UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF1934

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

AXS-ONEINC.

(Exact name of registrant asspecified in itscharter)

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

(201)935-3400

(Registrant’stelephone 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 90days.

YES            X            NO                        

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theExchangeAct).

YES                            NO            X        

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

YES                            NO            X        

Number of shares outstanding of theissuer’s common stock as of November 4,2005

|                                       |  |                             |  |  |  |  |
|---------------------------------------|--|-----------------------------|--|--|--|--|
| Class                                 |  | Numberof Shares Outstanding |
| Common Stock, par value $0.01pershare |  | 34,250,227                  |
|                                       |

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AXS-ONEINC.

INDEX

|                |  |                                                                                                                                                             |  |            |  |  |  |  |  |  |
|----------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------|--|--|--|--|--|--|
|           |  |                                                                                                                                                        |  | PageNumber |
| PARTI          |  | FINANCIALINFORMATION                                                                                                                                        |  |       |
|           |  | Item1.   FinancialStatements                                                                                                                      |  |       |
|           |  |   ConsolidatedBalance Sheets    September 30, 2005 (unaudited) and December31,2004                                            |  | 3          |
|           |  |   ConsolidatedStatements of Operations (unaudited)    Three and nine monthsended September 30, 2005 and2004                   |  | 4          |
|           |  |   ConsolidatedStatements of Comprehensive Income (Loss) (unaudited)     Threeand nine months ended September 30, 2005 and2004 |  | 5          |
|           |  |   ConsolidatedStatements of Cash Flows (unaudited)    Nine months endedSeptember 30, 2005 and2004                             |  | 6          |
|           |  |   Notesto Consolidated Interim FinancialStatements                                                                                                |  | 7          |
|           |  | Item 2.  Management’s Discussion and Analysis ofFinancial Condition and     Results ofOperations                        |  | 18         |
|           |  | Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk                                                                                |  | 30         |
|           |  | Item 4.  Controls andProcedures                                                                                                                   |  | 31         |
| **PARTII**     |  | **OTHERINFORMATION**                                                                                                                                        |  |       |
|           |  | Item1.   LegalProceedings                                                                                                                         |  | 32         |
|           |  | Item 4.  Submission of Matters to a Vote of SecurityHolders                                                                                       |  | 32         |
|           |  | Item 5.  OtherInformation                                                                                                                         |  | 32         |
|           |  | Item 6.  Exhibits                                                                                                                                 |  | 32         |
| **SIGNATURES** |
|           |  | Signatures                                                                                                                                                  |  | 35         |
|                |

2

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PART I. FINANCIALINFORMATION

Item 1. FinancialStatements

AXS-ONE INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands. exceptper sharedata)

|                                                                                                                                                               |  |                  |         |                  |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------|------------------|--|--------|---------|---------|--|--|
|                                                                                                                                                          |  | September30,2005 |         | December 31,2004 |
| **ASSETS**                                                                                                                                                    |  | (unaudited)      |         |             |
| Currentassets:                                                                                                                                                |  |             |    |             |  |   |    |    |
| Cash and cash equivalents                                                                                                                                     |  | $                | 4,814   |             |  | $      | 4,809   |    |
| Restrictedcash                                                                                                                                                |  |             | 56      |             |  |   | 62      |    |
| Accountsreceivable, net of allowance for doubtful accountsof                                                                                                  |  |             |    |             |  |   |    |    |
| $147and $577 at September 30, 2005 and December 31, 2004,respectively                                                                                         |  |             | 5,231   |             |  |   | 6,084   |    |
| Duefrom joint venture                                                                                                                                         |  |             | 90      |             |  |   | 68      |    |
| Prepaid expenses andother current assets                                                                                                                      |  |             | 950     |             |  |   | 1,221   |    |
| Totalcurrent assets                                                                                                                                           |  |             | 11,141  |             |  |   | 12,244  |    |
| Equipmentand leasehold improvements, atcost:                                                                                                                  |  |             |    |             |  |   |    |    |
| Computer and officeequipment                                                                                                                                  |  |             | 11,634  |             |  |   | 11,606  |    |
| Furniture andfixtures                                                                                                                                         |  |             | 939     |             |  |   | 943     |    |
| Leaseholdimprovements                                                                                                                                         |  |             | 865     |             |  |   | 865     |    |
|                                                                                                                                                          |  |             | 13,438  |             |  |   | 13,414  |    |
| Less-accumulateddepreciation and amortization                                                                                                                 |  |             | 13,027  |             |  |   | 12,905  |    |
|                                                                                                                                                          |  |             | 411     |             |  |   | 509     |    |
| Capitalizedsoftware development costs, net of accumulated amortization of $11,222and $10,409 at September 30, 2005 and December 31, 2004,respectively         |  |             | 1,248   |             |  |   | 1,886   |    |
| Otherassets                                                                                                                                                   |  |             | 13      |             |  |   | 142     |    |
|                                                                                                                                                          |  | $                | 12,813  |             |  | $      | 14,781  |    |
| **LIABILITIESAND STOCKHOLDERS'DEFICIT**                                                                                                                       |  |             |    |             |  |   |    |    |
| Currentliabilities:                                                                                                                                           |  |             |    |             |  |   |    |    |
| Bankdebt                                                                                                                                                      |  | $                | 1,500   |             |  | $      | — |    |
| Accountspayable                                                                                                                                               |  |             | 1,211   |             |  |   | 1,901   |    |
| Accruedexpenses                                                                                                                                               |  |             | 3,413   |             |  |   | 3,786   |    |
| Due tojointventure..                                                                                                                                          |  |             | — |             |  |   | 29      |    |
| Deferredrevenue                                                                                                                                               |  |             | 7,240   |             |  |   | 9,786   |    |
| Totalcurrent liabilities                                                                                                                                      |  |             | 13,364  |             |  |   | 15,502  |    |
| Long-termliabilities:                                                                                                                                         |  |             |    |             |  |   |    |    |
| Long-term deferredrevenue                                                                                                                                     |  |             | 123     |             |  |   | 303     |    |
| Commitmentsandcontingencies                                                                                                                                   |  |             |    |             |  |   |    |    |
| Stockholders'deficit:                                                                                                                                         |  |             |    |             |  |   |    |    |
| Preferred stock, $.01par value, authorized 5,000 shares, no shares issued andoutstanding                                                                      |  |             | — |             |  |   | — |    |
| Commonstock, $.01 par value, authorized 50,000 shares; 34,195 and 28,341shares issued and outstanding at September 30, 2005 and December 31,2004,respectively |  |             | 342     |             |  |   | 283     |    |
| Additionalpaid-in capital                                                                                                                                     |  |             | 87,821  |             |  |   | 80,339  |    |
| Accumulateddeficit                                                                                                                                            |  |             | (89,016 | )           |  |   | (81,665 | )  |
| Accumulatedother comprehensiveincome                                                                                                                          |  |             | 289     |             |  |   | 19      |    |
| Unearned stockcompensation                                                                                                                                    |  |             | (110    | )           |  |   | — |    |
| Totalstockholders' deficit                                                                                                                                    |  |             | (674    | )           |  |   | (1,024  | )  |
|                                                                                                                                                          |  | $                | 12,813  |             |  | $      | 14,781  |    |
|                                                                                                                                                               |

Theaccompanying notes are an integral part of these consolidated financialstatements.

3

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

|                                          |  |                                |         |                              |  |        |         |         |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------|--|--------------------------------|---------|------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                     |  | ThreeMonths EndedSeptember 30, |         | Nine MonthsEndedSeptember30, |
|                                     |  | 2005                           |         | 2004                         |  | 2005   |         | 2004    |
| Revenues:                                |  |                           |    |                         |  |   |    |    |  |   |   |    |  |   |   |    |
| Licensefees                              |  | $                              | 2,528   |                         |  | $      | 1,306   |    |  | $      | 4,068  |    |  | $      | 4,770  |    |
| Services                                 |  |                           | 6,797   |                         |  |   | 7,759   |    |  |   | 20,757 |    |  |   | 24,621 |    |
| Other-relatedparties                     |  |                           | 32      |                         |  |   | 80      |    |  |   | 69     |    |  |   | 181    |    |
| Totalrevenues                            |  |                           | 9,357   |                         |  |   | 9,145   |    |  |   | 24,894 |    |  |   | 29,572 |    |
| Operatingexpenses:                       |  |                           |    |                         |  |   |    |    |  |   |   |    |  |   |   |    |
| Cost oflicensefees                       |  |                           | 405     |                         |  |   | 693     |    |  |   | 1,175  |    |  |   | 1,479  |    |
| Costofservices                           |  |                           | 3,630   |                         |  |   | 4,129   |    |  |   | 12,672 |    |  |   | 12,926 |    |
| Salesandmarketing                        |  |                           | 2,218   |                         |  |   | 2,271   |    |  |   | 7,329  |    |  |   | 6,696  |    |
| Researchanddevelopment                   |  |                           | 1,838   |                         |  |   | 2,081   |    |  |   | 5,973  |    |  |   | 6,017  |    |
| Generalandadministrative                 |  |                           | 1,163   |                         |  |   | 1,714   |    |  |   | 3,948  |    |  |   | 4,811  |    |
| Restructuringand othercosts              |  |                           | — |                         |  |   | (83     | )  |  |   | 863    |    |  |   | 1,020  |    |
| Totaloperatingexpenses                   |  |                           | 9,254   |                         |  |   | 10,805  |    |  |   | 31,960 |    |  |   | 32,949 |    |
| Operatingincome(loss)                    |  |                           | 103     |                         |  |   | (1,660  | )  |  |   | (7,066 | )  |  |   | (3,377 | )  |
| Otherincome(expense):                    |  |                           |    |                         |  |   |    |    |  |   |   |    |  |   |   |    |
| Interestincome                           |  |                           | 47      |                         |  |   | 40      |    |  |   | 105    |    |  |   | 105    |    |
| Interestexpense                          |  |                           | (5      | )                       |  |   | — |    |  |   | (6     | )  |  |   | (14    | )  |
| Equityin losses of jointventures         |  |                           | (17     | )                       |  |   | (40     | )  |  |   | (44    | )  |  |   | (122   | )  |
| Otherincome (expense),net                |  |                           | 49      |                         |  |   | (17     | )  |  |   | (365   | )  |  |   | (68    | )  |
| Otherincome (expense),net                |  |                           | 74      |                         |  |   | (17     | )  |  |   | (310   | )  |  |   | (99    | )  |
| Income(loss) before incometaxes          |  |                           | 177     |                         |  |   | (1,677  | )  |  |   | (7,376 | )  |  |   | (3,476 | )  |
| Incometax benefit(expense)               |  |                           | — |                         |  |   | 18      |    |  |   | 25     |    |  |   | (10    | )  |
| Netincome (loss)                         |  | $                              | 177     |                         |  | $      | (1,659  | )  |  | $      | (7,351 | )  |  | $      | (3,486 | )  |
| Basicnet income (loss) per commonshare   |  | $                              | 0.01    |                         |  | $      | (0.06   | )  |  | $      | (0.24  | )  |  | $      | (0.13  | )  |
| Weightedaveragebasic                     |  |                           |    |                         |  |   |    |    |  |   |   |    |  |   |   |    |
| commonshares outstanding                 |  |                           | 33,635  |                         |  |   | 28,106  |    |  |   | 30,761 |    |  |   | 27,094 |    |
| Dilutednet income (loss) per commonshare |  | $                              | 0.01    |                         |  | $      | (0.06   | )  |  | $      | (0.24  | )  |  | $      | (0.13  | )  |
| Weightedaveragediluted                   |  |                           |    |                         |  |   |    |    |  |   |   |    |  |   |   |    |
| commonshares outstanding                 |  |                           | 34,865  |                         |  |   | 28,106  |    |  |   | 30,761 |    |  |   | 27,094 |    |
|                                          |

Theaccompanying notes are an integral part of these consolidated financialstatements.

