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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

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

AXS-ONEINC.

(Exact name of registrant as specifiedin itscharter)

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

(201) 935-3400

(Registrant's telephone number, includingarea code)

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

YES        NO    

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

    Large AcceleratedFiler                    AcceleratedFiler                    Non-AcceleratedFiler    

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

YES        NO    Number of shares outstanding of the issuer's common stock as ofNovember 16,2006

|                                       |  |  |                             |
|---------------------------------------|--|--|-----------------------------|
| Class                                 |  |  | Numberof Shares Outstanding |
| Common Stock, par value $0.01pershare |  |  | 34,970,627                  |
|                                       |

    

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|  |
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----

AXS-ONEINC.

INDEX

|            |  |  |                                                                                                                                                                                                                                                 |  |  |            |  |        |  |
|------------|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------|--|--------|--|
|       |  |  |                                                                                                                                                                                                                                            |  |  | PageNumber |
| PARTI      |  |  | FINANCIALINFORMATION                                                                                                                                                                                                                            |  |  |            |  |   |  |
|       |  |  | Item1.    FinancialStatements                                                                                                                                                                                               |  |  |            |  |   |  |
|       |  |  | ConsolidatedBalance Sheets September 30, 2006 (unaudited) andDecember 31,2005                                                                                                                                                                   |  |  |            |  | 3      |  |
|       |  |  | ConsolidatedStatements of Operations (unaudited) Three and Nine months endedSeptember 30, 2006 and2005                                                                                                                                          |  |  |            |  | 4      |  |
|       |  |  | ConsolidatedStatements of Comprehensive Loss (unaudited) Three and Nine monthsended September 30, 2006 and2005                                                                                                                                  |  |  |            |  | 5      |  |
|       |  |  | ConsolidatedStatements of Cash Flows (unaudited) Nine months endedSeptember 30, 2006 and2005                                                                                                                                                    |  |  |            |  | 6      |  |
|       |  |  | Notes toConsolidated Interim FinancialStatements                                                                                                                                                                                                |  |  |            |  | 7      |  |
|       |  |  | Item2.    Management’s Discussion and Analysis of FinancialCondition and                     Results ofOperations |  |  |            |  | 20     |  |
|       |  |  | Item3.    Quantitative and Qualitative Disclosures About MarketRisk                                                                                                                                                         |  |  |            |  | 31     |  |
|       |  |  | Item 4.    Controls andProcedures                                                                                                                                                                                           |  |  |            |  | 32     |  |
| PARTII     |  |  | OTHERINFORMATION                                                                                                                                                                                                                                |  |  |            |  |   |  |
|       |  |  | Item 1A. RiskFactors                                                                                                                                                                                                                            |  |  |            |  | 33     |  |
|       |  |  | Item6.     Exhibits                                                                                                                                                                                                    |  |  |            |  | 43     |  |
| SIGNATURES |
|       |  |  | Signatures                                                                                                                                                                                                                                      |  |  |            |  | 44     |  |
|            |

2

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Table of Contents

PARTI.    FINANCIAL INFORMATION

|              |                      |
|--------------|----------------------|
| Item1.  | Financial Statements |

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

|                                                                                                                                                                   |  |  |                  |   |         |                  |  |  |  |   |         |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------------|---|---------|------------------|--|--|--|---|---------|---|
|                                                                                                                                                              |  |  | September30,2006 |   |         | December 31,2005 |
| ASSETS                                                                                                                                                            |  |  | (unaudited)      |   |         |             |
| Currentassets:                                                                                                                                                    |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Cash and cashequivalents                                                                                                                                          |  |  |                  | $ | 2,126   |                  |  |  |  | $ | 3,613   |   |
| Restrictedcash                                                                                                                                                    |  |  |                  |   | 6       |                  |  |  |  |   | 57      |   |
| Accountsreceivable, net of allowance for doubtful accountsof                                                                                                      |  |  |                  |   |    |                  |  |  |  |   |    |   |
| $85 and $167 atSeptember  30,  2006 and December  31,  2005,respectively                                                                                          |  |  |                  |   | 1,474   |                  |  |  |  |   | 5,153   |   |
| Prepaidexpenses and other currentassets                                                                                                                      |  |  |                  |   | 900     |                  |  |  |  |   | 718     |   |
| Totalcurrentassets                                                                                                                                                |  |  |                  |   | 4,506   |                  |  |  |  |   | 9,541   |   |
| Equipmentand leasehold improvements, atcost:                                                                                                                      |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Computer and officeequipment                                                                                                                                 |  |  |                  |   | 2,543   |                  |  |  |  |   | 10,967  |   |
| Furnitureandfixtures                                                                                                                                              |  |  |                  |   | 639     |                  |  |  |  |   | 924     |   |
| Leaseholdimprovements                                                                                                                                             |  |  |                  |   | 701     |                  |  |  |  |   | 865     |   |
|                                                                                                                                                              |  |  |                  |   | 3,883   |                  |  |  |  |   | 12,756  |   |
| Less— accumulated depreciation andamortization                                                                                                              |  |  |                  |   | 3,440   |                  |  |  |  |   | 12,361  |   |
|                                                                                                                                                              |  |  |                  |   | 443     |                  |  |  |  |   | 395     |   |
| Capitalizedsoftware development costs, net of accumulatedamortization                                                                                             |  |  |                  |   |    |                  |  |  |  |   |    |   |
| of $989 and$11,432 at September  30,  2006 and December31,  2005,respectively                                                                                     |  |  |                  |   | 74      |                  |  |  |  |   | 1,038   |   |
| Otherassets                                                                                                                                                       |  |  |                  |   | 97      |                  |  |  |  |   | 92      |   |
| Assets held forsale                                                                                                                                               |  |  |                  |   | 2,144   |                  |  |  |  |   | — |   |
|                                                                                                                                                              |  |  |                  | $ | 7,264   |                  |  |  |  | $ | 11,066  |   |
| LIABILITIESAND STOCKHOLDERS'DEFICIT                                                                                                                               |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Currentliabilities:                                                                                                                                               |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Bankdebt                                                                                                                                                          |  |  |                  | $ | 1,844   |                  |  |  |  | $ | — |   |
| Accountspayable                                                                                                                                                   |  |  |                  |   | 1,386   |                  |  |  |  |   | 1,576   |   |
| Accruedexpenses                                                                                                                                                   |  |  |                  |   | 3,072   |                  |  |  |  |   | 3,267   |   |
| Due tojointventure                                                                                                                                                |  |  |                  |   | — |                  |  |  |  |   | 52      |   |
| Deferredrevenue                                                                                                                                                   |  |  |                  |   | 2,119   |                  |  |  |  |   | 8,224   |   |
| Totalcurrentliabilities                                                                                                                                           |  |  |                  |   | 8,421   |                  |  |  |  |   | 13,119  |   |
| Long-termliabilities:                                                                                                                                             |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Long-termdeferredrevenue                                                                                                                                          |  |  |                  |   | 4       |                  |  |  |  |   | 63      |   |
| Liabilities heldforsale                                                                                                                                           |  |  |                  |   | 8,621   |                  |  |  |  |   | — |   |
|                                                                                                                                                              |  |  |                  |   | 17,046  |                  |  |  |  |   | 13,182  |   |
| Commitmentsandcontingencies                                                                                                                                       |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Stockholders'deficit:                                                                                                                                             |  |  |                  |   |    |                  |  |  |  |   |    |   |
| Preferred stock,$.01 par value, authorized 5,000 shares, no shares issued andoutstanding                                                                          |  |  |                  |   | — |                  |  |  |  |   | — |   |
| Commonstock, $.01 par value, authorized 50,000 shares; 34,917 and 34,316shares issued and outstanding at September  30,  2006 andDecember  31,  2005,respectively |  |  |                  |   | 350     |                  |  |  |  |   | 343     |   |
| Additionalpaid-incapital                                                                                                                                          |  |  |                  |   | 88,183  |                  |  |  |  |   | 87,884  |   |
| Accumulateddeficit                                                                                                                                                |  |  |                  |   | (98,737 | )                |  |  |  |   | (90,663 | ) |
| Accumulatedother comprehensiveincome                                                                                                                              |  |  |                  |   | 422     |                  |  |  |  |   | 497     |   |
| Unamortizedstockcompensation                                                                                                                                      |  |  |                  |   | — |                  |  |  |  |   | (177    | ) |
| Totalstockholders'deficit                                                                                                                                         |  |  |                  |   | (9,782  | )                |  |  |  |   | (2,116  | ) |
|                                                                                                                                                              |  |  |                  | $ | 7,264   |                  |  |  |  | $ | 11,066  |   |
|                                                                                                                                                                   |

Theaccompanying notes are an integral part of these consolidated financialstatements.

3

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

|                                                  |  |  |                                  |   |         |                               |  |  |      |   |         |      |  |  |  |   |         |   |  |  |  |   |         |   |
|--------------------------------------------------|--|--|----------------------------------|---|---------|-------------------------------|--|--|------|---|---------|------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                             |  |  | ThreeMonths Ended September  30, |   |         | Nine MonthsEnded September30, |
|                                             |  |  | 2006                             |   |         | 2005                          |  |  | 2006 |   |         | 2005 |
| Revenues:                                        |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Licensefees                                      |  |  |                                  | $ | 476     |                               |  |  |      | $ | 2,017   |      |  |  |  | $ | 1,736   |   |  |  |  | $ | 2,806   |   |
| Services                                         |  |  |                                  |   | 1,757   |                               |  |  |      |   | 1,690   |      |  |  |  |   | 6,025   |   |  |  |  |   | 5,510   |   |
| Totalrevenues                                    |  |  |                                  |   | 2,233   |                               |  |  |      |   | 3,707   |      |  |  |  |   | 7,761   |   |  |  |  |   | 8,316   |   |
| Operatingexpenses:                               |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Costof licensefees                               |  |  |                                  |   | 257     |                               |  |  |      |   | 287     |      |  |  |  |   | 892     |   |  |  |  |   | 814     |   |
| Costofservices                                   |  |  |                                  |   | 2,195   |                               |  |  |      |   | 1,422   |      |  |  |  |   | 6,336   |   |  |  |  |   | 5,527   |   |
| Salesandmarketing                                |  |  |                                  |   | 2,292   |                               |  |  |      |   | 1,558   |      |  |  |  |   | 7,261   |   |  |  |  |   | 5,643   |   |
| Researchanddevelopment                           |  |  |                                  |   | 1,610   |                               |  |  |      |   | 1,381   |      |  |  |  |   | 4,884   |   |  |  |  |   | 4,569   |   |
| Generalandadministrative                         |  |  |                                  |   | 1,042   |                               |  |  |      |   | 947     |      |  |  |  |   | 3,494   |   |  |  |  |   | 3,346   |   |
| Restructuringcosts and othercosts                |  |  |                                  |   | — |                               |  |  |      |   | — |      |  |  |  |   | — |   |  |  |  |   | 322     |   |
| Totaloperatingexpenses                           |  |  |                                  |   | 7,396   |                               |  |  |      |   | 5,595   |      |  |  |  |   | 22,867  |   |  |  |  |   | 20,221  |   |
| Operatingloss                                    |  |  |                                  |   | (5,163  | )                             |  |  |      |   | (1,888  | )    |  |  |  |   | (15,106 | ) |  |  |  |   | (11,905 | ) |
| Otherincome(expense):                            |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Interestincome                                   |  |  |                                  |   | 17      |                               |  |  |      |   | 47      |      |  |  |  |   | 156     |   |  |  |  |   | 105     |   |
| Interestexpense                                  |  |  |                                  |   | (41     | )                             |  |  |      |   | (5      | )    |  |  |  |   | (97     | ) |  |  |  |   | (6      | ) |
| Otherexpense,net                                 |  |  |                                  |   | 20      |                               |  |  |      |   | 49      |      |  |  |  |   | 22      |   |  |  |  |   | (364    | ) |
| Totalother income (expense),net                  |  |  |                                  |   | (4      | )                             |  |  |      |   | 91      |      |  |  |  |   | 81      |   |  |  |  |   | (265    | ) |
| Lossbefore incometaxes                           |  |  |                                  |   | (5,167  | )                             |  |  |      |   | (1,797  | )    |  |  |  |   | (15,025 | ) |  |  |  |   | (12,170 | ) |
| Incometaxbenefit                                 |  |  |                                  |   | — |                               |  |  |      |   | — |      |  |  |  |   | — |   |  |  |  |   | 25      |   |
| Lossfrom continuingoperations                    |  |  |                                  |   | (5,167  | )                             |  |  |      |   | (1,797  | )    |  |  |  |   | (15,025 | ) |  |  |  |   | (12,145 | ) |
| Incomefrom discontinued operations netof         |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| taxprovision of $ — for allperiods         |  |  |                                  |   | 2,327   |                               |  |  |      |   | 1,974   |      |  |  |  |   | 6,951   |   |  |  |  |   | 4,794   |   |
| Netincome(loss)                                  |  |  |                                  | $ | (2,840  | )                             |  |  |      | $ | 177     |      |  |  |  | $ | (8,074  | ) |  |  |  | $ | (7,351  | ) |
| Basicnet income (loss) per commonshare:          |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| (Loss)from continuingoperations                  |  |  |                                  |   | (0.15   | )                             |  |  |      |   | (0.05   | )    |  |  |  |   | (0.43   | ) |  |  |  |   | (0.40   | ) |
| Incomefrom discontinuedoperations                |  |  |                                  |   | 0.07    |                               |  |  |      |   | 0.06    |      |  |  |  |   | 0.20    |   |  |  |  |   | 0.16    |   |
| Netincome(loss)                                  |  |  |                                  | $ | (0.08   | )                             |  |  |      | $ | 0.01    |      |  |  |  |   | (0.23   | ) |  |  |  |   | (0.24   | ) |
| Weightedaverage basic common sharesoutstanding   |  |  |                                  |   | 34,487  |                               |  |  |      |   | 33,635  |      |  |  |  |   | 34,364  |   |  |  |  |   | 30,761  |   |
| Dilutednet income (loss) per commonshare         |  |  |                                  |   |    |                               |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| (Loss)from continuingoperations                  |  |  |                                  |   | (0.15   | )                             |  |  |      |   | (0.05   | )    |  |  |  |   | (0.43   | ) |  |  |  |   | (0.40   | ) |
| Incomefrom discontinuedoperations                |  |  |                                  |   | 0.07    |                               |  |  |      |   | 0.06    |      |  |  |  |   | 0.20    |   |  |  |  |   | 0.16    |   |
| Netincome(loss)                                  |  |  |                                  | $ | (0.08   | )                             |  |  |      | $ | 0.01    |      |  |  |  | $ | (0.23   | ) |  |  |  | $ | (0.24   | ) |
| Weightedaverage diluted common sharesoutstanding |  |  |                                  |   | 34,487  |                               |  |  |      |   | 34,865  |      |  |  |  |   | 34,364  |   |  |  |  |   | 30,761  |   |
|                                                  |

Theaccompanying notes are an integral part of these consolidated financialstatements.

4

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Table of Contents

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

|                                       |  |  |                                  |   |        |                               |  |  |      |   |     |      |  |  |  |   |        |   |  |  |  |   |        |   |
|---------------------------------------|--|--|----------------------------------|---|--------|-------------------------------|--|--|------|---|-----|------|--|--|--|---|--------|---|--|--|--|---|--------|---|
|                                  |  |  | Three Months EndedSeptember  30, |   |        | Nine Months EndedSeptember30, |
|                                  |  |  | 2006                             |   |        | 2005                          |  |  | 2006 |   |     | 2005 |
| Netincome(loss)                       |  |  |                                  | $ | (2,840 | )                             |  |  |      | $ | 177 |      |  |  |  | $ | (8,074 | ) |  |  |  | $ | (7,351 | ) |
| Foreigncurrency translationadjustment |  |  |                                  |   | 47     |                               |  |  |      |   | (63 | )    |  |  |  |   | (75    | ) |  |  |  |   | 270    |   |
| Comprehensiveincome(loss)             |  |  |                                  | $ | (2,793 | )                             |  |  |      | $ | 114 |      |  |  |  | $ | (8,149 | ) |  |  |  | $ | (7,081 | ) |
|                                       |

Theaccompanying notes are an integral part of these consolidated financialstatements.

