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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly periodended March  31,  2006                CommissionFile Number        1-13591

AXS-ONE INC.

(Exact name of registrant as specified inits charter)

|                                                               |  |                                     |  |  |  |  |
|---------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Delaware                                                      |  | 13-2966911                          |
| (State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer IdentificationNo.) |
| 301 Route 17NorthRutherford, New Jersey                       |  | 07070                               |
| (Address of principal executiveoffices)                       |  | (Zip Code)                          |
|                                                               |

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

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

|                                                |  |                                          |  |                                              |  |  |  |  |  |  |
|------------------------------------------------|--|------------------------------------------|--|----------------------------------------------|--|--|--|--|--|--|
| LargeAccelerated Filer     |  | AcceleratedFiler     |  | Non-AcceleratedFiler     |
|                                                |

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

YES        NO    Number ofshares outstanding of the issuer’s common stock as of May2,  2006

|                                        |  |                             |  |  |  |  |
|----------------------------------------|--|-----------------------------|--|--|--|--|
| Class                                  |  | Number of SharesOutstanding |
| Common Stock, par value $0.01per share |  | 34,747,127                  |
|                                        |

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AXS-ONE INC.

INDEX

|            |  |                                                                                                                         |  |            |        |        |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------------------------------------------------|--|------------|--------|--------|--|--|--|--|
|       |  |                                                                                                                    |  | PageNumber |
| PARTI      |  | FINANCIALINFORMATION                                                                                                    |  |       |   |   |
|       |  | Item1.FinancialStatements                                                                                               |  |       |   |   |
|       |  | Consolidated BalanceSheetsMarch 31, 2006 (unaudited) and December31, 2005                                               |  |       | 3      |   |
|       |  | ConsolidatedStatements of Operations (unaudited)Three months endedMarch 31, 2006 and 2005                               |  |       | 4      |   |
|       |  | Consolidated Statements of Comprehensive Income(Loss) (unaudited) Three months ended March 31, 2006and 2005             |  |       | 5      |   |
|       |  | ConsolidatedStatements of Cash Flows (unaudited)Three months endedMarch 31, 2006 and 2005                               |  |       | 6      |   |
|       |  | Notes to Consolidated Interim FinancialStatements                                                                       |  |       | 7      |   |
|       |  | Item2.Management’s Discussion and Analysis ofFinancial Condition and     Results ofOperations |  |       | 19     |   |
|       |  | Item3.Quantitative and Qualitative Disclosures AboutMarket Risk                                                         |  |       | 29     |   |
|       |  | Item4.Controls and Procedures                                                                                           |  |       | 29     |   |
| PART II    |  | OTHERINFORMATION                                                                                                        |  |       |   |   |
|       |  | Item6.Exhibits                                                                                                          |  |       | 30     |   |
| SIGNATURES |
|       |  | Signatures                                                                                                              |  |       | 31     |   |
|            |

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PART I. FINANCIALINFORMATION

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

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

|                                                                                                                                                               |  |              |         |                  |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|---------|------------------|--|--------|---------|---------|--|--|
|                                                                                                                                                          |  | March31,2006 |         | December 31,2005 |
| ASSETS                                                                                                                                                        |  | (unaudited)  |         |             |
| Currentassets:                                                                                                                                                |  |         |    |             |  |   |    |    |
| Cash and cash equivalents                                                                                                                                     |  | $            | 7,641   |             |  | $      | 3,613   |    |
| Restrictedcash                                                                                                                                                |  |         | 43      |             |  |   | 57      |    |
| Accountsreceivable, net of allowance for doubtful accounts of $157 and $167 atMarch  31,  2006 and December  31,  2005,respectively                           |  |         | 3,565   |             |  |   | 5,153   |    |
| Prepaid expenses and other current assets                                                                                                                     |  |         | 1,083   |             |  |   | 718     |    |
| Total current assets                                                                                                                                          |  |         | 12,332  |             |  |   | 9,541   |    |
| Equipment and leasehold improvements, atcost:                                                                                                                 |  |         |    |             |  |   |    |    |
| Computer and office equipment                                                                                                                                 |  |         | 10,694  |             |  |   | 10,967  |    |
| Furnitureand fixtures                                                                                                                                         |  |         | 922     |             |  |   | 924     |    |
| Leasehold improvements                                                                                                                                        |  |         | 861     |             |  |   | 865     |    |
|                                                                                                                                                          |  |         | 12,477  |             |  |   | 12,756  |    |
| Less— accumulated depreciation and amortization                                                                                                         |  |         | 12,084  |             |  |   | 12,361  |    |
|                                                                                                                                                          |  |         | 393     |             |  |   | 395     |    |
| Capitalized software development costs, net of accumulatedamortization of $11,635 and $11,432 at March  31,  2006 andDecember  31,  2005, respectively        |  |         | 835     |             |  |   | 1,038   |    |
| Other assets                                                                                                                                                  |  |         | 96      |             |  |   | 92      |    |
|                                                                                                                                                          |  | $            | 13,656  |             |  | $      | 11,066  |    |
| LIABILITIESAND STOCKHOLDERS'DEFICIT                                                                                                                           |  |         |    |             |  |   |    |    |
| Currentliabilities:                                                                                                                                           |  |         |    |             |  |   |    |    |
| Accounts payable                                                                                                                                              |  | $            | 1,361   |             |  | $      | 1,576   |    |
| Accruedexpenses                                                                                                                                               |  |         | 2,838   |             |  |   | 3,267   |    |
| Dueto joint venture                                                                                                                                           |  |         | 78      |             |  |   | 52      |    |
| Deferred revenue                                                                                                                                              |  |         | 11,421  |             |  |   | 8,224   |    |
| Total current liabilities                                                                                                                                     |  |         | 15,698  |             |  |   | 13,119  |    |
| Long-termliabilities:                                                                                                                                         |  |         |    |             |  |   |    |    |
| Long-term deferredrevenue                                                                                                                                     |  |         | 2,627   |             |  |   | 63      |    |
| Commitments andcontingencies                                                                                                                                  |  |         |    |             |  |   |    |    |
| Stockholders'deficit:                                                                                                                                         |  |         |    |             |  |   |    |    |
| Preferred stock, $.01 parvalue, authorized 5,000 shares, no shares issued and outstanding                                                                     |  |         | — |             |  |   | — |    |
| Common stock,$.01 par value, authorized 50,000 shares; 34,747 and 34,316 sharesissued and outstanding at March  31,  2006 and December31,  2005, respectively |  |         | 347     |             |  |   | 343     |    |
| Additional paid-in capital                                                                                                                                    |  |         | 87,824  |             |  |   | 87,884  |    |
| Accumulated deficit                                                                                                                                           |  |         | (93,409 | )           |  |   | (90,663 | )  |
| Accumulated other comprehensive income                                                                                                                        |  |         | 569     |             |  |   | 497     |    |
| Unamortized stockcompensation                                                                                                                                 |  |         | — |             |  |   | (177    | )  |
| Total stockholders' deficit                                                                                                                                   |  |         | (4,669  | )           |  |   | (2,116  | )  |
|                                                                                                                                                          |  | $            | 13,656  |             |  | $      | 11,066  |    |
|                                                                                                                                                               |

The accompanying notes are anintegral part of these consolidated financialstatements.

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

|                                                                |  |                              |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------|--|------------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                           |  | Three Months EndedMarch  31, |
|                                                           |  | 2006                         |         | 2005    |
| Revenues:                                                      |  |                         |    |    |  |   |    |    |
| Licensefees                                                    |  | $                            | 965     |    |  | $      | 1,022   |    |
| Services                                                       |  |                         | 6,488   |    |  |   | 7,016   |    |
| Other-related parties                                          |  |                         | 39      |    |  |   | 20      |    |
| Totalrevenues                                                  |  |                         | 7,492   |    |  |   | 8,058   |    |
| Operatingexpenses:                                             |  |                         |    |    |  |   |    |    |
| Cost of license fees                                           |  |                         | 443     |    |  |   | 364     |    |
| Cost of services                                               |  |                         | 3,435   |    |  |   | 4,659   |    |
| Sales andmarketing                                             |  |                         | 2,819   |    |  |   | 2,588   |    |
| Research and development                                       |  |                         | 2,226   |    |  |   | 2,101   |    |
| General and administrative                                     |  |                         | 1,262   |    |  |   | 1,348   |    |
| Total operating expenses                                       |  |                         | 10,185  |    |  |   | 11,060  |    |
| Operating loss                                                 |  |                         | (2,693  | )  |  |   | (3,002  | )  |
| Otherexpense:                                                  |  |                         |    |    |  |   |    |    |
| Interest income                                                |  |                         | 84      |    |  |   | 30      |    |
| Interest expense                                               |  |                         | (27     | )  |  |   | — |    |
| Equity in losses ofjoint ventures                              |  |                         | (27     | )  |  |   | (24     | )  |
| Other expense, net                                             |  |                         | (83     | )  |  |   | (173    | )  |
| Total other expense, net                                       |  |                         | (53     | )  |  |   | (167    | )  |
| Netloss before income taxes                                    |  | $                            | (2,746  | )  |  | $      | (3,169  | )  |
| Income tax benefit                                             |  |                         | — |    |  |   | — |    |
| Net loss                                                       |  | $                            | (2,746  | )  |  | $      | (3,169  | )  |
| Basic & diluted loss per common share                      |  | $                            | (0.08   | )  |  | $      | (0.11   | )  |
| Weighted average basic & diluted common shares outstanding |  |                         | 34,247  |    |  |   | 28,576  |    |
|                                                                |

The accompanying notes are anintegral part of these consolidated financial statements.

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

|                                        |  |                              |        |         |  |        |        |         |  |  |
|----------------------------------------|--|------------------------------|--------|---------|--|--------|--------|---------|--|--|
|                                   |  | Three Months EndedMarch  31, |
|                                   |  | 2006                         |        | 2005    |
| Net loss                               |  | $                            | (2,746 | )  |  | $      | (3,169 | )  |
| Foreign currency translationadjustment |  |                         | 72     |    |  |   | 96     |    |
| Comprehensive loss                     |  | $                            | (2,674 | )  |  | $      | (3,073 | )  |
|                                        |

The accompanying notes are anintegral part of these consolidated financial statements.

