware (includes both embedded software and separately sold modules).

 

Cost of services consists primarily of personnel and third party costsfor product quality assurance, training, installation, consulting and customersupport.  Cost of services increased $0.4million or 9.1% for the three months ended March 31, 2005 as compared tothe three months ended March 31, 2004. The increase is primarily due to an increase of $152,000 in outsideconsulting expense due to the use of outside consultants to supplement ourinternal employees on a large project in our South African operation.  The increase is also the result of anincrease of approximately $0.3 million in expenses related to a U.K. servicescontract that were deferred in 2004 and recognized in 2005 when the work wassubstantially completed and the related revenue was recognized.

 

Sales and marketing expenses consist primarily of salaries, commissionand bonuses related to sales and marketing personnel, as well as travel andpromotional expenses.  Sales andmarketing expenses increased $0.6 million or 31.4% for the three months ended March 31,2005 as compared to the three months ended March 31, 2004.  The increase is primarily a result of anincrease of $0.4 million in salaries and wages and related benefits due to newhires particularly in our U.S. and Singapore operations.  There were also increases of $0.1 million intravel and living expenses, $0.1 million in other employee related expenses,$53,000 in marketing programs expense and $41,000 in miscellaneous otherexpenses, partially offset by a decrease of $0.1 million in variablecompensation due to decreased license revenue.

 

Research and development expenses consist primarily of personnel costs,costs of equipment, facilities and third party software development costs.  Research and development expenses aregenerally charged to operations as incurred. However, certain software development costs are capitalized inaccordance with Statement of Financial Accounting Standards No. 86.  Such capitalized software development costsare generally amortized to cost of license fees on a straight-line basis overperiods not exceeding three years.

 

Research and development expenses (net of capitalized softwaredevelopment costs) increased $0.2 million or 10.6% for the three months ended March 31,2005 as compared to the same period in 2004. The increase is primarily the result of a decrease in the amount ofcapitalized software development costs. We capitalized software development costs of $18,000 for the threemonths ended March 31, 2005 as compared to $0.3 million for the comparableprior year period which resulted in increased salary and wages expense for the2005 period.  This increase was partiallyoffset by a decrease in salaries and wages for the 2005 period due to lowerheadcount.  The rate of capitalization ofsoftware development costs may fluctuate depending on the mix and stage ofdevelopment of our product development and engineering projects.

 

General and administrativeexpenses consist primarily of salaries for administrative, executive andfinancial personnel, and outside professional fees.  General and administrative expenses decreased$0.2 million or 14.0% for the three months ended March 31, 2005, ascompared to the three months ended March 31, 2004.  The decrease is primarily the result ofdecreases of approximately $152,000 in recruiting expenses, $77,000 in otherpersonnel related expenses and $40,000 in facilities expense due to the releaseof a liability during the first quarter of 2005 at our Rutherford office.  The decrease was partially offset by anincrease of $73,000 in consulting expense primarily due to the use of anoutside consulting firm to assist with

 

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compliance withSarbanes-Oxley Section 404, related to Internal Control over FinancialReporting.  We expect that we willcontinue to have increased costs related to this process throughout 2005.

 

*OperatingIncome (Loss)*

 

Operating income (loss) decreased from income of $0.8 million for thethree months ended March 31, 2004 to a loss of ($3.0) million for thethree months ended March 31, 2005 due to the increase in operatingexpenses and decrease in total revenues.

 

*Other Expense,Net*

 

Other expense, net increased $114,000 for the three months ended March 31,2005 as compared to the three months ended March 31, 2004 as a result ofan increase in foreign currency exchange losses.

 

*Results ofOperations*

 

As a consequence of the above, net income(loss) decreased from net income of $0.8 million for the three months ended March 31,2004 to a net loss of ($3.2) million for the three months ended March 31,2005.