5

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Table of Contents

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

|                                                                                           |  |  |                              |   |         |      |  |  |  |   |         |   |
|-------------------------------------------------------------------------------------------|--|--|------------------------------|---|---------|------|--|--|--|---|---------|---|
|                                                                                      |  |  | NineMonths EndedSeptember30, |
|                                                                                      |  |  | 2006                         |   |         | 2005 |
| Cashflows from continuing operatingactivities:                                            |  |  |                              |   |    |      |  |  |  |   |    |   |
| Net loss fromcontinuingoperations                                                         |  |  |                              | $ | (15,025 | )    |  |  |  | $ | (12,145 | ) |
| Adjustmentsto reconcile net loss to net cash flows used in continuing operatingactivities |  |  |                              |   |    |      |  |  |  |   |    |   |
| Depreciationand amortization                                                              |  |  |                              |   | 429     |      |  |  |  |   | 239     |   |
| Netprovision for doubtfulaccounts                                                         |  |  |                              |   | (17     | )    |  |  |  |   | 2       |   |
| Stock optioncompensation expense                                                          |  |  |                              |   | 148     |      |  |  |  |   |    |   |
| Restrictedstock compensationexpense                                                       |  |  |                              |   | 102     |      |  |  |  |   | 28      |   |
| Changesin current assets andliabilities                                                   |  |  |                              |   |    |      |  |  |  |   |    |   |
| Accountsreceivable                                                                        |  |  |                              |   | 1,710   |      |  |  |  |   | (467    | ) |
| Prepaidexpenses and other currentassets                                                   |  |  |                              |   | (342    | )    |  |  |  |   | 493     |   |
| Change in otherassets                                                                     |  |  |                              |   | 12      |      |  |  |  |   | 79      |   |
| Accounts payable andaccruedexpenses                                                       |  |  |                              |   | 1,687   |      |  |  |  |   | (424    | ) |
| Deferredrevenue                                                                           |  |  |                              |   | (1,564  | )    |  |  |  |   | 125     |   |
| Netcash flows used in continuing operatingactivities                                      |  |  |                              |   | (12,860 | )    |  |  |  |   | (12,070 | ) |
| Cashflows from continuing investingactivities:                                            |  |  |                              |   |    |      |  |  |  |   |    |   |
| Restrictedcash                                                                            |  |  |                              |   | 50      |      |  |  |  |   | 5       |   |
| Capitalized softwaredevelopmentcosts                                                      |  |  |                              |   | — |      |  |  |  |   | (6      | ) |
| Purchase ofequipment and leaseholdimprovements                                            |  |  |                              |   | (272    | )    |  |  |  |   | (14     | ) |
| Netcash flows used in continuing investingactivities                                      |  |  |                              |   | (222    | )    |  |  |  |   | (15     | ) |
| Cashflows from continuing financingactivities:                                            |  |  |                              |   |    |      |  |  |  |   |    |   |
| Proceeds from exerciseof stock options andwarrants                                        |  |  |                              |   | 233     |      |  |  |  |   | 1,013   |   |
| Net proceeds fromthe sale of commonstock                                                  |  |  |                              |   | — |      |  |  |  |   | 6,390   |   |
| Debt issuancecosts                                                                        |  |  |                              |   | (31     | )    |  |  |  |   | (71     | ) |
| Borrowings of bankdebt                                                                    |  |  |                              |   | 1,844   |      |  |  |  |   | 1,500   |   |
| Netcash flows provided by continuing financingactivities                                  |  |  |                              |   | 2,046   |      |  |  |  |   | 8,832   |   |
| Cash flows from discontinuedoperations:                                                   |  |  |                              |   |    |      |  |  |  |   |    |   |
| Change in net operating assets held forsale                                               |  |  |                              |   | 9,680   |      |  |  |  |   | 3,554   |   |
| Change ininvesting activities held forsale                                                |  |  |                              |   | (172    | )    |  |  |  |   | (123    | ) |
| Net cash flows provided by discontinuedoperations                                         |  |  |                              |   | 9,508   |      |  |  |  |   | 3,431   |   |
| Foreign currency exchange rate effects on cash and cashequivalents                        |  |  |                              |   | 41      |      |  |  |  |   | (173    | ) |
| Net increase (decrease) in cash and cashequivalents                                       |  |  |                              |   | (1,487  | )    |  |  |  |   | 5       |   |
| Cashand cash equivalents, beginning ofperiod                                              |  |  |                              |   | 3,613   |      |  |  |  |   | 4,809   |   |
| Cash and cash equivalents, end ofperiod                                                   |  |  |                              | $ | 2,126   |      |  |  |  | $ | 4,812   |   |
| Supplemental disclosures of cash flowinformation:                                         |  |  |                              |   |    |      |  |  |  |   |    |   |
| Cash paidduring the period for–                                                     |  |  |                              |   |    |      |  |  |  |   |    |   |
| Interest                                                                                  |  |  |                              | $ | 74      |      |  |  |  | $ | — |   |
| Incometaxes                                                                               |  |  |                              | $ | — |      |  |  |  | $ | — |   |
|                                                                                           |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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(1)    OPERATIONS,BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTINGPOLICIES

AXS-One Inc. designs, markets and supportsrecords compliance management solutions that include digital archiving,business process management, electronic document delivery andintegrated records disposition and discovery for e-mail, instantmessaging, images, SAP and other corporate records, and as of thequarter ended September  30,  2006, financial managementapplications for global 2000 businesses, and scheduling and time andexpense solutions for professional services organizations. The Companyalso offers consulting, implementation, training, technical support andmaintenance services in support of its customers’ use of itssoftware products.

On October  31,  2006, theCompany sold certain assets and liabilities through which it operatedthe AXS-One Enterprise Solutions financial management and accountingapplications business (‘‘EnterpriseSolutions’’) to Computron Software, LLC for the sum of$12  million in cash plus future potential consideration forexceeding specified license revenue targets. Additionally, ComputronLLC assumed net liabilities of approximately $6.5  million. Theestimated gain on sale will be between $17  million and$18  million. The assets sold primarily consist of clientcontracts, marketing agreements, internally developed software,accounts receivable and fixed assets of the business. The liabilitiessold consist primarily of employee related liabilities, accountspayable and deferred revenue. The Company has classified the EnterpriseSolutions business as a discontinued operation in these financialstatements. Previously, the Company had two reporting segments, RecordsCompliance Management and Enterprise Solutions. As a result of the saleof the Enterprise Solutions, the Company now has one reportingsegment.

(a)    Basis ofPresentation

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

As ofSeptember  30,  2006, the Company met the criteria forreporting the sale of the Enterprise Solutions business as an assetheld for sale and discontinued operations in accordance with SFAS 144‘‘Accounting of the Impairment or Disposal of Long-LivedAssets’’, and has accounted for the discontinuedoperations as such within the consolidated financial statements andnotes to consolidated financial statements included in this Form 10-Qfiling.

Until May  31,  2006, the Company hada 49% ownership in a joint venture in its South Africanoperation, AXS-One African Solutions (Pty) Ltd (‘‘AfricanSolutions’’). The joint venture was considered to be avariable interest entity as defined in FASB Interpretation No. 46R,‘‘Consolidation of Variable InterestEntities’’ (FIN 46R). However, the Company had determinedthat it was not the primary beneficiary. Accordingly, until May31,  2006, the Company used the equity method of accounting forthe joint venture whereby investments, including loans to the jointventure, were stated at cost plus or minus the Company’s equityin undistributed earnings or losses. On May  31,  2006, theCompany purchased the remaining 51% of African Solutions fromAfrican Legends Technology for $161 less cash acquired of $20, to makeit a wholly owned subsidiary. The Company applied purchase accountingto record the transaction. The purchase price was less than the fairvalue of assets acquired and therefore the Company wrote-down the valueof all long-term assets to zero and recorded a gain of $37. As ofJune  1,  2006, 100% of the results of AfricanSolutions are included in the consolidated results of the Company indiscontinued operations as it is part of the Enterprise Solutionsbusiness segment.

The unaudited Consolidated InterimFinancial Statements have been prepared by the Company in accordancewith US generally accepted accounting principles and, in the opinion ofmanagement, contain all adjustments, consisting only of those of anormal recurring nature, necessary for a fair presentation of theseConsolidated Interim Financial Statements.

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

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

The results ofoperations for the three and nine months ended September30,  2006 are not necessarily indicative of results to beexpected for the full year 2006 or any future periods.

Wegenerated a net loss of $8.1  million for the nine months endedSeptember  30,  2006 and $9.0  million and$5.2  million for the years ended December  31,  2005and 2004, respectively. We experienced a decline in revenue as ourbusiness shifted to focus more heavily on the records compliancemanagement business. Management’s initiatives over the last twoyears, including the restructurings in June  2005 and 2004, theprivate placements of common stock in April  2004 and June2005 and 10% salary cuts of executive management for most of thesecond half of 2005, and the sale of the Enterprise Solutions businessin October  2006, have been designed to improve operating resultsand liquidity and better position AXS-One to compete under currentmarket conditions. As a result of these efforts, we expect that ourcurrent cash balance, availability of borrowing capacity under our bankline of credit, and operating cash flow should be sufficient to meetthe short-term requirements of the business. However, we may in thefuture be required to seek new sources of financing or futureaccommodations from our existing lender or other financialinstitutions, or we may seek equity infusions from private investors.Our ability to fund our operations is heavily dependent on the growthof our revenues over current levels to achieve profitable operations.We will also be required to further reduce operating costs in order tomeet our obligations. We are currently developing a restructuring planthat will be implemented in the fourth quarter of 2006 to reduceoperating expenses by approximately $5  million to $6million on an annual basis. If we are unable to achieve profitableoperations or secure additional sources of capital, there would besubstantial doubt about our ability to fund future operations andultimately continue as a going concern. Additionally, there is a riskthat cash held by one of our foreign subsidiaries approximating$0.4  million at September  30,  2006 may not bereadily available for use in our U.S. operations as the transfer offunds is sometimes delayed due to various foreign governmentrestrictions. No assurance can be given that management’sinitiatives including the restructuring plan will be successful or thatany such additional sources of financing, lender accommodations orequity infusions will be available.

(b)    RevenueRecognition

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

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arrangement for training, custom programmingand consulting revenues. Occasionally, where a master license orservices agreement with a customer already exists, the Company acceptsthe customer’s purchase order as evidence of an arrangement.

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

In multiple elementarrangements, the Company defers revenue based on the vendor-specificobjective evidence (‘‘VSOE’’) of fair valueof the undelivered elements and recognizes revenue on the deliveredelements using the residual method. The most commonly deferred elementsare initial maintenance and consulting services. Initial maintenance isrecognized on a straight-line basis over the initial maintenance term.The VSOE of fair value for maintenance is determined by using aconsistent percentage of maintenance fees to discounted license feebased on renewal rates. Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement. Maintenance contracts entitle the customer to hot-linesupport and all unspecified product upgrades released during the termof the maintenance contract. Upgrades include any and all unspecifiedpatches or releases related to a licensed software product. Maintenancedoes not include implementation services to install these upgrades. TheVSOE of fair value of services is determined by using an averageconsulting rate per hour for consulting services sold separatelymultiplied by the estimate of hours required to complete the consultingengagement.

Delivery of software generally occurs when theproduct (on CDs) is delivered to a common carrier. Occasionally,delivery occurs through electronic means where the software is madeavailable through the Company’s secure FTP (File TransferProtocol) site. The Company does not offer any customers or resellers aright of return.

For software license and maintenancerevenue, the Company assesses whether the fee is fixed and determinableand whether or not collection is probable. The Company assesses whetherthe fee is fixed and determinable based on the payment terms associatedwith the transaction. If a significant portion of a fee is due afterthe Company’s normal payment terms, which are 30 to 90 days frominvoice date, the fee is not considered to be fixed and determinable.In these cases, the Company recognizes revenue as the fees becomedue.

The majority of the Company’s training andconsulting services are billed based on hourly rates. The Companygenerally recognizes revenue as these services are performed when thereis also evidence of an arrangement, the fee is fixed or determinableand collectibility is reasonably assured. However, when the Companyenters into an arrangement that is based on a fixed fee, revenue isrecognized using the percentage of completion method of accounting.When the Company enters into an arrangement that requires it to performsignificant work either to alter the underlying software or to buildadditional complex interfaces so that the software performs as thecustomer requests, the Company recognizes the license revenue andservice revenue, using the percentage of completion method ofaccounting. This would apply to the Company’s custom programmingservices which are generally contracted on a fixed fee basis.Anticipated losses, if any, are charged to operations in the periodsuch losses are determined to be probable.

Prior to thepurchase of the remaining 51% of African Solutions on May31,  2006, revenues from the joint venture included consultingrevenue for the joint venture’s use of the Company’sSouth African subsidiary’s consultants in accordance with thejoint venture agreement. Revenue was recognized upon performance of theservices.

The Company assesses assuredness of collectionfor its revenue transactions based on a number of factors, includingpast transaction history with the customer and the credit-worthiness ofthe customer. The 

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

Our arrangements do not generally include acceptanceclauses. However, if an arrangement includes an acceptance provision,acceptance occurs upon the earliest of receipt of a written customeracceptance, expiration of the acceptance period or productive use ofthe software by the customer.

In accordance with EITFIssue No. 01-14, ‘‘Income Statement Characterization ofReimbursement Received for ‘Out of Pocket’ ExpensesIncurred,’’ reimbursements received for out-of-pocketexpenses incurred are classified as services revenue and the relatedexpense is recorded in cost of services in the unaudited ConsolidatedStatements of Operations.

(c)    Variable InterestEntity

The Company adopted FIN 46R as required onMarch  31,  2004. The Company had a 49% owned jointventure, African Solutions, that was considered to be a variableinterest entity as defined in FIN 46R. However, the Company determinedthat the majority owner at the time, African Legends Technology,absorbed the majority of the expected losses and therefore, AfricanLegends Technology, was the primary beneficiary. Due to the fact thatthe Company was not the primary beneficiary of African Solutions, theadoption of FIN 46R did not have an impact on the Company’sconsolidated financial position or results of operations.

African Solutions acted as a non-exclusive authorized thirdparty service provider to provide consulting and implementationservices, and as a non-exclusive representative in providing marketingand promotional services directly to the end users in regard to, amongother things, AXS-One’s software products. African Solutionsconducts business throughout the African continent where its targetmarkets are the financial sector and governmentdepartments.

On May  31,  2006, the Companypurchased the remaining 51% share of African Solutions fromAfrican Legends Technology for $161 less cash acquired of $20, to makeit a wholly owned subsidiary. The Company applied purchase accountingto record the transaction. The purchase price was less than the fairvalue of assets acquired and therefore the Company wrote-down the valueof all long-term assets to zero and recorded a gain of $37. Resultsprior to May  31,  2006 were recorded using the equitymethod of accounting. As of June  1,  2006, 100% ofthe results of African Solutions are included in the consolidatedresults of the Company in discontinued operations as it is part of theEnterprise Solutions business segment. At the time of the acquisitionthe investment in the joint venture was $122. Proforma results as ifAfrican Solutions had been acquired on January  1,  2006are not significantly different than the reported 2006 consolidatedresults.

(d)    Stock-BasedCompensation

Historically, the Company accounted forstock-based compensation under the recognition and measurementprinciples of Accounting Principles Board Opinion(‘‘APB’’) No. 25,‘‘Accounting for Stock Issued toEmployees’’ (‘‘APB 25’’), andrelated interpretations and disclosure provisions of Statement ofAccounting Standards SFAS 123 ‘‘Accounting ForStock-Based Compensation’’. Under this pronouncement, nocompensation expense related to stock option plans was reflected in theCompany's Consolidated Statements of Operations as all optionshad an exercise price equal to the market value of the underlyingcommon stock on the date of grant. Compensation cost for non-vestedrestricted stock grants was recorded based on its market value on thedate of grant and was included in the Company's ConsolidatedStatements of Operations ratably over the vesting period. Upon thegrant of non-vested restricted stock, unearned stock compensation wasrecorded as an offset to additional paid-in capital and was amortizedon a straight-line basis as compensation expense over the vestingperiod.

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On January  1,  2006,the start of the first quarter of fiscal 2006, the Company adopted theprovisions of Statement of Financial Accounting Standards No. 123R(revised 2004), ‘‘Share-Based Payment’’(‘‘SFAS 123R’’) which requiresthat the costs resulting from all share-based payment transactions berecognized in the financial statements at their fair values. TheCompany adopted SFAS 123R using the modified prospective applicationmethod under which the provisions of SFAS 123R apply to new awardsgranted after the adoption date and to awards modified, repurchased, orcancelled after the adoption date. Additionally, compensation cost forthe portion of the awards for which the requisite service has not beenrendered that are outstanding as of the adoption date is recognized inthe Consolidated Statement of Operations over the remaining serviceperiod after the adoption date based on the award's originalestimate 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 wasoffset against additional paid-in capital during the first quarter offiscal 2006. Results for prior periods have not been restated. Totalshare-based compensation expense recorded in the ConsolidatedStatements of Operations for the three and nine months endedSeptember  30,  2006 is $88 and $251, respectively.

As a result of adopting SFAS 123R on January  1,2006, the Company's loss before income taxes and net loss for thethree and nine months ended September  30,  2006 are $41and $148 higher than if it had continued to account for share-basedcompensation under APB No. 25. Basic and diluted earnings per share forthe three and nine months ended September  30,  2006 didnot change as a result of the Company adopting SFAS 123R.

On November  10,  2005, the FASB issued FASBStaff Position 123(R)-3 (‘‘FSP 123R-3’’),‘‘Transition Election Related to Accounting for the TaxEffects of Share-based Payment Awards,’’ that provides anelective alternative transition method of calculating the pool ofexcess tax benefits available to absorb tax deficiencies recognizedsubsequent to the adoption of SFAS 123R (the ‘‘APICPool’’) to the method otherwise required by paragraph 81of SFAS 123R. The Company may take up to one year from the effectivedate of this FSP to evaluate its available alternatives and make itsone-time election. The Company is currently evaluating the alternativemethods; however, neither alternative would have an impact on theCompany's results of operations or financial condition for thenine months ended September  30,  2006, due to the factthat the Company is currently using prior period net operating lossesand has not realized any tax benefits under SFAS 123R. Until and unlessthe Company elects the transition method described in this FSP, theCompany will follow the transition method described in paragraph 81 ofSFAS 123R.

