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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-Q

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

|                                                         |  |  |                                                                                                       |
|---------------------------------------------------------|--|--|-------------------------------------------------------------------------------------------------------|
| For the quarterly period ended March 31, 2007 |  |  | Commission File Number            1-13591 |
|                                                         |

AXS-ONE INC.(Exact name of registrant as specified in its charter)

|                                                                |  |  |                                      |
|----------------------------------------------------------------|--|--|--------------------------------------|
| Delaware                                                       |  |  | 13-2966911                           |
| (State or other jurisdiction of incorporation or organization) |  |  | (I.R.S. Employer Identification No.) |
| 301 Route 17 NorthRutherford, 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 be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES        NO    

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

    Large Accelerated Filer                    Accelerated Filer                    Non-Accelerated Filer    

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

YES        NO     Number of shares outstanding of the issuer’s common stock as of May 7, 2007

|                                         |  |  |                              |
|-----------------------------------------|--|--|------------------------------|
| Class                                   |  |  | Number of Shares Outstanding |
| Common Stock, par value $0.01 per share |  |  | 36,007,425                   |
|                                         |

    

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AXS-ONE INC.

INDEX

|            |  |  |                                                                                                                                                                                                                                                    |  |  |             |  |        |  |
|------------|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------|--|--------|--|
|       |  |  |                                                                                                                                                                                                                                               |  |  | Page Number |
| PART I     |  |  | FINANCIAL INFORMATION                                                                                                                                                                                                                              |  |  |             |  |   |  |
|       |  |  | Item 1.    Financial Statements                                                                                                                                                                                                |  |  |             |  |   |  |
|       |  |  | Consolidated Balance SheetsMarch 31, 2007 (unaudited) and December 31, 2006                                                                                                                                                    |  |  |             |  | 3      |  |
|       |  |  | Consolidated Statements of Operations (unaudited)Three months ended March 31, 2007 and 2006                                                                                                                                              |  |  |             |  | 4      |  |
|       |  |  | Consolidated Statements of Comprehensive Loss (unaudited) Three months ended March 31, 2007 and 2006                                                                                                                                     |  |  |             |  | 5      |  |
|       |  |  | Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 2007 and 2006                                                                                                                                             |  |  |             |  | 6      |  |
|       |  |  | Notes to Consolidated Interim Financial Statements                                                                                                                                                                                                 |  |  |             |  | 7      |  |
|       |  |  | Item 2.    Management’s Discussion and Analysis of Financial Condition and                     Results of Operations |  |  |             |  | 16     |  |
|       |  |  | Item 3.    Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                          |  |  |             |  | 23     |  |
|       |  |  | Item 4T.    Controls and Procedures                                                                                                                                                                                            |  |  |             |  | 23     |  |
| PART II    |  |  | OTHER INFORMATION                                                                                                                                                                                                                                  |  |  |             |  |   |  |
|       |  |  | Item 6.    Exhibits                                                                                                                                                                                                            |  |  |             |  | 25     |  |
| SIGNATURES |
|       |  |  | Signatures                                                                                                                                                                                                                                         |  |  |             |  | 26     |  |
|            |

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PART I.    FINANCIAL INFORMATION

|               |                      |
|---------------|----------------------|
| Item 1.  | Financial Statements |

AXS-ONE INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except per share data)

|                                                                                                                                                                                   |  |  |                |   |         |                   |  |        |  |   |         |         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|----------------|---|---------|-------------------|--|--------|--|---|---------|---------|
|                                                                                                                                                                              |  |  | March 31, 2007 |   |         | December 31, 2006 |
| ASSETS                                                                                                                                                                            |  |  | (unaudited)    |   |         |                   |  |   |  |
| Current assets:                                                                                                                                                                   |  |  |                |   |    |                   |  |        |  |   |    |         |
| Cash and cash equivalents                                                                                                                                                         |  |  |                | $ | 4,693   |                   |  |        |  | $ | 7,492   |         |
| Restricted cash                                                                                                                                                                   |  |  |                |   | 7       |                   |  |        |  |   | 7       |         |
| Accounts receivable, net of allowance for doubtful accounts of$90 and $83 at March 31, 2007 and December 31, 2006, respectively                               |  |  |                |   | 2,596   |                   |  |        |  |   | 2,258   |         |
| Prepaid expenses and other current assets                                                                                                                                         |  |  |                |   | 924     |                   |  |        |  |   | 1,255   |         |
| Total current assets                                                                                                                                                              |  |  |                |   | 8,220   |                   |  |        |  |   | 11,012  |         |
| Equipment and leasehold improvements, at cost:                                                                                                                                    |  |  |                |   |    |                   |  |        |  |   |    |         |
| Computer and office equipment                                                                                                                                                     |  |  |                |   | 2,600   |                   |  |        |  |   | 2,590   |         |
| Furniture and fixtures                                                                                                                                                            |  |  |                |   | 632     |                   |  |        |  |   | 630     |         |
| Leasehold improvements                                                                                                                                                            |  |  |                |   | 748     |                   |  |        |  |   | 706     |         |
|                                                                                                                                                                              |  |  |                |   | 3,980   |                   |  |        |  |   | 3,926   |         |
| Less – accumulated depreciation and amortization                                                                                                                            |  |  |                |   | 3,568   |                   |  |        |  |   | 3,507   |         |
|                                                                                                                                                                              |  |  |                |   | 412     |                   |  |        |  |   | 419     |         |
| Other assets                                                                                                                                                                      |  |  |                |   | 289     |                   |  |        |  |   | 102     |         |
|                                                                                                                                                                              |  |  |                | $ | 8,921   |                   |  |        |  | $ | 11,533  |         |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                        |  |  |                |   |    |                   |  |        |  |   |    |         |
| Current liabilities:                                                                                                                                                              |  |  |                |   |    |                   |  |        |  |   |    |         |
| Bank debt                                                                                                                                                                         |  |  |                | $ | 1,000   |                   |  |        |  | $ | — |         |
| Accounts payable                                                                                                                                                                  |  |  |                |   | 768     |                   |  |        |  |   | 962     |         |
| Accrued expenses                                                                                                                                                                  |  |  |                |   | 3,337   |                   |  |        |  |   | 3,541   |         |
| Deferred revenue                                                                                                                                                                  |  |  |                |   | 2,669   |                   |  |        |  |   | 2,594   |         |
| Liabilites of discontinued operations                                                                                                                                             |  |  |                |   | 78      |                   |  |        |  |   | 981     |         |
| Total current liabilities                                                                                                                                                         |  |  |                |   | 7,852   |                   |  |        |  |   | 8,078   |         |
| Long-term liabilities:                                                                                                                                                            |  |  |                |   |    |                   |  |        |  |   |    |         |
| Long-term deferred revenue                                                                                                                                                        |  |  |                |   | 41      |                   |  |        |  |   | 44      |         |
| Commitments and contingencies                                                                                                                                                     |  |  |                |   |    |                   |  |        |  |   |    |         |
| Stockholders’ equity:                                                                                                                                                       |  |  |                |   |    |                   |  |        |  |   |    |         |
| Preferred stock, $.01 par value, authorized 5,000 shares, no shares issued and outstanding                                                                                        |  |  |                |   | — |                   |  |        |  |   | — |         |
| Common stock, $.01 par value, authorized 50,000 shares; 36,007 and 35,637 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively |  |  |                |   | 359     |                   |  |        |  |   | 357     |         |
| Additional paid-in capital                                                                                                                                                        |  |  |                |   | 88,653  |                   |  |        |  |   | 88,365  |         |
| Accumulated deficit                                                                                                                                                               |  |  |                |   | (87,823 | )            |  |        |  |   | (85,162 | )  |
| Accumulated other comprehensive income (loss)                                                                                                                                     |  |  |                |   | (161    | )            |  |        |  |   | (149    | )  |
| Total stockholders’ equity                                                                                                                                                  |  |  |                |   | 1,028   |                   |  |        |  |   | 3,411   |         |
|                                                                                                                                                                              |  |  |                | $ | 8,921   |                   |  |        |  | $ | 11,533  |         |
|                                                                                                                                                                                   |

The accompanying notes are an integral part of these consolidated financial statements.

