AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

Management’s initiatives over the last two years, including the restructurings in June 2005 and 2004, the private placements of common stock in April 2004 and June 2005 and 10% salary cuts of executive management for most of the second half of 2005, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. As a result of these efforts, we expect that our current cash balance, availability of borrowing capacity under our bank line of credit, and operating cash flow should be sufficient to meet the short-term requirements of the business. However, we may in the future be required to seek new sources of financing or future accommodations from our existing lender or other financial institutions, or we may seek equity infusions from private investors or may seek to sell certain Company assets. We may also be required to further reduce operating costs in order to meet our obligations. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations. If we are unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about our ability to fund future operations. Additionally, there is a risk that cash held by our foreign subsidiaries may not be readily available for use in our U.S. operations to pay our obligations as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available.

(b)    Revenue Recognition

The Company recognizes revenue in accordance with Statement of Position 97-2, ‘‘Software Revenue Recognition’’ (‘‘SOP 97-2’’), and Statement of Position 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.’’ Revenue from non-cancelable software licenses, through both direct and indirect channels, is recognized when the license agreement has been signed or the customer purchase order has been received, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. For the majority of license sales the Company uses a signed license agreement as evidence of an arrangement. For maintenance fees, the Company uses a maintenance agreement as evidence of the arrangement. The Company uses a professional services agreement as evidence of an arrangement for training, custom programming and consulting revenues. Occasionally, where a master license or services agreement with a customer already exists, the Company accepts the customer’s purchase order as evidence of an arrangement.

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

In multiple element arrangements, the Company defers revenue based on the vendor-specific objective evidence (‘‘VSOE’’) of fair value of the undelivered elements and recognizes revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of fair value for maintenance is determined by using a consistent percentage of maintenance fees to discounted license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of fair value of services is determined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

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

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

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

Prior to the purchase of the remaining 51% of African Solutions on May 31, 2006, revenues from the joint venture (included in Revenues: Other-Related Parties in the unaudited Consolidated Statements of Operations) included consulting revenue for the joint venture’s use of the Company’s South African subsidiary’s consultants in accordance with the joint venture agreement. Revenue was recognized upon performance of the services.

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

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

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

(c)    Variable Interest Entity

The Company adopted FIN 46R as required on March 31, 2004. The Company had a 49% owned joint venture, African Solutions (Pty) Ltd (‘‘African Solutions’’), that was considered to be a variable interest entity as defined in FIN 46R. However, the Company determined that the majority owner at the time, African Legends Technology, absorbed the majority of the expected losses and therefore, African Legends Technology, was the primary beneficiary. Due to the fact that the Company was not the primary beneficiary of African Solutions, the adoption of FIN 46R did not have an impact on the Company’s consolidated financial position or results of operations.

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

African Solutions acted as a non-exclusive authorized third party service provider to provide consulting and implementation services, and as a non-exclusive representative in providing marketing and promotional services directly to the end users in regard to, among other things, AXS-One’s software products. African Solutions conducts business throughout the African continent where its target markets are the financial sector and government departments.

On May 31, 2006, the Company purchased the remaining 51% share of African Solutions from African Legends Technology for $161 less cash acquired of $20, to make it a wholly owned subsidiary. The Company applied purchase accounting to record the transaction. The purchase price was less than the fair value of assets acquired and therefore the Company wrote-down the value of all long-term assets to zero and recorded a gain of $37. Results prior to May 31, 2006 were recorded using the equity method of accounting. As of June 1, 2006, 100% of the results of African Solutions are included in the consolidated results of the Company. At the time of the acquisition the investment in the joint venture was $122. Proforma results as if African Solutions has been acquired on January 1, 2006 are not significantly different than the reported 2006 consolidated results.

Presented below is selected financial data for African Solutions for the three and six months ended June 30, 2006 and 2005, respectively.

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Total revenues				$	92					$	276					$	345					$	548
Operating (loss) income				$	(87	)				$	45					$	(91	)				$	50
Net loss				$	(106	)				$	(5	)				$	(161	)				$	(54	)
Amount of net loss recognized by AXS-One				$	(61	)				$	(2	)				$	(88	)				$	(26	)

(d)    Stock-Based Compensation

Historically, the Company accounted for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion (‘‘APB’’) No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), and related interpretations and disclosure provisions of Statement of Accounting Standards SFAS 123 ‘‘Accounting For Stock-Based Compensation’’. Under this pronouncement, no compensation expense related to stock option plans was reflected in the Company's Consolidated Statements of Operations as all options had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation cost for non-vested restricted stock grants was recorded based on its market value on the date of grant and was included in the Company's Consolidated Statements of Operations ratably over the vesting period. Upon the grant of non-vested stock, unearned stock compensation was recorded as an offset to additional paid-in capital and was amortized on a straight-line basis as compensation expense over the vesting period.

On January 1, 2006, the start of the first quarter of fiscal 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (revised 2004), ‘‘Share-Based Payment’’ (’’SFAS 123R’’) which requires that the costs resulting from all share-based payment transactions be recognized in the financial statements at their fair values. The Company adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards granted after the adoption date and to awards modified, repurchased, or cancelled after the adoption date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered that are outstanding as of the adoption date is recognized in the Consolidated Statement of Operations over the remaining service period after the adoption date based on the award's original estimate of fair value. In connection with the adoption of SFAS 123R, the unearned stock compensation at December 31, 2005 of $177 relating to previous grants of non-vested stock was offset against additional

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

paid-in capital during the first quarter of fiscal 2006. Results for prior periods have not been restated. Total share-based compensation expense recorded in the Consolidated Statements of Operations for the three and six months ended June 30, 2006 is $101 and $162, respectively.