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

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The following table illustrates theeffect on net loss and net loss per common share applicable to commonstockholders for the three and nine months ended September30,  2005, as if the Company had applied the fair valuerecognition provisions for stock-based employee compensation of SFAS123, as amended:

|                                                                                                      |  |  |                                     |   |        |                                    |  |  |  |  |         |   |
|------------------------------------------------------------------------------------------------------|--|--|-------------------------------------|---|--------|------------------------------------|--|--|--|--|---------|---|
|                                                                                                 |  |  | ThreeMonths EndedSeptember 30, 2005 |   |        | Nine MonthsEndedSeptember 30, 2005 |
| Net income (loss) asreported                                                                         |  |  |                                     | $ | 177    |                                    |  |  |  |  | ($7,351 | ) |
| Add: Stockbased compensationexpense                                                                  |  |  |                                     |   | 15     |                                    |  |  |  |  | 28      |   |
| Deduct: Total employeestock-based compensation determined under fair value based method forallawards |  |  |                                     |   | (459   | )                                  |  |  |  |  | (1,357  | ) |
| Proforma netloss                                                                                     |  |  |                                     |   | ($267  | )                                  |  |  |  |  | ($8,680 | ) |
| Netloss per commonshare:                                                                             |  |  |                                     |   |   |                                    |  |  |  |  |    |   |
| Basic and diluted– as reported                                                                 |  |  |                                     | $ | 0.01   |                                    |  |  |  |  | ($0.24  | ) |
| Basic and diluted– proforma                                                                    |  |  |                                     |   | ($0.01 | )                                  |  |  |  |  | ($0.28  | ) |
|                                                                                                      |

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

The table below presentsthe assumptions used to calculate the fair value of options grantedduring the three and nine months ended September  30,  2006and 2005.

|                                                                           |  |  |                                |  |     |                              |  |  |        |   |         |         |  |  |         |   |         |   |  |  |  |   |         |   |
|---------------------------------------------------------------------------|--|--|--------------------------------|--|-----|------------------------------|--|--|--------|---|---------|---------|--|--|---------|---|---------|---|--|--|--|---|---------|---|
|                                                                      |  |  | ThreeMonths EndedSeptember 30, |  |     | Nine MonthsEndedSeptember30, |
|                                                                      |  |  | 2006(a)                        |  |     | 2005                         |  |  | 2006   |   |         | 2005    |
| Risk-freeinterestrate                                                     |  |  |                                |  | n/a |                              |  |  |        |   | 4.57    | %       |  |  |         |   | 4.60    | % |  |  |  |   | 4.65    | % |
| Expecteddividendyield                                                     |  |  |                                |  | n/a |                              |  |  |        |   | — |         |  |  |         |   | — |   |  |  |  |   | — |   |
| Expectedlives                                                             |  |  |                                |  | n/a |                              |  |  | 5years |   |         | 5 years |  |  | 5 years |
| Expectedvolatility                                                        |  |  |                                |  | n/a |                              |  |  |        |   | 99      | %       |  |  |         |   | 92      | % |  |  |  |   | 100     | % |
| Forfeiturerate                                                            |  |  |                                |  | n/a |                              |  |  |        |   | n/a     |         |  |  |         |   | 14.5    | % |  |  |  |   | n/a     |   |
| Weighted-averagegrant date fair value of options granted during theperiod |  |  |                                |  | n/a |                              |  |  |        | $ | 1.19    |         |  |  |         | $ | 1.37    |   |  |  |  | $ | 1.66    |   |
|                                                                           |

|  |
|--|
|  |  |
|  |

|     |                                                                                 |
|-----|---------------------------------------------------------------------------------|
| (a) | Nostock options were granted during the three months endedSeptember  30,  2006. |

Stock OptionPlans

The Company has three stock incentive plans:the 1995 Stock Option Plan (the 1995 Plan), the 1998 Stock Option Plan(the 1998 Plan), and the 2005 Stock Incentive Plan (the 2005 Plan).Under the 1995 Plan, the Company could grant up to 4,500 shares ofcommon stock. The 1995 Plan has expired and no further options can beissued under this plan. Outstanding options under this plan willcontinue to vest. Under the 1998 Plan, the Company may grant stockoptions or stock appreciation rights to purchase an aggregate of up to5,000 shares of Common Stock. In accordance with a June  2004amendment, up to 300 shares of the total shares may be used fornon-vested restricted stock awards. Under the 2005 Plan, the Companymay grant stock options, stock appreciation rights and non-vestedrestricted stock to purchase an 

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aggregate of up to 1,500 shares of CommonStock. All options granted under the forgoing plans expire ten yearsfrom the date of grant (or five years for statutory options granted to10% stockholders), unless terminated earlier. Substantially alloptions vest over a four-year period. For a more detailed descriptionof all stock incentive plans, refer to the Company’s 2005 AnnualReport on Form 10-K.

Stock option transactions for thenine months ended September  30,  2006 under all plans areas follows:

|                                                  |  |  |                |  |       |                              |  |  |                                         |   |      |                                       |  |  |  |  |        |  |  |  |  |   |        |  |
|--------------------------------------------------|--|--|----------------|--|-------|------------------------------|--|--|-----------------------------------------|---|------|---------------------------------------|--|--|--|--|--------|--|--|--|--|---|--------|--|
|                                             |  |  | NumberofShares |  |       | WeightedAverageExercisePrice |  |  | WeightedAverageRemainingContractualLife |   |      | AggregateIntrinsic Value as of9/30/06 |
| Balance, December  31,2005                       |  |  |                |  | 6,370 |                              |  |  |                                         | $ | 2.31 |                                       |  |  |  |  |   |  |  |  |  |   |   |  |
| Granted                                          |  |  |                |  | 254   |                              |  |  |                                         | $ | 1.91 |                                       |  |  |  |  |   |  |  |  |  |   |   |  |
| Exercised                                        |  |  |                |  | (270  | )                            |  |  |                                         | $ | 0.86 |                                       |  |  |  |  |   |  |  |  |  |   |   |  |
| Forfeited                                        |  |  |                |  | (112  | )                            |  |  |                                         | $ | 1.68 |                                       |  |  |  |  |   |  |  |  |  |   |   |  |
| Expired                                          |  |  |                |  | (630  | )                            |  |  |                                         | $ | 2.41 |                                       |  |  |  |  |   |  |  |  |  |   |   |  |
| Balance,September  30,2006                       |  |  |                |  | 5,612 |                              |  |  |                                         | $ | 2.36 |                                       |  |  |  |  | 6.01   |  |  |  |  | $ | 842    |  |
| Vestedand expected to vest at September  30,2006 |  |  |                |  | 5,465 |                              |  |  |                                         | $ | 2.38 |                                       |  |  |  |  | 0.14   |  |  |  |  | $ | 834    |  |
| Exercisableat September  30,2006                 |  |  |                |  | 4,890 |                              |  |  |                                         | $ | 2.24 |                                       |  |  |  |  | 5.65   |  |  |  |  | $ | 762    |  |
|                                                  |

Thetotal intrinsic value of stock options exercised during the three andnine months ended September  30,  2006 was $20 and $525,respectively, as compared to $393 and $3,818 for the three and ninemonths ended September  30,  2005. As of September30,  2006, there was approximately $561 of total unrecognizedcompensation cost related to stock options granted under the plans.That cost is expected to be recognized over a weighted-average periodof 1.50 years.

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

|                        |  |  |                    |  |       |                                      |  |  |                              |  |        |                   |  |  |                               |   |        |  |  |  |  |  |       |  |  |  |  |   |        |  |
|------------------------|--|--|--------------------|--|-------|--------------------------------------|--|--|------------------------------|--|--------|-------------------|--|--|-------------------------------|---|--------|--|--|--|--|--|-------|--|--|--|--|---|--------|--|
|                   |  |  | OptionsOutstanding |  |       | Options Exercisable                  |
| Range ofexerciseprices |  |  | Numberoutstanding  |  |       | Weightedaverageremaining life(years) |  |  | Weightedaverageexerciseprice |  |        | Numberexercisable |  |  | Weightedaverageexercise price |
| $0.21 –$0.72     |  |  |                    |  | 1,203 |                                      |  |  |                              |  | 5.09   |                   |  |  |                               | $ | 0.54   |  |  |  |  |  | 1,113 |  |  |  |  | $ | 0.54   |  |
| $0.75–$1.75      |  |  |                    |  | 1,250 |                                      |  |  |                              |  | 4.64   |                   |  |  |                               | $ | 1.42   |  |  |  |  |  | 905   |  |  |  |  | $ | 1.38   |  |
| $1.80–$2.44      |  |  |                    |  | 1,176 |                                      |  |  |                              |  | 7.41   |                   |  |  |                               | $ | 2.18   |  |  |  |  |  | 903   |  |  |  |  | $ | 2.25   |  |
| $2.49–$4.21      |  |  |                    |  | 1,516 |                                      |  |  |                              |  | 7.55   |                   |  |  |                               | $ | 3.60   |  |  |  |  |  | 1,502 |  |  |  |  | $ | 3.61   |  |
| $6.00–$6.25      |  |  |                    |  | 467   |                                      |  |  |                              |  | 3.52   |                   |  |  |                               | $ | 6.02   |  |  |  |  |  | 467   |  |  |  |  | $ | 6.02   |  |
|                   |  |  |                    |  | 5,612 |                                      |  |  |                              |  |   |                   |  |  |                               |   |   |  |  |  |  |  | 4,890 |  |  |  |  |   |   |  |
|                        |

Non-VestedRestricted Stock

Compensation expense for non-vestedrestricted stock was historically recorded based on its market value onthe date of grant and recognized ratably over the associated serviceperiod, the period in which restrictions are removed. Compensationexpense for non-vested restricted stock was reported as unamortizedstock compensation on the Consolidated Balance Sheets. With theadoption of SFAS 123R, effective January  1,  2006,unamortized stock compensation has been offset against additionalpaid-in capital where it is reflected on the Consolidated Balance Sheetas of September  30,  2006. During the three and ninemonths ended September  30,  2006 there were zero and 410,respectively, shares of non-vested restricted stock granted. All shareswere issued to employees with 4-year vesting. In the year endedDecember  31,  2005, 120 shares of non-vested restrictedstock were granted with a vesting term of five years subject toacceleration in accordance with the grant stipulations. During fiscal2005, 25 shares issued 

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were forfeited as a result of employeeterminations and the corresponding compensation expense and remainingunamortized stock compensation amounts were reversed. During the threeand nine months ended September  30,  2006, 25 shares wereforfeited as a result of employee terminations. As of September30,  2006, 480 restricted shares are unvested.

Thefollowing table summarizes transactions related to non-vestedrestricted stock for the nine months ended September  30,2006:

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

Asof September  30,  2006, there was approximately $662 oftotal unrecognized compensation cost related to non-vested restrictedstock granted under the plans. That cost is expected to be recognizedover a weighted-average period of 2.25 years.

As ofSeptember  30,  2006, the Company also had warrants topurchase 1,423 shares of common stock outstanding at a weighted averageprice of $2.83. At December  31,  2005, all of thesewarrants were exercisable; therefore, no expense has been recognizedduring 2006. 516 of these warrants expire in April  2007 and 907of these warrants expire in June  2008.

Stockoptions and non-vested restricted stock awards available for grantunder all plans were 1,544 at September  30,  2006.

(2)    SUBSEQUENT EVENT/DISCONTINUEDOPERATIONS 

On October  31,2006, the Company sold certain assets and liabilities through which itoperated the AXS-One Enterprise Solutions financial management andaccounting applications business (‘‘EnterpriseSolutions’’) to Computron Software, LLC for the sum of$12  million in cash plus future potential consideration forexceeding specified license revenue targets. The assets sold ofapproximately $2.1  million, primarily consist of clientcontracts, marketing agreements, internally developed software,accounts receivable and fixed assets of the business. The liabilitiesassumed of approximately $8.6  million, consist primarily ofemployee related liabilities, accounts payable and deferred revenue. Aspart of the transaction, Computron Software, LLC agreed, among otherthings, to hire certain former AXS-One employees assigned to theEnterprise Solutions business. Further, AXS-One agreed to anon-competition agreement which prohibits the Company from engaging inthe enterprise financial business for a period of five years. As aresult of the transaction with Computron Software, LLC, our employeeheadcount has been reduced by approximately 70positions.

As of September  30,  2006, theCompany met the criteria for reporting the sale of the EnterpriseSolutions business as an asset held for sale and discontinuedoperations in accordance with SFAS 144 ‘‘Accounting ofthe Impairment or Disposal of Long-Lived Assets’’, andhas accounted for the discontinued operations as such within theconsolidated financial statements and notes to consolidated financialstatements included in this Form 10-Q filing.

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The following chart details assetsand liabilities held for sale at September  30,2006:

|                          |  |  |                  |   |        |  |
|--------------------------|--|--|------------------|---|--------|--|
|                     |  |  | September30,2006 |
| ASSETS:                  |  |  |                  |   |   |  |
| Accountsreceivable       |  |  |                  | $ | 1,428  |  |
| Other currentassets      |  |  |                  |   | 246    |  |
| Totalcurrent assets      |  |  |                  |   | 1,674  |  |
| Net fixedassets          |  |  |                  |   | 30     |  |
| Otherassets              |  |  |                  |   | 440    |  |
| Totalassets              |  |  |                  | $ | 2,144  |  |
| LIABILITIES:             |  |  |                  |   |   |  |
| Accountspayable          |  |  |                  | $ | 131    |  |
| Accruedliabilities       |  |  |                  |   | 587    |  |
| Deferredrevenue          |  |  |                  |   | 6,064  |  |
| Totalcurrent liabilities |  |  |                  |   | 6,782  |  |
| Long-termdeferredrevenue |  |  |                  |   | 1,839  |  |
| Totalliabilities         |  |  |                  | $ | 8,621  |  |
|                          |

Thefollowing chart summarizes the income statement for discontinuedoperations for the three and nine months ended September30,  2006 and2005:

|                                   |  |  |                                 |   |         |                              |  |  |      |   |       |      |  |  |  |   |        |   |  |  |  |   |        |   |
|-----------------------------------|--|--|---------------------------------|---|---------|------------------------------|--|--|------|---|-------|------|--|--|--|---|--------|---|--|--|--|---|--------|---|
|                              |  |  | ThreeMonths EndedSeptember  30, |   |         | Nine MonthsEndedSeptember30, |
|                              |  |  | 2006                            |   |         | 2005                         |  |  | 2006 |   |       | 2005 |
| Revenues                          |  |  |                                 | $ | 4,753   |                              |  |  |      | $ | 5,650 |      |  |  |  | $ | 14,701 |   |  |  |  | $ | 16,578 |   |
| Operatingexpenses                 |  |  |                                 |   | 2,426   |                              |  |  |      |   | 3,659 |      |  |  |  |   | 7,679  |   |  |  |  |   | 11,740 |   |
| Operatingincome                   |  |  |                                 |   | 2,327   |                              |  |  |      |   | 1,991 |      |  |  |  |   | 7,022  |   |  |  |  |   | 4,838  |   |
| Otherincome/(expense)net          |  |  |                                 |   | — |                              |  |  |      |   | (17   | )    |  |  |  |   | (71    | ) |  |  |  |   | (44    | ) |
| Incomefrom discontinuedoperations |  |  |                                 | $ | 2,327   |                              |  |  |      | $ | 1,974 |      |  |  |  | $ | 6,951  |   |  |  |  | $ | 4,794  |   |
|                                   |

TheCompany estimates the gain on sale of the Enterprise Solutions businessto Computron Software, LLC as well as the Company’s decision todiscontinue its Enterprise Solutions business, to be within the $17– $18  million range. Due to the utilization of netoperating loss tax carryforwards, the tax provision required on thetransaction is estimated to be only $0.3  million. In determiningthe estimated gain on the sale of the Enterprise Solutions business tobe recognized in the fourth quarter of 2006, the Company has estimatedthe following sales price, expenses and disposal cost using theSeptember  30,  2006 balancesheet:

|                       |  |  |  |   |        |   |
|-----------------------|--|--|--|---|--------|---|
| Salesprice            |  |  |  | $ | 12,000 |   |
| Assetssold            |  |  |  |   | (1,954 | ) |
| Liabilitiessold       |  |  |  |   | 8,621  |   |
| Transactionexpenses   |  |  |  |   | (640   | ) |
| Taxesprovision        |  |  |  |   | (301   | ) |
| Estimated gain onsale |  |  |  | $ | 17,726 |   |
|                       |

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(3)    REVOLVING LINE OF CREDIT 

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

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

Borrowings under the revolving line of credit,per the Amended Agreement, bore interest at prime rate plus one and onehalf percent (1.5%). Should, however, the Company fail to meetcertain of the financial covenants set forth in the Amended Agreement,the interest rate would increase to the prime rate plus two and onehalf percent (2.5%). The Agreement provided for a non-refundablecommitment fee of $30 per year and an unused revolving line facilityfee of .25% per annum. The Amended Agreement increased thesecond year commitment fee to $40 and the unused line fee to0.375% per annum. The Amended Agreement includes a warrantwaiver fee of $20 and upon the occurrence of certain events, minimummonthly interest of $8 and an additional $20 warrant waiver fee. TheAgreement is secured by substantially all domestic assets of theCompany. The maturity date of the loan was August  9,2006. As described in greater detail in the Amended Agreement, the loanis subject to acceleration upon breach of: (i) a covenant testedmonthly regarding the ratio of unrestricted cash and net billedaccounts receivable to current liabilities minus deferred revenue,which is to be no less than 1.35 to 1.0 (‘‘adjusted quickratio covenant’’), (ii) a covenant tested quarterlyregarding the Company's EBITDAS (earnings before interest expense(excluding interest income), taxes, depreciation, amortization andstock compensation expense in accordance with GAAP), and (iii) othercustomary non-financial covenants. There is also a monthly transitionevent covenant which requires the Company to maintain an adjusted quickratio greater than or equal to 1.6 to 1.0.

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

As of March  31,2006, the Company was in compliance with the monthly adjusted quickratio covenant and the transition event covenant, but was not incompliance with the quarterly EBITDAS covenant, which requires theCompany to achieve EBITDAS of the lesser of $1 better than theimmediately preceding quarter EBITDAS or $1. On May  11,2006, the Bank granted a waiver of the EBITDAS covenant as ofMarch  31,  2006. The waiver was for the March31,  2006 date only.