4

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

|                                       |  |                               |     |                               |  |        |        |         |  |        |        |         |  |        |        |         |  |  |
|---------------------------------------|--|-------------------------------|-----|-------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                  |  | ThreeMonths Ended September30 |     | NineMonths Ended September30, |
|                                  |  | 2005                          |     | 2004                          |  | 2005   |        | 2004    |
| Netincome(loss)                       |  | $                             | 177 |                          |  | $      | (1,659 | )  |  | $      | (7,351 | )  |  | $      | (3,486 | )  |
| Foreigncurrency translationadjustment |  |                          | (63 | )                        |  |   | (68    | )  |  |   | 270    |    |  |   | (75    | )  |
| Comprehensiveincome(loss)             |  | $                             | 114 |                          |  | $      | (1,727 | )  |  | $      | (7,081 | )  |  | $      | (3,561 | )  |
|                                       |

Theaccompanying notes are an integral part of these consolidated financialstatements.

5

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

|                                                                   |  |                               |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------|--|-------------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                              |  | NineMonths Ended September30, |
|                                                              |  | 2005                          |         | 2004    |
| Cashflows from operating activities:                              |  |                          |    |    |  |   |    |    |
| Netloss                                                           |  | $                             | (7,351  | )  |  | $      | (3,486  | )  |
| Adjustmentsto reconcile net loss to net cashflows                 |  |                          |    |    |  |   |    |    |
| used in operatingactivities                                       |  |                          |    |    |  |   |    |    |
| Decrease in cashsurrender value of officers' lifeinsurance        |  |                          | (7      | )  |  |   | (10     | )  |
| Depreciationandamortization                                       |  |                          | 875     |    |  |   | 1,038   |    |
| Netprovision for doubtfulaccounts                                 |  |                          | 12      |    |  |   | 436     |    |
| Equity inlosses of jointventure                                   |  |                          | 44      |    |  |   | 122     |    |
| Consultingservices received in lieu of paymenton                  |  |                          |    |    |  |   |    |    |
| accountsreceivable                                                |  |                          | — |    |  |   | 213     |    |
| Non-cashstock compensationexpense                                 |  |                          | 28      |    |  |   | — |    |
| Changesin current assets andliabilities                           |  |                          |    |    |  |   |    |    |
| Restrictedcash                                                    |  |                          | 5       |    |  |   | — |    |
| Accountsreceivable                                                |  |                          | 708     |    |  |   | (890    | )  |
| Due fromjointventure                                              |  |                          | (100    | )  |  |   | (106    | )  |
| Prepaidexpenses and other currentassets                           |  |                          | 346     |    |  |   | (217    | )  |
| Accountspayable and accruedexpenses                               |  |                          | (938    | )  |  |   | 679     |    |
| Deferredrevenue                                                   |  |                          | (2,548  | )  |  |   | (675    | )  |
| Netcash flows used in operatingactivities                         |  |                          | (8,926  | )  |  |   | (2,896  | )  |
| Cashflows from investingactivities:                               |  |                          |    |    |  |   |    |    |
| Change in otherassets                                             |  |                          | 82      |    |  |   | 27      |    |
| Loan to jointventure                                              |  |                          | — |    |  |   | (115    | )  |
| Capitalizedsoftware developmentcosts                              |  |                          | (18     | )  |  |   | (582    | )  |
| Purchase ofequipment and leaseholdimprovements                    |  |                          | (137    | )  |  |   | (275    | )  |
| Netcash flows used in investingactivities                         |  |                          | (73     | )  |  |   | (945    | )  |
| Cashflows from financingactivities:                               |  |                          |    |    |  |   |    |    |
| Proceeds fromexercise of stock options andwarrants                |  |                          | 1,013   |    |  |   | 464     |    |
| Netproceeds from the sale of commonstock                          |  |                          | 6,390   |    |  |   | 7,692   |    |
| Debtissuancecosts                                                 |  |                          | (71     | )  |  |   | — |    |
| Borrowings(payments) of bank debt                                 |  |                          | 1,500   |    |  |   | (547    | )  |
| Netcash flows provided by financingactivities                     |  |                          | 8,832   |    |  |   | 7,609   |    |
| Foreigncurrency exchange rate effects on cash and cashequivalents |  |                          | 172     |    |  |   | (33     | )  |
| Netincrease in cash and cashequivalents                           |  |                          | 5       |    |  |   | 3,735   |    |
| Cash and cashequivalents, beginning ofperiod                      |  |                          | 4,809   |    |  |   | 2,946   |    |
| Cashand cash equivalents, end ofperiod                            |  | $                             | 4,814   |    |  | $      | 6,681   |    |
| Supplementaldisclosures of cash flowinformation:                  |  |                          |    |    |  |   |    |    |
| Cash paidduring the period for-                                   |  |                          |    |    |  |   |    |    |
| Interest                                                          |  | $                             | — |    |  | $      | 21      |    |
| Incometaxes                                                       |  | $                             | — |    |  | $      | 17      |    |
|                                                                   |

Theaccompanying notes are an integral part of these consolidated financialstatements.

6

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

(1)    OPERATIONS, BUSINESS CONDITIONS AND SIGNIFICANTACCOUNTING POLICIES

The Company designs, marketsand supports records compliance management solutions that includedigital archiving, business process management, electronic documentdelivery and integrated records disposition and discovery for e-mail,instant messaging, images, SAP and other corporate records, as well asfinancial management applications for global 2000 businesses, andscheduling and time and expense solutions for professional servicesorganizations. The Company also offers consulting, implementation,training, technical support and maintenance services in support of itscustomers’ use of its softwareproducts.

(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 InterestEntities’’ (FIN 46R). However, the Company has determinedthat it is not the primary beneficiary. Accordingly, the Company usesthe equity method of accounting for the joint venture wherebyinvestments, including loans to the joint venture, are stated at costplus or minus the Company’s equity in undistributed earnings orlosses.

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

The preparationof Consolidated Interim Financial Statements in conformity with USgenerally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the Consolidated Interim Financial Statements and thereported amounts of revenues and expenses during the periods presented.Actual results could differ from those estimates. Some of thesignificant estimates involve allowance for doubtful accounts,recoverability of capitalized software development costs, accruedexpenses, provision for income taxes in foreign jurisdictions,assessment of contingencies, and pro forma compensation expensepursuant to SFAS No. 123.

These Consolidated InterimFinancial Statements should be read in conjunction with theconsolidated financial statements and related notes included in theCompany’s 2004 Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

The results ofoperations for the three and nine months ended September 30, 2005 arenot necessarily indicative of results to be expected for the full year2005 or any future periods.

(b)    RevenueRecognition

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

7

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

evidence of the arrangement. The Company usesa professional 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 therelationship.

Revenues from transaction fees associatedwith a hosting arrangement, billable on a per transaction basis andincluded in services revenue on the unaudited Consolidated Statementsof Operations, are recognized based on the actual number oftransactions processed during the period.

In multipleelement arrangements, the Company defers the vendor-specific objectiveevidence of fair value (‘‘VSOE’’) relatedto the undelivered elements and recognizes revenue on the deliveredelements using the residual method. The most commonly deferred elementsare initial maintenance and consulting services. Initial maintenance isrecognized on a straight-line basis over the initial maintenance term.The VSOE of maintenance is determined by using a consistent percentageof maintenance fee to license fee based on renewal rates. Maintenancefees in subsequent years are recognized on a straight-line basis overthe life of the applicable agreement. Maintenance contracts entitle thecustomer to hot-line support and all unspecified product upgradesreleased during the term of the maintenance contract. Upgrades includeany and all unspecified patches or releases related to a licensedsoftware product. Maintenance does not include implementation servicesto install these upgrades. The VSOE of services is determined by usingan average consulting rate per hour for consulting services soldseparately multiplied by the estimate of hours required to complete theconsulting engagement.

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

For software license andmaintenance revenue, the Company assesses whether the fee is fixed anddeterminable and whether or not collection is probable. The Companyassesses whether the fee is fixed and determinable based on the paymentterms associated with the transaction. If a significant portion of afee is due after the Company’s normal payment terms, which are30 to 90 days from invoice date, the fee is not considered to be fixedand determinable. In these cases, the Company recognizes revenue as thefees become due.

The majority of the Company’straining and consulting services are billed based on hourly rates. TheCompany generally recognizes revenue as these services are performedwhen there is also evidence of an arrangement, the fee is fixed ordeterminable and collectibility is reasonably assured. However, whenthe Company enters into an arrangement that is based on a fixed fee orrequires it to perform significant work either to alter the underlyingsoftware or to build additional complex interfaces so that the softwareperforms as the customer requests, the Company recognizes the relatedrevenue using the percentage of completion method of accounting. Thiswould apply to the Company’s custom programming services whichare generally contracted on a fixed fee basis. Anticipated losses, ifany, are charged to operations in the period such losses are determinedto be probable.

Revenues from the joint venture (includedin Revenues: Other-Related Parties in the unaudited ConsolidatedStatements of Operations) includes consulting revenue for the jointventures’ use of the Company’s South Africansubsidiary’s consultants and for director’s fees for theCompany’s subsidiary providing director services to the jointventure (during the 2004 period only) in accordance with the jointventure agreement. Revenue is recognized upon performance of theservices.

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

8

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

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

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

In accordance with EITFIssue No. 01-14, ‘‘Income Statement Characterization ofReimbursement Received for ‘Out of Pocket’ ExpensesIncurred,’’ reimbursements received for out-of-pocketexpenses incurred are classified as services revenue in the unauditedConsolidated Statements of Operations.

(c)    Variable Interest Entity

TheCompany adopted FIN 46R as required on March 31, 2004. TheCompany’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 September 30, 2005,AXS-One’s total exposure to loss as a result of its involvementin African Solutions is $90, representing the Company’s netinvestment in African Solutions as of September 30, 2005.

Presented below is selected financial data for AfricanSolutions for the three and nine months ended September 30, 2005 and2004,respectively.

|                       |  |                                 |     |                              |  |      |     |         |  |   |     |         |  |   |       |         |  |  |
|-----------------------|--|---------------------------------|-----|------------------------------|--|------|-----|---------|--|---|-----|---------|--|---|-------|---------|--|--|
|                  |  | ThreeMonths Ended September 30, |     | NineMonthsEnded September30, |
|                  |  | 2005                            |     | 2004                         |  | 2005 |     | 2004    |
| Totalrevenues         |  | $                               | 232 |                         |  | $    | 298 |    |  | $ | 780 |    |  | $ | 1,012 |    |
| Operatingincome(loss) |  | $                               | 16  |                         |  | $    | (33 | )  |  | $ | 67  |    |  | $ | (111  | )  |
| Netloss               |  | $                               | (36 | )                       |  | $    | (83 | )  |  | $ | (90 | )  |  | $ | (250  | )  |
|                       |

Totalassets were $433 and $535 as of September 30, 2005 and December 31,2004, respectively. Total stockholders’ deficit was $(1,653) and$(1,765) as of September 30, 2005 and December 31, 2004,respectively.