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

|                                                                                              |  |                              |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------|--|------------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                         |  | Three Months EndedMarch  31, |
|                                                                                         |  | 2006                         |         | 2005    |
| Cash flows from operatingactivities:                                                         |  |                         |    |    |  |   |    |    |
| Net loss                                                                                     |  | $                            | (2,746  | )  |  | $      | (3,169  | )  |
| Adjustments to reconcile net loss to net cash flowsprovided by (used in) operatingactivities |  |                         |    |    |  |   |    |    |
| Depreciation andamortization                                                                 |  |                         | 267     |    |  |   | 273     |    |
| Netprovision for (recovery of) doubtful accounts                                             |  |                         | (10     | )  |  |   | 23      |    |
| Equity in losses of joint venture                                                            |  |                         | 27      |    |  |   | 24      |    |
| Consulting servicesprovided in lieu of payment on accounts receivable                        |  |                         | — |    |  |   | (14     | )  |
| Stock optioncompensation expense                                                             |  |                         | 52      |    |  |   | — |    |
| Restricted stock compensation expense                                                        |  |                         | 9       |    |  |   | 10      |    |
| Changes in current assets andliabilities                                                     |  |                         |    |    |  |   |    |    |
| Restricted cash                                                                              |  |                         | 13      |    |  |   | 4       |    |
| Accounts receivable                                                                          |  |                         | 1,642   |    |  |   | 392     |    |
| Due to jointventure                                                                          |  |                         | (3      | )  |  |   | (65     | )  |
| Prepaidexpenses and other current assets                                                     |  |                         | (334    | )  |  |   | 258     |    |
| Accounts payable and accruedexpenses                                                         |  |                         | (671    | )  |  |   | (1,075  | )  |
| Deferred revenue                                                                             |  |                         | 5,752   |    |  |   | 774     |    |
| Netcash flows provided by (used in) operating activities                                     |  |                         | 3,998   |    |  |   | (2,565  | )  |
| Cash flows from investingactivities:                                                         |  |                         |    |    |  |   |    |    |
| Change in otherassets                                                                        |  |                         | (5      | )  |  |   | 27      |    |
| Capitalizedsoftware development costs                                                        |  |                         | — |    |  |   | (18     | )  |
| Purchase of equipment and leasehold improvements                                             |  |                         | (61     | )  |  |   | (56     | )  |
| Netcash flows used in investing activities                                                   |  |                         | (66     | )  |  |   | (47     | )  |
| Cash flows from financingactivities:                                                         |  |                         |    |    |  |   |    |    |
| Proceeds from exerciseof stock options and warrants                                          |  |                         | 60      |    |  |   | 870     |    |
| Debt issuance costs                                                                          |  |                         | (31     | )  |  |   | — |    |
| Net cash flows provided by financing activities                                              |  |                         | 29      |    |  |   | 870     |    |
| Foreigncurrency exchange rate effects on cash and cash equivalents                           |  |                         | 67      |    |  |   | 70      |    |
| Netincrease (decrease) in cash and cash equivalents                                          |  |                         | 4,028   |    |  |   | (1,672  | )  |
| Cash and cash equivalents, beginning ofperiod                                                |  |                         | 3,613   |    |  |   | 4,809   |    |
| Cash and cash equivalents, end of period                                                     |  | $                            | 7,641   |    |  | $      | 3,137   |    |
| Supplemental disclosures of cash flowinformation:                                            |  |                         |    |    |  |   |    |    |
| Cash paidduring the period for–                                                        |  |                         |    |    |  |   |    |    |
| Interest                                                                                     |  | $                            | 24      |    |  | $      | — |    |
| Income taxes                                                                                 |  | $                            | — |    |  | $      | — |    |
|                                                                                              |

Theaccompanying notes are an integral part of these consolidated financialstatements.

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

(1)    OPERATIONS,BUSINESS CONDITIONS AND SIGNIFICANT ACCOUNTING POLICIES

The Company designs, markets and supports records compliancemanagement solutions that include digital archiving, business processmanagement, electronic document delivery and integrated recordsdisposition and discovery for e-mail, instant messaging, images, SAPand other corporate records, as well as 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.

(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.

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

The unaudited Consolidated Interim Financial Statements havebeen prepared by the Company in accordance with U.S. generally acceptedaccounting principles and, in the opinion of management, contain alladjustments, consisting only of those of a normal recurring nature,necessary for a fair presentation of these Consolidated InterimFinancial Statements.

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 months ended March  31,  2006 arenot necessarily indicative of results to be expected for the full year2006 or any future periods.

We generated a net loss of$2.7  million for the three months ended March  31,2006 and $9.0  million and $5.2  million for the yearsended December  31,  2005 and 2004, respectively. Weexperienced a decline in revenue as our business shifted to focus moreheavily on the records compliance management business.Management’s initiatives over the last two years, including therestructurings in June  2005 and 2004, the private placements ofcommon stock in April  2004 and June  2005 and 10%salary cuts of executive management for most of the second half of2005, 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 

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

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. Our ability to fund our operations beyond 2006 isheavily dependent on the growth of our revenues over current levels toachieve profitable operations. Additionally, there is a risk that cashheld by our foreign subsidiaries may not be readily available for usein our U.S. operations to pay our obligations as the transfer of fundsis sometimes delayed due to various foreign government restrictions. Noassurance can be given that management’s initiatives will besuccessful or that any such additional sources of financing, lenderaccommodations or equity infusions will be available.

(b)    Revenue Recognition

TheCompany recognizes revenue in accordance with Statement of Position97-2, ‘‘Software Revenue Recognition’’(‘‘SOP 97-2’’), and Statement of Position 98-9,‘‘Modification of SOP 97-2, Software Revenue Recognition,With Respect to Certain Transactions.’’ Revenue fromnon-cancelable software licenses, through both direct and indirectchannels, is recognized when the license agreement has been signed orthe customer purchase order has been received, delivery has occurred,the fee is fixed or determinable and collectibility is probable. TheCompany recognizes revenue from resellers when an end user has placedan order with the reseller and the above revenue recognition criteriahave been met with respect to the reseller. For the majority of licensesales the Company uses a signed license agreement as evidence of anarrangement. For maintenance fees, the Company uses a maintenanceagreement as evidence of the arrangement. The Company uses aprofessional services agreement as evidence of an arrangement fortraining, custom programming and consulting revenues. Occasionally,where a master license or services agreement with a customer alreadyexists, the Company accepts the customer’s purchase order asevidence of an arrangement. Director fee revenue from the joint ventureis evidenced by a master agreement governing the relationship.

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

In multiple elementarrangements, the Company defers revenue based on the vendor-specificobjective evidence (‘‘VSOE’’) of fair value ofthe 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 services is determined by using an average consulting rate perhour for consulting services sold separately multiplied by the estimateof hours required to complete the consulting engagement.

Delivery of software generally occurs when the product (onCDs) is delivered to a common carrier. Occasionally, delivery occursthrough electronic means where the software is made available throughthe Company’s secure FTP (File Transfer Protocol) site. TheCompany does not offer any customers or resellers a right ofreturn.

For software license and maintenance revenue, theCompany assesses whether the fee is fixed and determinable and whetheror not collection is probable. The Company assesses whether the fee isfixed and determinable based on the payment terms associated with thetransaction. If a significant portion of 

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

a fee is due after the Company’s normalpayment terms, which are 30 to 90 days from invoice date, the fee isnot considered to be fixed and determinable. In these cases, theCompany recognizes revenue as the fees become due.

Themajority of the Company’s training and consulting services arebilled based on hourly rates. The Company generally recognizes revenueas these services are performed when there is also evidence of anarrangement, the fee is fixed or determinable and collectibility isreasonably assured. However, when the Company enters into anarrangement that is based on a fixed fee, revenue is recognized usingthe percentage of completion method of accounting. When the Companyenters into an arrangement that requires it to perform significant workeither to alter the underlying software or to build additional complexinterfaces so that the software performs as the customer requests, theCompany recognizes the license revenue and service revenue, using thepercentage of completion method of accounting. This would apply to theCompany’s 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 the joint venture (included inRevenues: Other-Related Parties in the unaudited ConsolidatedStatements of Operations) includes consulting revenue for the jointventures’ use of the Company’s South Africansubsidiary’s consultants in accordance with the joint ventureagreement. Revenue is recognized upon performance of the services.

The Company assesses assuredness of collection for itsrevenue transactions based on a number of factors, including pasttransaction history with the customer and the credit-worthiness of thecustomer. The Company does not request collateral from its customers.If the Company determines that collection of a fee is uncertain, itdefers the fee and recognizes revenue at the time the uncertainty iseliminated, which is generally upon receipt of cash.

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

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 in the unauditedConsolidated Statements of Operations.

(c)    Variable Interest Entity

TheCompany adopted FIN 46R as required on March  31,  2004.The Company’s 49% owned joint venture, African Solutions(Pty) Ltd (‘‘African Solutions’’), isconsidered to be a variable interest entity as defined in FIN 46R.However, the Company has determined that the majority owner, AfricanLegends Technology, absorbs the majority of the expected losses andtherefore, African Legends Technology, is the primary beneficiary. Dueto the fact that the Company is not the primary beneficiary of AfricanSolutions, the adoption of FIN 46R did not have an impact on theCompany’s consolidated financial position or results ofoperations.

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

As of March  31,2006, AXS-One’s total exposure to loss as a result of itsinvolvement in African Solutions is $78, representing theCompany’s amount due to African Solutions as of March31,  2006.