As of June  30,2006, the Company was in compliance with the quarterly EBITDAS covenantand the monthly adjusted quick ratio covenant, but was not incompliance with the transition event covenant, which requires theCompany to maintain an adjusted quick ratio covenant greater than orequal to 1.60 to 1.00. As result of such violation, the Bank moved theCompany to the higher interest rate facility which required the Companyto pay interest on outstanding balances of prime plus 2.5%,incur minimum monthly interest expense of $8 and pay a one-time warrantwaiver fee of $10.

As of September  30,2006, there was $1,844 outstanding under the Amended Agreement, whichwas the full amount of availability under the Amended Agreement basedon the lesser of $4,000 or 80% of eligible accounts receivable.The Company was not in compliance with the quarterly EBITDAS covenantor the monthly adjusted quick ratio covenant as of September30,  2006. On October  20,  2006, the Companyreceived a notice of default from the Bank in connection with thesecovenant violations. As a result, the effective interest rate of theloan has increased by 4.0%, any additional loans were at theBank’s sole discretion and the Bank reserved the right todeclare all obligations to be immediately due and payable in full, aright which they did not exercise.

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

On October  31,  2006the Company and the Bank entered into a Second Loan ModificationAgreement and an Intellectual Property Security Agreement. The SecondLoan Modification Agreement serves (a)  to amend the AmendedAgreement by reducing the amount the Company may borrow on a revolvingbasis from (i) up to the lesser of (A) $4,000,000 or (B) 80.0%of the Eligible Accounts to (ii) up to the lesser of (A) $2,000,000 or(B) 70.0% of the Eligible Accounts, and (b) as an agreement bythe Bank to forbear from exercising its rights and remedies withrespect to the default of the Company for failure to comply withcertain financial covenants under the Amended Agreement atSeptember  30,  2006. The IP Security Agreement serves tosupplement the Amended Agreement by including among the assets securingthe Company’s indebtedness to the Bank, a security interest inall of the Company’s right, title and interest in, to and underits Intellectual Property Collateral.

On November11,  2006 the Company and the Bank entered into a Third LoanModification Agreement. The Third Loan Modification Agreement serves(a) to amend the Amended Agreement by increasing the amount the Companymay borrow on a revolving basis from (i) up to the lesser of (A)$2,000,000 or (B) 70.0% of the Eligible Accounts to (ii) up tothe lesser of (A) $4,000,000 or (B) 70.0% of the EligibleAccounts, and (b) as an agreement by the Bank to extend the forbearancefrom exercising its rights and remedies with respect to the default ofthe Company for failure to comply with certain financial covenantsunder the Amended Agreement at September  30, throughDecember  10,  2006. It is the Company’s intent tonegotiate with the Bank to seek another amendment to the loan agreementto extend the loan into 2008 and revise the related financialcovenants.

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

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

Basic netincome (loss) per common share is based on the weighted average numberof shares of common stock outstanding during the period. Diluted netloss per common share for the nine months ended September30,  2006 and 2005, and the three months ended September30,  2006, does not include the effects of outstanding options topurchase 5,612 and 4,137 shares of common stock, respectively, 480 and50 shares of non-vested stock, respectively, and outstanding warrantsto purchase 1,423 shares of common stock for each period, as the effectof their inclusion is anti-dilutive for the periods.

Thefollowing represents the reconciliation of the shares used in the basicand diluted net loss per common share calculation for the three andnine months ended September  30,  2006 and2005:

|                                                                     |  |  |                                |  |         |                              |  |  |      |  |        |      |  |  |  |  |         |  |  |  |  |  |         |  |
|---------------------------------------------------------------------|--|--|--------------------------------|--|---------|------------------------------|--|--|------|--|--------|------|--|--|--|--|---------|--|--|--|--|--|---------|--|
|                                                                |  |  | ThreeMonths Ended September 30 |  |         | Nine Months EndedSeptember30 |
|                                                                |  |  | 2006                           |  |         | 2005                         |  |  | 2006 |  |        | 2005 |
| Weightedaverage basic common shares outstanding during theperiods   |  |  |                                |  | 34,487  |                              |  |  |      |  | 33,635 |      |  |  |  |  | 34,364  |  |  |  |  |  | 30,761  |  |
| Dilutiveeffect of stock options andwarrants                         |  |  |                                |  | — |                              |  |  |      |  | 1,230  |      |  |  |  |  | — |  |  |  |  |  | — |  |
| Weightedaverage diluted common shares outstanding during theperiods |  |  |                                |  | 34,487  |                              |  |  |      |  | 34,865 |      |  |  |  |  | 34,364  |  |  |  |  |  | 30,761  |  |
|                                                                     |

(5)    OPERATINGSEGMENTS

As a result of the Company meeting the criteriafor reporting the sale of the Enterprise Solutions business asdiscontinued operations, the Company has only one reportable segment incontinuing operations, AXS-One Records Compliance Platform Solutions,and therefore no longer meets the requirement for segmentreporting.

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(6)    CONTINGENCIES

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

(7)    PRIVATEPLACEMENT

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

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

(8)    RESTRUCTURING AND OTHER COSTS

OnJune  30,  2005 the Company eliminated 6 positions incontinuing operations in order to further streamline the organization.The Company recorded a charge to operations in the second quarter of2005 totaling approximately $0.3  million related to involuntarytermination benefits to be paid to the terminated employees. Theremaining restructuring liability is recorded as accrued expenses onthe September  30,  2006 balance sheet and will be paid inits entirety during 2006. The 2006 activity related to therestructuring is asfollows:

|                                                |  |  |      |   |         |   |
|------------------------------------------------|--|--|------|---|---------|---|
|                                           |  |  | 2006 |
| Restructuringliability at January  1,2006      |  |  |      | $ | 319     |   |
| Involuntary termination costs                  |  |  |      |   | — |   |
| Cash payments in2006                           |  |  |      |   | (263    | ) |
| Restructuringliability at September  30,  2006 |  |  |      | $ | 56      |   |
|                                                |

(9)    FINANCIALINFORMATION BY GEOGRAPHIC AREA

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

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segments in interim financial reports issuedto shareholders. It also establishes standards for related disclosuresabout products and services, geographic areas and major customers.

Revenues and long-lived assets for the Company's UnitedStates, United Kingdom, Australia and Asia, and South Africa continuingoperations are asfollows:

|                   |  |  |                                |   |       |                              |  |  |      |   |       |      |  |  |  |   |       |  |  |  |  |   |       |  |
|-------------------|--|--|--------------------------------|---|-------|------------------------------|--|--|------|---|-------|------|--|--|--|---|-------|--|--|--|--|---|-------|--|
|              |  |  | ThreeMonths EndedSeptember 30, |   |       | Nine MonthsEndedSeptember30, |
| Revenues:(1)      |  |  | 2006                           |   |       | 2005                         |  |  | 2006 |   |       | 2005 |
| UnitedStates      |  |  |                                | $ | 1,390 |                              |  |  |      | $ | 2,125 |      |  |  |  | $ | 4,811 |  |  |  |  | $ | 5,438 |  |
| UnitedKingdom     |  |  |                                |   | 308   |                              |  |  |      |   | 1,237 |      |  |  |  |   | 1,094 |  |  |  |  |   | 1,879 |  |
| AustraliaandAsia  |  |  |                                |   | 319   |                              |  |  |      |   | 239   |      |  |  |  |   | 1,167 |  |  |  |  |   | 591   |  |
| SouthAfrica       |  |  |                                |   | 216   |                              |  |  |      |   | 106   |      |  |  |  |   | 689   |  |  |  |  |   | 408   |  |
| Totalconsolidated |  |  |                                | $ | 2,233 |                              |  |  |      | $ | 3,707 |      |  |  |  | $ | 7,761 |  |  |  |  | $ | 8,316 |  |
|                   |

|  |
|--|
|  |  |
|  |

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

|                      |  |  |                  |   |     |                  |  |  |  |   |       |  |
|----------------------|--|--|------------------|---|-----|------------------|--|--|--|---|-------|--|
| Long-LivedAssets:(2) |  |  | September30,2006 |   |     | December 31,2005 |
| UnitedStates         |  |  |                  | $ | 247 |                  |  |  |  | $ | 1,184 |  |
| UnitedKingdom        |  |  |                  |   | 59  |                  |  |  |  |   | 75    |  |
| Australia andAsia    |  |  |                  |   | 168 |                  |  |  |  |   | 151   |  |
| SouthAfrica          |  |  |                  |   | 43  |                  |  |  |  |   | 23    |  |
| Totalconsolidated    |  |  |                  | $ | 517 |                  |  |  |  | $ | 1,433 |  |
|                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                       |
|-----|---------------------------------------------------------------------------------------|
| (2) | Long-livedassets as of December  31,  2005 include assets fromdiscontinuedoperations. |

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

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

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

ExecutiveOverview

We are a leading provider of Records ComplianceManagement software solutions designed to reduce the inherent risksassociated with retaining and managing corporate records as well as toefficiently manage complex business processes. Our Records ComplianceManagement software delivers an integrated solution that enablesorganizations to manage growing volumes of disparate electronicrecords, including e-mail and instant messages, images,voice, office documents, ERP-generated data such as SAP andelectronic print reports. All records are archived and managedaccording to corporate records policies from initial capture andindexing through archival, search and ultimate destruction. Theseproducts have been developed and optimized to address global issues ofregulatory compliance, corporate governance, supervision and privacy asthey relate to the retention and disposition of electronic records, aswell as to significantly reduce infrastructure costs (primarily storageand associated management costs). Patent-pending search technologyenables organizations to respond quickly and accurately to the growingpressures of e-discovery and litigation support. See‘‘Item 1. Business’’ in our 2005 AnnualReport on Form 10-K.

Our revenues are derived mainly fromlicense fees from software license agreements entered into with ourcustomers, including through resellers, for both our products and, to alesser degree, third party products resold by us and services revenuesfrom software maintenance agreements, training, consulting servicesincluding installation and custom programming. We also derive a smallamount of revenue (4.4% and 1.2% of total revenues forthe first nine months of 2006 and 2005, respectively) from subscriptionrevenue arrangements.

We are based in Rutherford, NewJersey with approximately 160 full-time employees in continuingoperations, as of September  30,  2006, in officesworldwide, including Asia, Australia, South Africa, the United Kingdomand the United States. Our foreign offices generated approximately37.8% and 38.0% of our total revenues for the three andnine months ended September  30,  2006, respectively, ascompared to 42.7% and 34.6%, respectively, for thecorresponding prior year periods. We expect that such revenues willcontinue to represent a significant percentage of our total revenues inthe future. Most of our international license fees and servicesrevenues are denominated in foreign currencies. Fluctuations in thevalue of foreign currencies relative to the US dollar in the futurecould result in fluctuations in our revenue.

UntilMay  31,  2006, the Company had a 49% ownership in ajoint venture in its South African operation, AXS-One African Solutions(Pty) Ltd (‘‘African Solutions’’). AfricanSolutions sells and services our suite of products. The joint venturewas considered to be a variable interest entity as defined in FASBInterpretation No. 46R, ‘‘Consolidation of VariableInterest Entities’’ (FIN 46R). However, the Company haddetermined that it was not the primary beneficiary. Accordingly, untilMay  31,  2006, the Company used the equity method ofaccounting for the joint venture whereby investments, including loansto the joint venture, were stated at cost plus or minus theCompany’s equity in undistributed earnings or losses. OnMay  31,  2006, the Company purchased the remaining51% of African Solutions from African Legends Technology for$161 less cash acquired of $20, to make it a wholly owned subsidiary.The Company applied purchase accounting to record the transaction. Thepurchase price was less than the fair value of assets acquired andtherefore the Company wrote-down the value of all long-term assets tozero and recorded a gain of $37. As of June  1,  2006,100% of the results of African Solutions are included in theconsolidated results of the Company in discontinued operations as it ispart of the Enterprise Solutions business segment.

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On October  31,  2006,the Company sold certain assets and liabilities through which itoperated the AXS-One Enterprise Solutions financial management andaccounting applications business (‘‘EnterpriseSolutions’’) to Computron Software, LLC for the sum of$12  million in cash plus future potential consideration forexceeding specified license revenue targets. Additionally, ComputronLLC assumed net liabilities of approximately $6.5  million. Theestimated gain on sale will be between $17  million and$18  million. The assets sold of approximately $2.1million, primarily consist of client contracts, marketing agreements,internally developed software, accounts receivable and fixed assets ofthe business. The liabilities assumed of approximately $8.6million, consist primarily of employee related liabilities, accountspayable and deferred revenue.

We encounter competitionfor all of our products in all markets and compete primarily based onthe quality of our products, our price, our customer service and ourtime to implement. The timing of the release of new products is alsoimportant to our ability to generate sales. During the second half of2003, we launched our Records Compliance Management solution for e-mailand instant messaging archival, supervision, and legal discovery inresponse to new regulatory requirements for financial institutions inthe United States as well as to address the need to reduce costs in theemail management area. During 2005, AXS-One announced furthersignificant development on the AXS-One Records Compliance Platform,focusing primarily on performance-based enhancements. Version 3.5,featuring Rapid-AXS, was launched in May  2005, and introducedpatent-pending search functionality. Rapid-AXS takes advantage of gridcomputing architecture and leverages commodity hardware to deliver whatAXS-One believes to be an unmatched price-performance ratio. Version3.5 also introduced a Search Wizard, reducing the potential complexityof searches for non-IT staff and ensuring error-proof searchcapabilities for legal discovery. Finally in 2005 AXS-One announcedAXS-Link for Desktop, a desktop archiving product available both as anintegrated component of the AXS-One Compliance Platform, as well as astand-alone solution.

Our future ability to grow revenuewill be directly affected by continued price competition, success ofour strategic partnerships and our ability to sustain an increasinglyhigher maintenance revenue base from which to grow. Our growth rate andtotal revenues depend significantly on future services for existingcustomers as well as our ability to expand our customer base and torespond successfully to the pace of technological change. If ourmaintenance renewal rate or pace of new customer acquisitions slows,our revenues and operating results would be adverselyaffected.

We have experienced, and may in the futureexperience, significant fluctuations in our quarterly and annualrevenues, results of operations and cash flows. We believe thatdomestic and international operating results and cash flows willcontinue to fluctuate significantly in the future as a result of avariety of factors. For a description of these factors that may affectour operating results, see ‘‘Risk Factors’’in Part II Item 1A of this Form 10-Q and in our 2005 Annual Report onForm 10-K.

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Results of Operations

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

|                                   |  |  |                                       |   |         |                                       |  |  |            |  |         |                           |  |  |  |   |         |   |  |  |  |  |         |   |
|-----------------------------------|--|--|---------------------------------------|---|---------|---------------------------------------|--|--|------------|--|---------|---------------------------|--|--|--|---|---------|---|--|--|--|--|---------|---|
|                              |  |  | ThreeMonths EndedSeptember  30,  2006 |   |         | ThreeMonths EndedSeptember  30,  2005 |
|  (inthousands)               |  |  | AsReported                            |   |         | Data asa% oftotalrevenue              |  |  | AsReported |  |         | Data asa% of totalrevenue |
|                              |  |  | (Unaudited)                           |   |         | (Unaudited)                           |
| Revenues:                         |  |  |                                       |   |    |                                       |  |  |            |  |    |                           |  |  |  |   |    |   |  |  |  |  |    |   |
| Licensefees                       |  |  |                                       | $ | 476     |                                       |  |  |            |  | 21.3    | %                         |  |  |  | $ | 2,017   |   |  |  |  |  | 54.4    | % |
| Services                          |  |  |                                       |   | 1,757   |                                       |  |  |            |  | 78.7    |                           |  |  |  |   | 1,690   |   |  |  |  |  | 45.6    |   |
| Totalrevenues                     |  |  |                                       |   | 2,233   |                                       |  |  |            |  | 100.0   |                           |  |  |  |   | 3,707   |   |  |  |  |  | 100.0   |   |
| Operatingexpenses:                |  |  |                                       |   |    |                                       |  |  |            |  |    |                           |  |  |  |   |    |   |  |  |  |  |    |   |
| Costof licensefees                |  |  |                                       |   | 257     |                                       |  |  |            |  | 11.5    |                           |  |  |  |   | 287     |   |  |  |  |  | 7.7     |   |
| Costofservices                    |  |  |                                       |   | 2,195   |                                       |  |  |            |  | 98.3    |                           |  |  |  |   | 1,422   |   |  |  |  |  | 38.4    |   |
| Salesandmarketing                 |  |  |                                       |   | 2,292   |                                       |  |  |            |  | 102.6   |                           |  |  |  |   | 1,558   |   |  |  |  |  | 42.0    |   |
| Researchanddevelopment            |  |  |                                       |   | 1,610   |                                       |  |  |            |  | 72.1    |                           |  |  |  |   | 1,381   |   |  |  |  |  | 37.3    |   |
| Generalandadministrative          |  |  |                                       |   | 1,042   |                                       |  |  |            |  | 46.7    |                           |  |  |  |   | 947     |   |  |  |  |  | 25.5    |   |
| Totaloperatingexpenses            |  |  |                                       |   | 7,396   |                                       |  |  |            |  | 331.2   |                           |  |  |  |   | 5,595   |   |  |  |  |  | 150.9   |   |
| Operatingloss                     |  |  |                                       |   | (5,163  | )                                     |  |  |            |  | (231.2  | )                         |  |  |  |   | (1,888  | ) |  |  |  |  | (50.9   | ) |
| Otherincome (expense),net         |  |  |                                       |   | (4      | )                                     |  |  |            |  | (0.2    | )                         |  |  |  |   | 91      |   |  |  |  |  | 2.5     |   |
| Lossbeforetaxes                   |  |  |                                       |   | (5,167  | )                                     |  |  |            |  | (231.4  | )                         |  |  |  |   | (1,797  | ) |  |  |  |  | (48.4   | ) |
| Incometaxbenefit                  |  |  |                                       |   | — |                                       |  |  |            |  | — |                           |  |  |  |   | — |   |  |  |  |  | — |   |
| Lossfrom continuingoperations     |  |  |                                       |   | (5,167  | )                                     |  |  |            |  | (231.4  | )                         |  |  |  |   | (1,797  | ) |  |  |  |  | (48.4   | ) |
| Incomefrom discontinuedoperations |  |  |                                       |   | 2,327   |                                       |  |  |            |  | 104.2   |                           |  |  |  |   | 1,974   |   |  |  |  |  | 53.2    |   |
| NetIncome (loss)                  |  |  |                                       | $ | (2,840  | )                                     |  |  |            |  | (127.2  | )%                        |  |  |  | $ | 177     |   |  |  |  |  | 4.8     | % |
|                                   |