(d)    Stock-BasedCompensation

FASB Statement No. 148,‘‘Accounting for Stock Based Compensation-Transition andDisclosure, an Amendment of FASB Statement No. 123’’(‘‘SFAS 148’’) provides alternative methodsof transition for a voluntary change to the fair value method ofaccounting for stock-based compensation. However, it allows an entityto continue to measure compensation cost for stock instruments grantedto employees using the intrinsic-value method of accounting prescribedby Accounting Principles Board Opinion No. 25 (‘‘APB25’’), ‘‘Accounting for Stock Issued toEmployees,’’ provided it discloses the effect of SFAS123, 

9

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

as amended by SFAS 148, in the footnotes tothe financial statements. In December 2004, the FASB issued SFAS 123(revised 2004), ‘‘Share-Based Payment’’(SFAS 123R), which replaces SFAS 123 and supercedes APB Opinion No. 25.SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options and restricted stock grants, to berecognized as a compensation cost based on their fair values. The proforma disclosures previously permitted under SFAS 123 no longer will bean alternative to financial statement recognition. The Company isrequired to adopt SFAS 123R no later than January 1, 2006. Until thattime, the Company has chosen to continue to account for stock-basedcompensation using the intrinsic-value method. Accordingly, no stockoption related compensation expense has been recognized in theconsolidated statements of operations as all options granted had anexercise price equal to the market value of the underlying stock on thedate of grant.

On January 3, 2005, the Company issued 75shares of restricted stock to certain employees with a vesting term offive years subject to acceleration in accordance with the grantstipulations. The fair value of the restricted stock awards on the dateof grant was $193 which was recorded as Unearned Stock Compensation, acomponent of stockholder’s deficit, and is being amortized overthe vesting period of the grants, subject to acceleration based onCompany performance. On June 30, 2005, 25 shares were forfeited and therelated unearned stock compensation in the amount of $64 was reversed.Previously recognized compensation expense related to the forfeituresof these shares was immaterial. For the three and nine months endedSeptember 30, 2005, the Company recognized $6 and $19, respectively, ascompensation expense leaving a net balance of deferred compensation of$110 as of September 30, 2005.

On October 26, 2005, theBoard of Directors of the Company approved the acceleration of vestingof all unvested ‘‘out-of-the money’’ stockoptions previously awarded to current employees and directors under theCompany’s stock option program. The accelerated options haveexercise prices ranging from $2.15 to $6.25 with a weighted averageexercise price of $2.99. Options to purchase approximately 2.2 millionshares became exercisable immediately as a result of the vestingacceleration. To avoid any unintended personal benefits, the Companyalso imposed a holding period on the shares underlying the acceleratedoptions in the form of a Resale Restriction Agreement. This agreementrequires all optionees to refrain from selling any shares acquired uponthe exercise of the 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 expects toreduce the stock compensation expense it otherwise would be required torecord beginning in January 2006 upon adoption of SFAS 123R byapproximately $4.1 million over a weighted average period of 1.82years. In making the decision to accelerate these options, the Board ofDirectors considered the interests of the Company’s stockholdersas this acceleration will reduce compensation expense in futureperiods. The Company is evaluating whether the requirements under SFAS123(R) will have a significant impact on our consolidated statements ofoperations and net income (loss) per common share.

Had theCompany elected to recognize compensation cost based on the fair valuemethod at the date of grant of all stock-based awards under SFAS 123,as amended by SFAS 148, such costs would have been recognized ratablyover the vesting period of the underlying instruments and theCompany’s net income (loss) and net income (loss) per commonshare would have changed to the pro forma amounts indicated in thetable below.

10

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

|                                                                                                      |  |                                |        |                              |  |        |         |         |  |        |        |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------------|--|--------------------------------|--------|------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                                                                                 |  | ThreeMonths EndedSeptember 30, |        | Nine MonthsEndedSeptember30, |
|                                                                                                 |  | 2005                           |        | 2004                         |  | 2005   |         | 2004    |
| Netincome (loss) asreported                                                                          |  | $                              | 177    |                         |  | $      | (1,659  | )  |  | $      | (7,351 | )  |  | $      | (3,486  | )  |
| Add:Stock-based compensationexpense                                                                  |  |                           | 15     |                         |  |   | — |    |  |   | 28     |    |  |   | — |    |
| Deduct:Total employee stock-based compensation determined under fair valuebased method for allawards |  |                           | (459   | )                       |  |   | (483    | )  |  |   | (1,357 | )  |  |   | (1,043  | )  |
| Proforma netloss                                                                                     |  | $                              | (267   | )                       |  | $      | (2,142  | )  |  | $      | (8,680 | )  |  | $      | (4,529  | )  |
| Netloss per common share:                                                                            |  |                           |   |                         |  |   |    |    |  |   |   |    |  |   |    |    |
| Basic and diluted– asreported                                                                  |  | $                              | 0.01   |                         |  | $      | (0.06   | )  |  | $      | (0.24  | )  |  | $      | (0.13   | )  |
| Basicand diluted – proforma                                                                    |  |                           | (0.01  | )                       |  |   | (0.08   | )  |  |   | (0.28  | )  |  |   | (0.17   | )  |
|                                                                                                      |

TheCompany has used the Black-Scholes option-pricing model in calculatingthe fair value of options granted. The assumptions used and theweighted average information for the three and nine months endedSeptember 30, 2005 and 2004 are asfollows:

|                                                                                                                   |  |                                |  |                              |  |           |  |          |  |  |  |  |  |  |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------------|--|--------------------------------|--|------------------------------|--|-----------|--|----------|--|--|--|--|--|--|--|--|--|--|
|                                                                                                              |  | ThreeMonths EndedSeptember 30, |  | Nine MonthsEndedSeptember30, |
|                                                                                                              |  | 2005                           |  | 2004                         |  | 2005      |  | 2004     |
| Risk-freeinterestrate                                                                                             |  | 4.57%                          |  | 4.89%                        |  | 4.65%     |  | 5.07%    |
| Expecteddividendyield                                                                                             |  | —                        |  | —                      |  | —   |  | —  |
| Expectedlives                                                                                                     |  | 5 years                        |  | 5 years                      |  | 5 years   |  | 5years   |
| Expectedvolatility                                                                                                |  | 99%                            |  | 103%                         |  | 100%      |  | 103%     |
| Weighted-averagegrant date fair value of options granted during theperiod                                         |  | $1.19                          |  | $1.70                        |  | $1.66     |  | $2.40    |
| Weighted-averageremaining contractual life of options outstanding                                                 |  | 7.0years                       |  | 6.9 years                    |  | 7.0 years |  | 6.9years |
| Weighted-average exercise price of 3,479 and3,988 options exercisable at September 30, 2005 and 2004,respectively |  | $2.31                          |  | $1.74                        |  | $2.31     |  | $1.74    |
|                                                                                                                   |

(2)    REVOLVINGLINE OF CREDIT AND LONG-TERM DEBT

On March 31,1998, the Company entered into a Loan and Security Agreement thatcontained a revolving line of credit and a term loan. The unpaidprincipal on the term loan at December 31, 2003 of $547 was fully paidas of March 31, 2004. The Loan and Security Agreement terminated on May28, 2004 in accordance with Amendment No. 15.

On August11, 2004, the Company entered into a two-year Loan and SecurityAgreement (‘‘Agreement’’) which contains arevolving line of credit under which the Company has available thelesser of $4 million or 80% of eligible accounts, asdefined.

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 with this revisedcovenant and all other covenants as of December 31,2004.

On March 28, 2005, the Company further amended theAgreement (Second Loan Modification) in order to set the EBITDA andadjusted quick ratio quarterly covenants for 2005. The Company was notin compliance with the EBITDA covenant as of June 30, 2005 and noborrowings were outstanding at that time.

11

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

On September 13, 2005, the Companyentered into 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 Company’s 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 August 9, 2006.As described in greater detail in the Loan Agreement, the loan issubject to acceleration upon breach of: (i) a covenant tested monthlyregarding the ratio of unrestricted cash and net billed accountsreceivable to current liabilities minus deferred revenue, (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-financialcovenants.

As of September 30, 2005, there was $1,500outstanding under the Amended Agreement and availability was $2,195.During October 2005, the Company repaid all outstanding amounts underthe Amended Agreement.

As of September 30, 2005, theCompany was in compliance with all covenants with the exception of a"transition event" covenant which requiresthe Company to maintain an adjusted quick ratio greater than or equalto of 1.6 to 1.0. The Company's adjusted quick ratio at September30, 2005 was 1.592 to 1.0. On November 7, 2005, Silicon Valley Bankgranted a waiver on the transition event covenant as of September 30,2005 and therefore did not require the Company to transition to thehigher-interest debt facility. The waiver was for the September 30,2005 date only.

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

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

Basic netincome (loss) per common share is based on the weighted average numberof shares of common stock outstanding during the period. Diluted netincome (loss) per common share for the three and nine months endedSeptember 30, 2005 does not include the effects of outstanding optionsto purchase 4,137 and 6,488 shares of common stock, respectively, 50shares of restricted stock for each period and outstanding warrants topurchase 1,423 shares of common stock for each period as the effect oftheir inclusion is anti-dilutive for the periods. Diluted net loss percommon share for the three and nine months ended September 30, 2004does not include the effects of outstanding options to purchase 7,168shares of common stock and outstanding warrants to purchase 516 sharesof common stock for each period as the effect of their inclusion isanti-dilutive for the periods.

12

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

The following represents thereconciliation of the basic and diluted net income (loss) per commonshare calculation for the three and nine months ended September 30,2005 and2004.

|                                                                     |  |                                |        |                              |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|---------------------------------------------------------------------|--|--------------------------------|--------|------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                                |  | ThreeMonths EndedSeptember 30, |        | Nine MonthsEndedSeptember30, |
|                                                                |  | 2005                           |        | 2004                         |  | 2005   |         | 2004   |
| Weightedaverage basic common shares outstanding during theperiods   |  |                           | 33,635 |                         |  |   | 28,106  |   |  |   | 30,761  |   |  |   | 27,094  |   |
| Dilutiveeffect of stock options andwarrants                         |  |                           | 1,230  |                         |  |   | — |   |  |   | — |   |  |   | — |   |
| Weightedaverage diluted common shares outstanding during theperiods |  |                           | 34,865 |                         |  |   | 28,106  |   |  |   | 30,761  |   |  |   | 27,094  |   |
|                                                                     |

(4)    OPERATINGSEGMENTS

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

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

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

The Company evaluates the performance of its two productlines based on revenues and operating income. Summarized financialinformation concerning the Company’s reportable segments isshown in the following table. The Chief Executive Officer uses theinformation below in this format while making decisions aboutallocating resources to each product line and assessing itsperformance.