 

**Liquidity and Capital Resources**

 

On April 5, 2004, we completed a private placement of shares of commonstock that resulted in the receipt of net proceeds of approximately $7.7million.  Prior to that we had a Loan andSecurity Agreement (“Agreement”) that contained a revolving line of credit anda term loan.  The term loan was paid infull as of March 31, 2004, and no amounts remain outstanding.  The Agreement terminated on May 28, 2004as per the Amendment 15.  On August 11,2004, the Company entered into a new two-year Loan and Security Agreement whichcontains a revolving line of credit under which the Company has available thelesser of $4 million or 80% of eligible accounts, as defined (See Note 2 to theConsolidated Interim Financial Statements). The available amount under the revolving line of credit at March 31,2005 was approximately $2.1 million of which no amounts were outstanding.

 

On January 27, 2005, we amended the Loan and Security Agreement(First Loan Modification) to revise the financial covenant based on EBITDA forthe six months ended December 31, 2004. We were in compliance with this revised covenant and all other covenantsas of December 31, 2004.

 

On March 28, 2005, we further amended the Agreement (Second LoanModification) in order to set the EBITDA and adjusted quick ratio covenants for2005.  We were in compliance with allfinancial covenants as of March 31, 2005.

 

Our operating activities provided (used) cash of ($2.6) million and$1.6 million for the three months ended March 31, 2005 and 2004,respectively.  Net cash used inoperations during the three months ended March 31, 2005 is primarily theresult of the net loss and a decrease in accounts payable and accruedexpenses.  This was partially offset by adecrease in accounts receivable due to collection of amounts due and anincrease in deferred revenue due to annual maintenance contract renewals.

 

Net cash provided by operating activities during the three months endedMarch 31, 2004 was primarily the result of the net income, non-cashdepreciation and amortization and an increase in deferred revenue partiallyoffset by an increase in accounts receivable. The increase in deferred revenue was mainly the result of new agreementsexecuted in the first quarter as well as annual maintenance renewal increases.

 

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The increase in accounts receivable was mainly the result of newlicense billings at the end of the quarter.

 

Our investing activities used cash of $47,000 and $0.4 million for thethree months ended March 31, 2005 and 2004, respectively.  The uses of cash for both periods wereprimarily for capitalized software development costs related to development ofnew products as well as significant enhancements to certain existing productsand for the purchase of computer equipment.

 

Cash provided (used) by financing activities was $0.9 million and($0.3) million for the three months ended March 31, 2005 and 2004,respectively.  Cash provided by financingactivities in the first quarter of 2005 resulted from the exercise of stockoptions during the period.  For the 2004 period,cash was primarily used to pay the remaining balance of the outstanding termloan.  This was partially offset byproceeds received from the exercise of stock options and warrants during theperiod.

 

We have no significant capital commitments.  Planned capital expenditures for the year2005 total approximately $0.5 million, including any software development coststhat may qualify for capitalization under SFAS 86.  Our aggregate minimum operating leasepayments for 2005 will be approximately $1.9 million.  We generated a net loss of ($5.2) million forthe year ended December 31, 2004 after generating net income of $2.3million and $1.9 million for the years ended December 31, 2003 and 2002,respectively.  For the year ended December 31,2004, we experienced a decline in revenue as our business has shifted to focusmore heavily on the records compliance management business.  Management’s initiatives over the last twoyears, including the restructuring in June of 2004 and the April 2004private placement of common stock, have been designed to improve operatingresults and liquidity and better position AXS-One to compete under currentmarket conditions.  As a result of theseefforts, we expect that our current cash balance, availability of borrowingcapacity under our bank line of credit and operating cash flow should besufficient to fund our working capital requirements through 2005.  However, we may in the future be required toseek new sources of financing or future accommodations from our existing lenderor other financial institutions, or we may seek equity infusions from privateinvestors.  We may also be required tofurther reduce operating costs in order to meet our obligations.  Our ability to fund our operations throughout2005 is heavily dependent on the growth of our revenues over 2004 and firstquarter 2005 levels.  Additionally, thereis a risk that cash held by our foreign subsidiaries may not be readilyavailable for use in our U.S. operations to pay our obligations as the transferof funds is sometimes delayed due to various foreign governmentrestrictions.  No assurance can be giventhat management’s initiatives will be successful or that any such additionalsources of financing, lender accommodations or equity infusions will beavailable.