|                                   |  |  |                                      |   |         |                                      |  |  |            |  |         |                           |  |  |  |   |         |   |  |  |  |  |        |    |
|-----------------------------------|--|--|--------------------------------------|---|---------|--------------------------------------|--|--|------------|--|---------|---------------------------|--|--|--|---|---------|---|--|--|--|--|--------|----|
|                              |  |  | NineMonths EndedSeptember  30,  2006 |   |         | NineMonths EndedSeptember  30,  2005 |
|  (inthousands)               |  |  | AsReported                           |   |         | Data asa% oftotalrevenue             |  |  | AsReported |  |         | Data asa% of totalrevenue |
|                              |  |  | (Unaudited)                          |   |         | (Unaudited)                          |
| Revenues:                         |  |  |                                      |   |    |                                      |  |  |            |  |    |                           |  |  |  |   |    |   |  |  |  |  |   |    |
| Licensefees                       |  |  |                                      | $ | 1,736   |                                      |  |  |            |  | 22.4    | %                         |  |  |  | $ | 2,806   |   |  |  |  |  | 33.7   | %  |
| Services                          |  |  |                                      |   | 6,025   |                                      |  |  |            |  | 77.6    |                           |  |  |  |   | 5,510   |   |  |  |  |  | 66.3   |    |
| Totalrevenues                     |  |  |                                      |   | 7,761   |                                      |  |  |            |  | 100.0   |                           |  |  |  |   | 8,316   |   |  |  |  |  | 100.0  |    |
| Operatingexpenses:                |  |  |                                      |   |    |                                      |  |  |            |  |    |                           |  |  |  |   |    |   |  |  |  |  |   |    |
| Costof licensefees                |  |  |                                      |   | 892     |                                      |  |  |            |  | 11.5    |                           |  |  |  |   | 814     |   |  |  |  |  | 9.8    |    |
| Costofservices                    |  |  |                                      |   | 6,336   |                                      |  |  |            |  | 81.6    |                           |  |  |  |   | 5,527   |   |  |  |  |  | 66.5   |    |
| Salesandmarketing                 |  |  |                                      |   | 7,261   |                                      |  |  |            |  | 93.6    |                           |  |  |  |   | 5,643   |   |  |  |  |  | 67.9   |    |
| Researchanddevelopment            |  |  |                                      |   | 4,884   |                                      |  |  |            |  | 62.9    |                           |  |  |  |   | 4,569   |   |  |  |  |  | 54.9   |    |
| Generalandadministrative          |  |  |                                      |   | 3,494   |                                      |  |  |            |  | 45.0    |                           |  |  |  |   | 3,346   |   |  |  |  |  | 40.2   |    |
| Restructuringand othercosts       |  |  |                                      |   | — |                                      |  |  |            |  | — |                           |  |  |  |   | 322     |   |  |  |  |  | 3.9    |    |
| Totaloperatingexpenses            |  |  |                                      |   | 22,867  |                                      |  |  |            |  | 294.6   |                           |  |  |  |   | 20,221  |   |  |  |  |  | 243.2  |    |
| Operatingloss                     |  |  |                                      |   | (15,106 | )                                    |  |  |            |  | (194.6  | )                         |  |  |  |   | (11,905 | ) |  |  |  |  | (143.2 | )  |
| Otherincome (expense),net         |  |  |                                      |   | 81      |                                      |  |  |            |  | 1.0     |                           |  |  |  |   | (265    | ) |  |  |  |  | (3.1   | )  |
| Lossbeforetaxes                   |  |  |                                      |   | (15,025 | )                                    |  |  |            |  | (193.6  | )                         |  |  |  |   | (12,170 | ) |  |  |  |  | (146.3 | )  |
| Incometaxbenefit                  |  |  |                                      |   | — |                                      |  |  |            |  | — |                           |  |  |  |   | 25      |   |  |  |  |  | 0.3    |    |
| Lossfrom continuingoperations     |  |  |                                      |   | (15,025 | )                                    |  |  |            |  | (193.6  | )                         |  |  |  |   | (12,145 | ) |  |  |  |  | (146.0 | )  |
| Incomefrom discontinuedoperations |  |  |                                      |   | 6,951   |                                      |  |  |            |  | 89.6    |                           |  |  |  |   | 4,794   |   |  |  |  |  | 57.6   |    |
| NetIncome(loss)                   |  |  |                                      | $ | (8,074  | )                                    |  |  |            |  | (104.0  | )%                        |  |  |  | $ | (7,351  | ) |  |  |  |  | (88.4  | )% |
|                                   |

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Comparison of Three Months EndedSeptember  30,  2006 to2005

Revenues

Total revenues fromcontinuing operations decreased $1.5  million or 39.8% forthe three months ended September  30,  2006 as compared tothe corresponding prior year period due to a $1.5  million or76.4% decrease in license fees. The three months endedSeptember  30,  2005 included a license fee ofapproximately $1.0  million to one customer which was notrepeated in the three months ended September  30,  2006.Additionally, revenue from our partner channel was weaker in the thirdquarter compared with the third quarter of 2005, although the Companyexpects channel revenue to strengthen in futurequarters.

Total revenues for the three months endedSeptember  30,  2006 included $0.3  million or12.8% of revenues from one customer. Total revenue for the threemonths ended September  30,  2005 included $1.4million and $0.5  million or 38.4% and 14.5%respectively of total revenues from two customers.

Thefollowing table sets forth, for the periods indicated, each majorcategory of our services revenues as a percent of total servicesrevenues:

|                       |  |  |                                  |   |       |          |  |  |        |  |       |           |  |  |  |   |       |  |  |  |  |  |       |   |
|-----------------------|--|--|----------------------------------|---|-------|----------|--|--|--------|--|-------|-----------|--|--|--|---|-------|--|--|--|--|--|-------|---|
|                  |  |  | Three Months EndedSeptember  30, |
| (dollars inthousands) |  |  | 2006                             |   |       | 2005     |
|                  |  |  | Amount                           |   |       | %ofTotal |  |  | Amount |  |       | % ofTotal |
| Maintenance           |  |  |                                  | $ | 1,089 |          |  |  |        |  | 62.0  | %         |  |  |  | $ | 1,159 |  |  |  |  |  | 68.6  | % |
| Consulting            |  |  |                                  |   | 570   |          |  |  |        |  | 32.4  | %         |  |  |  |   | 487   |  |  |  |  |  | 28.8  | % |
| Subscriptionrevenue   |  |  |                                  |   | 98    |          |  |  |        |  | 5.6   | %         |  |  |  |   | 44    |  |  |  |  |  | 2.6   | % |
| Totalservicesrevenue  |  |  |                                  | $ | 1,757 |          |  |  |        |  | 100.0 | %         |  |  |  | $ | 1,690 |  |  |  |  |  | 100.0 | % |
|                       |

Maintenancerevenue declined slightly in the third quarter of 2006 compared with2005 resulting from a reversal of revenue relating to one of theCompany’s customers as a result of non-payment of maintenancefees, approximating $0.1  million. Consulting revenue increasedslightly in the same period resulting from stronger license revenue andrelated consulting backlog from the second quarter 2006 compared withthe second quarter 2005. Subscription revenue has increased resultingfrom larger volumes of records being processed through theCompany’s hosted E-delivery product in the third quarter 2006compared with the third quarter 2005.

OperatingExpenses

The Company is currently developing arestructuring plan that will be implemented in the fourth quarter of2006 to reduce operating expenses by approximately $5  million to$6  million on an annual basis.

Cost of license feesconsists primarily of amortization of capitalized software developmentcosts and amounts paid to third parties with respect to products weresell in conjunction with the licensing of our products. The elementscan vary substantially from period to period as a percentage of licensefees. Cost of license fees for the three months ended September30,  2006 were flat compared to the corresponding prior yearperiod as increased royalty fees for third party software used inconjunction with our software (which includes both embedded softwareand separately sold software) were offset by decreased amortization ofcapitalized software development costs.

Cost of servicesconsists primarily of personnel and third party costs for productquality assurance, training, installation, consulting and customersupport. Cost of services increased $0.8  million or 54.4%for the three months ended September  30,  2006, ascompared to the corresponding prior year period. The increase for thethree-month period was mainly due to increases in services personnel,redeployment of Enterprise Solutions resources to focus on the RCMproduct line, and third party consultants to install and support theRCM products. Additionally, cost of resources formerly shared by theEnterprise Solutions segment and the RCM segment are now borne solelyby the RCM segment. This also affects Sales & Marketing expenses,R&D expenses and G&A expenses. These costs will be reduced aspart of 

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the restructuring mentioned above.Thisincrease in costs resulted in a negative service margin of 24.9%for the three months ended September  30,  2006 comparedwith a positive service margin of 15.9% for the correspondingprior year period. The Company expects to return to positive margins infuture quarters as service revenue increases and costs arereduced.

Sales and marketing expenses consist primarily ofsalaries, commissions and bonuses related to sales and marketingpersonnel, as well as travel and promotional expenses. Sales andmarketing expenses were $0.7  million or 47.1% higher forthe three months ended September  30,  2006, as compared tothe corresponding prior year period. The increase for the three-monthperiod was mainly due to the addition of sales, sales support andmarketing personnel and the redeployment of Enterprise Solutionsresources to focus on the RCM product line to expand the sales anddistribution of the Company’s RCM products.

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

Research and development expenses (net ofcapitalized software development costs) increased $0.2  millionor 16.6% for the three months ended September  30,2006, as compared to the comparable prior year period. The increase isprimarily the result an increased employee related cost and increase inthe use and cost of third party consultants for development of the RCMproducts.

General and administrative expenses consistprimarily of salaries for administrative, executive and financialpersonnel, and outside professional fees. General and administrativeexpenses increased $0.1  million or 10.0% for the threemonths ended September  30,  2006 as compared to thecorresponding prior year period. The increase for the three-monthperiod was mainly due to increased headcount and higher costs forprofessional services.

OperatingLoss

Operating loss increased $3.3  million forthe three months ended September  30,  2006 as compared tothe corresponding prior year period as a result of the decrease inlicense revenue of $1.5  million and increase in operatingexpenses of $1.8  million as a result of the reasons describedabove.

Other Income (Expense), Net

Otherincome (expense), net decreased $0.1  million for the threemonths ended September  30,  2006, as compared to the sameperiod in 2005. The decrease is the result of lower interest income andhigher interest expense resulting from the increased use of our bankdebt.

Loss from continuing operations

Lossfrom discontinued operations increased $3.4  million for thethree months ended September  30,  2006, as compared to thesame period in 2005 for the reasons stated in ‘‘OperatingLoss’’ above.

Income from discontinuedoperations

Income from discontinued operationsincreased $0.4  million for the three months endedSeptember  30,  2006, as compared to the same period in2005 due to the transfer of certain personnel from the EnterpriseSolutions business to the RCM business, offset somewhat by reducedrevenue relating to customer cancellations of maintenance contracts andlower professional services revenue.

Net Income(Loss)

Net income (loss) decreased from $0.2million, or $0.01 per diluted share of income for the three monthsended September  30,  2005 to $(2.8) million, or $(0.08)per diluted share loss for the three months ended September30,  2006, for the reasons stated above.

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Comparison of Nine Months EndedSeptember  30,  2006 to2005

Revenues

Total revenues decreased$0.6  million or 6.7% for the nine months endedSeptember  30,  2006 as compared to the corresponding prioryear period due to a $1.1  million or 38.1% decrease inlicense revenue offset somewhat by a $0.5  million or 9.3%increase in service revenue. License revenues for 2005 included alicense fee of approximately $1.0  million to one customer whichwas not repeated in the 2006. This reduction was offset by strongerrevenue from our partner channel in 2006 compared with 2005. Consultingrevenue is stronger in 2006 resulting in part from two large RCMprofessional service implementations which have taken place in2006.

Total revenues for the nine months endedSeptember  30,  2006 included $1.1  million and$0.9  million or 14.3% and 12.2% respectively oftotal revenues from two customers. Total revenue for the nine monthsended September  30,  2005 included $2.1  million and$0.9  million or 25.0% and 10.8% respectively oftotal revenues from two customers.

The following tablesets forth, for the periods indicated, each major category of ourservices revenues as a percent of total services revenues:

|                       |  |  |                                 |   |       |          |  |  |        |  |       |           |  |  |  |   |       |  |  |  |  |  |       |   |
|-----------------------|--|--|---------------------------------|---|-------|----------|--|--|--------|--|-------|-----------|--|--|--|---|-------|--|--|--|--|--|-------|---|
|                  |  |  | Nine Months EndedSeptember  30, |
| (dollars inthousands) |  |  | 2006                            |   |       | 2005     |
|                  |  |  | Amount                          |   |       | %ofTotal |  |  | Amount |  |       | % ofTotal |
| Maintenance           |  |  |                                 | $ | 3,450 |          |  |  |        |  | 57.3  | %         |  |  |  | $ | 3,374 |  |  |  |  |  | 61.2  | % |
| Consulting       |  |  |                                 |   | 2,232 |          |  |  |        |  | 37.0  | %         |  |  |  |   | 2,035 |  |  |  |  |  | 36.9  | % |
| Subscriptionrevenue   |  |  |                                 |   | 343   |          |  |  |        |  | 5.7   | %         |  |  |  |   | 101   |  |  |  |  |  | 1.9   | % |
| Totalservicesrevenue  |  |  |                                 | $ | 6,025 |          |  |  |        |  | 100.0 | %         |  |  |  | $ | 5,510 |  |  |  |  |  | 100.0 | % |
|                       |

Theincrease in services revenues is the result of increases in allcategories of service revenue, particularly in subscription revenuefrom the Company’s E-delivery travel service in Europe.Subscription revenue has increased resulting from larger volumes ofrecords being processed through the Company’s hosted E-deliveryproduct in 2006 compared with 2005.

OperatingExpenses

Cost of license fees consists primarily ofamortization of capitalized software development costs and amounts paidto third parties with respect to products we resell in conjunction withthe licensing of our products. The elements can vary substantially fromperiod to period as a percentage of license fees. Cost of license feesincreased $0.1  million or 9.6% for the nine months endedSeptember  30,  2006, as compared to the correspondingprior year period mainly as a result of an increase in royalty fees forthird party software used in conjunction with our software (whichincludes both embedded software and separately sold software) offsetsomewhat by decreased amortization of capitalized software developmentcosts.

Cost of services consists primarily of personneland third party costs for product quality assurance, training,installation, consulting and customer support. Cost of servicesincreased $0.8  million or 14.6% for the nine months endedSeptember  30,  2006, as compared to the correspondingprior year period. The increase for the nine-month period was mainlydue to increases in services personnel, redeployment of EnterpriseSolutions resources to focus on the RCM product line and third partyconsultants to install and support the RCM products. Additionally, costof resources formerly shared by the Enterprise Solutions segment andthe RCM segment are now borne solely by the RCM segment. This alsoaffects Sales & Marketing expenses, R&D expenses and G&Aexpenses. These costs will be reduced as part of the restructuringmentioned above. This increase in costs resulted in a negative marginof 5.2% for the nine months ended September  30,2006 compared to a negative service margin of .3% for thecorresponding prior year period. The Company expects positive marginsin the future as service revenue increases and costs arereduced.

Sales and marketing expenses consist primarily ofsalaries, commissions and bonuses related to sales and marketingpersonnel, as well as travel and promotional expenses. Sales andmarketing expenses increased 

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$1.6  million or 28.7% for thenine months ended September  30,  2006, as compared to thecorresponding prior year period. The increase was mainly due to theaddition of sales, sales support and marketing personnel, redeploymentof Enterprise Solutions resources to focus on the RCM product line, andincreased spending on marketing programs, to expand the sales anddistribution of the Company’s RCM products.

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

Research and development expenses (net ofcapitalized software development costs) increased $0.3  millionor 6.9% for the nine months ended September  30,2006, as compared to the comparable prior year period. The increase isprimarily the result an increase in the use of third party consultantsfor development of the RCM products and increased employee-relatedcosts.

General and administrative expenses consistprimarily of salaries for administrative, executive and financialpersonnel, and outside professional fees. General and administrativeexpenses increased $0.1  million or 4.4% for the ninemonths ended September  30,  2006 as compared to thecorresponding prior year period. The increase is primarily due higherprofessional services fees.

On June  30,2005, in order to reduce operating costs to better position ourselvesin the current market, we eliminated 6 positions from continuingoperations. We recorded a charge to operations in the second quarter of2005 totaling $0.3  million related to involuntary terminationbenefits to be paid to the terminated employees. Approximately$0.2  million of these restructuring costs have been paid. Theremaining liability at September  30,  2006 is $0.1million and is expected to be paid in 2006. There was no restructuringcost incurred in 2006.

OperatingLoss

Operating loss increased $3.2  million forthe nine months ended September  30,  2006 as compared tothe corresponding prior year period due mainly to an increase of$2.6  million in operating expenses and a decrease in totalrevenue of $0.6  million as described above.