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

Presented below is selectedfinancial data for African Solutions for the three months endedMarch  31,  2006 and 2005, respectively.

|                           |  |                            |     |         |  |   |     |         |  |  |
|---------------------------|--|----------------------------|-----|---------|--|---|-----|---------|--|--|
|                      |  | Three Months EndedMarch31, |
|                      |  | 2006                       |     | 2005    |
| Total revenues            |  | $                          | 253 |    |  | $ | 273 |    |
| Operating (loss) income   |  | $                          | (4  | )  |  | $ | 5   |    |
| Net loss                  |  | $                          | (55 | )  |  | $ | (50 | )  |
| AXS-One share of net loss |  | $                          | (27 | )  |  | $ | (24 | )  |
|                           |

Total assets were$295 and $252 as of March  31,  2006 and December31,  2005, respectively. Total stockholders’ deficit was$(1,858) and $(1,752) as of March  31,  2006 andDecember  31,  2005, respectively.

(d)    Stock-Based Compensation

Historically, the Company accounted for stock-basedcompensation under the recognition and measurement principles ofAccounting 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 For Stock-BasedCompensation’’. Under this pronouncement, no compensationexpense related to stock option plans was reflected in theCompany's Consolidated Statements of Operations as all options hadan exercise price equal to the market value of the underlying commonstock on the date of grant. Compensation cost for non-vested stock wasrecorded based on its market value on the date of grant and wasincluded in the Company's Consolidated Statements of Operationsratably over the vesting period. Upon the grant of non-vested stock,unearned stock compensation was recorded as an offset to additionalpaid-in capital and was amortized on a straight-line basis ascompensation expense over the vesting period.

OnJanuary  1,  2006, the start of the first quarter of fiscal2006, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123R (revised 2004), ‘‘Share-BasedPayment’’ (‘‘SFAS 123R’’) whichrequires that the costs resulting from all share-based paymenttransactions be recognized in the financial statements at their fairvalues. The Company adopted SFAS 123R using the modified prospectiveapplication method under which the provisions of SFAS 123R apply to newawards granted after the adoption date and to awards modified,repurchased, or cancelled after the adoption date. Additionally,compensation cost for the portion of the awards for which the requisiteservice has not been rendered that are outstanding as of the adoptiondate is recognized in the Consolidated Statement of Operations over theremaining service period after the adoption date based on theaward's original estimate of fair value. In connection with theadoption of SFAS 123R, the unearned stock compensation atDecember  31,  2005 of $177 relating to previous grants ofnon-vested stock were offset against additional paid-in capital duringthe first quarter of fiscal 2006. Results for prior periods have notbeen restated. Total share-based compensation expense recorded in theConsolidated Statement of Operations for the three months endedMarch  31,  2006 is $61.

As a result ofadopting SFAS 123R on January  1,  2006, the Company'sloss before income taxes and net income for the three months endedMarch  31,  2006 are $52 higher than if it had continued toaccount for share-based compensation under APB No. 25. Basic anddiluted earnings per share for the three months ended March31,  2006 did not change as a result of the Company adopting SFAS123R.

On November  10,  2005, the FASB issuedFASB Staff Position 123(R)-3 (‘‘FSP 123R-3’’),‘‘Transition Election Related to Accounting for the TaxEffects of Share-based Payment Awards,’’ that provides anelective alternative transition method of calculating the pool ofexcess tax benefits available to absorb tax deficiencies recognizedsubsequent to the adoption of SFAS 123R (the ‘‘APICPool’’) to the method otherwise required by paragraph 81 ofSFAS 123R. The Company may take up to one year from the 

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effective date of this FSP to evaluate itsavailable alternatives and make its one-time election. The Company iscurrently evaluating the alternative methods; however, neitheralternative would have an impact on the Company's results ofoperations or financial condition for the three months endedMarch  31,  2006, due to the fact that the Company iscurrently using prior period net operating losses and has not realizedany tax benefits under SFAS 123R. Until and unless the Company electsthe transition method described in this FSP, the Company will followthe transition method described in paragraph 81 of SFAS 123R.

On October  26,  2005, the Board of Directors ofthe Company approved the acceleration of vesting of all unvested‘‘out-of-the money’’ stock options previouslyawarded to current employees and directors under the Company’sstock option plans. The accelerated options had exercise prices rangingfrom $2.15 to $6.25 with a weighted average exercise price of $2.99.Options to purchase approximately 2,200 shares became exercisableimmediately as a result of the vesting acceleration. To avoid anyunintended personal benefits, the Company also imposed a holding periodon the shares underlying the accelerated options in the form of aResale Restriction Agreement. This agreement requires all optionees torefrain from selling any shares acquired upon the exercise of theaccelerated options until the earlier of the date such shares wouldhave vested under the options’ original vesting terms or thedate of the employee’s or director’s termination from theCompany. 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 future periods.

The following table illustrates the effect on net loss andnet loss per common share applicable to common stockholders for thethree months ended March  31,  2005, as if the Company hadapplied the fair value recognition provisions for stock-based employeecompensation of SFAS 123, as amended:

|                                                                                                       |  |                                  |         |         |  |  |
|-------------------------------------------------------------------------------------------------------|--|----------------------------------|---------|---------|--|--|
|                                                                                                  |  | Three Months EndedMarch31,  2005 |
| Net loss as reported                                                                                  |  |                             | ($3,169 | )  |
| Add: Stock based compensationexpense                                                                  |  |                             | 10      |    |
| Deduct: Total employeestock-based compensation determined under fair value based method forall awards |  |                             | (469    | )  |
| Proforma net loss                                                                                     |  |                             | ($3,628 | )  |
| Net loss per commonshare:                                                                             |  |                             |    |    |
| Basic and diluted – asreported                                                                  |  |                             | ($0.11  | )  |
| Basic and diluted –pro forma                                                                    |  |                             | ($0.13  | )  |
|                                                                                                       |

The fair valueof 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.

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The table below presents theassumptions used to calculate the fair value of options granted duringthe three months ended March  31,  2006 and 2005.

|                                                                            |  |                            |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                       |  | Three Months EndedMarch31, |
|                                                                       |  | 2006                       |         | 2005    |
| Risk-free interest rate                                                    |  |                       | 4.43    | %  |  |   | 4.77    | %  |
| Expecteddividend yield                                                     |  |                       | — |    |  |   | — |    |
| Expected lives                                                             |  | 5 years                    |         | 5years  |
| Expected volatility                                                        |  |                       | 94      | %  |  |   | 100     | %  |
| Forfeiture rate                                                            |  |                       | 14.5    | %  |  |   | n/a     |    |
| Weighted-averagegrant date fair value of options granted during the period |  | $                          | 1.37    |    |  | $      | 2.01    |    |
|                                                                            |

Stock OptionPlans

The Company has three stock incentive plans; the1995 Stock Option Plan (the 1995 Plan), the 1998 Stock Option Plan (the1998 Plan), and the 2005 Stock Incentive Plan (the 2005 Plan). Underthe 1995 Plan, the Company could grant up to 4,500 shares of commonstock. The 1995 Plan has expired and no further options can be issuedunder this plan. Outstanding options under this plan will continue tovest. Under the 1998 Plan, the Company may grant stock options or stockappreciation rights to purchase an aggregate of up to 5,000 shares ofCommon Stock. In accordance with a June  2004 amendment, up to300 shares of the total shares may be used for non-vested stock awards.Under the 2005 Plan, the Company may grant stock options, stockappreciation rights and non-vested stock to purchase an aggregate of upto 1,500 shares of Common Stock, of which 375 are available fornon-vested stock. This plan has been amended, subject to shareholderapproval, to remove the 375 share limitation on restricted shares. Thiswill allow grants of non-vested shares under the 2005 Plan up to thetotal maximum number of shares available under the 2005 Plan. Alloptions granted under the forgoing plans expire ten years from the dateof grant (or five years for statutory options granted to 10%stockholders), unless terminated earlier. Substantially all optionsvest over a four-year period. For a more detailed description of allstock incentive plans, refer to the Company’s 2005 Annual Reporton Form 10-K.

Stock option transactions for the threemonths ended March  31,  2006 under all plans are asfollows:

|                                                |  |                  |       |                               |  |                                          |      |                                       |  |        |        |        |  |        |        |        |  |  |
|------------------------------------------------|--|------------------|-------|-------------------------------|--|------------------------------------------|------|---------------------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                                           |  | Number of Shares |       | WeightedAverageExercise Price |  | WeightedAverageRemainingContractual Life |      | AggregateIntrinsic Value asof 3/31/06 |
| Balance, December  31,  2005                   |  |             | 6,370 |                          |  | $                                        | 2.31 |                                  |  |   |   |   |  |   |   |   |
| Granted                                        |  |             | 184   |                          |  | $                                        | 1.85 |                                  |  |   |   |   |  |   |   |   |
| Exercised                                      |  |             | (76   | )                        |  | $                                        | 0.79 |                                  |  |   |   |   |  |   |   |   |
| Forfeited                                      |  |             | (37   | )                        |  | $                                        | 1.59 |                                  |  |   |   |   |  |   |   |   |
| Expired                                        |  |             | (50   | )                        |  | $                                        | 3.17 |                                  |  |   |   |   |  |   |   |   |
| Balance, March  31,  2006                      |  |             | 6,391 |                          |  | $                                        | 2.31 |                                  |  |   | 6.55   |   |  | $      | 3,387  |   |
| Vested and Expected to Vest atMarch  31,  2006 |  |             | 6,266 |                          |  | $                                        | 2.33 |                                  |  |   | 0.18   |   |  | $      | 3,315  |   |
| Exercisable atMarch  31,  2006                 |  |             | 5,508 |                          |  | $                                        | 2.44 |                                  |  |   | 6.22   |   |  | $      | 2,779  |   |
|                                                |

The totalintrinsic value of stock options exercised during the three monthsended March  31,  2006 was $180 as compared to $3,173 forthe three months ended March  31,  2005. As of March31,  2006, there was approximately $598 of total unrecognizedcompensation cost related to stock options granted under the plans.That cost is expected to be recognized over a weighted-average periodof 1.71 years.