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AXS-ONE INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)(unaudited)

|                                                                                      |  |  |                                   |   |         |         |  |  |  |   |         |         |
|--------------------------------------------------------------------------------------|--|--|-----------------------------------|---|---------|---------|--|--|--|---|---------|---------|
|                                                                                 |  |  | Three Months Ended March 31, |
|                                                                                 |  |  | 2007                              |   |         | 2006    |
| Revenues:                                                                            |  |  |                                   |   |    |         |  |  |  |   |    |         |
| License fees                                                                         |  |  |                                   | $ | 1,796   |         |  |  |  | $ | 405     |         |
| Services                                                                             |  |  |                                   |   | 1,898   |         |  |  |  |   | 1,907   |         |
| Total revenues                                                                       |  |  |                                   |   | 3,694   |         |  |  |  |   | 2,312   |         |
| Operating expenses:                                                                  |  |  |                                   |   |    |         |  |  |  |   |    |         |
| Cost of license fees                                                                 |  |  |                                   |   | 121     |         |  |  |  |   | 268     |         |
| Cost of services                                                                     |  |  |                                   |   | 1,371   |         |  |  |  |   | 1,854   |         |
| Sales and marketing                                                                  |  |  |                                   |   | 2,122   |         |  |  |  |   | 2,611   |         |
| Research and development                                                             |  |  |                                   |   | 1,662   |         |  |  |  |   | 1,655   |         |
| General and administrative                                                           |  |  |                                   |   | 1,194   |         |  |  |  |   | 1,155   |         |
| Total operating expenses                                                             |  |  |                                   |   | 6,470   |         |  |  |  |   | 7,543   |         |
| Operating loss                                                                       |  |  |                                   |   | (2,776  | )  |  |  |  |   | (5,231  | )  |
| Other expense:                                                                       |  |  |                                   |   |    |         |  |  |  |   |    |         |
| Interest income                                                                      |  |  |                                   |   | 69      |         |  |  |  |   | 84      |         |
| Interest expense                                                                     |  |  |                                   |   | (31     | )  |  |  |  |   | (27     | )  |
| Other income (expense), net                                                          |  |  |                                   |   | 77      |         |  |  |  |   | (84     | )  |
| Total other income (expense), net                                                    |  |  |                                   |   | 115     |         |  |  |  |   | (27     | )  |
| Loss before income taxes                                                             |  |  |                                   |   | (2,661  | )  |  |  |  |   | (5,258  | )  |
| Income tax benefit                                                                   |  |  |                                   |   | — |         |  |  |  |   | — |         |
| Loss from continuing operations                                                      |  |  |                                   |   | (2,661  | )  |  |  |  |   | (5,258  | )  |
| Income from discontinued operations net oftax provision of $ – for all periods |  |  |                                   |   | — |         |  |  |  |   | 2,512   |         |
| Net loss                                                                             |  |  |                                   | $ | (2,661  | )  |  |  |  | $ | (2,746  | )  |
| Basic & diluted net loss per common share:                                       |  |  |                                   |   |    |         |  |  |  |   |    |         |
| (Loss) from continuing operations                                                    |  |  |                                   | $ | (0.08   | )  |  |  |  | $ | (0.15   | )  |
| Income from discontinued operations                                                  |  |  |                                   |   | — |         |  |  |  |   | 0.07    |         |
| Net loss                                                                             |  |  |                                   | $ | (0.08   | )  |  |  |  | $ | (0.08   | )  |
| Weighted average basic & diluted common shares outstanding                       |  |  |                                   |   | 34,735  |         |  |  |  |   | 34,247  |         |
|                                                                                      |

The accompanying notes are an integral part of these consolidated financial statements.

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AXS-ONE INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(In thousands)(Unaudited)

|                                         |  |  |                             |   |        |         |  |  |  |   |        |         |
|-----------------------------------------|--|--|-----------------------------|---|--------|---------|--|--|--|---|--------|---------|
|                                    |  |  | Three Months EndedMarch 31, |
|                                    |  |  | 2007                        |   |        | 2006    |
| Net loss                                |  |  |                             | $ | (2,661 | )  |  |  |  | $ | (2,746 | )  |
| Foreign currency translation adjustment |  |  |                             |   | (12    | )  |  |  |  |   | 72     |         |
| Comprehensive loss                      |  |  |                             | $ | (2,673 | )  |  |  |  | $ | (2,674 | )  |
|                                         |

The accompanying notes are an integral part of these consolidated financial statements.

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AXS-ONE INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)

|                                                                                              |  |  |                              |   |         |         |  |  |  |   |         |         |
|----------------------------------------------------------------------------------------------|--|--|------------------------------|---|---------|---------|--|--|--|---|---------|---------|
|                                                                                         |  |  | Three Months Ended,March 31, |
|                                                                                         |  |  | 2007                         |   |         | 2006    |
| Cash flows from operating activities:                                                        |  |  |                              |   |    |         |  |  |  |   |    |         |
| Net loss                                                                                     |  |  |                              | $ | (2,661  | )  |  |  |  | $ | (2,746  | )  |
| Less income from discontinued operations                                                     |  |  |                              |   | — |         |  |  |  |   | 2,512   |         |
| Loss from continuing operations                                                              |  |  |                              |   | (2,661  | )  |  |  |  |   | (5,258  | )  |
| Adjustments to reconcile net loss to net cash flows used in continuing operating activities: |  |  |                              |   |    |         |  |  |  |   |    |         |
| Depreciation and amortization                                                                |  |  |                              |   | 59      |         |  |  |  |   | 150     |         |
| Provision for doubtful accounts, net                                                         |  |  |                              |   | 8       |         |  |  |  |   | (10     | )  |
| Stock based compensation expense                                                             |  |  |                              |   | 161     |         |  |  |  |   | 61      |         |
| Changes in assets and liabilities                                                            |  |  |                              |   |    |         |  |  |  |   |    |         |
| Accounts receivable                                                                          |  |  |                              |   | (306    | )  |  |  |  |   | 1,940   |         |
| Prepaid expenses and other current assets                                                    |  |  |                              |   | 280     |         |  |  |  |   | (480    | )  |
| Change in other assets                                                                       |  |  |                              |   | (188    | )  |  |  |  |   | 9       |         |
| Accounts payable and accrued expenses                                                        |  |  |                              |   | (389    | )  |  |  |  |   | (97     | )  |
| Deferred revenue                                                                             |  |  |                              |   | 67      |         |  |  |  |   | (29     | )  |
| Net cash flows used in continuing operating activities                                       |  |  |                              |   | (2,969  | )  |  |  |  |   | (3,714  | )  |
| Cash flows from continuing investing activities:                                             |  |  |                              |   |    |         |  |  |  |   |    |         |
| Restricted cash, net                                                                         |  |  |                              |   | — |         |  |  |  |   | 13      |         |
| Purchase of equipment and leasehold improvements                                             |  |  |                              |   | (49     | )  |  |  |  |   | (52     | )  |
| Net cash flows used in continuing investing activities                                       |  |  |                              |   | (49     | )  |  |  |  |   | (39     | )  |
| Cash flows from continuing financing activities:                                             |  |  |                              |   |    |         |  |  |  |   |    |         |
| Proceeds from exercise of stock options and warrants                                         |  |  |                              |   | 129     |         |  |  |  |   | 60      |         |
| Payment of debt issuance costs                                                               |  |  |                              |   | — |         |  |  |  |   | (31     | )  |
| Borrowing of revolving line-of-credit                                                        |  |  |                              |   | 1,000   |         |  |  |  |   | — |         |
| Net cash flows provided by continuing financing activities                                   |  |  |                              |   | 1,129   |         |  |  |  |   | 29      |         |
| Cash flows from discontinued operations:                                                     |  |  |                              |   |    |         |  |  |  |   |    |         |
| Net cash provided by (used in) operating activities                                          |  |  |                              |   | (894    | )  |  |  |  |   | 7,678   |         |
| Net cash used in investing activities                                                        |  |  |                              |   | — |         |  |  |  |   | 9       |         |
| Net cash flows provided by (used in) discontinued operations                                 |  |  |                              |   | (894    | )  |  |  |  |   | 7,687   |         |
| Foreign currency exchange rate effects on cash and cash equivalents                          |  |  |                              |   | (16     | )  |  |  |  |   | 65      |         |
| Net increase (decrease) in cash and cash equivalents                                         |  |  |                              |   | (2,799  | )  |  |  |  |   | 4,028   |         |
| Cash and cash equivalents, beginning of period                                               |  |  |                              |   | 7,492   |         |  |  |  |   | 3,613   |         |
| Cash and cash equivalents, end of period                                                     |  |  |                              | $ | 4,693   |         |  |  |  | $ | 7,641   |         |
| Supplemental disclosures of cash flow information:                                           |  |  |                              |   |    |         |  |  |  |   |    |         |
| Cash paid during the year for                                                                |  |  |                              |   |    |         |  |  |  |   |    |         |
| Interest                                                                                     |  |  |                              | $ | 40      |         |  |  |  | $ | 24      |         |
| Income taxes                                                                                 |  |  |                              |   | 30      |         |  |  |  |   | — |         |
|                                                                                              |

The accompanying notes are an integral part of these consolidated financial statements.

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(1)    OPERATIONS, BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTING POLICIES

AXS-One Inc. designs, markets and supports records compliance management software that include digital archiving, business process management, electronic document delivery and integrated records disposition and discovery for e-mail, instant messaging, images, SAP and other corporate records, and until October 31, 2006, financial management applications for global 2000 businesses, and scheduling and time and expense software for professional services organizations. The Company also offers consulting, implementation, training, technical support and maintenance services in support of its customers’ use of its software products.