OtherIncome (Expense), Net

Other income (expense), netimproved $0.3  million for the nine months ended September30,  2006, as compared to the same period in 2005. Theimprovement is principally related to foreign currency exchange ratefluctuations and higher interest income offset partially by higherinterest expense.

Loss from continuing operations

Loss from discontinued operations increased $2.9million for the nine months ended September  30,  2006, ascompared to the same period in 2005 primarily due to the reasons statedabove.

Income from discontinuedoperations

Income from discontinued operationsincreased $2.2  million for the nine months endedSeptember  30,  2006, as compared to the same period in2005 due to the transfer of certain personnel from the EnterpriseSolutions business to the RCM business, offset somewhat by reducedrevenue relating to customer cancellations of maintenance contracts andlower professional services revenue.

Net Loss

Net loss increased $0.7  million to $8.1  millionor $(0.23) per diluted share for the nine months ended September30,  2006, as compared to $7.4  million or $(0.24) perdiluted share for the same period in 2005 due to the reasons statedabove.

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Liquidity and CapitalResources

On June  21,  2005 andSeptember  21,  2005 we completed a private placement ofshares of common stock that resulted in the receipt of net proceeds ofapproximately $5.8  million and $0.6  million,respectively. (See Note 7 to the Consolidated Interim FinancialStatements).

On August  11,  2004, theCompany entered into a two-year Loan and Security Agreement(the ‘‘Agreement’’) whichcontains a revolving line of credit under which the Company hadavailable the lesser of $4.0  million or 80% of eligibleaccounts, as defined (See Note 3 to the Consolidated Interim FinancialStatements).

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

Borrowings under the revolving line ofcredit, per the Amended Agreement, bore interest at prime rate plus oneand one half percent (1.5%). Should, however, the Company failto meet certain of the financial covenants set forth in the AmendedAgreement, the interest rate would increase to the prime rate plus twoand one half percent (2.5%). The Agreement provided for anon-refundable commitment fee of $30 per year and an unusedrevolving line facility fee of .25% per annum. The AmendedAgreement increased the second year commitment fee to $40 and theunused line fee to 0.375% per annum. The Amended Agreementincludes a warrant waiver fee of $20 and upon the occurrence of certainevents, minimum monthly interest of $8 and an additional $20 warrantwaiver fee. The Agreement is secured by substantially all domesticassets of the Company. The maturity date of the loan was August9,  2006. As described in greater detail in the AmendedAgreement, the loan is subject to acceleration upon breach of: (i) acovenant tested monthly regarding the ratio of unrestricted cash andnet billed accounts receivable to current liabilities minus deferredrevenue, which is to be no less than 1.35 to 1.0(‘‘adjusted quick ratio covenant’’), (ii) acovenant tested quarterly regarding the Company's EBITDAS(earnings before interest expense (excluding interest income), taxes,depreciation, amortization and stock compensation expense in accordancewith GAAP), and (iii) other customary non-financial covenants. There isalso a monthly transition event covenant which requires the Company tomaintain an adjusted quick ratio covenant greater than or equal to 1.60to 1.0.

As of March  31,  2006, the Companywas in compliance with the monthly adjusted quick ratio covenant andthe transition event covenant, but was not in compliance with thequarterly EBITDAS covenant, which requires the Company to achieveEBITDAS of the lesser of $1 better than the immediately precedingquarter EBITDAS or $1. On May  11,  2006, the Bank granteda waiver of the EBITDAS covenant as of March  31,  2006.The waiver was for the March  31,  2006 dateonly.

As of June  30,  2006, the Company wasin compliance with the quarterly EBITDAS covenant and the monthlyadjusted quick ratio covenant, but was not in compliance with thetransition event covenant, which requires the Company to maintain anadjusted quick ratio covenant greater than or equal to 1.60to 1.00. As result of such violation, the Bank moved the Company to thehigher interest rate facility which required the Company to payinterest on outstanding balances of prime plus 2.5%, incurminimum monthly interest expense of $8 and pay a one-time warrantwaiver fee of $10.

As of September  30,2006, there was $1,844 outstanding under the Amended Agreement, whichwas the full amount of availability under the Amended Agreement basedon the lesser of $4,000 or 80% of eligible accounts receivable.The Company was not in compliance with the quarterly EBITDAS covenantor the monthly adjusted quick ratio covenant as of September30,  2006. On October  20,  2006, the Companyreceived a notice of default from the Bank in connection with thesecovenant violations. As a result, the effective interest rate of theloan has increased by 4.0%, any additional loans were at theBank’s sole discretion and the Bank reserved the right todeclare all obligations to be immediately due and payable in full, aright which they did not exercise.

On October31,  2006 the Company and the Bank entered into a Second LoanModification Agreement and an Intellectual Property Security Agreement.The Second Loan Modification Agreement serves (a) to amendthe Amended Agreement by reducing the amount the Company may borrow ona revolving basis 

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from (i) up to the lesser of (A) $4,000,000or (B) 80.0% of the Eligible Accounts to (ii) up to the lesserof (A) $2,000,000 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 thedefault of the Company for failure to comply with certain financialcovenants under the Amended Agreement at September  30,2006. The IP Security Agreement serves to supplement the AmendedAgreement by including among the assets securing the Company’sindebtedness to the Bank, a security interest in all of theCompany’s right, title and interest in, to and under itsIntellectual Property Collateral.

On November11,  2006 the Company and the Bank entered into a Third LoanModification Agreement. The Third Loan Modification Agreement serves(a) to amend the Second Loan Modification Agreement by increasing theamount the Company may borrow on a revolving basis from (i) up to thelesser of (A) $2,000,000 or (B) 70.0% of the EligibleAccounts to (ii) up to the lesser of (A) $4,000,000 or (B) 70.0%of the Eligible Accounts, and (b) as an agreement by the Bank to extendthe forbearance from exercising its rights and remedies with respect tothe default of the Company through December  10,  2006 forfailure to comply with certain financial covenants under the AmendedAgreement at September  30,  2006. It is theCompany’s intent to negotiate with the Bank to seek anotheramendment to the Amended Agreement to extend the loan into 2008 andrevise the related financial covenants

Our operatingactivities used cash of $12.9  million for the nine months endedSeptember  30,  2006 and $12.1  million for the ninemonths ended September  30,  2005. Net cash used inoperating activities during the nine months ended September30,  2006 is primarily the result of the net loss from continuingoperations and a decrease in deferred revenue offset slightly byreduced accounts receivable, increased accrued expenses, anddepreciation and amortization. The use of cash in 2005 was primarilythe result of the net loss from continuing operations, increasedaccounts receivable and decreased accounts payable and accruedexpenses; offset slightly by decreases in prepaid and other currentassets and depreciation and amortization.

Our investingactivities used cash of $0.2  million and zero for the ninemonths ended September  30,  2006 and 2005, respectively.The use of cash for 2006 was primarily for the purchase of computerequipment for the Company’s internal operations.

Cash provided by financing activities was $2.0  millionand $8.8  million for the nine months ended September30,  2006 and 2005, respectively. For the nine months endedSeptember  30,  2006, cash was provided by borrowings underthe Company’s debt facility and the exercise of stock optionsduring the period. For the nine months ended September30,  2005, cash was primarily provided by net proceeds receivedfrom the private placement and the exercise of stock options andwarrants and by borrowings under the Company’s debtfacility.

Cash provided by discontinued operations was$9.5 million and $3.4 million for the nine months ended September 30,2006 and 2005, respectively. For the nine months ended September 30,2006, cash was provided by net income from discontinued operations andthe change in net assets held for sale. For the nine months endedSeptember 30, 2005, cash was provided by net income from discontinuedoperations offset somewhat by the change in net assets held forsale.

We have no significant capital commitments. Plannedcapital expenditures for the year 2006 are expected to be less than$0.5  million, including any software development costs that mayqualify for capitalization under SFAS 86. Our aggregate minimumoperating lease payments for 2006 will be approximately $1.9million. We have no remaining aggregate minimum royalties payable tothird party software providers in accordance with 2006 agreements forthird party software used in conjunction with our software. Futurecommitments to third party software providers are as follows:

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|               |  |  |        |   |         |  |
|---------------|--|--|--------|---|---------|--|
| (inthousands) |
| Year          |  |  | Amount |
| 2006          |  |  |        | $ | — |  |
| 2007          |  |  |        |   | 150     |  |
| 2008          |  |  |        |   | 75      |  |
| 2009          |  |  |        |   | 75      |  |
| Total         |  |  |        | $ | 300     |  |
|               |

Wegenerated a net loss of $8.1  million for the nine months endedSeptember  30,  2006 and $9.0  million and$5.2  million for the years ended December  31,  2005and 2004, respectively. We experienced a decline in revenue as ourbusiness shifted to focus more heavily on the records compliancemanagement business. Management’s initiatives over the last twoyears, including the restructurings in June  2005 and 2004, theprivate placements of common stock in April  2004 and June2005 and 10% salary cuts of executive management for most of thesecond half of 2005, and the sale of the Enterprise Solutions business,have been designed to improve operating results and liquidity andbetter position AXS-One to compete under current market conditions. Asa result of these efforts, we expect that our current cash balance,availability of borrowing capacity under our bank line of credit, andoperating cash flow should be sufficient to meet the short-termrequirements of the business. However, we may in the future be requiredto seek new sources of financing or future accommodations from ourexisting lender or other financial institutions, or we may seek equityinfusions from private investors. Our ability to fund our operations isheavily dependent on the growth of our revenues over current levels toachieve profitable operations, particularly given the recent sale ofthe Enterprise Solutions business, which was our profitable segment. Wewill also be required to further reduce operating costs in order tomeet our obligations. We are currently developing a restructuring planthat will be implemented in the fourth quarter of 2006 to reduceoperating expenses by approximately $5  million to $6million on an annual basis. If we are unable to achieve profitableoperations or secure additional sources of capital, there would besubstantial doubt about our ability to fund future operations andultimately continue as a going concern. Additionally, there is a riskthat cash held by one foreign subsidiary approximating $0.4million at September  30,  2006 may not be readilyavailable for use in our U.S. operations to pay our obligations as thetransfer of funds is sometimes delayed due to various foreigngovernment restrictions. No assurance can be given thatmanagement’s initiatives will be successful or that any suchadditional sources of financing, lender accommodations or equityinfusions will be available.

Critical AccountingEstimates

Our critical accounting policies are asfollows:

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

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

Revenue Recognition

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

We normally license our software products on aperpetual basis. Each license agreement generally includes a provisionfor initial post-contract support (maintenance). For the majority oflicense sales we use a signed license agreement as evidence of anarrangement. For maintenance fees, we use a maintenance agreement asevidence of the arrangement. We use a professional services agreementas evidence of an arrangement for our training, subscription, customprogramming and consulting revenues. Occasionally, where a masterlicense or services agreement with a customer already exists, we acceptthe customer’s purchase order as evidence of an arrangement.

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We recognize revenue in accordancewith Statement of Position 97-2, ‘‘Software RevenueRecognition’’ (‘‘SOP 97-2’’),and Statement of Position 98-9, ‘‘Modification of SOP97-2, Software Revenue Recognition, With Respect to CertainTransactions.’’ Revenue from non-cancelable softwarelicenses is recognized when the license agreement has been signed,delivery has occurred, the fee is fixed or determinable andcollectibility is probable. The Company recognizes revenue fromresellers when an end user has placed an order with the reseller andthe above revenue recognition criteria have been met with respect tothe reseller. In multiple element arrangements, we defer revenue basedon the vendor-specific objective evidence(‘‘VSOE’’) of fair value for theundelivered elements and recognize revenue on the delivered elementsusing the residual method. The most commonly deferred elements areinitial maintenance and consulting services. Initial maintenance isrecognized on a straight-line basis over the initial maintenance term.The VSOE of fair value for maintenance is determined by using aconsistent percentage of maintenance fees to discounted license feebased on renewal rates. Maintenance fees in subsequent years arerecognized on a straight-line basis over the life of the applicableagreement. Maintenance contracts entitle the customer to hot-linesupport and all unspecified product upgrades released during the termof the maintenance contract. Upgrades include any and all unspecifiedpatches or releases related to a licensed software product. Maintenancedoes not include implementation services to install these upgrades. TheVSOE of fair value of services is determined by using an averageconsulting rate per hour for consulting services sold separatelymultiplied by the estimate of hours required to complete the consultingengagement.

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

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

The majority ofour training and consulting services are billed based on hourly rates.We generally recognize revenue as these services are performed.However, when we enter into an arrangement that is based on a fixedfee, revenue is recognized using the percentage of completion method ofaccounting. When we enter into an arrangement that requires us toperform significant work either to alter the underlying software or tobuild additional complex interfaces so that the software performs asthe customer requests, we recognize the license revenue and servicerevenue using the percentage of completion method of accounting. Thiswould apply to our custom programming services, which are generallycontracted on a fixed fee basis. Anticipated losses, if any, arecharged to operations in the period such losses are determined to beprobable.

Revenues from transaction fees associated withour subscription arrangements, billable on a per transaction basis andincluded in services revenue in the Consolidated Statements ofOperations, are recognized based on the actual number of transactionsprocessed during the period.

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

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

In accordance with EITF Issue No. 01-14,‘‘Income Statement Characterization of ReimbursementReceived for ‘Out of Pocket’ ExpensesIncurred,’’ reimbursements received for out-of-pocketexpenses incurred are classified as services revenue and the relatedexpense is recorded in cost of services in the unaudited ConsolidatedStatements of Operations.

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Capitalized Software DevelopmentCosts

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

Recently Issued Accounting Standards

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

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

In September  2006, the FASB issuedStatement No. 157 ‘‘Fair ValueMeasurements’’, which defines fair value, establishes aframework for measuring fair value under GAAP, and expands disclosureabout fair value measurement. FASB Statement No. 157 applies to otheraccounting pronouncements that require fair value measurements thatrequire or permit fair value measurements. The new guidance iseffective for financial statements issued for fiscal years beginningafter November  15,  2007 and for interim periods withinthose fiscal years. We are currently evaluating the potential impact,in any, of the adoption of FASB Statement No. 157 on our consolidatedfinancial position, results of operations and cashflows.

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

See Part II, Item 1A herein and our 2005Annual Report on Form 10K for a detailed discussion of riskfactors.

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|               |                                                           |
|---------------|-----------------------------------------------------------|
| Item 3.  | Quantitativeand Qualitative Disclosures about Market Risk |

In thenormal course of business, we are exposed to fluctuations in interestrates and equity market risks as we seek debt and equity capital tosustain our operations. We are also exposed to fluctuations in foreigncurrency exchange rates as the financial results and financialconditions of our foreign subsidiaries are translated into U.S. dollarsin consolidation. We do not use derivative instruments or hedging tomanage our exposures and do not currently hold any market risksensitive instruments for trading purposes.

|              |                         |
|--------------|-------------------------|
| Item4.  | Controls and Procedures |

Evaluationof disclosure controls and procedures

The Companymaintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company'sExchange Act reports is recorded, processed, summarized and reportedwithin the time periods specified in the SEC's rules and forms,and that such information is accumulated and communicated to theCompany's management, including its Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure based on the definition of‘‘disclosure controls and procedures’’ inRule 13a-15(e). In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonableassurance of achieving the desired control objectives, and managementnecessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls andprocedures.

The Company carried out an evaluation, underthe supervision and with the participation of the Company'smanagement, including the Company's Chief Executive Officer andthe Company's Chief Financial Officer, of the effectiveness ofthe design and operation of the Company's disclosure controls andprocedures as of September  30,  2006. Based upon theforegoing, the Company's Chief Executive Officer and ChiefFinancial Officer concluded that the Company's disclosurecontrols and procedures were effective as of September30,  2006.

Internal controls over financialreporting

There have been no changes in theCompany's internal control over financial reporting during thequarter ended September  30,  2006 that have materiallyaffected, or are reasonably likely to materially affect, theCompany's internal control over financialreporting.

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PARTII    OTHER INFORMATION

|                |             |
|----------------|-------------|
| Item 1A.  | RiskFactors |

We have a previous history of netlosses.

AXS-One incurred a net loss of $8.1million for the nine months ended September  30,  2006 and$9.0 million and $5.2  million for 2005 and 2004,respectively, after having generated net income of $2.3  millionduring the year ended December  31,  2003. Although AXS-Onegenerated revenues and reduced costs sufficient to be profitable in2003, we were not able to sustain profitability in the first nine monthof 2006 or for the years 2005 and 2004 and may not be able to on aquarterly or annual basis in the future. As of September30,  2006, we had an accumulated deficit of $98.7  million.On November  1,  2006, we sold the assets of our EnterpriseFinancials business to Computron Software, LLC, a subsidiary ofParallax Capital Partners, LLC for $12  million in cash plusfuture potential consideration if specified license revenue thresholdsare exceeded. Since the Enterprise Financials business was profitableduring 2005 and prior to its sale in 2006, our losses for the remainderof 2006 are expected to increase.