13

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

|                                               |  |            |        |                                    |  |        |        |         |  |        |        |         |  |  |
|-----------------------------------------------|--|------------|--------|------------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                          |  | Enterprise |        | RecordsCompliancePlatformSolutions |  | Total  |
| **ThreeMonths Ended September 30,2005**       |  |       |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                     |  |       |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                   |  | $          | 512    |                               |  | $      | 2,016  |    |  | $      | 2,528  |    |
| Services                                      |  |       | 5,106  |                               |  |   | 1,691  |    |  |   | 6,797  |    |
| TotalRevenues, excluding related partyrevenue |  |       | 5,618  |                               |  |   | 3,707  |    |  |   | 9,325  |    |
| Operatingincome(loss)                         |  |       | 2,383  |                               |  |   | (640   | )  |  |   | 1,743  |    |
| Totalassets                                   |  |       | 9,499  |                               |  |   | 3,314  |    |  |   | 12,813 |    |
| Capitalexpenditures                           |  |       | 21     |                               |  |   | 1      |    |  |   | 22     |    |
| Depreciationandamortization                   |  |       | 182    |                               |  |   | 102    |    |  |   | 284    |    |
| **ThreeMonths Ended September 30,2004**       |  |       |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                     |  |       |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                   |  | $          | 363    |                               |  | $      | 943    |    |  | $      | 1,306  |    |
| Services                                      |  |       | 6,219  |                               |  |   | 1,540  |    |  |   | 7,759  |    |
| TotalRevenues, excluding related partyrevenue |  |       | 6,582  |                               |  |   | 2,483  |    |  |   | 9,065  |    |
| Operatingincome                               |  |       | 56     |                               |  |   | 451    |    |  |   | 507    |    |
| Totalassets                                   |  |       | 13,502 |                               |  |   | 2,672  |    |  |   | 16,174 |    |
| Capitalexpenditures                           |  |       | 56     |                               |  |   | 7      |    |  |   | 63     |    |
| Depreciationandamortization                   |  |       | 345    |                               |  |   | 8      |    |  |   | 353    |    |
| **NineMonths Ended September 30,2005**        |  |       |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                     |  |       |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                   |  | $          | 1,262  |                               |  | $      | 2,806  |    |  | $      | 4,068  |    |
| Services                                      |  |       | 15,247 |                               |  |   | 5,510  |    |  |   | 20,757 |    |
| TotalRevenues, excluding related partyrevenue |  |       | 16,509 |                               |  |   | 8,316  |    |  |   | 24,825 |    |
| Operatingincome(loss).                        |  |       | 5,803  |                               |  |   | (7,249 | )  |  |   | (1,446 | )  |
| Totalassets                                   |  |       | 9,499  |                               |  |   | 3,314  |    |  |   | 12,813 |    |
| Capitalexpenditures                           |  |       | 124    |                               |  |   | 13     |    |  |   | 137    |    |
| Depreciationandamortization                   |  |       | 559    |                               |  |   | 316    |    |  |   | 875    |    |
| **NineMonths Ended September 30,2004**        |  |       |   |                               |  |   |   |    |  |   |   |    |
| Revenues:                                     |  |       |   |                               |  |   |   |    |  |   |   |    |
| Licensefees                                   |  | $          | 1,231  |                               |  | $      | 3,539  |    |  | $      | 4,770  |    |
| Services                                      |  |       | 20,355 |                               |  |   | 4,266  |    |  |   | 24,621 |    |
| TotalRevenues, excluding related partyrevenue |  |       | 21,586 |                               |  |   | 7,805  |    |  |   | 29,391 |    |
| Operatingincome                               |  |       | 492    |                               |  |   | 2,394  |    |  |   | 2,886  |    |
| Totalassets                                   |  |       | 13,502 |                               |  |   | 2,672  |    |  |   | 16,174 |    |
| Capitalexpenditures                           |  |       | 246    |                               |  |   | 29     |    |  |   | 275    |    |
| Depreciationandamortization                   |  |       | 1,017  |                               |  |   | 21     |    |  |   | 1,038  |    |
|                                               |

14

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

Reconciliation of totalsegment operating income (loss) to consolidated operating income(loss):

|                                                  |  |                                |        |                              |  |        |        |         |  |        |        |         |  |        |        |         |  |  |
|--------------------------------------------------|--|--------------------------------|--------|------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                             |  | ThreeMonths EndedSeptember 30, |        | Nine MonthsEndedSeptember30, |
|                                             |  | 2005                           |        | 2004                         |  | 2005   |        | 2004    |
| Operatingincome (loss) from reportablesegments   |  | $                              | 1,743  |                         |  | $      | 507    |    |  | $      | (1,446 | )  |  | $      | 2,886  |    |
| Unallocatedrevenue, other — relatedparties |  |                           | 32     |                         |  |   | 80     |    |  |   | 69     |    |  |   | 181    |    |
| Unallocatedgeneral and administrativeexpense     |  |                           | (1,163 | )                       |  |   | (1,699 | )  |  |   | (3,948 | )  |  |   | (4,765 | )  |
| Othercorporate unallocatedexpenses               |  |                           | (509   | )                       |  |   | (548   | )  |  |   | (1,741 | )  |  |   | (1,679 | )  |
| Totalconsolidated operating income(loss)         |  | $                              | 103    |                         |  | $      | (1,660 | )  |  | $      | (7,066 | )  |  | $      | (3,377 | )  |
|                                                  |

(5)    CONTINGENCIES

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

(6)    PRIVATEPLACEMENTS

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

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

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

On June 17,2005, the Company entered into a definitive agreement with a number ofinvestors as well as members of AXS-One Management and Board members tosell 4,534 shares of its common stock for total consideration of$6,750. On June 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 being 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 beginning June 21,2005. The warrants were classified within permanent equity inaccordance with EITF 00-19, ‘‘Accounting for DerivativeFinancial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock.’’ Warrants to purchase anadditional 45 

15

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

shares of common stock at $1.90 per shareand 45 shares of common stock at $2.15 per share were issuable tomembers of the Company’s management and Board member investorsupon approval of the shareholders. This private placement and issuanceof warrants was made pursuant to the terms of a Unit SubscriptionAgreement, dated as of June 17, 2005, among the Company and severalinvestors.

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, the Company receivednet proceeds of $615, issued 453 shares of common stock and warrants topurchase 45 shares of common stock at $1.90 per share and 45 shares ofcommon stock at $2.15 per share.

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

On June 23, 2005, the Company fileda Form 8-K with the SEC disclosing details of the private placement andissuance of warrants. On July 13, 2005, the Company filed a Form S-3registration statement with the SEC covering the resale of 4,081 sharesof the common stock issued and 816 shares of the common stock issuableupon exercise of the warrants. The Form S-3 registration statement, asamended, was declared effective by the SEC on August 3,2005.

On September 22, 2005, the Company filed a Form 8-Kwith the SEC disclosing details of the private placement and issuanceof warrants to members of the Company’s management and Boardmembers. On October 20, 2005, the Company filed a Form S-3 registrationstatement with the SEC covering the resale of 453 shares of the commonstock issued and 91 shares of the common stock issuable upon exerciseof the warrants. The Form S-3 registration statement, as amended, wasdeclared effective by the SEC on November 7,2005.

(7)    RESTRUCTURING AND OTHER COSTS

OnJune 30, 2004, in order to streamline and reorganize the Company tobetter meet its long-term goals, the Company eliminated 25 positions inthe United States and 11 positions in its foreign operations. TheCompany recorded a charge to operations in the second quarter totalingapproximately $786 related to involuntary termination benefits to bepaid to the terminated employees. The severance accrual was adjusteddown by approximately $83 in the third quarter of 2004 mainly due tothe re-assignment of two people previously scheduled for termination.All amounts related to this restructuring had been paid as of December31, 2004.

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

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

On June 30, 2005 the Companyeliminated 22 positions in the United States and 6 positions in itsforeign operations in order to further streamline the organization. TheCompany recorded a charge to operations in the second quarter totalingapproximately $863 related to involuntary termination benefits to bepaid to the terminated employees. The remaining restructuring liabilityis recorded as accrued expenses on the September 30, 2005 balancesheet. The activity related to the restructuring is as follows:

|                                                    |  |        |         |         |  |  |
|----------------------------------------------------|--|--------|---------|---------|--|--|
| Involuntary termination costs recorded in June2005 |  | $      | 863     |    |
| Cash payments through June 30,2005                 |  |   | — |    |
| Restructuringliability at June 30, 2005            |  |   | 863     |    |
| Adjustment toJune 2005 termination accrual         |  |   | 5       |    |
| Cashpayments through September 30,2005             |  |   | (464    | )  |
| Restructuring liabilityat September 30,2005        |  | $      | 404     |    |
|                                                    |

(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.

Revenues andlong-lived assets for the Company's United States, UnitedKingdom, Australia and Southeast Asia and South Africa operations areasfollows:

|                            |  |                                |       |                              |  |        |       |        |  |        |        |        |  |        |        |        |  |  |
|----------------------------|--|--------------------------------|-------|------------------------------|--|--------|-------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                       |  | ThreeMonths EndedSeptember 30, |       | Nine MonthsEndedSeptember30, |
| Revenues:(1)               |  | 2005                           |       | 2004                         |  | 2005   |       | 2004   |
| UnitedStates               |  | $                              | 5,970 |                         |  | $      | 6,145 |   |  | $      | 16,603 |   |  | $      | 20,474 |   |
| UnitedKingdom              |  |                           | 1,784 |                         |  |   | 1,312 |   |  |   | 3,508  |   |  |   | 3,677  |   |
| Australiaand SoutheastAsia |  |                           | 917   |                         |  |   | 1,119 |   |  |   | 2,758  |   |  |   | 3,478  |   |
| SouthAfrica                |  |                           | 686   |                         |  |   | 569   |   |  |   | 2,025  |   |  |   | 1,943  |   |
| TotalConsolidated          |  | $                              | 9,357 |                         |  | $      | 9,145 |   |  | $      | 24,894 |   |  | $      | 29,572 |   |
|                            |

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

|                             |  |                  |       |                  |  |        |       |        |  |  |
|-----------------------------|--|------------------|-------|------------------|--|--------|-------|--------|--|--|
| Long-LivedAssets:           |  | September30,2005 |       | December 31,2004 |
| UnitedStates                |  | $                | 1,394 |             |  | $      | 2,094 |   |
| UnitedKingdom               |  |             | 85    |             |  |   | 87    |   |
| Australia andSoutheast Asia |  |             | 158   |             |  |   | 185   |   |
| SouthAfrica                 |  |             | 22    |             |  |   | 29    |   |
| TotalConsolidated           |  | $                | 1,659 |             |  | $      | 2,395 |   |
|                             |

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

The followingdiscussion should be read in conjunction with the Consolidated InterimFinancial Statements and Notes thereto and is qualified in its entiretyby reference thereto.

This Report contains statements of aforward-looking nature within the meaning of the safe harbor provisionsof Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended, relating tofuture events or the future financial performance of AXS-One. Investorsare cautioned that such statements are only predictions and that actualevents or results may differ materially. In evaluating such statements,investors should specifically consider the various factors identifiedin this Report which could cause actual results to differ materiallyfrom those indicated by such forward-looking statements, including thematters set forth in ‘‘Business—RiskFactors’’ in our 2004 Annual Report on Form10-K.

Executive Overview

We are a leading providerof Records Compliance Management and Financial Management softwaresolutions designed to reduce the inherent risks associated withretaining and managing corporate records as well as to efficientlymanage complex business processes. We have implemented high-volume,interoperable, scalable and secure business solutions for global 2000companies. Our Web Services-based technology has been criticallyacclaimed as best of class. Our Records Compliance Management solutionsdeliver an integrated platform providing content management-basedsolutions for disparate electronic record types. This includes e-mailand instant messaging, SAP, electronic print report (Books and Records)archival and records management, as well as supervision and legaldiscovery functionality for regulatory compliance and corporategovernance, and for operational efficiency. See ‘‘Item 1.Business’’ in our 2004 Annual Report on Form10-K.