On October 31, 2006, the Company sold certain assets and liabilities through which it operated the AXS-One Enterprise Solutions financial management and accounting applications business (‘‘Enterprise Solutions’’) to Computron Software, LLC for the sum of $12 million in cash plus future potential consideration for exceeding specified license revenue targets. Additionally, Computron Software, LLC assumed assets of approximately $2.1 million and liabilities of approximately $8.3 million. The Company recorded a gain of $17.2 million on the sale. The assets sold primarily consisted of client contracts, marketing agreements, internally developed software, accounts receivable and fixed assets of the business. The liabilities sold consisted primarily of employee related liabilities, accounts payable and deferred revenue. The Company has classified the Enterprise Solutions business as a discontinued operation in these financial statements. Previously, the Company had two reporting segments, Records Compliance Management and Enterprise Solutions. As a result of the sale of the Enterprise Solutions, Records Compliance Management is the Company’s only reporting segment.

(a)    Basis of Presentation

The accompanying Consolidated Interim Financial Statements include the accounts of AXS-One Inc. and its wholly owned subsidiaries located in Australia, Singapore, South Africa, and the United Kingdom (collectively, the ‘‘Company’’). All intercompany transactions and balances have been eliminated.

Until May 31, 2006, the Company had a 49% ownership in a joint venture in its South African operation, AXS-One African Solutions (Pty) Ltd (‘‘African Solutions’’). The joint venture was considered to be a variable interest entity as defined in FASB Interpretation No. 46R, ‘‘Consolidation of Variable Interest Entities’’ (FIN 46R). However, the Company had determined that it was not the primary beneficiary. Accordingly, until May 31, 2006, the Company used the equity method of accounting for the joint venture whereby investments, including loans to the joint venture, were stated at cost plus or minus the Company’s equity in undistributed earnings or losses. On May 31, 2006, the Company purchased the remaining 51% of African Solutions from African Legends Technology for $161 less cash acquired of $20, to make it a wholly owned subsidiary. The Company applied purchase accounting to record the transaction. The purchase price was less than the fair value of assets acquired and therefore the Company wrote-down the value of all long-term assets to zero and recorded a gain of $37. As of June 1, 2006, 100% of the results of African Solutions are included in the consolidated results of the Company in discontinued operations as it was part of the Enterprise Solutions business segment.

The unaudited Consolidated Interim Financial Statements have been prepared by the Company in accordance with US generally accepted accounting principles and, in the opinion of management, contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of these Consolidated Interim Financial Statements.

The preparation of Consolidated Interim Financial Statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Interim Financial Statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Some of the significant estimates involve allowance for doubtful accounts, accrued expenses, provision for income taxes in foreign jurisdictions, assessment of contingencies, and compensation expense pursuant to SFAS No. 123R.

The accompanying Financial Statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally in annual financial statements prepared in 

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accordance with GAAP have been condensed or omitted, although the Company believes the disclosures made are adequate to make the information not misleading.

These Consolidated Interim Financial Statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three months ended March 31, 2007 are not necessarily indicative of results to be expected for the full year 2007 or any future periods

AXS-One recorded net income of $5.5 million for the year ended December 31, 2006 primarily related to the sale of the Enterprise Solutions business, and recorded net losses of $9.0 million and $5.2 million for the years ended December 31, 2005 and 2004 respectively. AXS-One incurred a loss of $19.6 million, $15.1 million and $2.7 million for the years ended December 31, 2006, 2005 and 2004, respectively, from continuing operations. We were not able to obtain operating profitability for the years ended December 31, 2004, 2005 and 2006 from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management’s initiatives over the last three years, including the restructurings in December 2006, June 2005 and June 2004, the private placements of common stock in June 2005 and April 2004, the executive management salary reductions for most of the second half of 2005 and for all of 2007, and the sale of the Enterprise Solutions business, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations, particularly given the recent sale of the Enterprise Solutions business, which historically was our profitable segment. We may be required to further reduce operating costs in order to meet our obligations. The Company is currently in default of its bank credit facility and is currently in the process of seeking to secure additional sources of financing. If we are unable to achieve profitable operations or secure additional sources of financing, there would be substantial doubt about our ability to continue as a going concern. Additionally, there is a risk that cash held by one foreign subsidiary approximating $0.4 million at March 31, 2007 may not be readily available for use in our U.S. operations to pay our obligations, as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available.

(b)    Revenue Recognition

The Company recognizes 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 to Certain Transactions.’’ Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes license revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. In multiple element arrangements, the Company defers the vendor-specific objective evidence of fair value (‘‘VSOE’’) related to the undelivered elements and recognizes revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of maintenance is determined by using a consistent percentage of maintenance fee to license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of services is determined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.

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

For software license, services and maintenance revenue, the Company assesses whether the fee is fixed and determinable and whether or not collection is probable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from invoice date, the fee is considered not fixed and determinable. In these cases, the Company recognizes revenue as the fees become due.

The Company assesses assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Collateral is not requested from customers. If it is determined that collection of a fee is not probable, the fee is deferred and revenue is recognized at the time collection becomes probable, which is generally upon receipt of cash.

The Company’s arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period.

The majority of our training and consulting services are billed based on hourly rates. The Company generally recognizes revenue as these services are performed. However, when there is an arrangement that is based on a fixed fee or requires significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests, the Company recognizes the related revenue using the percentage of completion method of accounting. This would apply to our custom programming services, which are generally contracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period such losses are determined to be probable.

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

In accordance with EITF Issue No. 01-14, ‘‘Income Statement Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,’’ reimbursements received for out-of-pocket expenses incurred are classified as services revenue in the Consolidated Statements of Operations.

(c)    Foreign Currency Translation

The functional currency for foreign subsidiaries is the local currency. The results of operations for these foreign subsidiaries are translated from local currencies into U.S. dollars using the average exchange rates during each period. Assets and liabilities are translated using exchange rates at the end of the period with translation adjustments accumulated in stockholders’ equity (deficit). Intercompany loans are denominated in U.S. currency. Foreign currency transaction gains and losses, related to short-term intercompany loans, were recorded in the consolidated statements of operations as incurred. As of January 1, 2007, all intercompany loans are considered of a long-term nature and therefore are accounted for in accordance with SFAS 52, ‘‘Foreign Currency Translation,’’ whereby foreign currency transaction gains and losses are recorded in cumulative foreign currency translation adjustment, a component of stockholders’ equity.

(d)    Stock-Based Compensation

On January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’) which requires that the costs resulting from all share-based payment transactions be recognized in the financial statements at their fair values. The Company adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards granted after the adoption date and to awards modified, repurchased, or cancelled after the adoption date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered that are outstanding as of the adoption date 

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is recognized in the Consolidated Statement of Operations over the remaining service period after the adoption date based on the award’s original estimate of fair value. In connection with the adoption of SFAS 123R, the unearned stock compensation at December 31, 2005 of $177 relating to previous grants of non-vested restricted stock was offset against additional paid-in capital during the first quarter of fiscal 2006. Total share-based compensation expense recorded in the Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 is $88 and $61, respectively.

On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (‘‘FSP 123R-3’’), ‘‘Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards,’’ that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R (the ‘‘APIC Pool’’) to the method otherwise required by paragraph 81 of SFAS 123R. The Company is currently using prior period net operating losses and has not realized any tax benefits under SFAS 123R.

The fair value of options granted is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatilities are calculated in part based on the historical volatility of the Company’s stock. Management monitors share option exercise and employee termination patterns to estimate forfeiture rates within the valuation model. The expected holding period of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the expected life of the option is based on the interest rate of a 5-year U.S. Treasury note in effect on the date of the grant.

The table below presents the assumptions used to calculate the fair value of options granted during the three months ended March 31, 2007 and 2006.

|                                                                            |  |  |           |  |     |      |  |  |         |   |         |         |
|----------------------------------------------------------------------------|--|--|-----------|--|-----|------|--|--|---------|---|---------|---------|
|                                                                       |  |  | March 31, |
|                                                                       |  |  | 2007 (a)  |  |     | 2006 |
| Risk-free interest rate                                                    |  |  |           |  | n/a |      |  |  |         |   | 4.57    | %  |
| Expected dividend yield                                                    |  |  |           |  | n/a |      |  |  |         |   | — |         |
| Expected lives                                                             |  |  |           |  | n/a |      |  |  | 5 years |
| Expected volatility                                                        |  |  |           |  | n/a |      |  |  |         |   | 99      | %  |
| Forfeiture rate                                                            |  |  |           |  | n/a |      |  |  |         |   | n/a     |         |
| Weighted-average grant date fair value ofoptions granted during the period |  |  |           |  | n/a |      |  |  |         | $ | 1.19    |         |
|                                                                            |

|  |
|--|
|  |  |
|  |

| (a) | No stock options were granted during the three months ended March 31, 2007. |
|-----|---------------------------------------------------------------------------------------|

Stock Option Plans

The Company has three stock incentive plans: the 1995 Stock Option Plan (the 1995 Plan), the 1998 Stock Option Plan (the 1998 Plan), and the 2005 Stock Incentive Plan (the 2005 Plan). Under the 1995 Plan, the Company could grant up to 4,500 shares of common stock. The 1995 Plan has expired and no further options can be issued under this plan. Outstanding options under this plan will continue to vest. Under the 1998 Plan, the Company may grant stock options or stock appreciation rights to purchase an aggregate of up to 5,000 shares of Common Stock. In accordance with a June 2004 amendment, up to 300 of the total shares may be used for restricted stock awards. Under the 2005 Plan, the Company may grant stock options, stock appreciation rights and restricted stock to purchase an aggregate of up to 1,500 shares of Common Stock. All options granted under the forgoing plans expire ten years from the date of grant (or five years for statutory options granted to 10% stockholders), unless terminated earlier. Substantially all options vest over a four-year period. For a more detailed description of all stock incentive plans, refer to the Company’s 2006 Annual Report on Form 10-K.