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A summary of stock optionsoutstanding and exercisable as of March  31,  2006follows:

|                        |  |                     |       |                                      |  |                               |        |                   |  |                                |        |        |  |        |       |        |  |        |        |        |  |  |
|------------------------|--|---------------------|-------|--------------------------------------|--|-------------------------------|--------|-------------------|--|--------------------------------|--------|--------|--|--------|-------|--------|--|--------|--------|--------|--|--|
|                   |  | Options Outstanding |       | Options Exercisable                  |
| Rangeofexercise prices |  | Numberoutstanding   |       | Weightedaverageremaining life(years) |  | Weightedaverageexercise price |        | Numberexercisable |  | Weighted averageexercise price |
| $0.21 -0.75            |  |                | 1,327 |                                 |  |                          | 5.66   |              |  | $                              | 0.54   |   |  |   | 1,186 |   |  | $      | 0.54   |   |
| $0.81 - 1.75           |  |                | 1,457 |                                 |  |                          | 5.10   |              |  | $                              | 1.42   |   |  |   | 979   |   |  | $      | 1.36   |   |
| $1.80 - 2.36           |  |                | 1,374 |                                 |  |                          | 8.57   |              |  | $                              | 2.20   |   |  |   | 1,126 |   |  | $      | 2.27   |   |
| $2.38 - 4.21           |  |                | 1,758 |                                 |  |                          | 7.54   |              |  | $                              | 3.47   |   |  |   | 1,742 |   |  | $      | 3.48   |   |
| $6.00 - 6.25           |  |                | 475   |                                 |  |                          | 4.02   |              |  | $                              | 6.02   |   |  |   | 475   |   |  | $      | 6.02   |   |
|                   |  |                | 6,391 |                                 |  |                          |   |              |  |                           |   |   |  |   | 5,508 |   |  |   |   |   |
|                        |

Non-Vested Stock

Compensation expense for non-vested stock was historicallyrecorded based on its market value on the date of grant and recognizedratably over the associated service period, the period in whichrestrictions are removed. Compensation expense for non-vested stock wasreported as unamortized stock compensation on the Consolidated BalanceSheets. With the adoption of SFAS 123R, effective January1,  2006, unamortized stock compensation has been offset againstadditional paid-in capital where it is reflected on the ConsolidatedBalance Sheet as of March  31,  2006. During the threemonths ended March  31,  2006 there were 380 shares ofrestricted stock granted. All shares were issued to employees with4-year vesting. In the year ended December  31,  2005, 120shares of non-vested stock were granted with a vesting term of fiveyears subject to acceleration in accordance with the grantstipulations. During fiscal 2005, 25 shares issued were forfeited as aresult of employee terminations and the corresponding compensationexpense and remaining unamortized stock compensation amounts werereversed. During the three months ended March  31,  2006,25 shares were forfeited as a result of employee terminations. As ofMarch  31,  2006, 450 shares are unvested.

The following table summarizes transactions related tonon-vested stock for the three months ended March  31,2006:

|                              |  |                  |     |                                |  |   |      |        |  |  |
|------------------------------|--|------------------|-----|--------------------------------|--|---|------|--------|--|--|
|                         |  | Number of shares |     | Weightedaverage priceper share |
| Balance, December  31,  2005 |  |             | 95  |                           |  | $ | 2.16 |   |
| Granted                      |  |             | 380 |                           |  | $ | 2.49 |   |
| Forfeited                    |  |             | (25 | )                         |  | $ | 2.58 |   |
| Balance, March  31,  2006    |  |             | 450 |                           |  | $ | 2.42 |   |
|                              |

As ofMarch  31,  2006, there was approximately $721 of totalunrecognized compensation cost related to non-vested stock grantedunder the plans. That cost is expected to be recognized over aweighted-average period of 2.8 years.

As of March31,  2006, the Company also had 1,423 stock warrants outstandingat a weighted average price of $2.83. At December  31,2005, these warrants were exercisable; therefore, no expense has beenrecognized. 516 of these warrants expire in April  2007 and 907of these warrants expire in June  2008.

Stockoptions and non-vested stock awards available for grant under all planswere 1,054 at March  31,  2006.

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(2)    REVOLVING LINE OF CREDITAND LONG-TERM DEBT

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

On January  27,  2005, the Company amended theAgreement (First Loan Modification) to revise the financial covenantbased on earnings before interest, taxes, deprecation and amortization(‘‘EBITDA’’) for the six months endedDecember  31,  2004. The Company was in compliance withthis revised covenant and all other covenants as of December31,  2004.

On March  28,  2005, theCompany further amended the Agreement (Second Loan Modification) inorder to set the EBITDA and adjusted quick ratio quarterly covenantsfor 2005. The Company was not in compliance with the EBITDA covenant asof June  30,  2005 and no borrowings were outstanding atthat time.

On September  13,  2005, theCompany entered into an Amended and Restated Loan and SecurityAgreement (‘‘Amended Agreement’’) in order torevise certain terms of the Agreement including the loan fees, intereston the loan and the financial covenants. The Amended Agreement includeda waiver of the Company’s June  30,  2005 financialcovenant default under the Second Loan Modification.

Borrowings under the revolving line of credit, per theAmended Agreement, bear interest at prime rate plus one and one halfpercent (1.5%). Should, however, the Company fail to meetcertain of the financial covenants set forth in the Amended Agreement,the interest rate will increase to the prime rate plus two and one halfpercent (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 the secondyear commitment fee to $40 and the unused line fee to 0.375% perannum. The Amended Agreement includes a warrant waiver fee of $20 andupon the occurrence of certain events, minimum monthly interest of $8and an additional $20 warrant waiver fee. The Agreement is secured bysubstantially all domestic assets of the Company. The maturity date ofthe loan is August  9,  2006. As described in greaterdetail in the Loan Agreement, the loan is subject to acceleration uponbreach of: (i) a covenant tested monthly regarding the ratio ofunrestricted cash and net billed accounts receivable to currentliabilities minus deferred revenue, which is to be no less than 1.35 to1.0 (‘‘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 greater than or equal to 1.6 to1.0.

As of March  31,  2006, there were noamounts outstanding under the Amended Agreement and availability underthe Amended Agreement was $2,119, based on the lesser of $4,000 or80% of eligible accounts receivable. On March  14,2006, the Company and the Bank agreed to extend the loan toFebruary  15,  2007. All other terms of the loan remain thesame.

As of March  31,  2006, the Company wasin compliance with the monthly adjusted quick ratio covenant and thetransition event covenant, but was not in compliance with the quarterlyEBITDAS covenant, which requires the Company to achieve EBITDAS of thelesser of $1 better than the immediate preceding quarter EBITDAS or $1.On May  11,  2006, the Bank granted a waiver on the EBITDAScovenant as of March  31,  2006. The waiver was for theMarch  31,  2006 date only.

(3)    BASICAND DILUTED NET INCOME (LOSS) PER COMMON SHARE

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

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Basic net income (loss) per commonshare is based on the weighted average number of shares of common stockoutstanding during the period. Diluted net loss per common share forthe three months ended March  31,  2006 and 2005 does notinclude the effects of outstanding options to purchase 6,391 and 6,888shares of common stock, respectively, 450 and 75 shares of non-vestedstock, respectively, and outstanding warrants to purchase 1,423 and 516shares of common stock, respectively, as the effect of their inclusionis anti-dilutive for the periods.

The followingrepresents the reconciliation of the basic and diluted net income(loss) per common share calculation for the three months endedMarch  31,  2006 and 2005:

|                                                                      |  |                            |         |        |  |        |         |        |  |  |
|----------------------------------------------------------------------|--|----------------------------|---------|--------|--|--------|---------|--------|--|--|
|                                                                 |  | Three Months EndedMarch31, |
|                                                                 |  | 2006                       |         | 2005   |
| Weighted average basic common sharesoutstanding during the periods   |  |                       | 34,247  |   |  |   | 28,576  |   |
| Dilutive effect of stock options andwarrants                         |  |                       | — |   |  |   | — |   |
| Weighted average diluted common sharesoutstanding during the periods |  |                       | 34,247  |   |  |   | 28,576  |   |
|                                                                      |

(4)    OPERATING SEGMENTS

The Company has two product lines that it offers to specificmarkets as part of its strategy to focus on market opportunities. Thetwo product lines are as follows:

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

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

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The Company evaluates theperformance of its two product lines based on revenues and operatingincome. Summarized financial information concerning theCompany’s reportable segments is shown in the following table.The Chief Executive Officer uses the information below in this formatwhile making decisions about allocating resources to each product lineand assessing its performance.

|                                                |  |                     |        |                                    |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------|--|---------------------|--------|------------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                           |  | EnterpriseSolutions |        | RecordsCompliancePlatformSolutions |  | Total  |
| Three Months EndedMarch  31,2006               |  |                |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                      |  |                |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                    |  | $                   | 560    |                               |  | $      | 405    |    |  | $      | 965    |    |
| Services                                       |  |                | 4,581  |                               |  |   | 1,907  |    |  |   | 6,488  |    |
| Total Revenues, excludingrelated party revenue |  |                | 5,141  |                               |  |   | 2,312  |    |  |   | 7,453  |    |
| Operating income (loss)                        |  |                | 2,692  |                               |  |   | (3,595 | )  |  |   | (903   | )  |
| Totalassets                                    |  |                | 6,891  |                               |  |   | 6,765  |    |  |   | 13,656 |    |
| Capital expenditures                           |  |                | 50     |                               |  |   | 11     |    |  |   | 61     |    |
| Depreciation and amortization                  |  |                | 166    |                               |  |   | 101    |    |  |   | 267    |    |
| Three Months EndedMarch  31,2005               |  |                |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                      |  |                |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                    |  | $                   | 495    |                               |  | $      | 527    |    |  | $      | 1,022  |    |
| Services                                       |  |                | 5,064  |                               |  |   | 1,952  |    |  |   | 7,016  |    |
| Total Revenues, excludingrelated party revenue |  |                | 5,559  |                               |  |   | 2,479  |    |  |   | 8,038  |    |
| Operating income (loss)                        |  |                | 1,871  |                               |  |   | (2,985 | )  |  |   | (1,114 | )  |
| Totalassets                                    |  |                | 8,813  |                               |  |   | 3,335  |    |  |   | 12,148 |    |
| Capital expenditures                           |  |                | 50     |                               |  |   | 6      |    |  |   | 56     |    |
| Depreciation and amortization                  |  |                | 175    |                               |  |   | 98     |    |  |   | 273    |    |
|                                                |