Additionally,AXS-One’s revenue and operating results have fluctuated and maycontinue to fluctuate significantly from quarter to quarter in thefuture, causing our common stock price to be quite volatile and maycause the market price to fall. A variety of factors, many of which arenot in our control, cause these fluctuations and include, amongothers:

|  |               |                                                                                              |
|--|---------------|----------------------------------------------------------------------------------------------|
|  | –  | the proportion of revenues we earnfrom license fees versus fees for the services we provide, |

|  |               |                                                                                     |
|--|---------------|-------------------------------------------------------------------------------------|
|  | –  | the number of partners selling our productsand their continued willingness to doso, |

|  |               |                                                        |
|--|---------------|--------------------------------------------------------|
|  | –  | the number of third parties we use toperform services, |

|  |               |                                                                         |
|--|---------------|-------------------------------------------------------------------------|
|  | –  | the amount of revenueswe generate from our sale of third partysoftware, |

|  |               |                         |
|--|---------------|-------------------------|
|  | –  | demand for ourproducts, |

|  |               |                                                        |
|--|---------------|--------------------------------------------------------|
|  | –  | the size and timing ofindividual license transactions, |

|  |               |                                                                      |
|--|---------------|----------------------------------------------------------------------|
|  | –  | theproducts and enhancements that we, or our competitors, introduce, |

|  |               |                                         |
|--|---------------|-----------------------------------------|
|  | –  | changes in our customers’budgets, |

|  |               |                                                                                                                   |
|--|---------------|-------------------------------------------------------------------------------------------------------------------|
|  | –  | potential customers’unwillingness to undertake major expenditures with us due to our pastoperating results, |

|  |               |                                                                          |
|--|---------------|--------------------------------------------------------------------------|
|  | –  | competitive conditionsin the industry and general economic conditionsand |

|  |               |                                                 |
|--|---------------|-------------------------------------------------|
|  | –  | unrest in the Middle East or otherworld events. |

Additionally, clients’ licensing ofour products is often delayed because:

|  |               |                                                         |
|--|---------------|---------------------------------------------------------|
|  | –  | our clients must commit a significant amountof capital, |

|  |               |                                                                                                                         |
|--|---------------|-------------------------------------------------------------------------------------------------------------------------|
|  | –  | frequently, a licensepurchase must be authorized through the multiple channels within aclient’s organization and, |

|  |               |                                                                                              |
|--|---------------|----------------------------------------------------------------------------------------------|
|  | –  | salesare increasingly driven through our partners, reducing our control overthe sales cycle. |

Because of these reasons, as well asothers, our products’ sales cycles are typically lengthy andsubject to a number of significant risks over which we often havelittle or no control which include a customer’s budgetaryconstraints and internal authorizationreviews.

Historically, AXS-One has operated with a smalllicense backlog, since products are generally shipped as we receiveorders. Because our license fees in any quarter substantially depend onorders booked and shipped in the last month, and often during the lastweek, of a given quarter our revenues have been back end loaded andsubject to fluctuation.

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Delays in the timing of when werecognize specific revenues may adversely and disproportionately affectour operating results because:

|  |               |                                                                     |
|--|---------------|---------------------------------------------------------------------|
|  | –  | a highpercentage of our operating expenses are relatively fixed,and |

|  |               |                                                                          |
|--|---------------|--------------------------------------------------------------------------|
|  | –  | only a small percentage of ouroperating expenses vary with our revenues. |

Because ofthese factors, we believe that period-to-period comparisons of ouroperating results are not necessarily meaningful and one should notrely on quarter-to-quarter comparisons of our operating results to beindicative of our future performance.

Additionally, ourbusiness has experienced, and we expect to continue to experience,significant seasonality, due, in part, to our customers’ buyingpatterns, caused primarily by:

|  |               |                                                           |
|--|---------------|-----------------------------------------------------------|
|  | –  | ourcustomers’ budgeting and purchasing patterns,and |

|  |               |                                                                                                                             |
|--|---------------|-----------------------------------------------------------------------------------------------------------------------------|
|  | –  | our sales commission policies.Generally, we compensate our sales personnel based on quarterly andannual performance quotas. |

We expect that these patternswill likely continue in the future.

As a result of thesefactors, in future quarters, our operating results may be significantlylower than the estimates of public market analysts and investors. Anydiscrepancy could cause the price of our common stock to be volatileand to decline significantly. We can give no assurance that we will beprofitable in any future quarter.

The market in which wecompete is intensely competitive.

AXS-One cangive no assurance that we will be able to compete successfully againstcurrent or future competitors or that competitive pressures will nothave a material adverse effect on our business, operating results andfinancial condition. Our market is intensely competitive and changingrapidly. A number of companies offer products similar to ours andtarget the same customers. We believe that our ability to competedepends upon many factors, many of which are not in our control,including, among others,

|  |               |                                                                                                             |
|--|---------------|-------------------------------------------------------------------------------------------------------------|
|  | –  | timing andmarket acceptance of new products and enhancements developed by us, aswell as by our competitors, |

|  |               |                                                                               |
|--|---------------|-------------------------------------------------------------------------------|
|  | –  | whether ourproducts are reliable, how they function, perform, and are priced, |

|  |               |                                  |
|--|---------------|----------------------------------|
|  | –  | our customer service andsupport, |

|  |               |                                     |
|--|---------------|-------------------------------------|
|  | –  | our sales and marketing efforts,and |

|  |               |                          |
|--|---------------|--------------------------|
|  | –  | our productdistribution. |

AXS-One solutions are positioned in a highlydynamic market. Our competitors for records and compliance managementproducts include IBM, HP, EMC (Legato), CA (iLumin), OpenText (IXOS),Zantaz and Symantec (KVS). There are also a growing number of smaller,niche vendors targeting specific areas of this marketworldwide.

Most of our competitors are substantiallylarger than us, and have significantly greater financial, technical andmarketing resources, and extensive direct and indirect distributionchannels. As a result, our competitors may be able to respond morequickly to new or emerging technologies and changes in customerrequirements or to devote greater resources to developing, promotingand selling their products than we can. Additionally, our competitorsoften have stronger financial positions than we do, and use that factas an advantage during the selling process. Our products also competewith those offered by other vendors and with proprietary softwaredeveloped by third-party professional service organizations, as well asby potential customers’ management information systemsdepartments.

As our market continues to develop andexpand, we expect established and emerging companies to compete with usdue to the relatively low barriers necessary to enter the softwaremarket. We expect that competition will also increase as the softwareindustry consolidates. During 2005, we saw the acquisition

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trend continue with competitors in therecords and compliance management market being acquired by largecompanies with significantly greater financial and marketing resourcesthan us. Furthermore, we cannot assure anyone that any of the companieswith whom we currently have relationships, most of which may havesignificantly greater financial and marketing resources than we do,will not, in the future, develop or market software products thatcompete with our products, or discontinue their relationship or supportof us.

Additionally, our current and potentialcompetitors have established, or may establish in the future,cooperative relationships among themselves or with third parties toincrease their products’ ability to address the needs of ourprospective customers. Therefore, new competitors or alliances amongcompetitors could emerge and rapidly acquire a significant marketshare. Increased competition is likely to result in

|  |               |                                    |
|--|---------------|------------------------------------|
|  | –  | reducing the price of ourproducts, |

|  |               |                                |
|--|---------------|--------------------------------|
|  | –  | reducing our gross margins,and |

|  |               |                          |
|--|---------------|--------------------------|
|  | –  | losing our market share. |

Any of these factors would adversely affect our business, ouroperating results and financial condition.

AXS-One dependson one principal suite of products for itsrevenues.

On October  31,  2006, AXS-Onesold the assets of our Enterprise Financials business to ComputronSoftware, LLC, a subsidiary of Parallax Capital Partners, LLC for$12  million in cash plus future potential consideration ifspecified license revenue thresholds are exceeded. Therefore, we expectthat substantially all of our revenues for 2007 will be attributable tothe licensing, maintenance and support services of our suite of AXS-OneCompliance Platform solutions. The market for these products isrelatively new and evolving rapidly. Accordingly, our future operatingresults will depend, in part,on:

|  |               |                                                                  |
|--|---------------|------------------------------------------------------------------|
|  | –  | achieving broader market acceptance ofour products and services, |

|  |               |                                                                                                                                  |
|--|---------------|----------------------------------------------------------------------------------------------------------------------------------|
|  | –  | expanding ourrelationships with vendors in the emerging subscription market as wellas our Value-Added Reseller networkworldwide, |

|  |               |                                                      |
|--|---------------|------------------------------------------------------|
|  | –  | expanding our relationshipswith systems integrators, |

|  |               |                                        |
|--|---------------|----------------------------------------|
|  | –  | maintaining ourexisting customer base, |

|  |               |                                        |
|--|---------------|----------------------------------------|
|  | –  | expanding ourcustomer base, as well as |

|  |               |                                                                                   |
|--|---------------|-----------------------------------------------------------------------------------|
|  | –  | enhancing theseproducts and services to meet our customers’ evolving needs. |

Additionally, during 2007, our AXS-One Compliance Platformsolutions need to gain greater market acceptance. If:

|  |               |                                                          |
|--|---------------|----------------------------------------------------------|
|  | –  | demand in the market for our type of softwareis reduced, |

|  |               |                           |
|--|---------------|---------------------------|
|  | –  | competition increases, or |

|  |               |                                            |
|--|---------------|--------------------------------------------|
|  | –  | sales of such products or servicesdecline, |

any of these factors could have a materialadverse affect on our business, operating results and financialcondition.

AXS-One has a concentration of revenues fromcertain customers.

During the last three years,AXS-One has generated a significant amount of revenues from a selectnumber of customers. Because of the size of certain of our customers,it is likely that they will continue to generate a significant portionof our revenues especially in our services revenue area. If any ofthese customers should discontinue their business with us it could havea material adverse affect on our business, operating results andfinancial condition. There is no assurance that we would be able toreplace these lost revenues with revenues from new or other existingcustomers.

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For the nine months endedSeptember, 2006, two customers represented 14.3% and12.2% individually, of total revenue. For the year endedDecember  31,  2005, one customer represented 18.4%of total revenues. For the nine months ended September30,  2006, two customers represented 40.0% and10.6%, individually, of license revenue. For the year endedDecember  31,  2005, two customers represented 26.8%and 12.2% individually of license revenue. One customerrepresented 12.7% of service revenues for the nine months endedSeptember  30,  2006. One customer represented 13.6%of service revenues for the year ended December  31,2005.

AXS-One’s market is characterized by newproducts frequently being introduced, rapid technology changes, productdefect risks, and development delays.

If AXS-One isunable, for technological, financial or other reasons, whether or notwithin its control, to timely develop and introduce new products orenhancements to respond to changing customer requirements,technological change or emerging industry standards, our business,operating results and financial condition could suffer.

Our software performance, customization, reportingcapabilities, or other business objectives may or may not be affectedby these changes and may or may not render us incapable of meetingfuture customer software demands. Introducing products embodying newtechnologies and emerging new industry standards can render existingproducts obsolete and unmarketable. Accordingly, it is difficult toestimate our products’ life cycles. Our future success willdepend in part on our ability to develop and introduce new AXS-OneCompliance Platform products that respond to evolving customerrequirements and keep pace with technological development and emergingindustry standards, such as new:

|  |               |                   |
|--|---------------|-------------------|
|  | –  | operatingsystems, |

|  |               |                    |
|--|---------------|--------------------|
|  | –  | hardwareplatforms, |

|  |               |                                                         |
|--|---------------|---------------------------------------------------------|
|  | –  | new environments such assubscription and ASP providers, |

|  |               |                |
|--|---------------|----------------|
|  | –  | interfaces,and |

|  |               |                                               |
|--|---------------|-----------------------------------------------|
|  | –  | third party hardware and applicationsoftware. |

We can give no assurance that:

|  |               |                                                                                                        |
|--|---------------|--------------------------------------------------------------------------------------------------------|
|  | –  | we will be successful in developing andmarketing product enhancements or new products that respond to: |

|  |              |                       |
|--|--------------|-----------------------|
|  | •  | technological change, |

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | changes in customer requirements, or |

|  |              |                             |
|--|--------------|-----------------------------|
|  | •  | emerging industrystandards. |

|  |               |                                                                                                                                                        |
|--|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | –  | we will not experiencedifficulties that could delay or prevent our successfully developing,introducing and marketing new products and enhancements, or |

|  |               |                                                                                               |
|--|---------------|-----------------------------------------------------------------------------------------------|
|  | –  | any new products or enhancements that we mayintroduce will be accepted by our targetedmarket. |

Software products as complex as those we offeroften encounter development delays and, when introduced or when newversions are released, may contain undetected errors or may simplyfail. These delays, errors or failures create a risk that the softwarewill not operate correctly and could cause our future operating resultsto fall short of expectations published by certain public marketfinancial analysts or others. From time to time, we develop productsthat are intended to be compatible with various new computer operatingsystems, although we make no assurances that we will successfullydevelop software products that will be compatible with additionaloperating systems or that will perform as we intend. Additionally, ourproducts, technologies and our business in general rely uponthird-party products from various sources including, amongothers:

|  |               |                               |
|--|---------------|-------------------------------|
|  | –  | hardware and softwarevendors, |

|  |               |                                                |
|--|---------------|------------------------------------------------|
|  | –  | relational database managementsystems vendors, |

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|  |               |                     |
|--|---------------|---------------------|
|  | –  | ERP softwarevendors |

|  |               |                           |
|--|---------------|---------------------------|
|  | –  | reporting softwarevendors |

|  |               |                        |
|--|---------------|------------------------|
|  | –  | IM software vendors,or |

|  |               |                        |
|--|---------------|------------------------|
|  | –  | e-mail system vendors. |

Inthe future, it is unclear whether our dependence upon these third-partyproducts will affect our ability to support or make our productsreadily available. In the past, we have experienced delays by thirdparties who develop software that our products depend upon. Theseholdups have resulted in delays in developing and shipping ourproducts. Despite testing by our current and potential customers, aswell as by us, errors may be found in new products or enhancementsafter we ship them that can delay or adversely affect marketacceptance. We cannot assure anyone that any of these problems wouldnot adversely affect our business, operating results and financialcondition.

We may not be successful in convincing customersto migrate to future releases of our products.

Ourcustomers may not be willing to incur the costs or invest the resourcesnecessary to complete upgrades to current or future releases of ourproducts. This may lead to our loss of services, maintenance, and othersupport revenues, as well as less future business from customers thatcontinue to operate prior versions of our products.

We riskbeing de-listed from the American Stock Exchange, which could reduceour ability to raise funds.

On October6,  2006 the American Stock Exchange notified us that we were notin compliance with the exchange’s continued listing requirementsdue to shareholders equity of less than $2,000,000 and losses fromcontinuing operations and/or net losses in two out of our three mostrecent fiscal years. We submitted a compliance plan on November6,  2006, advising the American Stock Exchange of action we havetaken or will take to bring AXS-One into compliance with theexchange’s continued listing standards within a maximum of 18months. Acceptance of the plan is in the discretion of the AmericanStock Exchange. If the plan is accepted, we will be able to continueour listing during the plan period of up to 18 months, during whichtime we will be subject to periodic review to determine whether we aremaking progress consistent with the plan. If we are not in compliancewith the listing standards at the end of the 18-month period or do notmake progress consistent with the plan, the American Stock Exchangewill initiate delisting proceedings.

If our common stockwere to be de-listed by the American Stock Exchange, we might be unableto list our common stock with another stock exchange. In that event,trading of our common stock might be limited to the OTC Bulletin Boardor similar quotation system. Inclusion of our common stock on the OTCBulletin Board or similar quotation system could adversely affect theliquidity and price of our common stock and make it more difficult forAXS-One to raise additional capital on favorable terms, if at all. Inaddition, de-listing by the American Stock Exchange might negativelyimpact AXS-One’s reputation and, as a consequence, itsbusiness.

In the future, AXS-One may not have sufficientcapital resources to fully carry out its businessplans.

Our ability to carry out our future businessplans and achieve the anticipated results will be affected by theamount of cash generated from operations. There is also the risk thatcash held by our foreign subsidiaries will not be readily available foruse in our U.S. operations as the transfer of funds is sometimesdelayed due to various foreign government restrictions. Accordingly, wemay in the future be required to seek new sources of financing orfuture accommodations from our existing lender or other financialinstitutions, or we may seek equity infusions from private investors.We may also be required to further reduce operating costs in order tomeet our obligations.

On June  17,  2005, theCompany entered into a definitive agreement with a number of investorsas well as members of AXS-One Management and Board members to sell4,534,461 shares of its common stock for total consideration of$6.8  million. On June  21,  2005, the initialclosing date, the Company received net proceeds of approximately$5.8  million from the investors and issued 4,081,015 shares ofcommon 

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stock. This excluded amounts due from membersof the Company’s management and Board members which togetherrepresented 10% of the investment. The closing with respect tothe shares being offered to members of the Company’s managementand Board members was subject to shareholder approval. The Company alsoissued, at the same time, warrants to purchase an aggregate of 408,103shares of common stock at $1.90 per share and warrants to purchase408,095 shares of common stock at $2.15 per share. These warrants areexercisable for a period of three years beginning June21,  2005. Warrants to purchase an additional 45,347 shares ofcommon stock at $1.90 per share and 45,342 shares of common stock at$2.15 per share were issuable to members of the Company’smanagement and Board member investors upon approval of theshareholders.

On September  20,  2005, theshareholders approved the above sale of the Company’s commonstock and warrants to members of the Company’s management andBoard members. On September  21,  2005, the closing date,the Company received net proceeds of $0.6  million, issued453,446 shares of common stock and warrants to purchase 45,347 sharesof common stock at $1.90 per share and 45,342 shares of common stock at$2.15 per share.

On August  11,  2004, weentered into a two-year Loan and Security Agreement(‘‘Agreement’’) with a financialinstitution which contains a revolving line of credit under which wecan borrow the lesser of $4  million or 80% of eligibleaccounts, as defined in the Agreement. The Agreement contains certainrestrictive financial covenants. On January  27, March  28and September  13,  2005 we amended the Loan and SecurityAgreement in order to revise certain terms of theAgreement.