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Stock option transactions for the three months ended March 31, 2007 under all plans are as follows:

|                                                         |  |  |                 |  |         |                                 |  |  |                                             |   |         |                                         |  |  |  |  |         |  |  |  |  |   |        |  |
|---------------------------------------------------------|--|--|-----------------|--|---------|---------------------------------|--|--|---------------------------------------------|---|---------|-----------------------------------------|--|--|--|--|---------|--|--|--|--|---|--------|--|
|                                                    |  |  | Number ofShares |  |         | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Life |   |         | Aggregate Intrinsic Value as of 3/31/07 |
| Balance, December 31, 2006                    |  |  |                 |  | 5,528   |                                 |  |  |                                             | $ | 2.38    |                                         |  |  |  |  |    |  |  |  |  |   |   |  |
| Granted                                                 |  |  |                 |  | — |                                 |  |  |                                             |   | — |                                         |  |  |  |  |    |  |  |  |  |   |   |  |
| Exercised                                               |  |  |                 |  | (220    | )                          |  |  |                                             | $ | 0.58    |                                         |  |  |  |  |    |  |  |  |  |   |   |  |
| Forfeited                                               |  |  |                 |  | (4      | )                          |  |  |                                             | $ | 2.24    |                                         |  |  |  |  |    |  |  |  |  |   |   |  |
| Expired                                                 |  |  |                 |  | (799    | )                          |  |  |                                             | $ | 2.84    |                                         |  |  |  |  |    |  |  |  |  |   |   |  |
| Balance, March 31, 2007                       |  |  |                 |  | 4,505   |                                 |  |  |                                             | $ | 2.38    |                                         |  |  |  |  | 5.77    |  |  |  |  | $ | 104    |  |
| Vested and expected to vest at March 31, 2007 |  |  |                 |  | 4,411   |                                 |  |  |                                             | $ | 2.40    |                                         |  |  |  |  | — |  |  |  |  | $ | 103    |  |
| Exercisable at March 31, 2007                 |  |  |                 |  | 3,985   |                                 |  |  |                                             | $ | 2.48    |                                         |  |  |  |  | 5.47    |  |  |  |  | $ | 96     |  |
|                                                         |

The total intrinsic value of stock options exercised during the three months ended March 31, 2007 was $46 as compared to $120 for the three months ended March 31, 2006. As of March 31, 2007, there was approximately $472 of total unrecognized compensation cost related to stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.35 years.

A summary of stock options outstanding and exercisable as of March 31, 2007 follows:

|                         |  |  |                     |  |       |                                       |  |  |                                |  |        |                   |  |  |                                |   |        |  |  |  |  |  |       |  |  |  |  |   |        |  |
|-------------------------|--|--|---------------------|--|-------|---------------------------------------|--|--|--------------------------------|--|--------|-------------------|--|--|--------------------------------|---|--------|--|--|--|--|--|-------|--|--|--|--|---|--------|--|
|                    |  |  | Options Outstanding |  |       | Options Exercisable                   |
| Range ofexercise prices |  |  | Numberoutstanding   |  |       | Weighted averageremaining life(years) |  |  | Weighted averageexercise price |  |        | Numberexercisable |  |  | Weighted averageexercise price |
| $0.21 – $0.72     |  |  |                     |  | 925   |                                       |  |  |                                |  | 4.49   |                   |  |  |                                | $ | 0.54   |  |  |  |  |  | 869   |  |  |  |  | $ | 0.54   |  |
| $0.75 – $1.75     |  |  |                     |  | 922   |                                       |  |  |                                |  | 4.60   |                   |  |  |                                | $ | 1.49   |  |  |  |  |  | 653   |  |  |  |  | $ | 1.44   |  |
| $1.80 – $2.44     |  |  |                     |  | 945   |                                       |  |  |                                |  | 6.90   |                   |  |  |                                | $ | 2.17   |  |  |  |  |  | 758   |  |  |  |  | $ | 2.22   |  |
| $2.49 – $4.21     |  |  |                     |  | 1,463 |                                       |  |  |                                |  | 7.06   |                   |  |  |                                | $ | 3.62   |  |  |  |  |  | 1,455 |  |  |  |  | $ | 3.63   |  |
| $6.00 – $6.25     |  |  |                     |  | 250   |                                       |  |  |                                |  | 3.03   |                   |  |  |                                | $ | 6.01   |  |  |  |  |  | 250   |  |  |  |  | $ | 6.01   |  |
|                    |  |  |                     |  | 4,505 |                                       |  |  |                                |  |   |                   |  |  |                                |   |   |  |  |  |  |  | 3,985 |  |  |  |  |   |   |  |
|                         |

Restricted Stock

Compensation expense for restricted stock is recorded based on its market value on the date of grant and recognized ratably over the associated service period, the period in which restrictions are removed. During the three months ended March 31, 2007 and 2006, there were 150 and 380, respectively, shares of restricted stock granted, with fair values of $114 and $946. All shares were issued to employees with 4-year vesting. During the three months ended March 31, 2007 and 2006, there were zero and 25 shares forfeited as a result of employee terminations. As of March 31, 2007, 1,136 restricted shares are unvested.

The following table summarizes transactions related to restricted stock for the three months ended March 31, 2007:

|                                      |  |  |                 |  |         |                                 |  |  |  |   |         |  |
|--------------------------------------|--|--|-----------------|--|---------|---------------------------------|--|--|--|---|---------|--|
|                                 |  |  | Number ofshares |  |         | Weighted average priceper share |
| Balance, December 31, 2006 |  |  |                 |  | 1,076   |                                 |  |  |  | $ | 1.37    |  |
| Granted                              |  |  |                 |  | 150     |                                 |  |  |  | $ | 0.76    |  |
| Vested                               |  |  |                 |  | (90     | )                          |  |  |  | $ | 2.49    |  |
| Forfeited                            |  |  |                 |  | — |                                 |  |  |  |   | — |  |
| Balance, March 31, 2007    |  |  |                 |  | 1,136   |                                 |  |  |  | $ | 1.20    |  |
|                                      |

As of March 31, 2007, there was approximately $954 of total unrecognized compensation cost related to restricted stock granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.58 years.

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As of March 31, 2007, the Company also had warrants to purchase 1,423 shares of common stock outstanding at a weighted average price of $2.83. At December 31, 2006, all of these warrants were exercisable. No warrants were issued in the first quarter of 2007 or 2006 and no expense has been recognized during 2007. 516 of these warrants expired in April 2007 and 907 of these warrants expire in June 2008.

Stock options and restricted stock available for grant under all plans were 1,154 at March 31, 2007.

(2)    discontinued operAtions

On October 31, 2006, the Company sold certain assets and liabilities through which it operated the AXS-One Enterprise Solutions financial management and accounting applications business (‘‘Enterprise Solutions’’) to Computron Software, LLC for the sum of $12,000 in cash plus future potential consideration for exceeding specified license revenue targets. The assets sold of approximately $2,100 primarily consisted of client contracts, marketing agreements, internally developed software, accounts receivable and fixed assets of the business. The liabilities assumed of approximately $8,300, consisted primarily of employee related liabilities, accounts payable and deferred revenue. As part of the transaction, Computron Software, LLC agreed, among other things, to hire certain former AXS-One employees assigned to the Enterprise Solutions business. Further, AXS-One agreed to a non-competition agreement which prohibits the Company from engaging in the enterprise financial business for a period of five years. As a result of the transaction with Computron Software, LLC, our employee headcount has been reduced by approximately 70 positions.

Liabilities held for sale as of March 31, 2007 totaling $78 consisted primarily of customer payments made to AXS-One on behalf of Computron Software, LLC.