Reconciliation of total segmentoperating income (loss) to consolidated operating income (loss):

|                                                   |  |                             |        |         |  |        |        |         |  |  |
|---------------------------------------------------|--|-----------------------------|--------|---------|--|--------|--------|---------|--|--|
|                                              |  | Three MonthsEndedMarch  31, |
|                                              |  | 2006                        |        | 2005    |
| Operating loss from reportable segments           |  | $                           | (903   | )  |  | $      | (1,114 | )  |
| Unallocated revenue, other –related parties |  |                        | 39     |    |  |   | 20     |    |
| Unallocatedgeneral and administrative expense     |  |                        | (1,262 | )  |  |   | (1,348 | )  |
| Other corporate unallocatedexpenses               |  |                        | (567   | )  |  |   | (560   | )  |
| Total consolidated operating loss                 |  | $                           | (2,693 | )  |  | $      | (3,002 | )  |
|                                                   |

(5)    CONTINGENCIES

Historically, the Company has been involved in disputesand/or litigation encountered in its normal course of business. TheCompany believes that the ultimate outcome of these proceedings willnot have a material adverse effect on the Company's business,consolidated financial condition, results of operations or cashflows.

(6)    PRIVATE PLACEMENT

OnJune  17,  2005, the Company entered into a definitiveagreement with a number of investors as well as members of AXS-OneManagement and Board members to sell 4,534 shares of its common stockfor 

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

total consideration of $6,750. OnJune  21,  2005, the initial closing date, the Companyreceived net proceeds of approximately $5,775 from the investors andissued 4,081 shares of common stock. This excluded amounts due frommembers of the Company’s management and Board members whichtogether represented 10% of the investment. The closing withrespect to the shares offered to members of the Company’smanagement and Board members was subject to shareholder approval. TheCompany also issued, at the same time, warrants to purchase anaggregate of 408 shares of common stock at $1.90 per share and warrantsto purchase 408 shares of common stock at $2.15 per share. Thesewarrants are exercisable for a period of three years beginningJune  21,  2005. The warrants were classified withinpermanent equity in accordance with EITF 00-19,‘‘Accounting for Derivative Financial Instruments Indexedto and Potentially Settled in, a Company’s OwnStock.’’ Warrants to purchase an additional 45 shares ofcommon stock at $1.90 per share and 45 shares of common stock at $2.15per share were issuable to members of the Company’s managementand Board member investors upon approval of the shareholders. Thisprivate placement and issuance of warrants was made pursuant to theterms of a Unit Subscription Agreement, dated as of June17,  2005, among the Company and several investors.

On September  20,  2005, the shareholdersapproved the above sale of the Company’s common stock andwarrants to members of the Company’s management and Boardmembers. On September  21,  2005, the closing date, theCompany received net proceeds of $587, issued 453 shares of commonstock and warrants to purchase 46 shares of common stock at $1.90 pershare and 45 shares of common stock at $2.15 per share.

(7)    RESTRUCTURING AND OTHER COSTS

OnJune  30,  2005 the Company eliminated 22 positions in theUnited States and 6 positions in its foreign operations in order tofurther streamline the organization. The Company recorded a charge tooperations in the second quarter of 2005 totaling approximately $863related to involuntary termination benefits to be paid to theterminated employees. The remaining restructuring liability is recordedas accrued expenses on the March  31,  2006 balance sheetand will be paid in its entirety during 2006. The 2006 activity relatedto the restructuring is as follows:

|                                       |  |        |         |         |  |  |
|---------------------------------------|--|--------|---------|---------|--|--|
|                                  |  | 2006   |
| Restructuring liability at January  1 |  | $      | 319     |    |
| Involuntary termination costs         |  |   | — |    |
| Cash payments                         |  |   | (150    | )  |
| Restructuringliability at March  31   |  | $      | 169     |    |
|                                       |

(8)    FINANCIALINFORMATION BY GEOGRAPHIC AREA

SFAS No. 131,‘‘Disclosure about Segments of an Enterprise and RelatedInformation,’’ establishes standards for the way publicbusiness enterprises report information about operating segments inannual financial statements and requires that those enterprises reportselected information about reporting segments in interim financialreports issued to shareholders. See Note (4). It also establishesstandards for related disclosures about products and services,geographic areas and major customers.

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

Revenues and long-lived assets forthe Company's United States, United Kingdom, Australia andSoutheast Asia, and South Africa operations are as follows:

|                             |  |                             |       |        |  |        |       |        |  |  |
|-----------------------------|--|-----------------------------|-------|--------|--|--------|-------|--------|--|--|
|                        |  | Three MonthsEndedMarch  31, |
| Revenues:(1)                |  | 2006                        |       | 2005   |
| United States               |  | $                           | 4,936 |   |  | $      | 5,395 |   |
| United Kingdom              |  |                        | 509   |   |  |   | 1,188 |   |
| Australia and SoutheastAsia |  |                        | 1,091 |   |  |   | 907   |   |
| South Africa                |  |                        | 956   |   |  |   | 568   |   |
| TotalConsolidated           |  | $                           | 7,492 |   |  | $      | 8,058 |   |
|                             |

|  |
|--|
|  |  |  |
|  |

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

|                             |  |                |        |                   |  |        |        |        |  |  |
|-----------------------------|--|----------------|--------|-------------------|--|--------|--------|--------|--|--|
|                        |  | March  31,2006 |        | December  31,2005 |
| Long-LivedAssets:           |  |           |   |              |  |   |   |   |
| United States               |  | $              | 980    |              |  | $      | 1,184  |   |
| United Kingdom              |  |           | 73     |              |  |   | 75     |   |
| Australia and SoutheastAsia |  |           | 142    |              |  |   | 151    |   |
| South Africa                |  |           | 33     |              |  |   | 23     |   |
| TotalConsolidated           |  | $              | 1,228  |              |  | $      | 1,433  |   |
|                             |

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

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

ThisReport contains statements of a forward-looking nature within themeaning of the safe harbor provisions of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Actof 1934, as amended, relating to future events or the future financialperformance of AXS-One. Investors are cautioned that such statementsare only predictions and that actual events or results may differmaterially. In evaluating such statements, investors shouldspecifically consider the various factors identified in this Reportwhich could cause actual results to differ materially from thoseindicated by such forward-looking statements, in addition to thematters set forth in ‘‘Risk Factors’’ in our2005 Annual Report on Form 10-K.

Executive Overview

We are a leading provider of Records Compliance Managementand Financial Management software solutions designed to reduce theinherent risks associated with retaining and managing corporate recordsas well as to efficiently manage complex business processes. We haveimplemented high-volume, interoperable, scalable and secure businesssolutions for Global 2000 companies. Our Web Services-based technologyhas been critically acclaimed as best of class. 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, officedocuments, ERP-generated data such as SAP and electronic print reports.All records are archived and managed according to corporate recordspolicies from initial capture and indexing through archival, search andultimate destruction. These products have been developed and optimizedto address global issues of regulatory compliance, corporategovernance, supervision and privacy as they relate to the retention anddisposition of electronic records, as well as to significantly reduceinfrastructure costs (primarily storage and associated managementcosts). Patent-pending search technology enables organizations torespond quickly and accurately to the growing pressures of e-discoveryand litigation support. See ‘‘Item 1.Business’’ in our 2005 Annual Report on Form 10-K.

Our revenues are derived mainly from license fees fromsoftware license agreements entered into with our customers, includingthrough resellers, for both our products and, to a lesser degree, thirdparty products resold by us and services revenues from softwaremaintenance agreements, training, consulting services includinginstallation and custom programming. We also derive a small amount ofrevenue (less than 3% and 1% of total revenues for thefirst three months of 2006 and 2005, respectively) from hostingarrangements.

We are based in Rutherford, New Jersey withapproximately 224 full-time employees, as of March  31,2006, in offices worldwide, including Asia, Australia, South Africa,the United Kingdom and the United States. Our foreign offices generatedapproximately 34.1% and 36.7% of our total revenues forthe three months ended March  31,  2006 and 2005,respectively. We expect that such revenues will continue to represent asignificant percentage of our total revenues in the future. Most of ourinternational license fees and services revenues are denominated inforeign currencies. Fluctuations in the value of foreign currenciesrelative to the US dollar in the future could result in fluctuations inour revenue.

We have a 49% ownership in a jointventure in our South African operation, AXS-One African Solutions (Pty)Ltd (‘‘African Solutions’’). African Solutionssells and services our suite of products. We use the equity method ofaccounting for our investment whereby the investment, including loansto the joint venture, is stated at cost plus or minus our equity inundistributed earnings or losses.

We encountercompetition for all of our products in all markets and competeprimarily based on the quality of our products, our price, our customerservice and our time to implement. The timing of the release of newproducts is also important to our ability to generate sales. During thesecond half of 2003, we launched our Records Compliance Managementsolution for e-mail and instant messaging archival, supervision, andlegal discovery in response to new regulatory requirements forfinancial 

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institutions in the United States as well asto address the need to reduce costs in the email management area.During 2005, AXS-One announced further significant development on theAXS-One Records Compliance Platform, focusing primarily onperformance-based enhancements. Version 3.5, featuring Rapid-AXS, waslaunched in May  2005, and introduced patent-pending searchfunctionality. Rapid-AXS takes advantage of grid computing architectureand leverages commodity hardware to deliver what AXS-One believes to bean unmatched price-performance ratio. Version 3.5 also introduced aSearch Wizard, reducing the potential complexity of searches for non-ITstaff and ensuring error-proof search capabilities for legal discovery.Finally in 2005 AXS-One announced AXS-Link for Desktop, a desktoparchiving product available both as an integrated component of theAXS-One Compliance Platform, as well as a stand-alone solution. OurRecords Compliance Management software, including this new solution,accounted for approximately 74% of our total license feerevenues for the year ended December  31,  2005.