Our revenues are derived mainly from license feesfrom software license agreements entered into with our customers,including through resellers, for both our products and, to a lesserdegree, third party products resold by us and services revenues fromsoftware maintenance agreements, training, consulting servicesincluding installation and custom programming. We also derive a smallamount of revenue (less than 2% of total revenues in 2004 andless than 1% of total revenues for the three and nine monthsended September 30, 2005) from hosting arrangements.

Weare based in Rutherford, New Jersey with approximately 211 full-timeemployees, as of September 30, 2005, in offices worldwide, includingAsia, Australia, South Africa, the United Kingdom and the UnitedStates. Our foreign offices generated approximately 36.2% and33.3% of our total revenues for the three and nine months endedSeptember 30, 2005, respectively, as compared to 32.8% and30.8%, respectively, for the corresponding prior year periods.We expect that such revenues will continue to represent a significantpercentage 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’’). AfricanSolutions sells and services our suite of products. We use the equitymethod of accounting for our investment whereby the investment,including loans to the joint venture, is stated at cost plus or minusour equity in undistributed earnings or losses.

Weencounter competition for all of our products in all markets andcompete primarily based on the quality of our products, our price, ourcustomer service and our time to implement. The timing of the releaseof new products is also important to our ability to generate sales.During the second half of 2003, we launched our Records ComplianceManagement solution for e-mail and Instant Messaging Archival,Supervision, and Legal Discovery in response to new regulatoryrequirements for financial institutions in the United States as well asto address the need to reduce costs in the email management area. OurRecords Compliance Management software, including this new solution,accounted for approximately 67% of our total license feerevenues for the year ended December 31, 2004. We have increased ourresearch and development, sales and services teams in this area inorder to meet the needs of this growing market and capitalize on thisopportunity. However, there is no assurance that these efforts willachieve the desired results.

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

We have experienced, and may in the futureexperience, significant fluctuations in our quarterly and annualrevenues, results of operations and cash flows. We believe thatdomestic and international operating results and cash flows willcontinue to fluctuate significantly in the future as a result of avariety of factors. For a description of these factors that may affectour operating results, see ‘‘Business—RiskFactors’’ in our 2004 Annual Report on Form10-K.

On June 21, 2005, we completed a private placementof shares of common stock that resulted in net proceeds ofapproximately $5.8 million through June 30, 2005. Additional proceedsof $0.6 million were received from Company executive officers and boardmembers after approval of the private placement by the shareholders ata special meeting on September 20, 2005 for this purpose. We expect touse the proceeds from the private placement to strengthen our balancesheet and to develop and continue the business activities of AXS-One.(See Note 6 to the Consolidated Interim FinancialStatements.)

On September 26, 2005, Harold D. Coppermanwas elected to the Board of Directors to fill the vacancy created bythe death of William E. Vogel. Mr. Copperman will sit on the audit,compensation and nominating committees of the Board ofDirectors.

On September 13, 2005, the Company entered intoan Amended and Restated Loan and Security Agreement with Silicon ValleyBank (the ‘‘Loan Agreement’’). Subject tocertain borrowing base limitations and compliance with covenants, theCompany may borrow and repay up to $4,000,000 on a revolving basis. Theloan is secured by an all asset lien on the Company. Interest ispayable monthly on the principal amount outstanding from time to timeat a rate of interest equal to the prime rate plus 1.50%although the interest rate will increase to the prime rate plus2.50% if the Company fails to meet certain of the financialcovenants set forth in the Loan Agreement. The maturity date of theloan is August 9, 2006. As described in greater detail in the LoanAgreement, the loan is subject to acceleration upon breach of: (i) acovenant tested monthly regarding the ratio of unrestricted cash andnet billed accounts receivable to current liabilities minus deferredrevenue, (ii) a covenant tested quarterly regarding the Company'sEBITDAS (earnings before interest expense (excluding interest income),taxes, depreciation, amortization and stock compensation expense inaccordance with GAAP), and (iii) other customary non-financialcovenants. The Loan Agreement included a waiver of the Company'sJune 30, 2005 financial covenant default under the prior loan agreementbetween the Company and Silicon Valley Bank.

As ofSeptember 30, 2005, there was $1,500 outstanding under the AmendedAgreement and availability was $2,195. During October 2005, the Companyrepaid all outstanding amounts under the AmendedAgreement.

As of September 30, 2005, the Company was incompliance with all covenants with the exception of a"transition event" covenant which requiresthe Company to maintain an adjusted quick ratio greater than or equalto of 1.6 to 1.0. The Company's adjusted quick ratio at September30, 2005 was 1.592 to 1.0. On November 7, 2005, Silicon Valley Bankgranted a waiver on the transition event covenant as of September 30,2005 and therefore did not require the Company to transition to thehigher-interest debt facility. The waiver was for the September 30,2005 date only.

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Results of Operations

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

|                                  |  |                                     |        |                                    |  |            |         |                          |  |        |        |         |  |        |        |          |  |  |
|----------------------------------|--|-------------------------------------|--------|------------------------------------|--|------------|---------|--------------------------|--|--------|--------|---------|--|--------|--------|----------|--|--|
|                             |  | ThreeMonths EndedSeptember 30, 2005 |        | Three MonthsEndedSeptember 30,2004 |
| (inthousands)                    |  | AsReported                          |        | Data asapercent ofrevenue          |  | AsReported |         | Data asapercentofrevenue |
|                             |  | (Unaudited)                         |        | (Unaudited)                        |
| Revenues:                        |  |                                |   |                               |  |       |    |                     |  |   |   |    |  |   |   |     |
| Licensefees                      |  | $                                   | 2,528  |                               |  |       | 27.0    | %                   |  | $      | 1,306  |    |  |   | 14.3   | %   |
| Services                         |  |                                | 6,797  |                               |  |       | 72.7    |                     |  |   | 7,759  |    |  |   | 84.8   |     |
| Other-relatedparties             |  |                                | 32     |                               |  |       | 0.3     |                     |  |   | 80     |    |  |   | 0.9    |     |
| Totalrevenues                    |  |                                | 9,357  |                               |  |       | 100.0   |                     |  |   | 9,145  |    |  |   | 100.0  |     |
| Operatingexpenses:               |  |                                |   |                               |  |       |    |                     |  |   |   |    |  |   |   |     |
| Cost of licensefees              |  |                                | 405    |                               |  |       | 4.3     |                     |  |   | 693    |    |  |   | 7.6    |     |
| Costofservices                   |  |                                | 3,630  |                               |  |       | 38.8    |                     |  |   | 4,129  |    |  |   | 45.2   |     |
| Salesandmarketing                |  |                                | 2,218  |                               |  |       | 23.7    |                     |  |   | 2,271  |    |  |   | 24.8   |     |
| Researchanddevelopment           |  |                                | 1,838  |                               |  |       | 19.7    |                     |  |   | 2,081  |    |  |   | 22.8   |     |
| Generalandadministrative         |  |                                | 1,163  |                               |  |       | 12.4    |                     |  |   | 1,714  |    |  |   | 18.7   |     |
| Restructuringand othercosts      |  |                                | 0      |                               |  |       | — |                     |  |   | (83    | )  |  |   | (0.9   | )   |
| Totaloperatingexpenses           |  |                                | 9,254  |                               |  |       | 98.9    |                     |  |   | 10,805 |    |  |   | 118.2  |     |
| Operatingincome(loss)            |  |                                | 103    |                               |  |       | 1.1     |                     |  |   | (1,660 | )  |  |   | (18.2  | )   |
| Otherincome (expense):           |  |                                |   |                               |  |       |    |                     |  |   |   |    |  |   |   |     |
| Equity in losses of jointventure |  |                                | (17    | )                             |  |       | (0.2    | )                   |  |   | (40    | )  |  |   | (0.4   | )   |
| Otherincome (expense),net        |  |                                | 91     |                               |  |       | 1.0     |                     |  |   | 23     |    |  |   | 0.3    |     |
| Otherincome (expense),net        |  |                                | 74     |                               |  |       | 0.8     |                     |  |   | (17    | )  |  |   | (0.1   | )   |
| Netincome (loss) beforetaxes     |  |                                | 177    |                               |  |       | 1.9     |                     |  |   | (1,677 | )  |  |   | (18.3  | )   |
| Incometaxbenefit                 |  |                                | 0      |                               |  |       | — |                     |  |   | 18     |    |  |   | 0.2    |     |
| Netincome(loss)                  |  | $                                   | 177    |                               |  |       | 1.9     | %                   |  | $      | (1,659 | )  |  |   | (18.1  | )%  |
|                                  |

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|                                  |  |                                    |        |                                   |  |            |        |                          |  |        |        |         |  |        |        |          |  |  |
|----------------------------------|--|------------------------------------|--------|-----------------------------------|--|------------|--------|--------------------------|--|--------|--------|---------|--|--------|--------|----------|--|--|
|                             |  | NineMonths EndedSeptember 30, 2005 |        | Nine MonthsEndedSeptember 30,2004 |
| (inthousands)                    |  | AsReported                         |        | Data asapercent ofrevenue         |  | AsReported |        | Data asapercentofrevenue |
|                             |  | (Unaudited)                        |        | (Unaudited)                       |
| Revenues:                        |  |                               |   |                              |  |       |   |                     |  |   |   |    |  |   |   |     |
| Licensefees                      |  | $                                  | 4,068  |                              |  |       | 16.3   | %                   |  | $      | 4,770  |    |  |   | 16.1   | %   |
| Services                         |  |                               | 20,757 |                              |  |       | 83.4   |                     |  |   | 24,621 |    |  |   | 83.3   |     |
| Other-relatedparties             |  |                               | 69     |                              |  |       | 0.3    |                     |  |   | 181    |    |  |   | 0.6    |     |
| Totalrevenues                    |  |                               | 24,894 |                              |  |       | 100.0  |                     |  |   | 29,572 |    |  |   | 100.0  |     |
| Operatingexpenses:               |  |                               |   |                              |  |       |   |                     |  |   |   |    |  |   |   |     |
| Cost of licensefees              |  |                               | 1,175  |                              |  |       | 4.7    |                     |  |   | 1,479  |    |  |   | 5.0    |     |
| Costofservices                   |  |                               | 12,672 |                              |  |       | 50.9   |                     |  |   | 12,926 |    |  |   | 43.7   |     |
| Salesandmarketing                |  |                               | 7,329  |                              |  |       | 29.4   |                     |  |   | 6,696  |    |  |   | 22.6   |     |
| Researchanddevelopment           |  |                               | 5,973  |                              |  |       | 24.0   |                     |  |   | 6,017  |    |  |   | 20.3   |     |
| Generalandadministrative         |  |                               | 3,948  |                              |  |       | 15.9   |                     |  |   | 4,811  |    |  |   | 16.3   |     |
| Restructuringand othercosts      |  |                               | 863    |                              |  |       | 3.5    |                     |  |   | 1,020  |    |  |   | 3.4    |     |
| Totaloperatingexpenses           |  |                               | 31,960 |                              |  |       | 128.4  |                     |  |   | 32,949 |    |  |   | 111.4  |     |
| Operatingincome(loss)            |  |                               | (7,066 | )                            |  |       | (28.4  | )                   |  |   | (3,377 | )  |  |   | (11.4  | )   |
| Otherincome (expense):           |  |                               |   |                              |  |       |   |                     |  |   |   |    |  |   |   |     |
| Equity in losses of jointventure |  |                               | (44    | )                            |  |       | (0.2   | )                   |  |   | (122   | )  |  |   | (0.4   | )   |
| Otherincome (expense),net        |  |                               | (266   | )                            |  |       | (1.0   | )                   |  |   | 23     |    |  |   | (0.1   | )   |
| Otherexpense,net                 |  |                               | (310   | )                            |  |       | (1.2   | )                   |  |   | (99    | )  |  |   | (0.3   | )   |
| Netincome (loss) beforetaxes     |  |                               | (7,376 | )                            |  |       | (29.6  | )                   |  |   | (3,476 | )  |  |   | (11.8  | )   |
| Incometax benefit(expense)       |  |                               | 25     |                              |  |       | 0.1    |                     |  |   | (10    | )  |  |   | (0.0   | )   |
| Netincome(loss)                  |  | $                                  | (7,351 | )                            |  |       | (29.5  | )%                  |  | $      | (3,486 | )  |  |   | (11.8  | )%  |
|                                  |

Comparisonof Three Months Ended September 30, 2005 to2004

Revenues

Total revenuesincreased $0.2 million or 2.3% for the three months endedSeptember 30, 2005 as compared to the corresponding prior year perioddue to a $1.2 million or 93.6% increase in license feespartially offset by a $1.0 million or 12.9% decrease in servicesrevenues. The increase in license fees is mainly the result of anincrease in license fees for our RCM products, including one licensefee of $1.0 million.