There was no income statement activity related to discontinued operations for the three months ended March 31, 2007. The following chart summarizes the income statement for discontinued operations for the three months ended March 31, 2006:

|                                     |  |  |  |   |       |         |
|-------------------------------------|--|--|--|---|-------|---------|
| Revenues                            |  |  |  | $ | 5,180 |         |
| Operating expenses                  |  |  |  |   | 2,642 |         |
| Operating income                    |  |  |  |   | 2,538 |         |
| Other expense, net                  |  |  |  |   | (26   | )  |
| Income from discontinued operations |  |  |  | $ | 2,512 |         |
|                                     |

The Company recorded a gain on sale of the Enterprise Solutions business to Computron Software, LLC of $17,241. Due to the utilization of available net operating loss tax carryforwards in each of the relevant jurisdictions, the tax provision required on the transaction is estimated to be only $200. In determining the estimated gain on the sale of the Enterprise Solutions business to be recognized in the fourth quarter of 2006, the Company has estimated the following sales price, expenses and disposal cost using the October 31, 2006 balance sheet:

|                      |  |  |  |   |        |         |
|----------------------|--|--|--|---|--------|---------|
| Sales price          |  |  |  | $ | 12,000 |         |
| Assets sold          |  |  |  |   | (2,093 | )  |
| Liabilities sold     |  |  |  |   | 8,248  |         |
| Transaction expenses |  |  |  |   | (714   | )  |
| Tax provision        |  |  |  |   | (200   | )  |
| Gain on sale         |  |  |  | $ | 17,241 |         |
|                      |

(3)    Revolving line of credit  

On August 11, 2004, the Company entered into a two-year Loan and Security Agreement (the ‘‘Agreement’’) which contained a revolving line of credit under which the Company had available the lesser of $4.0 million or 80% of eligible accounts, as defined.

On January 27, 2005, March 28, 2005 and September 13, 2005, the Company entered into modifications to the Agreement (the ‘‘Amended Agreement’’) in order to revise certain terms of the Agreement including the loan fees, interest on the loan and the financial covenants.

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Borrowings under the revolving line of credit, per the Amended Agreement, bore interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial covenants set forth in the Amended Agreement, the interest rate would increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment fee of $30 per year and an unused revolving line facility fee of 0.25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additional $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Amended Agreement, the loan was subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company’s EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There was also a monthly transition event covenant which required the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.0.

On October 31, 2006 the Company and the Bank entered into a Second Loan Modification Agreement and an Intellectual Property Security Agreement. The Second Loan Modification Agreement served (a) to amend the Amended Agreement by reducing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 80.0% of the Eligible Accounts to (ii) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to forbear until November 10, 2006 from exercising its rights and remedies with respect to the default of the Company for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006. The IP Security Agreement serves to supplement the Amended Agreement by including among the assets securing the Company’s indebtedness to the Bank, a security interest in all of the Company’s right, title and interest in, to and under its intellectual property.

On November 11, 2006 the Company and the Bank entered into a Third Loan Modification Agreement. The Third Loan Modification Agreement serves (a) to amend the Second Loan Modification Agreement by increasing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts to (ii) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to extend the forbearance from exercising its rights and remedies with respect to the default of the Company through December 10, 2006 for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006.

On March 6, 2007, the Company entered into a Fourth Loan Modification Agreement (the ‘‘Fourth Modification Agreement’’) with the Bank effective as of February 15, 2007 to amend and supplement its Amended and Restated Loan and Security Agreement dated as of September 13, 2005 between the Company and the Bank, as amended by the First Loan Modification Agreement dated as of March 14, 2006, the Second Loan Modification Agreement dated as of October 31, 2006, and the Third Loan Modification Agreement dated as of November 11, 2006 (as amended, the ‘‘Loan Agreement’’).

Subject to certain borrowing base limitations and compliance with covenants, the Fourth Modification Agreement serves to amend the Loan Agreement by changing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts (as such term is defined in the Loan Agreement) to (ii) up to the lesser of (A) $2,500 or (B) 80.0% of the Eligible Accounts (as such term is defined in the Loan Agreement). The Fourth Modification Agreement also extends the maturity date of the Loan Agreement from February 15, 2007 to April 1, 2008.

In addition, the Fourth Modification Agreement deletes the existing financial covenants contained in the Loan Agreement and adds two new financial covenants: (i) a covenant requiring the Company to maintain a Tangible Net Worth (as defined in the Fourth Modification Agreement) of at least (A) $1,700 as of the months ending January 31, 2007, February 28, 2007 and March 31, 2007, (B) $600 as of the months ending April 30, 2007, May 31, 2007 and June 30, 2007, (C) ($150) as of the months ending July 31, 2007, August 31, 2007 and September 30, 2007, and (D) $1.00 as of the month ending 

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October 31, 2007 and as of the last day of each month thereafter and (ii) a covenant requiring the Company to maintain Liquidity (representing the amount of unrestricted cash of the Company at the Bank plus the unused availability under the Loan Agreement) at all times of at least $1,000.

The Bank also waived the Company’s existing defaults under the Loan Agreement based on certain failures to meet prior financial covenants during the year ended December 31, 2006.

As of March 31, 2007, the Company had borrowings of $1,000, and had remaining availability under the Loan Agreement of $225. During April 2007, the Company repaid all outstanding amounts under the Agreement. For each month of 2007 the Company was in compliance with its liquidity covenant but was not in compliance with its minimum tangible net worth covenant of $1,700 for the months ended February 28 and March 31, 2007. Tangible net worth as of March 31, 2007 was $1,201. On May 15, 2007, the Bank waived such violations and agreed to forbear until June 15, 2007, from exercising its rights and remedies with respect to the default of the Company for failure to comply with the tangible net worth covenant. The Company is currently in the process of seeking to secure additional financing. Upon receipt of such additional financing, the Bank has preliminarily agreed to provide new financial covenants acceptable to the Company. No assurance can be given that such additional financing will be secured and that the Bank will definitively agree to provide new financial covenants.

(4)    Basic and Diluted Net INCOME (LOSS) Per Common Share

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

Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share for the three months ended March 31, 2007 and 2006 does not include the effects of outstanding options to purchase 4,505 and 6,391 shares of common stock, respectively, 1,136 and 450 shares of restricted stock, respectively, and outstanding warrants to purchase 1,423 shares of common stock for each period, as the effect of their inclusion is anti-dilutive for the periods.

The following represents the reconciliation(1) of the shares used in the basic and diluted net loss per common share calculation for the three months ended March 31, 2007 and 2006:

|                                                                       |  |  |                                   |  |         |      |  |  |  |  |         |  |
|-----------------------------------------------------------------------|--|--|-----------------------------------|--|---------|------|--|--|--|--|---------|--|
|                                                                  |  |  | Three Months Ended March 31, |
|                                                                  |  |  | 2007                              |  |         | 2006 |
| Weighted average basic common shares outstanding during the periods   |  |  |                                   |  | 34,735  |      |  |  |  |  | 34,247  |  |
| Dilutive effect of stock options and warrants                         |  |  |                                   |  | — |      |  |  |  |  | — |  |
| Weighted average diluted common shares outstanding during the periods |  |  |                                   |  | 34,735  |      |  |  |  |  | 34,247  |  |
|                                                                       |

|  |
|--|
|  |  |
|  |

| (1) | This reconciliation does not include non-vested restricted stock. |
|-----|-------------------------------------------------------------------|

(5)    CONTINGENCIES

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

(6)    RESTRUCTURING AND OTHER COSTS

In December 2006, in order to reduce operating costs to better position ourselves in the current market, we eliminated 19 positions from continuing operations. We recorded a charge to operations of $431 in 2006 related to involuntary termination benefits to be paid to the terminated employees. The remaining 

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restructuring liability is recorded as accrued expenses on the March 31, 2007 balance sheet and will be paid in its entirety during 2007. The 2007 activity related to the restructuring is as follows:

|                                                      |  |  |      |   |         |         |
|------------------------------------------------------|--|--|------|---|---------|---------|
|                                                 |  |  | 2007 |
| Restructuring liability at January 1, 2007 |  |  |      | $ | 49      |         |
| Involuntary termination costs                        |  |  |      |   | — |         |
| Cash payments in 2007                                |  |  |      |   | (41     | )  |
| Restructuring liability at March 31, 2007  |  |  |      | $ | 8       |         |
|                                                      |

(7)    FINANCIAL INFORMATION BY GEOGRAPHIC AREA

SFAS No. 131, ‘‘Disclosure about Segments of an Enterprise and Related Information,’’ establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reporting segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers.

Revenues and long-lived assets for the Company’s United States, United Kingdom, Australia and Asia, and South Africa continuing operations are as follows:

|                    |  |  |                                  |   |       |      |  |  |  |   |       |  |
|--------------------|--|--|----------------------------------|---|-------|------|--|--|--|---|-------|--|
|               |  |  | Three Months EndedMarch 31, |
| Revenues:(1)       |  |  | 2007                             |   |       | 2006 |
| United States      |  |  |                                  | $ | 2,204 |      |  |  |  | $ | 1,505 |  |
| United Kingdom     |  |  |                                  |   | 881   |      |  |  |  |   | 299   |  |
| Australia and Asia |  |  |                                  |   | 413   |      |  |  |  |   | 379   |  |
| South Africa       |  |  |                                  |   | 196   |      |  |  |  |   | 129   |  |
| Total Consolidated |  |  |                                  | $ | 3,694 |      |  |  |  | $ | 2,312 |  |
|                    |

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

|                    |  |  |                    |   |     |                       |  |  |  |   |     |  |
|--------------------|--|--|--------------------|---|-----|-----------------------|--|--|--|---|-----|--|
| Long-Lived Assets: |  |  | March 31,2007 |   |     | December 31,2006 |
| United States      |  |  |                    | $ | 166 |                       |  |  |  | $ | 159 |  |
| United Kingdom     |  |  |                    |   | 45  |                       |  |  |  |   | 54  |  |
| Australia and Asia |  |  |                    |   | 167 |                       |  |  |  |   | 169 |  |
| South Africa       |  |  |                    |   | 34  |                       |  |  |  |   | 37  |  |
| Total Consolidated |  |  |                    | $ | 412 |                       |  |  |  | $ | 419 |  |
|                    |

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|               |                                                                                             |
|---------------|---------------------------------------------------------------------------------------------|
| Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |

The following discussion should be read in conjunction with the Consolidated Interim Financial Statements and Notes thereto and is qualified in its entirety by reference thereto.