Our future ability to grow revenue will be directly affectedby continued price competition, success of our strategic partnershipsand our ability to sustain an increasingly higher maintenance revenuebase from which to grow. Our growth rate and total revenues dependsignificantly on future services for existing customers as well as ourability to expand our customer base and to respond successfully to thepace of technological change. If our maintenance renewal rate or paceof new customer acquisitions slows, our revenues and operating resultswould be adversely affected.

We have experienced, and mayin the future experience, significant fluctuations in our quarterly andannual revenues, 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’’ inour 2005 Annual Report on Form 10-K.

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Results of Operations

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

|                                  |  |                                 |         |                                 |  |            |         |                           |  |        |         |         |  |        |         |          |  |  |
|----------------------------------|--|---------------------------------|---------|---------------------------------|--|------------|---------|---------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                             |  | Three Months EndedMarch31, 2006 |         | Three Months EndedMarch 31,2005 |
| (inthousands)                    |  | AsReported                      |         | Dataas apercent ofrevenue       |  | AsReported |         | Dataas apercent ofrevenue |
|                             |  | (Unaudited)                     |         | (Unaudited)                     |
| Revenues:                        |  |                            |    |                            |  |       |    |                      |  |   |    |    |  |   |    |     |
| Licensefees                      |  | $                               | 965     |                            |  |       | 12.9    | %                    |  | $      | 1,022   |    |  |   | 12.7    | %   |
| Services                         |  |                            | 6,488   |                            |  |       | 86.6    |                      |  |   | 7,016   |    |  |   | 87.1    |     |
| Other-related parties            |  |                            | 39      |                            |  |       | 0.5     |                      |  |   | 20      |    |  |   | 0.2     |     |
| Total revenues                   |  |                            | 7,492   |                            |  |       | 100.0   |                      |  |   | 8,058   |    |  |   | 100.0   |     |
| Operatingexpenses:               |  |                            |    |                            |  |       |    |                      |  |   |    |    |  |   |    |     |
| Cost of licensefees              |  |                            | 443     |                            |  |       | 5.9     |                      |  |   | 364     |    |  |   | 4.5     |     |
| Cost of services                 |  |                            | 3,435   |                            |  |       | 45.8    |                      |  |   | 4,659   |    |  |   | 57.8    |     |
| Sales andmarketing               |  |                            | 2,819   |                            |  |       | 37.6    |                      |  |   | 2,588   |    |  |   | 32.1    |     |
| Research and development         |  |                            | 2,226   |                            |  |       | 29.7    |                      |  |   | 2,101   |    |  |   | 26.1    |     |
| General and administrative       |  |                            | 1,262   |                            |  |       | 16.9    |                      |  |   | 1,348   |    |  |   | 16.7    |     |
| Total operating expenses         |  |                            | 10,185  |                            |  |       | 135.9   |                      |  |   | 11,060  |    |  |   | 137.2   |     |
| Operating loss                   |  |                            | (2,693  | )                          |  |       | (35.9   | )                    |  |   | (3,002  | )  |  |   | (37.2   | )   |
| Otherexpense:                    |  |                            |    |                            |  |       |    |                      |  |   |    |    |  |   |    |     |
| Equity in lossesof joint venture |  |                            | (27     | )                          |  |       | (0.4    | )                    |  |   | (24     | )  |  |   | (0.3    | )   |
| Other expense, net               |  |                            | (26     | )                          |  |       | (0.3    | )                    |  |   | (143    | )  |  |   | (1.8    | )   |
| Other expense, net               |  |                            | (53     | )                          |  |       | (0.7    | )                    |  |   | (167    | )  |  |   | (2.1    | )   |
| Net loss before taxes            |  |                            | (2,746  | )                          |  |       | (36.6   | )                    |  |   | (3,169  | )  |  |   | (39.3   | )   |
| Income tax benefit               |  |                            | — |                            |  |       | — |                      |  |   | — |    |  |   | — |     |
| Netloss                          |  | $                               | (2,746  | )                          |  |       | (36.6   | )%                   |  | $      | (3,169  | )  |  |   | (39.3   | )%  |
|                                  |

Comparison of Three MonthsEnded March  31,  2006 to 2005

Revenues

Total revenues decreased $0.6million or 7.0% for the three months ended March31,  2006 as compared to the corresponding prior year period dueto a $0.1  million or 5.6% decrease in license fees and a$0.5  million or 7.5% decrease in services revenues.

No one customer represented more than 10% of our totalrevenues for the three months ended March  31,  2006. Totalrevenues for the three months ended March  31,  2005included approximately $0.9  million or 11.3% of totalrevenues from one customer.

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The following table sets forth, forthe periods indicated, each major category of our services revenues asa percent of total services revenues:

|                        |  |                              |       |          |  |        |       |           |  |        |       |        |  |        |       |         |  |  |
|------------------------|--|------------------------------|-------|----------|--|--------|-------|-----------|--|--------|-------|--------|--|--------|-------|---------|--|--|
|                   |  | Three Months EndedMarch  31, |
| (dollars inthousands)  |  | 2006                         |       | 2005     |
|                   |  | Amount                       |       | %ofTotal |  | Amount |       | % ofTotal |
| Maintenance            |  | $                            | 4,084 |     |  |   | 62.9  | %    |  | $      | 4,129 |   |  |   | 58.8  | %  |
| Consulting             |  |                         | 2,203 |     |  |   | 34.0  | %    |  |   | 2,783 |   |  |   | 39.7  | %  |
| Subscription revenue   |  |                         | 201   |     |  |   | 3.1   | %    |  |   | 104   |   |  |   | 1.5   | %  |
| Total services revenue |  | $                            | 6,488 |     |  |   | 100.0 | %    |  | $      | 7,016 |   |  |   | 100.0 | %  |
|                        |

Thedecrease in services revenues is mainly a result of decreases of$0.7  million in consulting revenue from our enterprisefinancials product line, offset partially by an increase of $0.2million in subscription revenue from our E-delivery travel service inEurope.

The increase in Other-Related Party revenuesresulted from increased use of consultants from African Solutions.

Operating Expenses

Cost of license feesconsist primarily of amortization of capitalized software developmentcosts and amounts paid to third parties with respect to products weresell in conjunction with the licensing of our products. The elementscan vary substantially from period to period as a percentage of licensefees. Cost of license fees increased $0.1  million or21.7% for the three months ended March  31,  2006,as compared to the corresponding prior year period mainly as a resultof an increase in fixed royalty fees for third party software used inconjunction with our software (which includes both embedded softwareand separately sold software).

Cost of services consistsprimarily of personnel and third party costs for product qualityassurance, training, installation, consulting and customer support.Cost of services decreased $1.2  million or 26.3% for thethree months ended March  31,  2006, as compared to thecorresponding prior year period. The decrease for the three-monthperiod was mainly due to decreases of $0.9  million in personnelrelated expenses resulting from lower headcount and $0.3  millionin third party services expenses, each primarily in the UK and USoperations.

Sales and marketing expenses consistprimarily of salaries, commissions and bonuses related to sales andmarketing personnel, as well as travel and promotional expenses. Salesand marketing expenses increased $0.2  million or 8.9% forthe three months ended March  31,  2006, as compared to thecorresponding prior year period. The increase is primarily the resultof an increase of $0.1  million marketing programs and$0.1  million in employee recruiting expenses.

Research and development expenses consist primarily ofpersonnel costs, costs of equipment, facilities and third partysoftware development costs. Research and development expenses aregenerally charged to operations as incurred. However, certain softwaredevelopment costs are capitalized in accordance with Statement ofFinancial Accounting Standards No. 86 (‘‘SFAS86’’). Such capitalized software development costs aregenerally amortized to cost of license fees on a straight-line basisover periods not exceeding three years. There was no significant costcapitalized over the periods ended March  31,  2006 and2005.

Research and development expenses (net ofcapitalized software development costs) increased $0.1  millionor 5.9% for the three months ended March  31,  2006,as compared to the comparable prior year period. The increase isprimarily the result an increase in the use and cost of third partyconsultants.

General and administrative expenses consistprimarily of salaries for administrative, executive and financialpersonnel, and outside professional fees. General and administrativeexpenses decreased $0.1  million or 6.4% for the threemonths ended March  31,  2006 as compared to thecorresponding 

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prior year period. The decrease for the threemonths is primarily as a result of decreases in personnel relatedexpenses, professional services, insurance and bad debt reservestotaling $0.1  million.

Operating Loss

Operating loss decreased $0.3  million for the threemonths ended March  31,  2006 as compared to thecorresponding prior year period due mainly to a decrease of $0.9million in operating expenses offset somewhat by a decrease in totalrevenue of $0.6  million.

Other Expense, Net

Other income (expense), net improved $0.1  million forthe three months ended March  31,  2006, as compared to thesame period in 2005. The improvement is principally related to foreigncurrency exchange rate fluctuations.

Liquidity and CapitalResources

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

On August  11,  2004, theCompany entered into a two-year Loan and Security Agreement (the‘‘Agreement’’) which contains a revolving lineof credit under which the Company has available the lesser of $4million or 80% of eligible accounts, as defined (See Note 2 tothe Consolidated Interim Financial Statements).

OnJanuary  27,  2005, we amended the Loan and SecurityAgreement (First Loan Modification) to revise the financial covenantbased on EBITDA for the six months ended December  31,2004.

On March  28,  2005, we further amendedthe Agreement (Second Loan Modification) in order to set the EBITDA andadjusted quick ratio quarterly covenants for 2005. We were out ofcompliance with the EBITDA covenant as of June  30,2005.