For both periods, we had aconcentration of total revenues within a few select customers. Totalrevenues for the three months ended September 30, 2005 included $1.7million or 18.1% of total revenues from one customer. Totalrevenues for the three months ended September 30, 2004 includedapproximately $1.1 million or 12.5% and $1.1 million or11.7% of total revenues from two customers,respectively.

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

|                       |  |                                |       |          |  |        |       |          |  |        |       |        |  |        |       |         |  |  |
|-----------------------|--|--------------------------------|-------|----------|--|--------|-------|----------|--|--------|-------|--------|--|--------|-------|---------|--|--|
|                  |  | ThreeMonths Ended September30, |       |     |  |   |       |     |  |   |
|                  |  | 2005                           |       | 2004     |  |   |       |     |
| (dollarsin thousands) |  | Amount                         |       | %ofTotal |  | Amount |       | %ofTotal |
| Maintenance           |  | $                              | 4,176 |     |  |   | 61.4  | %   |  | $      | 4,371 |   |  |   | 56.3  | %  |
| Consulting            |  |                           | 2,531 |     |  |   | 37.2  | %   |  |   | 3,208 |   |  |   | 41.4  | %  |
| Training              |  |                           | 13    |     |  |   | 0.2   | %   |  |   | 8     |   |  |   | 0.1   | %  |
| Customprogramming     |  |                           | 77    |     |  |   | 1.1   | %   |  |   | 172   |   |  |   | 2.2   | %  |
| Totalservicesrevenue  |  | $                              | 6,797 |     |  |   | 100.0 | %   |  | $      | 7,759 |   |  |   | 100.0 | %  |
|                       |

Thedecrease in services revenues is mainly a result of decreases of $195in maintenance revenue (caused by the revenue reduction frommaintenance cancellations of enterprise financials customers exceedingnew maintenance revenue from records compliance customers) and lowerconsulting revenue from our enterprise financials product line.

Other-Related Party revenues, as shown in the table below,include management/directors’ fees and consulting revenue fromAfrican Solutions.

|                                 |  |                                 |         |        |  |        |    |        |  |  |
|---------------------------------|--|---------------------------------|---------|--------|--|--------|----|--------|--|--|
|                            |  | ThreeMonths Ended September 30, |
| (dollarsinthousands)            |  | 2005                            |         | 2004   |
| Management/Directors’fees |  | $                               | — |   |  | $      | 10 |   |
| Consultingrevenue               |  |                            | 32      |   |  |   | 70 |   |
| Totalrevenues                   |  | $                               | 32      |   |  | $      | 80 |   |
|                                 |

Thedecrease in management/directors’ fee revenue for the threemonths ended September 30, 2005 as compared to the same period in 2004resulted from our decision in the fourth quarter of 2004 to temporarilystop charging management fees until African Solutions becomesprofitable. The decrease in consulting revenue resulted from decreaseduse of consultants from African Solutions, choosing instead to utilizeour own internal staff.

OperatingExpenses

Cost of license fees consist primarily ofamortization of capitalized software development costs and amounts paidto third parties with respect to products we resell in conjunction withthe licensing of our products. The elements can vary substantially fromperiod to period as a percentage of license fees. Cost of license feesdecreased $0.3 million or 42% for the three months endedSeptember 30, 2005, as compared to the corresponding prior year periodmainly as a result of a decrease in royalties for third party softwareused in conjunction with our software (which includes both embeddedsoftware and separately sold software).

Cost of servicesconsists primarily of personnel and third party costs for productquality assurance, training, installation, consulting and customersupport. Cost of services decreased $0.5 million or 12% for thethree months ended September 30, 2005 as compared to the correspondingprior year period. The decrease for the three-month period was mainlydue to decreases of $0.3 million in compensation expenses resultingfrom lower headcount and $0.2 million in third party services expenses,each primarily in the US operations.

Sales and marketingexpenses consist primarily of salaries, commissions and bonuses relatedto sales and marketing personnel, as well as travel and promotionalexpenses. Sales and marketing expenses decreased $0.1 million or2% for the three months ended September 30, 2005, as compared tothe corresponding prior year period. The decrease is primarily theresult of a decrease of $0.1 million in employee recruitingexpenses.

Research and development expenses consistprimarily of personnel costs, costs of equipment, facilities and thirdparty software development costs. Research and development expenses aregenerally charged 

22

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to operations as incurred. However, certainsoftware development costs are capitalized in accordance with Statementof Financial 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.

Research anddevelopment expenses (net of capitalized software development costs)decreased $0.2 million or 12% for the three months endedSeptember 30, 2005 as compared to the comparable prior year period. Thedecrease is primarily the result of a decrease in compensation expense(resulting from lower headcount) and related costs, along with adecrease 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 $0.6 million or 32% for the three monthsended September 30, 2005 as compared to the corresponding prior yearperiod. The decrease for the three months is primarily as a result of adecrease of $0.4 million in the provision for bad debt in our foreignlocations of which $0.3 million was recognized in 2004 related to onecustomer in the South African operations, a decrease in personnelrelated expenses of $0.1 million and a decrease in professionalservices of $0.1 million.

Restructuring and other costs:On June 30, 2004, in order to streamline and reorganize our operationsto better meet our long-term goals, we eliminated 25 positions in theUnited States and 11 positions in our foreign operations. We recorded acharge to operations in the second quarter totaling approximately $0.8million related to involuntary termination benefits to be paid to theterminated employees. In the third quarter of 2004, we reduced therestructuring charge by approximately $0.1 million mainly resultingfrom our decision to retain two people in our foreign operations. Therewas no restructuring activity in the third quarter of2005.

Operating Income (Loss)

Operatingincome increased $1.8 million for the three months ended September 30,2005 as compared to the corresponding prior year period due mainly to adecrease of $1.6 million in operating expenses and an increase in totalrevenue of $0.2 million.

Other Income (Expense),Net

Other income (expense), net improved $91 thousandto a net income of $74 thousand for the three months ended September30, 2005, as compared to $17 thousand expense in the same period in2004. The improvement is principally related to foreign currencyexchange rate fluctuations.

Income Tax Benefit(Expense)

The income tax benefit of $18 thousand forthe three months ended September 30, 2004 represents an adjustment tothe estimated taxes due on earnings in our South Africansubsidiary.

Comparison of Nine Months Ended September 30, 2005to 2004

Revenues

Total revenues decreased$4.7 million or 16% for the nine months ended September 30,2005, as compared to the corresponding prior year period. The decreasefor the nine-month period is mainly attributable to a decrease of $3.9million in services revenues and by a decrease of $0.7 million inlicense revenue. The decrease in services revenue is mainlyattributable to a $5.2 million decrease in service revenue for ourenterprise financials software, offset by a $1.2 million increase inservice revenue for our records compliance managementsoftware.

No one customer represented more than 10%of total revenue for the nine months ended September 30, 2005. Totalrevenues for the nine months ended September 30, 2004 included $3.0million or 10.1% and $4.9 million or 16.6% of totalrevenues from two customers, respectively.

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

|                       |  |                               |        |          |  |        |       |          |  |        |        |        |  |        |       |         |  |  |
|-----------------------|--|-------------------------------|--------|----------|--|--------|-------|----------|--|--------|--------|--------|--|--------|-------|---------|--|--|
|                  |  | NineMonths Ended September30, |        |     |  |   |       |     |  |   |
|                  |  | 2005                          |        | 2004     |  |   |       |     |
| (dollarsin thousands) |  | Amount                        |        | %ofTotal |  | Amount |       | %ofTotal |
| Maintenance           |  | $                             | 12,540 |     |  |   | 60.4  | %   |  | $      | 12,961 |   |  |   | 52.6  | %  |
| Consulting            |  |                          | 7,991  |     |  |   | 38.5  | %   |  |   | 11,074 |   |  |   | 45.0  | %  |
| Training              |  |                          | 22     |     |  |   | 0.1   | %   |  |   | 45     |   |  |   | 0.2   | %  |
| Customprogramming     |  |                          | 204    |     |  |   | 1.0   | %   |  |   | 541    |   |  |   | 2.2   | %  |
| Totalservicesrevenue  |  | $                             | 20,757 |     |  |   | 100.0 | %   |  | $      | 24,621 |   |  |   | 100.0 | %  |
|                       |

Thedecrease in services revenues is principally the result of a decreaseof $421 thousand in maintenance revenue (caused by the revenuereduction from maintenance cancellations of enterprise financialscustomers exceeding new maintenance revenue from records compliancecustomers) and a decrease of $3.1 million in consulting revenue due tolower consulting revenue from our enterprise financials product line,slightly offset by higher consulting revenue from our recordscompliance management products.

The following table setsforth, for the periods indicated, each category of other related partyrevenue:

|                                        |  |                                |         |        |  |        |     |        |  |  |
|----------------------------------------|--|--------------------------------|---------|--------|--|--------|-----|--------|--|--|
|                                   |  | NineMonths Ended September 30, |
| (dollarsinthousands)                   |  | 2005                           |         | 2004   |
| Management/Directors’fee revenue |  | $                              | — |   |  | $      | 28  |   |
| Consultingrevenue                      |  |                           | 69      |   |  |   | 153 |   |
| Totalrevenues                          |  | $                              | 69      |   |  | $      | 181 |   |
|                                        |

Thedecrease in management/directors’ fee revenue for the threemonths ended September 30, 2005 as compared to the same period in 2004resulted from our decision in the fourth quarter of 2004 to temporarilystop charging management fees until African Solutions becomesprofitable. The decrease in consulting revenue resulted from decreaseduse of consultants from African Solutions, choosing instead to utilizeour own internal staff.

OperatingExpenses

Cost of license fees decreased $0.3 millionfor the nine months ended September 30, 2005, as compared to thecorresponding prior year period. This reduction resulted from adecrease of $0.2 million in amortization of capitalized softwaredevelopment costs and a decrease of $0.1 million in third partysoftware royalty fees.