This Report contains statements of a forward-looking nature within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events or the future financial performance of AXS-One. Investors are cautioned that actual events or results may differ materially. In evaluating such statements, investors should specifically consider the various factors identified in this Report which could cause actual results to differ materially from those indicated by such forward-looking statements, in addition to the matters set forth in ‘‘Risk Factors’’ in our 2006 Annual Report on Form 10-K.

Executive Overview

We are a leading provider of Records Compliance Management software designed to reduce the inherent risks associated with retaining and managing corporate records as well as to achieve efficiency in its business processes and to extend those efficiencies to its customers, suppliers, and business partners. Our Records Compliance Management software, The AXS-One Compliance PlatformTM, delivers an integrated archiving and electronic records management software solution that enables organizations to manage growing volumes of disparate electronic records, including e-mail and instant messages, images, voice, office documents, ERP-generated data such as SAP and electronic print reports. All records are archived and managed according to corporate records policies from initial capture and indexing through archival, search and ultimate destruction. These products have been developed and optimized to address global issues of regulatory compliance, corporate governance, litigation readiness, e-discovery, supervision and privacy as they relate to the retention and disposition of electronic records, as well as to significantly reduce infrastructure costs (primarily storage and associated management costs).

Our revenues are derived mainly from license fees from software license agreements entered into with our customers, including through resellers, for both our products and, to a lesser degree, third party products resold by us and services revenues from software maintenance agreements, training, consulting services including installation and custom programming. We also derive a small amount of revenue (3.0% and 4.0% of total revenues for the first three months of 2007 and 2006, respectively) from subscription revenue arrangements.

We are based in Rutherford, New Jersey with approximately 133 full-time employees in continuing operations, as of March 31, 2007, in offices worldwide, including Asia, Australia, South Africa, the United Kingdom and the United States. Our foreign offices generated approximately 40.3% and 33.9% of our total revenues for the three months ended March 31, 2007 and 2006, respectively. We expect that such revenues will continue to represent a significant percentage of our total revenues in the future. Most of our international license fees and services revenues are denominated in foreign currencies. Fluctuations in the value of foreign currencies relative to the US dollar in the future could result in fluctuations in our revenue.

On October 31, 2006, the Company sold certain assets and liabilities through which it operated the AXS-One Enterprise Solutions financial management and accounting applications business (‘‘Enterprise Solutions’’) to Computron Software, LLC for the sum of $12 million in cash plus future potential consideration for exceeding specified license revenue targets. Additionally, Computron Software, LLC assumed net liabilities of approximately $6.2 million. The Company recorded a gain of $17.2 million on the sale. The assets sold primarily consisted of client contracts, marketing agreements, internally developed software, accounts receivable and fixed assets of the business. The liabilities sold consisted primarily of employee related liabilities, accounts payable and deferred revenue.

We encounter competition for all of our products in all markets and compete primarily based on the quality of our products, our price, our customer service and our time to implement. The timing of the release of new products is also important to our ability to generate sales. During the second half of 2003, we launched our Records Compliance Management solution for e-mail and Instant Messaging Archival and Supervision in response to new regulatory requirements for financial institutions in the United States 

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as well as to address the need to reduce costs in the e-mail management area. During 2006, AXS-One announced further significant development of AXS-One Compliance Platform, focusing primarily on enhancements to address the growing market for litigation readiness and risk management. Version 3.5.5, was announced in September and introduced major new functionality including .PST management and file system archiving. Both leverage the high-performance workflow integrated into the AXS-One Compliance Platform to address the scalability and litigation/liability issues of today’s enterprises associated with managing and migrating .PST files and records stored in file systems. Significant enhancements were made to the product’s Case Management functionality in response to growing pressures on organizations worldwide regarding litigation readiness and e-discovery. Enhancement to Supervisory Review focused on performance, scale and ease of use, in response to enterprise-wide demand for this functionality (versus departmental needs). Finally, usability enhancements were introduced to facilitate administration within the e-mail archiving products and significantly reduce implementation time and effort for the entire platform.

Our future ability to grow revenue will be directly affected by continued price competition, success of our strategic partnerships and our ability to sustain an increasingly higher maintenance revenue base from which to grow. Our growth rate and total revenues depend significantly on future services for existing customers as well as our ability to expand our customer base and to respond successfully to the pace of technological change. If our maintenance renewal rate or pace of new customer acquisitions slows, our revenues and operating results would be adversely affected.

We have experienced, and may in the future experience, significant fluctuations in our quarterly and annual revenues, results of operations and cash flows. We believe that domestic and international operating results and cash flows will continue to fluctuate significantly in the future as a result of a variety of factors. For a description of these factors that may affect our operating results, see ‘‘Risk Factors’’ in our 2006 Annual Report on Form 10-K.

Results of Operations

The following table sets forth for the periods indicated, certain operating data, and data as a percentage of total revenues:

|                                     |  |  |                                  |   |         |                                  |  |  |            |  |         |                            |  |  |  |   |         |         |  |  |  |  |         |          |
|-------------------------------------|--|--|----------------------------------|---|---------|----------------------------------|--|--|------------|--|---------|----------------------------|--|--|--|---|---------|---------|--|--|--|--|---------|----------|
|                                |  |  | Three Months EndedMarch 31, 2007 |   |         | Three Months EndedMarch 31, 2006 |
| (in thousands)                      |  |  | AsReported                       |   |         | Data as a% of totalrevenue       |  |  | AsReported |  |         | Data as a% of totalrevenue |
| Revenues:                           |  |  | (Unaudited)                      |   |         | (Unaudited)                      |
| License fees                        |  |  |                                  | $ | 1,796   |                                  |  |  |            |  | 48.6    | %                     |  |  |  | $ | 405     |         |  |  |  |  | 17.5    | %   |
| Services                            |  |  |                                  |   | 1,898   |                                  |  |  |            |  | 51.4    |                            |  |  |  |   | 1,907   |         |  |  |  |  | 82.5    |          |
| Total revenues                      |  |  |                                  |   | 3,694   |                                  |  |  |            |  | 100.0   |                            |  |  |  |   | 2,312   |         |  |  |  |  | 100.0   |          |
|                                |  |  |                                  |   |    |                                  |  |  |            |  |    |                            |  |  |  |   |    |         |  |  |  |  |    |          |
| Operating expenses:                 |  |  |                                  |   |    |                                  |  |  |            |  |    |                            |  |  |  |   |    |         |  |  |  |  |    |          |
| Cost of license fees                |  |  |                                  |   | 121     |                                  |  |  |            |  | 3.3     |                            |  |  |  |   | 268     |         |  |  |  |  | 11.6    |          |
| Cost of services                    |  |  |                                  |   | 1,371   |                                  |  |  |            |  | 37.1    |                            |  |  |  |   | 1,854   |         |  |  |  |  | 80.2    |          |
| Sales and marketing                 |  |  |                                  |   | 2,122   |                                  |  |  |            |  | 57.4    |                            |  |  |  |   | 2,611   |         |  |  |  |  | 112.9   |          |
| Research and development            |  |  |                                  |   | 1,662   |                                  |  |  |            |  | 45.0    |                            |  |  |  |   | 1,655   |         |  |  |  |  | 71.6    |          |
| General and administrative          |  |  |                                  |   | 1,194   |                                  |  |  |            |  | 32.3    |                            |  |  |  |   | 1,155   |         |  |  |  |  | 50.0    |          |
| Total operating expenses            |  |  |                                  |   | 6,470   |                                  |  |  |            |  | 175.1   |                            |  |  |  |   | 7,543   |         |  |  |  |  | 326.3   |          |
| Operating loss                      |  |  |                                  |   | (2,776  | )                           |  |  |            |  | (75.1   | )                     |  |  |  |   | (5,231  | )  |  |  |  |  | (226.3  | )   |
| Other income (expense), net         |  |  |                                  |   | 115     |                                  |  |  |            |  | 3.1     |                            |  |  |  |   | (27     | )  |  |  |  |  | (1.2    | )   |
| Loss before taxes                   |  |  |                                  |   | (2,661  | )                           |  |  |            |  | (72.0   | )                     |  |  |  |   | (5,258  | )  |  |  |  |  | (227.5  | )   |
| Income tax benefit                  |  |  |                                  |   | — |                                  |  |  |            |  | — |                            |  |  |  |   | — |         |  |  |  |  | — |          |
| Loss from continuing operations     |  |  |                                  |   | (2,661  | )                           |  |  |            |  | (72.0   | )                     |  |  |  |   | (5,258  | )  |  |  |  |  | (227.5  | )   |
| Income from discontinued operations |  |  |                                  |   | — |                                  |  |  |            |  | — |                            |  |  |  |   | 2,512   |         |  |  |  |  | 108.7   |          |
| Net loss                            |  |  |                                  | $ | (2,661  | )                           |  |  |            |  | (72.0   | )%                    |  |  |  | $ | (2,746  | )  |  |  |  |  | (118.8  | )%  |
|                                     |

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Comparison of Three Months Ended March 31, 2007 to 2006

Revenues

Total revenues from continuing operations increased $1.4 million or 59.8% for the three months ended March 31, 2007 as compared to the corresponding prior year period due to a $1.4 million or 343.5% increase in license fees. The three months ended March 31, 2007 included license revenue of approximately $1.2 million from two large customers which did not occur in the first quarter of 2006. Additionally, revenue from our partner channel was stronger in the first quarter of 2007 compared with the first quarter of 2006.