On September  13,  2005, we enteredinto an Amended and Restated Loan and Security Agreement(‘‘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 June  30,  2005 financial covenant defaultunder the Second Loan Modification.

Borrowings under therevolving line of credit, per the Amended Agreement, bear interest atprime rate plus one and one half percent (1.5%). Should,however, the Company fail to meet certain of the financial covenantsset forth in the Amended Agreement, the interest rate will increase tothe prime rate plus two and one half percent (2.5%). TheAgreement provided for a non-refundable commitment fee of $30 per yearand an unused revolving line facility fee of.25% per annum. TheAmended Agreement increased the second year commitment fee to $40 andthe unused line fee to 0.375% per annum. The Amended Agreementincludes a warrant waiver fee of $20 and upon the occurrence of certainevents, minimum monthly interest of $8 and an additional $20 warrantwaiver fee. The Agreement is secured by substantially all domesticassets of the Company. The maturity date of the loan is August9,  2006. As described in greater detail in the Loan Agreement,the loan is subject to acceleration upon breach of: (i) a covenanttested monthly regarding the ratio of unrestricted cash and net billedaccounts receivable to current liabilities minus deferred revenue,which is to be no less than 1.35 to 1.0 (‘‘adjusted quickratio covenant’’) (ii) a covenant tested quarterlyregarding the Company's EBITDAS (earnings before interest expense(excluding interest income), taxes, depreciation, amortization andstock compensation expense in accordance with GAAP), and (iii) othercustomary non-financial covenants. There is also a monthly transitionevent covenant which requires the Company to maintain an adjusted quickratio covenant greater than or equal to 1.60 to 1.0.

Asof March  31,  2006, there were no amounts outstandingunder the Amended Agreement and availability under the AmendedAgreement was $2.1  million, based on the lesser of $4.0million or 

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80% of eligible accounts receivable.On March  14,  2006, the Company and the Bank agreed toextend the loan to February  15,  2007. All other terms ofthe loan remain the same.

As of March  31,2006, the Company was in compliance with the monthly adjusted quickratio covenant of 1.35 to 1.0 and the transition event covenant, butwas not in compliance with the quarterly EBITDAS covenant, whichrequires the Company to achieve EBITDAS of the lesser of one dollarbetter than the immediate preceding quarter EBITDAS or one dollar. OnMay  11,  2006, the bank granted a waiver on the quarterlyEBITDAS covenant. The EBITDAS covenant waiver was for the quarter endedMarch  31,  2006 date only.

Our operatingactivities provided cash of $4.0  million for the three monthsended March  31,  2006 and used cash of $2.6  millionfor the three months ended March  31,  2005. Net cashprovided by operating activities during the three months endedMarch  31,  2006 is primarily the result of an increase indeferred revenue, a decrease in accounts receivable and non-cashdepreciation and amortization, offset partially by the net loss, adecrease in accounts payable and accrued expenses and an increase inprepaid expenses and other current assets. The increase in deferredrevenue is mainly the result of a three year pre-paid maintenanceagreement with one large customer. The decrease in accounts receivablein 2006, mainly in US operations, resulting from better collectionsfrom customers in 2006 compared to 2005. The decrease in accountspayable and accrued expenses in 2005 is mainly due to timing ofpayments and lower bonus accruals.

Our investingactivities used cash of $0.1  million and $47  thousand forthe three months ended March  31,  2006 and 2005,respectively. The use of cash for 2006 was primarily for the purchaseof computer equipment for the Company’s internal operations. Theuse of cash for 2005 was primarily for capitalized software developmentcosts and for the purchase of computer equipment.

Cashprovided by financing activities was $29  thousand and$0.9  million for the three months ended March  31,2006 and 2005, respectively. For the three months ended March31,  2006, cash was provided by the exercise of stock optionsduring the period offset by debt issuance cost. For the three monthsended March  31,  2005, cash was provided by the exerciseof stock options during the period.

We have nosignificant capital commitments. Planned capital expenditures for theyear 2006 are expected to be less than $0.5  million, includingany software development costs that may qualify for capitalizationunder SFAS 86. Our aggregate minimum operating lease payments for 2006will be approximately $1.9  million. We have no remainingaggregate minimum royalties payable to third party software providersin accordance with 2006 agreements for third party software used inconjunction with our software. Future commitments to third partysoftware providers are as follows:

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

We generateda net loss of $2.7  million for the three months endedMarch  31,  2006 and $9.0  million and $5.2million for the years ended December  31,  2005 and 2004,respectively. We experienced a decline in revenue as our businessshifted to focus more heavily on the records compliance managementbusiness. Management’s initiatives over the last two years,including the restructurings in June  2005 and 2004, the privateplacements of common stock in April  2004 and June  2005and 10% salary cuts of executive management for most of thesecond half of 2005, have been designed to improve operating resultsand liquidity and better position AXS-One to compete under currentmarket conditions. As a result of these efforts, we expect that ourcurrent cash balance, availability of borrowing capacity under our bankline of credit, and operating cash flow should be sufficient to meetthe short-term requirements of the business. However, we may in thefuture be required to seek new sources of financing or futureaccommodations from our existing lender or other financialinstitutions, 

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or we may seek equity infusions from privateinvestors. We may also be required to further reduce operating costs inorder to meet our obligations. Our ability to fund our operationsbeyond 2006 is heavily dependent on the growth of our revenues overcurrent levels to achieve profitable operations. Additionally, there isa risk that cash held by our foreign subsidiaries 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.

Segment Information

Enterprise Solutions

For the three monthsended March  31,  2006, license fee revenues were$0.6  million compared to $0.5  million for the comparableprior year period. License fees have remained fairly consistent, as wehave continued to license new software modules and additional users forpreviously licensed modules to our existing customers. Service revenuesfor the three months ended March  31,  2006 were$4.6  million compared to $5.1  million for the comparableprior year period. Enterprise Solutions had operating income of$2.7  million for the three months ended March  31,2006 as compared to $1.9  million for the comparable prior yearperiod. Operating income increased primarily as a result of reductionsof expenses in all areas relative to this operating segment as theCompany’s focus has shifted to the development of RecordsCompliance Platform Solutions. We continue to maintain a qualifiedstaff to develop, enhance, support and maintain our financial modulesfor our customer base.

Records Compliance PlatformSolutions

Records Compliance Platform Solutions hadlicense fee revenues of $0.4  million for the three months endedMarch  31,  2006, compared to $0.5  million for thecomparable prior year period. The services revenues for the threemonths ended months ended March  31,  2006 were $1.9million compared to $2.0  million for the comparable prior yearperiod. The Company’s service revenues are generally driven bynew license orders. Records Compliance Platform Solutions generated anoperating loss for the three months ended March  31,  2006of $3.6  million as compared to an operating loss of $3.0million for the comparable prior year period. The operating losses arethe result of increased expenses in all areas to develop, market andsupport the growth of this operating segment. A reconciliation ofsegment operating income to consolidated operating income is providedin Note 4 of the Consolidated Interim Financial Statements providedherein.

Critical Accounting Policies

Ourcritical accounting policies are as follows:

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

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

Revenue Recognition

We derive our revenue primarily from two sources:    (i)software licenses and (ii) services and support revenue, which includessoftware maintenance, subscription services, training, consulting andcustom programming revenue. We also derive a limited amount ofconsulting revenue and directors’ fees from the related partyjoint venture in South Africa (less than 1% of total revenue in2005). 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 different estimates.

We normally license our software products on a perpetualbasis. Each license agreement generally includes a provision forinitial post-contract support (maintenance). For the majority oflicense sales 

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we use a signed license agreement as evidenceof an arrangement. For maintenance fees, we use a maintenance agreementas evidence of the arrangement. We use a professional servicesagreement as evidence of an arrangement for our training, subscription,custom programming and consulting revenues. Occasionally, where amaster license or services agreement with a customer already exists, weaccept the customer’s purchase order as evidence of anarrangement. Director fee revenues from our joint venture are evidencedby a master agreement governing the relationship.

Werecognize revenue in accordance with Statement of Position 97-2,‘‘Software Revenue Recognition’’(‘‘SOP 97-2’’), and Statement of Position 98-9,‘‘Modification of SOP 97-2, Software Revenue Recognition,With Respect to Certain Transactions.’’ Revenue fromnon-cancelable software licenses is recognized when the licenseagreement has been signed, delivery has occurred, the fee is fixed ordeterminable and collectibility is probable. The Company recognizesrevenue from resellers when an end user has placed an order with thereseller and the above revenue recognition criteria have been met withrespect to the reseller. In multiple element arrangements, we deferrevenue based on the vendor-specific objective evidence(‘‘VSOE’’) of fair value for the undeliveredelements and recognize revenue on the delivered elements using theresidual method. The most commonly deferred elements are initialmaintenance and consulting services. Initial maintenance is recognizedon a straight-line basis over the initial maintenance term. The VSOE offair value for maintenance is determined by using a consistentpercentage of maintenance fees to discounted license fee based onrenewal rates. Maintenance fees in subsequent years are recognized on astraight-line basis over the life of the applicable agreement.Maintenance contracts entitle the customer to hot-line support and allunspecified product upgrades released during the term of themaintenance contract. Upgrades include any and all unspecified patchesor releases related to a licensed software product. Maintenance doesnot include implementation services to install these upgrades. The VSOEof services is determined by using an average consulting rate per hourfor consulting services sold separately multiplied by the estimate ofhours required to complete the consulting engagement.

Delivery of software generally occurs when the product (onCDs) is delivered to a common carrier. Occasionally, delivery occursthrough electronic means where the software is made available throughour secure FTP (File Transfer Protocol) site. The Company does notoffer any customers or resellers a right of return.

Forsoftware license, services and maintenance revenue, we assess whetherthe fee is fixed and determinable and whether or not collection isprobable. We assess whether the fee is fixed and determinable based onthe payment terms associated with the transaction. If a significantportion of a fee is due after our normal payment terms, which are 30 to90 days from invoice date, we account for the fee as not being fixedand determinable. In these cases, we recognize revenue as the feesbecome due.