As of September  30,  2005, theCompany was in compliance with all covenants with the exception of amonthly ‘‘transition event’’ covenant whichrequires the Company to maintain an adjusted quick ratio greater thanor equal to 1.6 to 1.0. The Company’s adjusted quick ratio atSeptember  30,  2005 was 1.592 to 1.0. On November7,  2005, the bank granted a waiver on the transition eventcovenant as of September  30,  2005 and therefore did notrequire the Company to transition to the higher-interest debt facility.The waiver was for the September  30,  2005 dateonly.

As of December  31,  2005, the Companywas in compliance with the adjusted quick ratio covenant of 1.35 to 1.0and transition event covenant, but was not in compliance with thequarterly earnings before interest, taxes, depreciation, amortizationand stock compensation expense(‘‘EBITDAS’’) covenant, which requires theCompany to achieve EBITDAS of the lesser of $1 better than theimmediate preceding quarter EBITDAS or $1. Additionally, as ofNovember  30,  2005, the Company did not achieve itsmonthly ‘‘transition event’’ covenant whichrequires the Company to maintain an adjusted quick ratio greater thanor equal to of 1.6 to 1.0. The Company’s adjusted quick ratio atNovember  30,  2005 was 1.44 to 1.0. On February6,  2006, the bank granted a waiver on the quarterly EBITDAScovenant and the November transition event covenant. The EBITDAScovenant waiver was for the quarter ended December  31,2005 only. The transition event waiver was for the November30,  2005 date only.

On March  14,2006, the Company and the bank agreed to extend the loan toFebruary  15,  2007. All other terms of the loan remainedthe same.

As of March  31,  2006, the Companywas in compliance with the monthly adjusted quick ratio covenant andthe transition event covenant, but was not in compliance with thequarterly EBITDAS covenant, which requires the Company to achieveEBITDAS of the lesser of $1 better than the immediately precedingquarter EBITDAS or $1. On May  11,  2006, the lendergranted a waiver on the EBITDAS covenant as of March  31,2006. The waiver was for the March  31,  2006 dateonly.

As of June  30,  2006, the Company wasin compliance with the quarterly EBITDAS covenant and the monthlyadjusted quick ratio covenant, but was not in compliance with thetransition event covenant, which requires the Company to maintain anadjusted quick ratio covenant greater than or equal to 1.60 to 1.00. Asresult of such violation, the lender moved the Company to the higherinterest rate facility which required the Company to pay interest onoutstanding balances of prime plus 2.5%, incur minimum monthlyinterest expense of $8 and pay a one-time warrant waiver fee of$10.

As of September  30,  2006, there was$1,844 outstanding under the Amended Agreement, which was the fullamount of availability under the Agreement based on the lesser of$4,000 or 80% of eligible accounts receivable. The Company wasnot in compliance with the quarterly EBITDAS covenant or the monthly

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adjusted quick ratio covenant as ofSeptember  30,  2006. On October  20,  2006,the Company received a letter of default from the lender in connectionwith these covenant violations. As a result, the effective interestrate of the loan has increased by 4.0%, any additional loanswere at the lender’s sole discretion and the lender reserved theright to declare all obligations to be immediately due and payable infull, a right which they did not exercise.

OnOctober  31,  2006 the Company and the lender entered intoa Second Loan Modification Agreement and an Intellectual PropertySecurity Agreement. The Second Loan Modification Agreement serves(a) to amend the Agreement by reducing the amount theCompany may borrow on a revolving basis from (i) up to thelesser of (A) $4,000,000 or (B) 80.0% of the Eligible Accountsto (ii) up to the lesser of (A) $2,000,000 or (B)70.0% of the Eligible Accounts, and (b) an agreement by thelender to forbear until November  10,  2006 from exercisingits rights and remedies with respect to the default of the Company forfailure to comply with certain financial covenants under the Agreementat September  30,  2006. The IP Security Agreement servesto supplement the Agreement by including among the assets securing theCompany’s indebtedness to the lender, a security interest in allof the Company’s right, title and interest in, to and under itsIntellectual Property Collateral.

On November11,  2006 the Company and the Bank entered into a Third LoanModification Agreement. The Third Loan Modification Agreement serves(a) to amend the Second Loan Modification Agreement by increasing theamount the Company may borrow on a revolving basis from (i) up to thelesser of (A) $2,000,000 or (B) 70.0% of the EligibleAccounts to (ii) up to the lesser of (A) $4,000,000 or (B) 70.0%of the Eligible Accounts, and (b) as an agreement by the Bank to extendthe forbearance from exercising its rights and remedies with respect tothe default of the Company through December  10,  2006 forfailure to comply with certain financial covenants under the AmendedAgreement at September  30,  2006. It is theCompany’s intent to negotiate with the Bank to seek anotheramendment to the Amended Agreement to extend the loan into 2008 andrevise the related financial covenants

In each ofJune  2005 and 2004 we initiated cost reduction efforts designedto reduce our operating costs and reduce our need for additionalcapital. In the future, if we are unsuccessful with increasingrevenues and operating cash flow, we may be required to further reduceour operating costs. We believe we can successfully reduce theCompany’s cost structure in the event of a shortage of capital;however, there can be no assurance that we will be able to reduceoperating costs quickly enough or in amounts sufficient to avoid theneed to find additional sources of financing.  

Noassurance can be given that management’s initiatives to generateprofitable operations will be successful or that any additionalnecessary sources of financing, lender accommodations or equityinfusions will be available. As a result our business, operatingresults and financial condition could be adverselyimpacted.

AXS-One depends upon its proprietarytechnology and if we were unable to protect our technology, ourcompetitive position would be adversely affected.

We believe that our success greatly depends on ourproprietary technology and software. We rely primarily on a combinationof trademark and copyright law, trade secret protection and contractualagreements with our employees, customers, partners and others toprotect our proprietary rights. Despite our efforts to protect ourproprietary rights, unauthorized third parties may attempt to copy allor part of our products or reverse engineer or obtain and useinformation that we regard as proprietary. We make our source codeavailable to certain of our customers, which may increase thelikelihood of misappropriation or other misuse of our software.Additionally, the laws of some foreign countries do not protect ourproprietary rights to the same extent as do the laws of the UnitedStates. We cannot assure anyone that the steps we take to protect ourproprietary rights will be adequate or that our competitors will notindependently develop technologies that are substantially equivalent orsuperior to ours.

Although we believe that the trademarksand service marks we use are distinct, there can be no assurance thatwe will be able to register or protect such trademarks and servicemarks.

Our products may become subject to infringementclaims.

We believe that none of our products,trademarks, or service marks, technologies or other proprietary rightsinfringe upon the proprietary rights of any third parties. However, asthe number of software 

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products in our industry increases and thefunctionality of these products further overlap, we believe thatsoftware developers like us may become increasingly subject toinfringement claims. Additionally, the market in which we compete hasseen an increase in the number of ‘‘businessmethod’’ patents issued, and infringement claimsasserted, based on these issued patents. Any claims asserted,regardless of their merit, can be time consuming and expensive todefend, could cause delays in shipping our products or require us toenter into royalty or licensing agreements that may not be available onterms acceptable to us. Any of these factors would significantly impactour operating results and financial conditions or materially disruptthe conduct of our business. We cannot assure anyone that third partieswill not assert infringement claims against us in the future withrespect to our current or future products or services.

Asecurity breach could harm our business. 

Ourproducts provide security features designed to protect itsusers’ data from being retrieved or modified without beingauthorized. While AXS-One continues to review and enhance the securityfeatures in its products, we can make no assurances concerning thesuccessful implementation of security features and their effectivenesswithin a customer’s operating environment. If an actual securitybreach were to occur, our business, operating results and financialcondition could suffer.

A variety of risks associatedwith AXS-One’s international operations could adversely affectour business.

Risks inherent in international revenueinclude the impact of longer payment cycles, greater difficulty inaccounts receivable collection, unexpected changes in regulatoryrequirements, tariffs and other trade barriers, and difficulties instaffing and managing foreign operations. In addition, most of ourinternational license fees and services revenues are denominated inforeign currencies which can have an impact on our consolidatedrevenues as exchange rates fluctuate. Currently, we do not hedgeagainst foreign currency exchange risks but in the future we maycommence hedging against specific foreign currency transaction risks.We may be unable to hedge all of our exchange rate exposureeconomically and exchange rate fluctuations may have a negative effecton our ability to meet our obligations. With respect to ourinternational sales that are U.S. dollar denominated, decreases in thevalue of foreign currencies relative to the U.S. dollar could make ourproducts less price competitive. These factors may have a materialadverse effect on our future international revenue.

Webelieve that our continued growth and profitability will requireAXS-One to expand its sales in international markets, which requiresignificant management attention and financial resources. As a result,we expect that revenues from customers outside the United States willcontinue to represent a significant percentage of our total revenues inthe future. We cannot assure anyone, however, that we will be able tomaintain or increase international market demand for our products andservices.

In 2005, 2004 and 2003 the Company'stotal revenues generated by the Company’s foreign offices wereasfollows:

|      |  |  |             |  |  |                             |
|------|--|--|-------------|--|--|-----------------------------|
| Year |  |  | $ Amount    |  |  | Percentage of TotalRevenues |
| 2005 |  |  | $4.3million |  |  | 38.1%                       |
| 2004 |  |  | $2.1million |  |  | 20.5%                       |
| 2003 |  |  | $1.9million |  |  | 27.7%                       |
|      |

AXS-One issubject to additional risks related to operating in foreign countries.These risks generally include:

|  |               |                                                                           |
|--|---------------|---------------------------------------------------------------------------|
|  | –  | unexpectedchanges in tariffs, trade barriers and regulatory requirements, |

|  |               |                                                    |
|--|---------------|----------------------------------------------------|
|  | –  | costs of localizing products for foreigncountries, |

|  |               |                                                             |
|--|---------------|-------------------------------------------------------------|
|  | –  | lack of acceptance of localizedproducts in foreign markets, |

|  |               |                                          |
|--|---------------|------------------------------------------|
|  | –  | longeraccounts receivable paymentcycles, |

|  |               |                                                |
|--|---------------|------------------------------------------------|
|  | –  | difficulties managinginternational operations, |

|  |               |                                      |
|--|---------------|--------------------------------------|
|  | –  | potentiallyadverse tax consequences, |

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|  |               |                                          |
|--|---------------|------------------------------------------|
|  | –  | restrictions onrepatriation of earnings, |

|  |               |                                                          |
|--|---------------|----------------------------------------------------------|
|  | –  | reduced legalprotection of our intellectual property,and |

|  |               |                                                             |
|--|---------------|-------------------------------------------------------------|
|  | –  | the burden of complying with a widevariety of foreign laws. |

Any of these factors, or others,could adversely affect our future international revenues and,consequently, our business, operating results and financialcondition.

We rely on certain third-party relationships.

Our business, product development, operatingresults and financial condition could be adversely impacted if we failto maintain our existing relationships or establish new relationships,in the future, with third parties because of diverging interests, oneor more of these third parties is acquired, or for any other reason,whether or not within our control. We rely on third-party relationshipswith a number of consultants, systems integrators and software vendorsto:

|  |               |                                 |
|--|---------------|---------------------------------|
|  | –  | enhance our productdevelopment, |

|  |               |                              |
|--|---------------|------------------------------|
|  | –  | market and sell ourproducts, |

|  |               |                                     |
|--|---------------|-------------------------------------|
|  | –  | implement our software products,and |

|  |               |                       |
|--|---------------|-----------------------|
|  | –  | support ourcustomers. |

These relationships assist our productdevelopment process and assist us in marketing, servicing andimplementing our products. A number of these relationships are notmemorialized in formal written agreements.

Our productsalso incorporate software that we license from third parties. Theselicenses expire from time to time and generally, we do not have accessto the source code for the software that a third party will license tous. Certain of these third parties are small companies withoutextensive financial resources. If any of these companies terminaterelationships with us, cease doing business, or stop supporting theirproducts, we may be forced to expend a significant amount of time anddevelopment resources to try to replace the licensed software. We mayalso find that replacement is not possible or commercially feasible. Ifthat were to occur, our business, operating results and financialcondition could be adversely impacted. 

We rely on strategicpartners and resellers for a large portion of our new licenserevenue.

Our strategy has shifted over the pastseveral years to reliance on strategic partners such as SunMicrosystems and other resellers around the world. A loss of astrategic partner or the inability to maintain productive resellerrelationships could have a significant negative effect on our abilityto generate new license and related service revenue.

AXS-One’s executive officers, directors andaffiliates own a significant amount of its common stock.

This stock ownership may prevent or discouragetender offers for our common stock unless these controllingstockholders approve the terms of any such offers. As of March6,  2006, AXS-One’s executive officers, directors andaffiliates together beneficially own approximately 20% of ouroutstanding common stock. As a result, these stockholders are able toexercise significant influence over matters requiring stockholderapproval including:

|  |               |                        |
|--|---------------|------------------------|
|  | –  | electing directors,and |

|  |               |                                                                             |
|--|---------------|-----------------------------------------------------------------------------|
|  | –  | mergers, consolidations, and sale ofall or substantially all of our assets. |

AXS-Onerelies on its key personnel and may have difficulty attracting andretaining the skilled employees it needs to operate successfully.

AXS-One’s future success will depend, inlarge part, on the continued service of its key executives, and if wefail to attract and maintain those executives, the quality of ourproducts, our business, financial condition and operating results couldsuffer. We cannot provide assurances that turnover of our keyexecutives will not continue, and that such turnover would notadversely affect our business, operating results and financialcondition.

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We also believe that our futuresuccess will depend, in large part, on our ability to attract, retainand motivate highly skilled employees, and, particularly, technical,management, sales and marketing personnel. Competition for qualifiedemployees in our industry is intense. AXS-One has from time to time inthe past experienced, and expects to continue experiencing, difficultyin hiring and retaining employees with appropriate qualifications. Wecannot assure anyone that we will be able to retain our employees orattract or retain highly qualified employees to develop, market,service and support our products and conduct our operations.

AXS-One’s common stock trading price may bevolatile for reasons over which it may have little or no control.

AXS-One’s common stock trading price has,from time to time, experienced, and is likely to continue toexperience, significant price and volume fluctuations, often respondingto, among other factors:

|  |               |                                               |
|--|---------------|-----------------------------------------------|
|  | –  | quarterlyvariations in our operating results, |

|  |               |                                          |
|--|---------------|------------------------------------------|
|  | –  | thegain or loss of significantcontracts, |

|  |               |                                                      |
|--|---------------|------------------------------------------------------|
|  | –  | changes in earnings estimatesby securities analysts, |

|  |               |                                                                    |
|--|---------------|--------------------------------------------------------------------|
|  | –  | announcements oftechnological innovations by us or ourcompetitors, |

|  |               |                                                                    |
|--|---------------|--------------------------------------------------------------------|
|  | –  | announcements of new productsor services by us or our competitors, |

|  |               |                                                                |
|--|---------------|----------------------------------------------------------------|
|  | –  | general conditions in the software andcomputer industries, and |

|  |               |                                        |
|--|---------------|----------------------------------------|
|  | –  | general economicand market conditions. |

Additionally, the stock market, ingeneral, frequently experiences extreme price and volume fluctuations.In particular, the market prices of the securities of companies such asours have been especially volatile recently, and often thesefluctuations have been unrelated or disproportionate to the operatingperformance of the affected companies. The market price of our commonstock may be adversely affected by these market fluctuations. Also, thelow market price of our common stock may make it prohibitive to obtainadditional equity funding.

AXS-One has never paid ordeclared dividends and does not expect to in the foreseeablefuture.

AXS-One has never paid or declared any cashdividends and we do not expect to pay any cash dividends in theforeseeable future. We currently intend that future earnings, if any,will be retained for business use.

Changes in lawsand regulations that affect the governance of public companies haveincreased our operating expenses and will continue to do so.

Changes in the laws and regulations affectingpublic companies included in the Sarbanes-Oxley Act of 2002 haveimposed new duties on us and on our executives, directors, attorneysand independent registered public accounting firm. In order to complywith these new rules, we hired a consulting advisory firm to assist usin the process and we also expect to use additional services of ouroutside legal counsel, both of which will increase our operatingexpenses. In particular, we expect to incur additional administrativeexpenses as we implement Section 404 of the Sarbanes-Oxley Act, whichrequires management to report on, and our Independent Registered PublicAccounting Firm to attest to, our internal controls. For example, weexpect to incur significant expenses in connection with theimplementation, documentation and testing of our existing controlsystems and possible establishment of new controls. Management timeassociated with these compliance efforts necessarily reduces timeavailable for other operating activities, which could adversely affectoperating results. If we are unable to achieve full and timelycompliance with these regulatory requirements, we could be required toincur additional costs, expend additional management time on remedialefforts and make related public disclosures that could adversely affectour stock price.

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

|             |  |  |                                                                |
|-------------|--|--|----------------------------------------------------------------|
| Exhibit31.1 |  |  | Rule 13a-14(a)/15d-14(a)Certification – William P. Lyons |
| Exhibit31.2 |  |  | Rule 13a-14(a)/15d-14(a) Certification – JosephDwyer     |
| Exhibit 32  |  |  | Officer Certificationsunder 18 USC 1350                        |
|             |

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SIGNATURES

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

|                                                |  |  |             |  |  |                                                                                                       |
|------------------------------------------------|--|--|-------------|--|--|-------------------------------------------------------------------------------------------------------|
|                                           |  |  | AXS-ONEINC. |
| Date:    November20,  2006 |  |  | By:         |  |  | /s/ William P.Lyons                                                                                   |
|                                           |  |  |        |  |  | William P. Lyons ChiefExecutive Officer and Chairman of the Board                                     |
|                                           |  |  | By:         |  |  | /s/Joseph Dwyer                                                                                       |
|                                           |  |  |        |  |  | JosephDwyerExecutive Vice President, Chief Financial Officer andTreasurer(Principal FinancialOfficer) |
|                                                |

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