Total revenues for the three months ended March 31, 2007 included $0.8 million and $0.8 million or 21.9% and 21.2% respectively, of total revenues from two customers. Total revenue for the three months ended March 31, 2006 included $0.4 million and $0.3 million or 18.2% and 12.6% respectively of total revenues from two customers.

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

|                        |  |  |                              |   |       |           |  |  |        |  |       |           |  |  |  |   |       |  |  |  |  |  |       |         |
|------------------------|--|--|------------------------------|---|-------|-----------|--|--|--------|--|-------|-----------|--|--|--|---|-------|--|--|--|--|--|-------|---------|
|                   |  |  | Three Months Ended March 31, |
| (dollars in thousands) |  |  | 2007                         |   |       | 2006      |
|                   |  |  | Amount                       |   |       | % ofTotal |  |  | Amount |  |       | % ofTotal |
| Maintenance            |  |  |                              | $ | 1,314 |           |  |  |        |  | 69.2  | %    |  |  |  | $ | 1,125 |  |  |  |  |  | 59.0  | %  |
| Consulting             |  |  |                              |   | 472   |           |  |  |        |  | 24.9  | %    |  |  |  |   | 690   |  |  |  |  |  | 36.2  | %  |
| Subscription revenue   |  |  |                              |   | 112   |           |  |  |        |  | 5.9   | %    |  |  |  |   | 92    |  |  |  |  |  | 4.8   | %  |
| Total services revenue |  |  |                              | $ | 1,898 |           |  |  |        |  | 100.0 | %    |  |  |  | $ | 1,907 |  |  |  |  |  | 100.0 | %  |
|                        |

Maintenance revenue increased in the first quarter of 2007 compared with 2006 resulting from a maintenance contract executed in 2007 related to maintenance services provided in 2006. Consulting revenue decreased in the same period resulting from a large implementation project during the first quarter of 2006 with no similar consulting project in the first quarter of 2007. Subscription revenue has increased resulting from larger volumes of records being processed through the Company’s hosted e-Delivery product in the first quarter 2007 compared with the first quarter 2006.

Operating Expenses

Cost of license fees consists primarily of amortization of capitalized software development costs and amounts paid to third parties with respect to products we resell in conjunction with the licensing of our products. The elements can vary substantially from period to period as a percentage of license fees. Cost of license fees for the three months ended March 31, 2007 were $0.1 million lower than the same period last year as there was no amortization of capitalized software development costs in the first quarter of 2007. All capitalized software development cost have been fully amortized as of December 31, 2006.

Cost of services consists primarily of personnel and third party costs for product quality assurance, training, installation, consulting and customer support. Cost of services decreased $0.5 million or 26.1% for the three months ended March 31, 2007, as compared to the corresponding prior year period. The decrease for the three-month period was mainly due to headcount reductions as a result of the reduction in force implemented in the fourth quarter of 2006. The service margin was 27.8% for the three months ended March 31, 2007 compared with 2.8% for the corresponding prior year period. This increase was a result of the reduction in cost in the first quarter of 2007 versus the first quarter of 2006.

Sales and marketing expenses consist primarily of salaries, commissions and bonuses related to sales and marketing personnel, as well as travel and promotional expenses. Sales and marketing expenses were $0.5 million or 18.7% lower for the three months ended March 31, 2007, as compared to the corresponding prior year period. The decrease for the three-month period was primarily due to headcount reductions as a result of the reduction in force implemented in the fourth quarter of 2006.

Research and development expenses consist primarily of personnel costs, costs of equipment, facilities and third party software development costs. Research and development expenses are generally charged 

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to operations as incurred. However, certain software development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86 (‘‘SFAS 86’’). Such capitalized software development costs are generally amortized to cost of license fees on a straight-line basis over periods not exceeding three years. There was no cost capitalized over the periods ended March 31, 2007 and 2006.

Research and development expenses were flat for the three months ended March 31, 2007, as compared to the comparable prior year period. Headcount reductions as a result of the reduction in force implemented in the fourth quarter of 2006 were offset by increases in temporary consultant expenses.

General and administrative expenses consist primarily of salaries for administrative, executive and financial personnel, and outside professional fees. General and administrative expenses were flat for the three months ended March 31, 2007 as compared to the corresponding prior year period. Headcount reductions as a result of the reduction in force implemented in the fourth quarter of 2006 were offset by increases in professional services costs.

Operating Loss

Operating loss improved $2.5 million for the three months ended March 31, 2007 as compared to the corresponding prior year period as a result of the increase in license revenue of $1.4 million and reductions in operating expenses of $1.1 million as a result of the reasons described above.

Other Income (Expense), Net

Other income (expense), net increased $0.1 million for the three months ended March 31, 2007, as compared to the same period in 2006. This increase is a result of lower foreign exchange transaction losses during the three months ended March 31, 2007 as compared to the same period last year. As of January 1, 2007, the Company has considered its inter-company loans to its foreign subsidiaries to be permanently reinvested. As a result of this decision, all foreign currency translation adjustments are recorded through the foreign currency translation adjustment account in the stockholders equity section of the Company’s balance sheet and are no longer recorded on the Company’s Statement of Operations. 

Loss from continuing operations

Loss from continuing operations improved $2.6 million for the three months ended March 31, 2007, as compared to the same period in 2006 for the reasons stated in ‘‘Operating Loss’’ above.

Income from discontinued operations

There was no activity in discontinued operations during the three months ended March 31, 2007 compared to income of $2.5 million in the same period 2006. The Enterprise Solutions business was sold on October 31, 2006 as described in footnote 2 to the financial statements contained herein.

Net loss

The net loss was $2.7 million, or $(0.08) per diluted share of income for the three months ended March 31, 2007, the same as for the three months ended March 31, 2006, for the reasons stated above.

Liquidity and Capital Resources

On August 11, 2004, the Company entered into a two-year Loan and Security Agreement (the ‘‘Agreement’’) which contained a revolving line of credit under which the Company had available the lesser of $4.0 million or 80% of eligible accounts, as defined.

On January 27, 2005, March 28, 2005 and September 13, 2005, the Company entered into modifications to the Agreement (the ‘‘Amended Agreement’’) in order to revise certain terms of the Agreement including the loan fees, interest on the loan and the financial covenants. The Amended Agreement included a waiver of the Company’s June 30, 2005 financial covenant default.

Borrowings under the revolving line of credit, per the Amended Agreement, bore interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial 

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covenants set forth in the Amended Agreement, the interest rate would increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment fee of $30 per year and an unused revolving line facility fee of 0.25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additional $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Amended Agreement, the loan was subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company’s EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There was also a monthly transition event covenant which required the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.0.

On October 31, 2006 the Company and the Bank entered into a Second Loan Modification Agreement and an Intellectual Property Security Agreement. The Second Loan Modification Agreement served (a) to amend the Amended Agreement by reducing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 80.0% of the Eligible Accounts to (ii) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to forbear until November 10, 2006 from exercising its rights and remedies with respect to the default of the Company for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006. The IP Security Agreement serves to supplement the Amended Agreement by including among the assets securing the Company’s indebtedness to the Bank, a security interest in all of the Company’s right, title and interest in, to and under its intellectual property.

On November 11, 2006 the Company and the Bank entered into a Third Loan Modification Agreement. The Third Loan Modification Agreement serves (a) to amend the Second Loan Modification Agreement by increasing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts to (ii) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to extend the forbearance from exercising its rights and remedies with respect to the default of the Company through December 10, 2006 for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006.

On March 6, 2007, the Company entered into a Fourth Loan Modification Agreement (the ‘‘Fourth Modification Agreement’’) with the Bank effective as of February 15, 2007 to amend and supplement its Amended and Restated Loan and Security Agreement dated as of September 13, 2005 between the Company and the Bank, as amended by the First Loan Modification Agreement dated as of March 14, 2006, the Second Loan Modification Agreement dated as of October 31, 2006, and the Third Loan Modification Agreement dated as of November 11, 2006 (as amended, the ‘‘Loan Agreement’’).