Cost of services decreased $0.3million or 2.0% for the nine months ended September 30, 2005 ascompared to the corresponding prior year period. The decrease ispartially due to a decrease of $0.2 million in variable compensationresulting from a decrease in revenue, a decrease in billable expense of$0.3 million, a decrease of personnel related expenses of $0.2 million,and decrease in third party services of $0.1 million. These decreaseswere partially offset by an increase of $0.5 million in temps andconsultants expense due to the use of temporary consultants tosupplement our internal employees on a large project in our SouthAfrican operations.

Sales and marketing expenses increased$0.6 million or 9.5% for the nine months ended September 30,2005 as compared to the corresponding prior year period. The increaseis primarily a result of increases of $0.7 million in salaries andrelated benefits due to the upgrade of our sales and marketingpersonnel during the period.

Research and developmentexpenses (net of capitalized software development costs) were flat forthe nine months ended September 30, 2005, as compared to thecorresponding prior year period. Capitalized software development costswere $0.6 million in 2004 and only $18 thousand in 2005. This increasein expense was offset by a $0.4 million of reduction in compensationexpense resulting from lower headcount and a reduction of $0.2 millionof outside consultants expenses.

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General and administrative expensesdecreased $0.9 million or 17.9% for the nine months endedSeptember 30, 2005 as compared to the corresponding prior year period.The decrease is primarily the result of a decrease of $0.4 million inthe provision for bad debt in our foreign locations of which $0.3million recognized in 2004 related to one customer in our South Africanoperations, a decrease of $0.2 million in temps and consultantsexpenses, a decrease of $0.2 million in professional fees and adecrease of $0.2 million of compensation expense.

On June30, 2005, in order to reduce operating costs to better positionourselves in the current market, we eliminated 22 positions in theUnited States and 6 positions in our foreign operations. We recorded acharge to operations in the second quarter totaling $0.9 millionrelated to involuntary termination benefits to be paid to theterminated employees. On June 30, 2004, we eliminated 25 positions inthe United States and 11 positions in our foreign operations andrecorded a charge to operations in the second quarter totalingapproximately $0.8 million related to involuntary termination benefitswhich were subsequently paid to the terminated employees. (See Note 7to the Consolidated Interim Financial Statements.)

Inaddition, as of June 30, 2004, we expensed approximately $0.3 millionrelated to a retirement agreement with our former CEO. The retirementbenefits were paid in the first quarter of 2005.

OperatingIncome (Loss)

Operating loss increased $3.7 millionfor the nine months ended September 30, 2005 as compared to the sameperiod in 2004 due to a decrease of $4.7 million in total revenuesoffset partially by a decrease of $1.0 million in operatingexpenses.

Other (Expense), Net

Otherexpense, net increased $0.2 million for the nine months ended September30, 2005 as compared to the same period in 2004, due primarily toforeign exchange losses in our U.K. and South African subsidiaries.Equity in losses of joint venture decreased $78,000.

IncomeTax Benefit (Expense)

The income tax benefit of$25,000 for the nine months ended September 30, 2005 represents arefund of prior year taxes paid by our U.K. subsidiary. The income taxprovision of $10,000 for the nine months ended September 30, 2004represented foreign taxes due in our South Africansubsidiary.

Liquidity and Capital Resources

OnJune 21, 2005 and September 21, 2005 we completed a private placementof shares of common stock that resulted in the receipt of net proceedsof approximately $5.8 million and $0.7 million, respectively. On April5, 2004, we completed a private placement of shares of common stockthat resulted in the receipt of net proceeds of approximately $7.7million (See Note 6 to the Consolidated Interim Financial Statements).Prior to that we had a Loan and Security Agreement that contained arevolving line of credit and a term loan (See Note 2 to theConsolidated Interim Financial Statements). The term loan was paid infull as of March 31, 2004, and no amounts remain outstanding. The Loanand Security Agreement terminated on May 28, 2004 as per theagreement.

On August 11, 2004, the Company entered into atwo-year Loan and Security Agreement (the‘‘Agreement’’) which contains a revolvingline of 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 Agreement (First Loan Modification) torevise the financial covenant based on EBITDA for the six months endedDecember 31, 2004. We were in compliance with this revised covenant andall other covenants as of December 31, 2004.

On March 28,2005, we further amended the Agreement (Second Loan Modification) inorder to set the EBITDA and adjusted quick ratio quarterly covenantsfor 2005. We were out of compliance with the EBITDA covenant as of June30, 2005.

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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 default under the SecondLoan Modification.

As of September 30, 2005, there was$1,500 outstanding under the Amended Agreement and availability was$2,195. During October 2005, the Company repaid all outstanding amountsunder the Amended Agreement.

As of September 30, 2005, theCompany was in compliance with all covenants with the exception of a"transition event" covenant which requiresthe Company to maintain an adjusted quick ratio greater than or equalto of 1.6 to 1.0. The Company's adjusted quick ratio at September30, 2005 was 1.592 to 1.0. On November 7, 2005, Silicon Valley Bankgranted a waiver on the transition event covenant as of September 30,2005 and therefore did not require the Company to transition to thehigher-interest debt facility. The waiver was for the September 30,2005 date only.

Our operating activities used cash of $8.9million and $2.9 million for the nine months ended September 30, 2005and 2004, respectively. Net cash used by operating activities duringthe nine months ended September 30, 2005 is primarily the result of thenet loss, a decrease in deferred revenue and a decrease in accountspayable and accrued expenses, offset partially by non-cash depreciationand amortization and a decrease in accounts receivable. The decrease indeferred revenue is mainly the result of a decrease in long-termdeferred revenue as nine months of a two year pre-paid maintenanceagreement with one large customer have now been substantiallyrecognized as revenue. The decrease in accounts payable and accruedexpenses in 2005 is mainly due to timing of payments and lower bonusaccruals. The decrease in accounts receivable in 2005, mainly in USoperations, is due to lower revenue during the current year as well asbetter collections from customers in 2005 compared to 2004.

Our investing activities used cash of $0.1 million and $0.9million for the nine months ended September 30, 2005 and 2004,respectively. The use of cash for 2005 was primarily for the purchaseof computer equipment for the Company’s internal operations. Theuse of cash for 2004 was primarily for capitalized software developmentcosts and for the purchase of computer equipment.

Cashprovided by financing activities was $8.8 million and 7.6 million forthe nine months ended September 30, 2005 and 2004, respectively. Forthe nine months ended September 30, 2005, cash was primarily providedfrom the net proceeds received from the private placement, the exerciseof stock options and warrants during the period, and by borrowingsunder the Company’s debt facility. For the nine months endedSeptember 30, 2004, cash was primarily provided by the net proceedsreceived from the private placement and the exercise of stock optionsand warrants during the period. This was partially offset by thepayment of the remaining balance of the then outstanding term loan.

We have no significant capital commitments. Planned capitalexpenditures for the year 2005 are expected to be less than $0.5million, including any software development costs that may qualify forcapitalization under SFAS 86. Our aggregate minimum operating leasepayments for 2005 will be approximately $1.9 million. Our aggregateminimum royalties payable to third party software providers inaccordance with 2005 agreements for third party software used inconjunction with our software is approximately $50,000 for theremainder of 2005. Future commitments to third party software providersare as follows:

(inthousands)

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

Wegenerated a net loss of ($7.4) million for the nine months endedSeptember 30, 2005 and ($5.2) million for the year ended December 31,2004 after generating net income of $2.3 million and $1.9 million forthe years ended December 31, 2003 and 2002, respectively. For the ninemonths ended September 30, 2005 

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and the year ended December 31, 2004, 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 of 2005 and 2004, the private placements ofcommon stock in April of 2004 and June of 2005 and 10% salarycuts of executive management for most of the second half of 2005, havebeen designed to improve operating results and liquidity and betterposition AXS-One to compete under current market conditions. As aresult of these efforts, we expect that our current cash balance,availability of borrowing capacity under our bank line of credit, andoperating cash flow should be sufficient to meet the short-termrequirements of the business. However, we may in the future be requiredto seek new sources of financing or future accommodations from ourexisting lender or other financial institutions, or we may seek equityinfusions from private investors. We may also be required to furtherreduce operating costs in order to meet our obligations. Our ability tofund our operations beyond 2005 is heavily dependent on the growth ofour revenues over current levels to achieve profitable operations.Additionally, there is a risk that cash held by our foreignsubsidiaries may not be readily available for use in our U.S.operations to pay our obligations as the transfer of funds is sometimesdelayed due to various foreign government restrictions. No assurancecan be given that management’s initiatives will be successful orthat any such additional sources of financing, lender accommodations orequity infusions will be available.

SegmentInformation

AXS-One EnterpriseSolutions

For the three and nine months endedSeptember 30, 2005, license fee revenues were $0.5 million and $1.3million, respectively, compared to $0.4 million and $1.2 million,respectively, for the comparable prior year period. License fees haveremained fairly consistent, as we have continued to license newsoftware modules and additional users for previously licensed modulesto our existing customers. Service revenues for the three and ninemonths ended September 30, 2005 were $5.1 million and $15.2 million,respectively, compared to $6.2 million and $20.4 million, respectively,for the comparable prior year period. In 2004 we had a large consultingproject with one customer that was substantially completed by the endof the third quarter of 2004. There is no similar project in 2005.Enterprise Solutions had operating income of $2.4 million and $5.8million, respectively, for the three and nine months ended September30, 2005 as compared to $0.1 million and $0.5 million, respectively,for the comparable prior year periods. Operating income increasedprimarily as a result of reductions of expenses in all areas relativeto this operating segment as the Company’s focus has shifted tothe development of Records Compliance Platform Solutions. We continueto maintain a qualified staff to develop, enhance, support and maintainour financial modules for our customer base.

RecordsCompliance Platform Solutions

Records CompliancePlatform Solutions had license fee revenues of $2.0 million and $2.8million, respectively, for the three and nine months ended September30, 2005, compared to $0.9 million and $3.5 million, respectively forthe comparable prior year periods. The increase in license fee revenuesfor the quarter was primarily due to an increase in the number oforders for these products, including one order which exceeded $1million of license revenue recognized in the third quarter. Theservices revenues for the three and nine months ended September 30,2005 were $1.7 million and $5.5 million, respectively, compared to $1.5million and $4.3 million, respectively, for the comparable prior yearperiods. The increase in services revenues was from implementationprojects resulting from licenses entered into during the fourth quarterof 2004, as well as from new license contracts entered into in 2005.The Company’s service revenues are generally driven by newlicense orders. Records Compliance Platform Solutions generatedoperating losses for the three and nine months ended September 30, 2005of $0.6 million and $7.2 million, respectively, as compared tooperating income of $0.5 million and $2.4 million, respectively, forthe comparable prior year periods. The operating losses are the resultof increased expenses in all areas to develop, market and support thisgrowing operating segment. A reconciliation of segment operating incometo consolidated operating income is provided in Note 4 of theConsolidated Interim Financial Statements providedherin.

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Critical Accounting Policies

Our critical accounting policies are as follows:

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

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

Revenue Recognition

Wederive our revenue primarily from two sources: (i) software licensesand (ii) services and support revenue, which includes softwaremaintenance, hosting services, training, consulting and customprogramming revenue. We also derive a limited amount of consultingrevenue and directors’ fees from the related party joint venturein South Africa (less than 1% of total revenue in 2004). Asdescribed below, significant management judgments and estimates must bemade and used in connection with the revenue recognized in anyaccounting period. Material differences may result in the amount andtiming of our revenue for any period if our management made differentjudgments or utilized different estimates.