The majority of our training and consultingservices are billed based on hourly rates. We generally recognizerevenue as these services are performed. However, when we enter into anarrangement that is based on a fixed fee, revenue is recognized usingthe percentage of completion method of accounting. When the Companyenters into an arrangement that requires it to perform significant workeither to alter the underlying software or to build additional complexinterfaces so that the software performs as the customer requests, theCompany recognizes the license revenue and service revenue using thepercentage of completion method of accounting. This would apply to ourcustom programming services, which are generally contracted on a fixedfee basis. Anticipated losses, if any, are charged to operations in theperiod such losses are determined to be probable.

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

Revenues from joint ventures(included in Revenues: Other-Related Parties in our ConsolidatedStatements of Operations) includes consulting revenue for the jointventures’ use of our South African subsidiary’sconsultants in accordance with the joint venture agreement. Revenue isrecognized upon performance of the services.

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We assess assuredness of collectionbased on a number of factors, including past transaction history withthe customer and the credit-worthiness of the customer. We do notrequest collateral from our customers. If we determine that collectionof a fee is not probable, we defer the fee and recognize revenue at thetime collection becomes probable, which is generally upon receipt ofcash.

Our arrangements do not generally includeacceptance clauses. However, if an arrangement includes an acceptanceprovision, acceptance occurs upon the earliest of receipt of a writtencustomer acceptance or expiration of the acceptance period.

Capitalized Software Development Costs

Ourpolicy is to capitalize certain software development costs inaccordance with Statement of Financial Accounting Standards No. 86,‘‘Accounting for the Costs of Computer Software to Be Sold,Leased, or Otherwise Marketed’’ (‘‘SFAS86’’). Under SFAS 86, costs incurred to develop orsignificantly enhance computer software products are charged toresearch and development expense as incurred until technologicalfeasibility has been established. We establish technologicalfeasibility upon completion of a working model or completion of adetailed program design. Generally costs related to projects that reachtechnological feasibility upon completion of a working model are notcapitalized as the time period between establishment of the workingmodel and general availability is of short duration. For projects thatmeet technological feasibility upon completion of a detailed programdesign, all research and development costs for that project arecapitalized from that point until the product is available for generalrelease to customers. The nature of our current development for RCMproducts is generally such that we can measure technologicalfeasibility most effectively using the working model method where thetime between establishment of a working model and general availabilityis of short duration which results in very little or no costs thatqualify for capitalization. We historically used a detailed programdesign model to measure technological feasibility for our enterprisefinancial products. This shift in development of our product lines willresult in lower capitalized costs in the future. The establishment oftechnological feasibility and the ongoing assessment of recoverabilityof capitalized software development costs require considerable judgmentby management with respect to certain external factors, including, butnot limited to, anticipated future revenues, estimated economic lifeand changes in technology. It is reasonably possible that estimates ofanticipated future revenues, the remaining estimated economic life ofthe products, or both will be reduced in the future due to competitivepressures. As a result, the carrying amount of the capitalized softwarecosts may be reduced through a charge to operations in the near term.Upon the general release of the software product to customers,capitalization ceases and such costs are amortized (using thestraight-line method) over the estimated life, which is generally threeyears

Recently Issued Accounting Standards

Historically, the Company accounted for stock-basedcompensation under the recognition and measurement principles ofAccounting Principles Board Opinion (‘‘APB’’)No. 25, ‘‘Accounting for Stock Issued toEmployees’’ (‘‘APB 25’’), andrelated interpretations, and disclosure only provisions of Statement ofAccounting Standards SFAS 123 ‘‘Accounting For Stock-BasedCompensation’’. Under this pronouncement, no compensationexpense related to stock option plans was reflected in theCompany's Consolidated Statements of Operations as all options hadan exercise price equal to the market value of the underlying commonstock on the date of grant. Compensation cost for non-vested stock wasrecorded based on its market value on the date of grant and wasincluded in the Company's Consolidated Statements of Operationsratably over the vesting period. Upon the grant of non-vested stock,unearned stock compensation was recorded as an offset to additionalpaid-in capital and was amortized on a straight-line basis ascompensation expense over the vesting period. On January1,  2006, the start of the first quarter of fiscal 2006, theCompany adopted the provisions of Statement of Financial AccountingStandards No. 123R (revised 2004), ‘‘Share-BasedPayment’’ (‘‘SFAS 123R’’) whichrequires that the costs resulting from all share-based paymenttransactions be recognized in the financial statements at their fairvalues. The Company adopted SFAS 123R using the modified prospectiveapplication method under which the provisions of SFAS 123R apply to newawards granted after the adoption date and to awards modified,repurchased, or cancelled after the 

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adoption date. Additionally, compensationcost for the portion of the awards for which the requisite service hasnot been rendered that are outstanding as of the adoption date isrecognized in the Consolidated Statement of Operations over theremaining service period after the adoption date based on theaward's original estimate of fair value. In connection with theadoption of SFAS 123R, the unearned stock compensation atDecember  31,  2005 of $177 relating to previous grants ofnon-vested stock were offset against additional paid-in capital duringthe first quarter of fiscal 2006. Results for prior periods have notbeen restated. Total share-based compensation expense recorded in theConsolidated Statement of Operations for the three months endedMarch  31,  2006 is $61. As a result of adopting SFAS 123Ron January  1,  2006, the Company's loss before incometaxes and net income for the three months ended March  31,2006 are $52 lower than if it had continued to account for share-basedcompensation under APB No. 25. Basic and diluted earnings per share forthe three months ended March  31,  2006 did not change as aresult of the Company adopting SFAS 123R. On October  26,2005, the Board of Directors of the Company approved the accelerationof vesting of all unvested ‘‘out-of-the money’’stock options previously awarded to current employees and directorsunder the Company’s stock option plans. The accelerated optionshad exercise 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 future periods.

On December  16,  2004, the FASB issued StatementNo. 153, ‘‘Exchanges of Non-monetary Assets,’’an amendment of APB Opinion No. 29. Statement No. 153 addresses themeasurement of exchanges of non-monetary assets and redefines the scopeof transactions that should be measured based on the fair value of theassets exchanged. The Statement is effective for non-monetary assetexchanges occurring in fiscal years beginning after June15,  2005. The adoption of Statement No. 153 has not had amaterial effect on our consolidated financial position, results ofoperations or cash flows.

On December  21,2004, the FASB issued FASB Staff Position No. FAS 109-2 (FAS 109-2),‘‘Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Actof 2004.’’ The American Jobs Creation Act introduces aspecial one-time dividends received deduction on the repatriation ofcertain foreign earnings to a U.S. taxpayer (repatriation provision),provided certain criteria are met. FAS 109-2 provides accounting anddisclosure guidance for the repatriation provision. FAS 109-2 iseffective immediately, though the Treasury Department or Congress isexpected to provide additional clarifying language on key elements ofthe repatriation provision. The adoption of FAS 109-2 did not have amaterial effect on our consolidated financial position, results ofoperations or cash flows as we do not currently have foreign earningsavailable for repatriation.

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

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the change. SFAS No. 154 does not change thetransition provisions of any existing pronouncement. SFAS No. 154 iseffective for the Company for all accounting changes and corrections oferrors made beginning January  1,  2006.

CertainFactors That May Affect Future Results and Financial Condition and theMarket Price of Securities

See our 2005 Annual Report onForm 10K for a detailed discussion of risk factors.

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

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

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

Evaluation of disclosure controls andprocedures

The Company maintains disclosurecontrols and procedures that are designed to ensure that informationrequired to be disclosed in the Company's Exchange Act reports isrecorded, processed, summarized and reported within the time periodsspecified in the SEC's rules and forms, and that such informationis accumulated and communicated to the Company's management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosurebased on the definition of ‘‘disclosure controls andprocedures’’ in Rule 13a-15(e). In designing and evaluatingthe disclosure controls and procedures, management recognizes that anycontrols and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired controlobjectives, and management necessarily is required to apply itsjudgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

The Company carried out anevaluation, under the supervision and with the participation of theCompany's management, including the Company's Chief ExecutiveOfficer and the Company's Chief Financial Officer, of theeffectiveness of the design and operation of the Company'sdisclosure controls and procedures as of March  31,  2006.Based upon the foregoing, the Company's Chief Executive Officerand Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective as of March31,  2006.

Internal controls over financialreporting

There have been no changes in theCompany's internal control over financial reporting during thequarter ended March  31,  2006 that have materiallyaffected, or are reasonably likely to materially affect, theCompany's internal control over financialreporting.

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PART II OTHERINFORMATION

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

|              |  |                                                                                   |  |  |  |  |
|--------------|--|-----------------------------------------------------------------------------------|--|--|--|--|
| Exhibit10.1  |  | Form of Restricted Stock Agreement for grants pursuant to1998 Stock Option Plan   |
| Exhibit 10.2 |  | Formof Restricted Stock Agreement for grants pursuant to 2005 StockIncentive Plan |
| Exhibit 31.1 |  | Rule13a-14(a)/15d-14(a) Certifications – William P. Lyons                   |
| Exhibit 31.2 |  | Rule 13a-14(a)/15d-14(a) Certifications– Joseph Dwyer                       |
| Exhibit 32   |  | OfficerCertifications under 18 USC1350                                            |
|              |

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SIGNATURES

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

|                                           |  |              |  |                                                                                                       |  |  |  |  |  |  |
|-------------------------------------------|--|--------------|--|-------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
|                                      |  | AXS-ONE INC. |
| Date:    May  11,2006 |  | By:          |  | /s/ William P.Lyons                                                                                   |
|                                      |  |         |  | William P. LyonsChiefExecutive Officer andChairman of the Board                                       |
|                                      |  | By:          |  | /s/ Joseph Dwyer                                                                                      |
|                                      |  |         |  | Joseph DwyerExecutive Vice President,ChiefFinancial Officer and Treasurer(Principal FinancialOfficer) |
|                                           |

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