 

**Segment Information**

 

For the three monthsended March 31, 2005, AXS-One Enterprise Solutions had license feerevenues of $0.5 million compared to $0.6 million for the comparable prior yearperiod; services revenue of $5.1 million compared to $7.2 million for thecomparable prior year period; and operating income of $1.9 million compared to$1.1 million for the comparable prior year period.  License fees were lower for the three monthsended March 31, 2005 due to less demand for additional users and Web basedadd-on products than in the prior year. Service revenues decreased due to less demand for consulting services inthe installed base as customers had already upgraded to the latest version ofour software and the new version was not made available until March 31,2005.  Operating income for the threemonths ended March 31, 2005 increased $0.8 million from the correspondingprior year period primarily as a result of a decrease in operating expenses asour focus has shifted to development, sales and marketing of our recordscompliance management solutions.

 

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Records CompliancePlatform Solutions had license fee revenues of $0.5 million for the threemonths ended March 31, 2005 compared to $1.8 million for the comparable prioryear period; service revenues of $2.0 million compared to $1.2 million for thecomparable prior year period; and an operating loss of $3.0 million compared tooperating income of $1.5 million for the comparable prior year period.  The decrease in license revenues wasprimarily the result of slower sales to new customers.  The increase in service revenues wasprimarily due to increased demand for consulting services to implement softwaresold in 2004.  The decrease in operatingincome (loss) from 2004 was mainly the result of the decrease in total revenuesand an increase in operating expenses incurred for the development and salesand marketing of this product line during the quarter.

 

**Critical Accounting Policies**

 

Our critical accounting policies are asfollows:

 

•                  Revenuerecognition and

 

•                  Capitalizedsoftware development costs.

 

## ***Revenue Recognition***

 

We derive our revenue primarily from two sources: (i) softwarelicenses and (ii) services and support revenue, which includes softwaremaintenance, hosting services, training, consulting and custom programmingrevenue.  We also derive a limited amountof consulting revenue and directors’ fees from the related party joint venturein South Africa (less than 1% of total revenue in 2004).  As described below, significant managementjudgments and estimates must be made and used in connection with the revenuerecognized in any accounting period. Material differences may result in the amount and timing of our revenuefor any period if our management made different judgments or utilized differentestimates.

 

We normally license our software products on a perpetual basis.  Each license agreement generally includes aprovision for initial post-contract support (maintenance).  For the majority of license sales we use asigned license agreement as evidence of an arrangement.  For maintenance fees, we use a maintenanceagreement as evidence of the arrangement. We use a professional services agreement as evidence of an arrangementfor our training, custom programming and consulting revenues.  Occasionally, where a master license orservices agreement with a customer already exists, we accept the customer’spurchase order as evidence of an arrangement. Director fee revenues from our joint venture are evidenced by a master agreementgoverning the relationship.

 

We recognize revenue in accordance with Statement of Position 97-2,“Software Revenue Recognition” (“SOP 97-2”), and Statement of Position 98-9,“Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.”  Revenue fromnon-cancelable software licenses is recognized when the license agreement hasbeen signed, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.  Revenuesfrom resellers are recorded using the sell through method whereby we recognizerevenue when the software has been licensed to the end user and the aboverevenue recognition criteria have been met. In multiple element arrangements, we defer the vendor-specific objectiveevidence of fair value (“VSOE”) related to the undelivered elements andrecognize revenue on the delivered elements using the residual method.  The most commonly deferred element is initialmaintenance, which is recognized on a straight-line basis over the initialmaintenance

 

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term.  The VSOE of maintenance isdetermined by using a consistent percentage of maintenance fee to license feebased on renewal rates.  Maintenance feesin subsequent years are recognized on a straight-line basis over the life ofthe applicable agreement.  Maintenancecontracts entitle the customer to hot-line support and all unspecified productupgrades released during the term of the maintenance contract.  Upgrades include any and all unspecifiedpatches or releases related to a licensed software product.  Maintenance does not include implementationservices to install these upgrades.

 

Delivery of softwaregenerally occurs when the product (on CDs) is delivered to a commoncarrier.  Occasionally, delivery occursthrough electronic means where the software is made available through oursecure FTP (File Transfer Protocol) site. The Company does not offer any customers or resellers a right of return.