We normallylicense our software products on a perpetual basis. Each licenseagreement generally includes a provision for initial post-contractsupport (maintenance). For the majority of license sales we use asigned license agreement as evidence of an arrangement. For maintenancefees, we use a maintenance agreement as evidence of the arrangement. Weuse a professional services agreement as evidence of an arrangement forour training, custom programming and consulting revenues. Occasionally,where a master license or services agreement with a customer alreadyexists, we accept the customer’s purchase order as evidence ofan arrangement. Director fee revenues from our joint venture areevidenced by a master agreement governing therelationship.

We recognize revenue in accordance withStatement of Position 97-2, ‘‘Software RevenueRecognition’’ (‘‘SOP 97-2’’),and Statement of Position 98-9, ‘‘Modification of SOP97-2, Software Revenue Recognition, With Respect to CertainTransactions.’’ Revenue from non-cancelable softwarelicenses is recognized when the license agreement has been signed,delivery has occurred, the fee is fixed or determinable andcollectibility is probable. The Company recognizes revenue fromresellers when an end user has placed an order with the reseller andthe above revenue recognition criteria have been met with respect tothe reseller. In multiple element arrangements, we defer thevendor-specific objective evidence of fair value(‘‘VSOE’’) related to 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 ofmaintenance is determined by using a consistent percentage ofmaintenance fee to license fee based on renewal rates. Maintenance feesin subsequent years are recognized on a straight-line basis over thelife of the applicable agreement. Maintenance contracts entitle thecustomer to hot-line support and all unspecified product upgradesreleased during the term of the maintenance contract. Upgrades includeany and all unspecified patches or releases related to a licensedsoftware product. Maintenance does not include implementation servicesto install these upgrades. The VSOE of services is determined by usingan average consulting rate per hour for consulting services soldseparately multiplied by the estimate of hours required to complete theconsulting engagement.

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

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

The majority ofour training and consulting services are billed based on hourly rates.We generally recognize revenue as these services are performed.However, when we enter into an arrangement that is 

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based on a fixed fee or requires us toperform significant work either to alter the underlying software or tobuild additional complex interfaces so that the software performs asthe customer requests, we recognize the related 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.

Revenuesfrom transaction fees associated with a hosting arrangement, billableon a per transaction basis and included in services revenue on theUnaudited Consolidated Statements of Operations, are recognized basedon the actual number of transactions processed during the period.

Revenues from joint ventures (included in Revenues:Other-Related Parties in our Consolidated Statements of Operations)includes consulting revenue for the joint ventures’ use of ourSouth African subsidiary’s consultants and directors’fees (during the 2004 period only) in accordance with the joint ventureagreement. Revenue is recognized upon performance of theservices.

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

Our arrangements do not generally include acceptance clauses.However, if an arrangement includes an acceptance provision, acceptanceoccurs upon the earliest of receipt of a written customer acceptance,expiration of the acceptance period or productive use of the softwareby the customer.

Capitalized Software DevelopmentCosts

Our policy is to capitalize certain softwaredevelopment costs in accordance with Statement of Financial AccountingStandards No. 86, ‘‘Accounting for the Costs of ComputerSoftware to Be Sold, Leased, or Otherwise Marketed’’(‘‘SFAS 86’’). Under SFAS 86, costsincurred to develop or significantly enhance computer software productsare charged to research and development expense as incurred untiltechnological feasibility has been established. We establishtechnological feasibility upon completion of a working model orcompletion of a detailed program design. Generally costs related toprojects that reach technological feasibility upon completion of aworking model are not capitalized as the time period betweenestablishment of the working model and general availability is of shortduration. For projects that meet technological feasibility uponcompletion of a detailed program design, all research and developmentcosts for that project are capitalized from that point until theproduct is available for general release to customers. Theestablishment of technological feasibility and the ongoing assessmentof recoverability of capitalized software development costs requireconsiderable judgment by management with respect to certain externalfactors, including, but not limited to, anticipated future revenues,estimated economic life and changes in technology. It is reasonablypossible that estimates of anticipated future revenues, the remainingestimated economic life of the products, or both will be reduced in thefuture due to competitive pressures. As a result, the carrying amountof the capitalized software costs may be reduced through a charge tooperations in the near term. Upon the general release of the softwareproduct to customers, capitalization ceases and such costs areamortized (using the straight-line method) over the estimated life,which is generally three years.

Recently Issued AccountingStandards

In December 2004, the FASB issued SFAS No. 123(revised 2004), ‘‘Share-Based Payment’’(SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB OpinionNo. 25. SFAS No. 123R addresses the accounting for transactions inwhich an enterprise receives employee services in exchange for (a)equity instruments of the enterprise or (b) liabilities that are basedon the fair value of the enterprise's equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS No.123R requires all share-based payments to employees, including grantsof employee stock options and restrictive stock grants, to berecognized as a compensation cost based on their fair values. The proforma disclosures previously permitted under SFAS No. 123 no longerwill be an alternative to financial statement recognition. We arerequired to adopt SFAS No. 123R no later than January 1, 2006. UnderSFAS No. 

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123R, we must determine the appropriate fairvalue model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method tobe used at date of adoption. The transition methods include prospectiveand retroactive adoption options. Under the retroactive option, priorperiods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requiresthat compensation expense be recorded for all unvested stock optionsand restricted stock at the beginning of the first quarter of adoptionof SFAS No. 123R, while the retroactive methods would recordcompensation expense for all unvested stock options and restrictedstock beginning with the first period presented. On October 26, 2005,the Board of Directors of the Company approved the acceleration ofvesting of all unvested ‘‘out-of-themoney’’ stock options previously awarded to currentemployees and directors under the Company’s stock optionprogram. The accelerated options have exercise prices ranging from$2.15 to $6.25 with a weighted average exercise price of $2.99. Optionsto purchase approximately 2.2 million 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 theoptions until the earlier of the date such shares would have vestedunder the options’ original vesting terms or the date of theemployee’s or director’s termination from the Company. Asa result of this acceleration, the Company expects to reduce the stockcompensation expense it otherwise would be required to record beginningin January 2006 upon adoption of SFAS 123R by approximately $4.1million over a weighted average period of 1.82 years. In making thedecision to accelerate these options, the Board of Directors consideredthe interests of the Company’s stockholders as this accelerationwill reduce compensation expense in future periods. The Company isevaluating whether the requirements under SFAS 123(R) will have asignificant impact on our consolidated statements of operations and netincome (loss) per common share.

On December 16, 2004, theFASB issued Statement No. 153, ‘‘Exchanges ofNon-monetary Assets,’’ an amendment of APB Opinion No.29. Statement No. 153 addresses the measurement of exchanges ofnon-monetary assets and redefines the scope of transactions that shouldbe measured based on the fair value of the assets exchanged. TheStatement is effective for non-monetary asset exchanges occurring infiscal periods beginning after June 15, 2005. We do not believeadoption of Statement No. 153 will have a material effect on ourconsolidated financial position, results of operations or cashflows.

On December 21, 2004, the FASB issued FASB StaffPosition No. FAS 109-2 (FAS 109-2), ‘‘Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provisionwithin the American Jobs Creation Act of 2004.’’ TheAmerican Jobs Creation Act introduces a special one-time dividendsreceived deduction on the repatriation of certain foreign earnings to aU.S. taxpayer (repatriation provision), provided certain criteria aremet. FAS 109-2 provides accounting and disclosure guidance for therepatriation provision. FAS 109-2 is effective immediately, though theTreasury Department or Congress is expected to provide additionalclarifying language on key elements of the repatriation provision. Theadoption of FAS 109-2 did not have a material effect on ourconsolidated financial position, results of operations or cash flows aswe do not currently have foreign earnings available forrepatriation.

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

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

See our 2004 Annual Report on Form 10K for adiscussion of risk factors.

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Item 3. Quantitative andQualitative Disclosures About Market Risk

In the normalcourse of business, we are exposed to fluctuations in interest ratesand equity market risks as we seek debt and equity capital to sustainour operations. We are also exposed to fluctuations in foreign currencyexchange rates as the financial results and financial conditions of ourforeign subsidiaries are translated into U.S. dollars in consolidation.We do not use derivative instruments or hedging to manage our exposuresand do not currently hold any market risk sensitive instruments fortrading purposes.

Item 4. Controls and Procedures

Evaluation of disclosure controls andprocedures

The Company maintains disclosure controlsand procedures that are designed to ensure that information required tobe disclosed in the Company's Exchange Act reports is recorded,processed, summarized and reported within the time periods specified inthe SEC's rules and forms, and that such information isaccumulated 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 andevaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

TheCompany carried out an evaluation, under the supervision and with theparticipation of the Company's management, including theCompany's Chief Executive Officer and the Company's ChiefFinancial Officer, of the effectiveness of the design and operation ofthe Company's disclosure controls and procedures as of September30, 2005. Based upon the foregoing, the Company's Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective as of September 30,2005.

Internal controls over financialreporting

There have been no changes in theCompany's internal control over financial reporting during thequarter ended September 30, 2005 that have materially affected, or arereasonably likely to materially affect, the Company's internalcontrol over financial reporting.

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Part II OtherInformation

Item 1. LegalProceedings

Historically, we have been involved indisputes and/or litigation encountered in our normal course ofbusiness. We believe that the ultimate outcome of these proceedingswill not have a material adverse effect on our business, consolidatedfinancial condition, results of operations or cash flows.

Item4. Submission of Matters to a Vote of SecurityHolders

At a special meeting of stockholders held onSeptember 20, 2005, the stockholders approved sales of common stock andissuance of warrants to Company management and Board members by thevotesindicated:

|            |  |               |  |             |  |                 |  |  |  |  |  |  |  |  |
|------------|--|---------------|--|-------------|--|-----------------|--|--|--|--|--|--|--|--|
| VotesFor   |  | Votes Against |  | Abstentions |  | BrokerNon-votes |
| 18,105,565 |  | 542,323       |  | 258,459     |  | —         |
|            |

Item5.    Other Information

At the Board meeting held onOctober 26, 2005, the Board reconstituted certain Board committees dueto the recent changes of Board of Directors of the Company. Outlinedbelow is the current composition of each Boardcommittee:

Audit CommitteeDaniel H.BurchHarold D. CoppermanAllan D.Weingarten

Compensation CommitteeRobert J.MigliorinoAllan D. WeingartenHarold D.Copperman

Nominating CommitteeAnthony H.BloomAllan D. WeingartenHarold D. Copperman

Item6. Exhibits

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

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SIGNATURES

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

|                                 |  |             |  |                                                                                                       |  |  |  |  |  |  |
|---------------------------------|--|-------------|--|-------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
|                            |  | AXS-ONEINC. |
|                            |  |        |  |                                                                                                  |
| **Date: **November14, 2005 |  | By:         |  | /s/ William P.Lyons                                                                                   |
|                            |  |        |  | William P. Lyons ChiefExecutive Officer and Chairman of theBoard                                      |
|                            |  |        |  |                                                                                                  |
|                            |  | By:    |  | /s/Joseph Dwyer                                                                                       |
|                            |  |        |  | JosephDwyerExecutive Vice President, Chief Financial Officer andTreasurer(Principal FinancialOfficer) |
|                                 |

33

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