Subject to certain borrowing base limitations and compliance with covenants, the Fourth Modification Agreement serves to amend the Loan Agreement by changing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts (as such term is defined in the Loan Agreement) to (ii) up to the lesser of (A) $2,500 or (B) 80.0% of the Eligible Accounts (as such term is defined in the Loan Agreement). The Fourth Modification Agreement also extends the maturity date of the Loan Agreement from February 15, 2007 to April 1, 2008.

In addition, the Fourth Modification Agreement deletes the existing financial covenants contained in the Loan Agreement and adds two new financial covenants: (i) a covenant requiring the Company to maintain a Tangible Net Worth (as defined in the Fourth Modification Agreement) of at least (A) $1,700 as of the months ending January 31, 2007, February 28, 2007 and March 31, 2007, (B) $600 as of the months ending April 30, 2007, May 31, 2007 and June 30, 2007, (C) ($150) as of the months ending July 31, 2007, August 31, 2007 and September 30, 2007, and (D) $1.00 as of the month ending October 31, 2007 and as of the last day of each month thereafter and (ii) a covenant requiring the Company to maintain Liquidity (representing the amount of unrestricted cash of the Company at the Bank plus the unused availability under the Loan Agreement) at all times of at least $1,000.

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The Bank also waived the Company’s existing defaults under the Loan Agreement based on certain failures to meet prior financial covenants during the year ended December 31, 2006.

As of March 31, 2007, the Company had borrowings of $1,000, and had remaining availability under the Loan Agreement of $225. During April 2007, the Company repaid all outstanding amounts under the Agreement. For each month of 2007 the Company was in compliance with its liquidity covenant but was not in compliance with its minimum tangible net worth covenant of $1,700 for the months ended February 28 and March 31, 2007. Tangible net worth as of March 31, 2007 was $1,201. On May 15, 2007, the Bank waived such violations and agreed to forbear until June 15, 2007, from exercising its rights and remedies with respect to the default of the Company for failure to comply with the tangible net worth covenant. The Company is currently in the process of seeking to secure additional financing. Upon receipt of such additional financing, the Bank has preliminarily agreed to provide new financial covenants acceptable to the Company. No assurance can be given that such additional financing will be secured and that the Bank will definitively agree to provide new financial covenants.

Our operating activities used cash of $3.0 million for the three months ended March 31, 2007 and $3.7 million for the three months ended March 31, 2006. Net cash used in operating activities during the three months ended March 31, 2007 is primarily the result of the net loss from continuing operations and a decrease in accounts payable and accrued expenses, increased accounts receivable and increased other assets offset slightly by decreased prepaid expenses and other current assets and non-cash stock compensation expense. The use of cash in the first quarter 2006 was primarily the result of the net loss from continuing operations and increased prepaid expenses and other current assets offset somewhat by income from discontinued operations, a reduction in accounts receivable and depreciation and amortization.

Our investing activities used no significant cash for the three months ended March 31, 2007 and 2006, respectively.

Cash provided by financing activities was $1.0 million and zero for the three months ended March 31, 2007 and 2006, respectively. For the three months ended March 31, 2007, cash was provided by borrowings under the Company’s debt facility and the exercise of stock options during the period.

Cash used by discontinued operations was $0.9 for the three months ended March 31, 2007. Cash provided by discontinued operations was $7.7 million for the three months ended March 31, 2006. For the three months ended March 31, 2007, cash used related to payment of cash to Computron Software, LLC related to collection of their accounts receivable received by us and required to be returned to Computron Software, LLC. For the three months ended March 31, 2006, cash was provided by net income from discontinued operations offset somewhat by the change in net assets held for sale.

We have no significant capital commitments. Planned capital expenditures for the year 2007 are expected to be less than $0.5 million. Our aggregate minimum operating lease payments for 2007 will be approximately $1.2 million. We have $150 of remaining aggregate minimum royalties payable to third party software providers in accordance with 2007 agreements for third party software used in conjunction with our software. Future commitments to third party software providers are as follows:

|                |  |  |        |   |         |  |
|----------------|--|--|--------|---|---------|--|
| (in thousands) |
| Year           |  |  | Amount |
| 2007           |  |  |        | $ | 150     |  |
| 2008           |  |  |        |   | 50      |  |
| 2009           |  |  |        |   | 50      |  |
| 2010           |  |  |        |   |    |  |
| 2011           |  |  |        |   | — |  |
| Total          |  |  |        | $ | 250     |  |
|                |

AXS-One recorded net income of $5.5 million for the year ended December 31, 2006 primarily related to the sale of the Enterprise Solutions business, and recorded net losses of $9.0 million and $5.2 million for the years ended December 31, 2005 and 2004 respectively. AXS-One incurred a loss of $19.6 million, $15.1 million and $2.7 million for the years ended December 31, 2006, 2005 and 2004, respectively, from 

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continuing operations. We were not able to obtain operating profitability for the years ended December 31, 2004, 2005 and 2006 from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management’s initiatives over the last three years, including the restructurings in December 2006, June 2005 and June 2004, the private placements of common stock in June 2005 and April 2004, the executive management salary reductions for most of the second half of 2005 and for all of 2007, and the sale of the Enterprise Solutions business, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations, particularly given the recent sale of the Enterprise Solutions business, which historically was our profitable segment. We may be required to further reduce operating costs in order to meet our obligations. The Company is currently in default of its bank credit facility and is currently in the process of seeking to secure additional sources of financing. If we are unable to achieve profitable operations or secure additional sources of financing, there would be substantial doubt about our ability to continue as a going concern. Additionally, there is a risk that cash held by one foreign subsidiary approximating $0.4 million at March 31, 2007 may not be readily available for use in our U.S. operations to pay our obligations as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available.

Critical Accounting Estimates

Our critical accounting policies are as follows:

|  |              |                         |
|--|--------------|-------------------------|
|  | •  | Revenue recognition and |

|  |              |                                         |
|--|--------------|-----------------------------------------|
|  | •  | Capitalized software development costs. |

Revenue Recognition

The Company recognizes 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 to Certain Transactions.’’ Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes license revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. In multiple element arrangements, the Company defers the vendor-specific objective evidence of fair value (‘‘VSOE’’) related to the undelivered elements and recognizes revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of maintenance is determined by using a consistent percentage of maintenance fee to license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of services is determined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.

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

For software license, services and maintenance revenue, the Company assesses whether the fee is fixed and determinable and whether or not collection is probable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from invoice date, the fee is considered not fixed and determinable. In these cases, the Company recognizes revenue as the fees become due.

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The Company assesses assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Collateral is not requested from customers. If it is determined that collection of a fee is not probable, the fee is deferred and revenue is recognized at the time collection becomes probable, which is generally upon receipt of cash.

The Company’s arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period.

The majority of our training and consulting services are billed based on hourly rates. The Company generally recognizes revenue as these services are performed. However, when there is an arrangement that is based on a fixed fee or requires significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests, the Company recognizes the related revenue using the percentage of completion method of accounting. This would apply to our custom programming services, which are generally contracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period such losses are determined to be probable.

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

In accordance with EITF Issue No. 01-14, ‘‘Income Statement Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,’’ reimbursements received for out-of-pocket expenses incurred are classified as services revenue in the Consolidated Statements of Operations.

Recently Issued Accounting Standards

In July 2006, the FASB issued FIN 48 ‘‘Accounting for Uncertainty in Income Taxes.’’ This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The impact of adopting FIN 48 on our financial statements is not material.

In September 2006, the FASB issued Statement No. 157 ‘‘Fair Value Measurements’’, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurement. FASB Statement No. 157 applies to other accounting pronouncements that require fair value measurements or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.

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

See our 2006 Annual Report on Form 10K for a detailed discussion of risk factors.

|               |                                                            |
|---------------|------------------------------------------------------------|
| Item 3.  | Quantitative and Qualitative Disclosures about Market Risk |

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

|                |                         |
|----------------|-------------------------|
| Item 4T.  | Controls and Procedures |

Evaluation of disclosure controls and procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and 

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reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of ‘‘disclosure controls and procedures’’ in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2007. Based upon the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2007.

Internal controls over financial reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.    OTHER INFORMATION

|               |          |
|---------------|----------|
| Item 6.  | Exhibits |

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

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SIGNATURES

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

|                              |  |  |              |  |  |                                                                                                            |
|------------------------------|--|--|--------------|--|--|------------------------------------------------------------------------------------------------------------|
|                         |  |  | AXS-ONE INC. |
| Date: May 15, 2007 |  |  | By:          |  |  | /s/ William P. Lyons                                                                                       |
|                         |  |  |         |  |  | William P. Lyons Chief Executive Officer and Chairman of the Board                                         |
|                         |  |  | By:          |  |  | /s/ Joseph P. Dwyer                                                                                        |
|                         |  |  |         |  |  | Joseph P. DwyerExecutive Vice President,Chief Financial Officer and Treasurer(Principal Financial Officer) |
|                              |

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