 

For software license and maintenance revenue, weassess whether the fee is fixed and determinable and whether or not collectionis probable.  We assess whether the feeis fixed and determinable based on the payment terms associated with thetransaction.  If a significant portion ofa fee is due after our normal payment terms, which are 30 to 90 days frominvoice date, we account for the fee as not being fixed and determinable.  In these cases, we recognize revenue as thefees become due.

 

The majority of our training and consulting servicesare billed based on hourly rates.  Wegenerally recognize revenue as these services are performed.  However, when we enter into an arrangementthat requires 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 using thepercentage of completion method of accounting. This would apply to our custom programming services, which are generallycontracted on a fixed fee basis.  Anticipatedlosses, if any, are charged to operations in the period such losses aredetermined to be probable.

 

Revenues from transaction fees associated with a hosting arrangement,billable on a per transaction basis and included in services revenue on theUnaudited Consolidated Statements of Operations, are recognized based on theactual number of transactions processed during the period.

 

Revenues from joint ventures (included in Revenues:Other-Related Parties in our Consolidated Statements of Operations) includesconsulting revenue for the joint ventures’ use of our South African subsidiary’sconsultants and directors’ fees (2004 period only) in accordance with the jointventure agreement.  Revenue is recognizedupon performance of the services.

 

We assess assuredness of collection based on a numberof factors, including past transaction history with the customer and thecredit-worthiness of the customer.  We donot request collateral from our customers. If we determine that collection of a fee is not probable, we defer thefee and recognize revenue at the time collection becomes probable, which isgenerally upon receipt of cash.

 

Our arrangements do not generally include acceptanceclauses.  However, if an arrangementincludes an acceptance provision, acceptance occurs upon the earliest ofreceipt of a written customer acceptance, expiration of the acceptance periodor productive use of the software by the customer.

 

## ***Capitalized Software Development Costs***

## *** ***

Our policy is to capitalize certain software development costs inaccordance with Statement of Financial Accounting Standards No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” (“SFAS86”).  Under SFAS 86, costs incurred todevelop or significantly enhance computer software products are charged toresearch and development expense as incurred until

 

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technological feasibility has been established.  We establish technological feasibility uponcompletion of a working model or completion of a detailed program design.  Generally costs related to projects thatreach technological feasibility upon completion of a working model are notcapitalized as the time period between establishment of the working model andgeneral availability is of short duration. For projects that meet technological feasibility upon completion of adetailed program design, all research and development costs for that projectare capitalized from that point until the product is available for general releaseto customers.  The establishment oftechnological feasibility and the ongoing assessment of recoverability ofcapitalized software development costs require considerable judgment bymanagement with respect to certain external factors, including, but not limitedto, anticipated future revenues, estimated economic life and changes intechnology.  It is reasonably possiblethat estimates of anticipated future revenues, the remaining estimated economiclife of the products, or both will be reduced in the future due to competitivepressures.  As a result, the carryingamount of the capitalized software costs may be reduced through a charge tooperations in the near term.  Upon thegeneral release of the software product to customers, capitalization ceases andsuch costs are amortized (using the straight-line method) over the estimatedlife, which is generally three years.

 

**Recently Issued Accounting Standards**

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R),which replaces SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123R addresses the accountingfor transactions in which an enterprise receives employee services in exchangefor (a) equity instruments of the enterprise or (b) liabilities that arebased on the fair value of the enterprise’s equity instruments or that may besettled by the issuance of such equity instruments.  SFAS No. 123R requires all share-basedpayments to employees, including grants of employee stock options andrestrictive stock grants, to be recognized as a compensation cost based ontheir fair values.  The pro formadisclosures previously permitted under SFAS No. 123 no longer will be analternative to financial statement recognition. We are required to adopt SFAS No. 123R no later than January 1,2006.  Under SFAS No. 123R, we mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transitionmethod to be used at date of adoption. The transition methods includeprospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as ofthe beginning of the year of adoption or for all periods presented.  The prospective method requires that compensationexpense be recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS No. 123R, while theretroactive methods would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated.  We are evaluating the requirements of SFAS No. 123Rand expect that the adoption of SFAS No. 123R will have a material impacton our consolidated results of operations and earnings per share.

 

On December 16, 2004, the FASB issuedStatement No. 153, “Exchanges of Non-monetary Assets,” an amendment of APBOpinion No. 29.  Statement No. 153addresses the measurement of exchanges of non-monetary assets and redefines thescope of transactions that should be measured based on the fair value of theassets exchanged.  The Statement iseffective for non-monetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005.  Wedo not believe adoption of Statement No. 153 will have a material effect on ourconsolidated financial position, results of operations or cash flows.

 

On December 21, 2004, the FASB issuedFASB Staff Position No. FAS 109-2 (FAS 109-2), “Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004.”  TheAmerican Jobs Creation Act introduces a special one-time dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer(repatriation provision), provided certain criteria are met.  FAS 109-2 provides accounting anddisclosure guidance for the repatriation provision.  FAS 109-2 is effective immediately,though the Treasury Department or

 

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Congress is expected to provide additionalclarifying language on key elements of the repatriation provision.  The adoption of FAS 109-2 did not havea material effect on our consolidated financial position, results of operationsor cash flows as we do not currently have foreign earnings available forrepatriation.

 

**Item 3.****           Quantitative andQualitative Disclosures About Market Risk**

 

In the normalcourse of business, we are exposed to fluctuations in interest rates and equitymarket risks as we seek debt and equity capital to sustain our operations.  We are also exposed to fluctuations inforeign currency exchange rates as the financial results and financialconditions of our foreign subsidiaries are translated into U.S. dollars inconsolidation.  We do not use derivativeinstruments or hedging to manage our exposures and do not currently hold anymarket risk sensitive instruments for trading purposes.

 

**Certain Factors That May Affect FutureResults and Financial Condition and the Market Price of Securities**

 

See our 2004 Annual Report on Form 10K for a discussion of riskfactors.

 

**Item 4. Controls and Procedures**

 

***Evaluation of disclosure controls andprocedures***

 

Our chief executiveofficer and our chief financial officer, after evaluating the effectiveness ofour “disclosure controls and procedures” (as defined in the Securities ExchangeAct of 1934 Rule 13a-15(e)) as of March 31, 2005 (the “EvaluationDate”), have concluded that as of the Evaluation Date, our disclosure controlsand procedures were effective and designed to ensure that material informationrelating to us and our consolidated subsidiaries would be collected and madeknown to them by others within those entities as appropriate to allow timelydecisions regarding required disclosure of such information.

 

***Internal controls over financial reporting***

 

During the most recentfiscal quarter, there has not been any change in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**AXS-ONEINC.**

Part II

OtherInformation

 

**Item 1.****           Legal Proceedings**

 

Historically, we havebeen involved in disputes and/or litigation encountered in our normal course ofbusiness.  We believe that the ultimate outcomeof these proceedings will not have a material adverse effect on our business,consolidated financial condition, results of operations or cash flows.

 

**Item 6.****           Exhibits**

 
| Exhibit 31.1 |   | Rule 13a-14(a)/15d-14(a) Certifications  – William P. Lyons |
|-------------------|--------|----------------------------------------------------------------------------|
| Exhibit 31.2 |   | Rule 13a-14(a)/15d-14(a) Certifications  – Joseph Dwyer     |
| Exhibit 32   |   | Officer Certifications under 18 USC 1350                                   |

 

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**AXS-ONEINC.**

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                              | AXS-ONE INC. |
|-----------------------------------|--------------|
|                              |         |   |
|                              |         |   |
| **Date: **May 13,  2005 | By:          | /s/ William P. Lyons |   |
|                              |         | William P. Lyons  Chairman of the Board and  Chief Executive Officer |
|                              |         |   |
|                              |         |   |
|                              | By:          | /s/ Joseph Dwyer |   |
|                              |         | Joseph Dwyer  Executive Vice President,  Chief Financial Officer and Treasurer |
|                              |         | (Duly  Authorized Officer and  Principal Financial Officer) |
|                                   |              |  |  |  |

 

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