As a result of adopting SFAS 123R on January 1, 2006, the Company's loss before income taxes and net loss for the three and six months ended June 30, 2006 are $55 and $107 higher than if it had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the three and six months ended June 30, 2006 did not change as a result of the Company adopting SFAS 123R.

On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (‘‘FSP 123R-3’’), ’’Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards,’’ that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R (the ‘‘APIC Pool’’) to the method otherwise required by paragraph 81 of SFAS 123R. The Company may take up to one year from the effective date of this FSP to evaluate its available alternatives and make its one-time election. The Company is currently evaluating the alternative methods; however, neither alternative would have an impact on the Company's results of operations or financial condition for the six months ended June 30, 2006, due to the fact that the Company is currently using prior period net operating losses and has not realized any tax benefits under SFAS 123R. Until and unless the Company elects the transition method described in this FSP, the Company will follow the transition method described in paragraph 81 of SFAS 123R.

On October 26, 2005, the Board of Directors of the Company approved the acceleration of vesting of all unvested ‘‘out-of-the money’’ stock options previously awarded to current employees and directors under the Company’s stock option plans. The accelerated options had exercise prices ranging from $2.15 to $6.25 with a weighted average exercise price of $2.99. Options to purchase approximately 2,200 shares became exercisable immediately as a result of the vesting acceleration. To avoid any unintended personal benefits, the Company also imposed a holding period on the shares underlying the accelerated options in the form of a Resale Restriction Agreement. This agreement requires all optionees to refrain from selling any shares acquired upon the exercise of the accelerated options until the earlier of the date such shares would have vested under the options’ original vesting terms or the date of the employee’s or director’s termination from the Company. As a result of this acceleration, the Company reduced the stock compensation expense it otherwise would have been required to record beginning in January 2006 upon adoption of SFAS 123R by approximately $4,100 over approximately 2.5 years. In making the decision to accelerate these options, the Board of Directors considered the interests of the Company’s stockholders, as this acceleration will reduce compensation expense in future periods.

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The following table illustrates the effect on net loss and net loss per common share applicable to common stockholders for the three and six months ended June 30, 2005, as if the Company had applied the fair value recognition provisions for stock-based employee compensation of SFAS 123, as amended:

			Three Months Ended June 30, 2005						Six Months Ended June 30, 2005
Net loss as reported					($4,359	)					($7,528	)
Add: Stock based compensation expense					10						19
Deduct: Total employee stock-based compensation determined under fair value based method for all awards					(451	)					(919	)
Pro forma net loss					($4,800	)					($8,428	)
Net loss per common share:
Basic and diluted – as reported					($0.15	)					($0.26	)
Basic and diluted – pro forma					($0.16	)					($0.29	)

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

The table below presents the assumptions used to calculate the fair value of options granted during the three and six months ended June 30, 2006 and 2005.

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Risk-free interest rate					4.90	%					4.22	%					4.60	%					4.70	%
Expected dividend yield					—						—						—						—
Expected lives			5 years						5 years						5 years						5 years
Expected volatility					85	%					101	%					92	%					100	%
Forfeiture rate					14.5	%					na						14.5	%					na
Weighted-average grant date fair value of options granted during the period				$	1.42					$	1.18					$	1.37					$	1.91

Stock Option Plans

The Company has three stock incentive plans: the 1995 Stock Option Plan (the 1995 Plan), the 1998 Stock Option Plan (the 1998 Plan), and the 2005 Stock Incentive Plan (the 2005 Plan). Under the 1995 Plan, the Company could grant up to 4,500 shares of common stock. The 1995 Plan has expired and no further options can be issued under this plan. Outstanding options under this plan will continue to vest. Under the 1998 Plan, the Company may grant stock options or stock appreciation rights to purchase an aggregate of up to 5,000 shares of Common Stock. In accordance with a June 2004 amendment, up to 300 shares of the total shares may be used for non-vested stock awards. Under the 2005 Plan, the Company may grant stock options, stock appreciation rights and non-vested stock to purchase an aggregate of up to 1,500 shares of Common Stock. All options granted under the forgoing plans expire ten years from the date of grant (or five years for statutory options granted to 10% stockholders), unless terminated earlier.

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

Substantially all options vest over a four-year period. For a more detailed description of all stock incentive plans, refer to the Company’s 2005 Annual Report on Form 10-K.

Stock option transactions for the six months ended June 30, 2006 under all plans are as follows:

			Number of Shares						Weighted Average Exercise Price						Weighted Average Remaining Contractual Life						Aggregate Intrinsic Value as of 6/30/06
Balance, December 31, 2005					6,370					$	2.31
Granted					254					$	1.91
Exercised					(255	)				$	0.87
Forfeited					(44	)				$	1.60
Expired					(495	)				$	2.53
Balance, June 30, 2006					5,830					$	2.34						6.25					$	1,601
Vested and Expected to Vest at June 30, 2006					5,647					$	2.36						0.17					$	1,580
Exercisable at June 30, 2006					4,960					$	2.48						5.81					$	1,433

The total intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $325 and $505, respectively, as compared to $258 and $3,425 for the three and six months ended June 30, 2005. As of June 30, 2006, there was approximately $615 of total unrecognized compensation cost related to stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.61 years.

A summary of stock options outstanding and exercisable as of June 30, 2006 follows:

			Options Outstanding																		Options Exercisable
Range of exercise prices			Number outstanding						Weighted average remaining life (years)						Weighted average exercise price						Number exercisable						Weighted average exercise price
$0.21 – $0.72					1,211						5.34					$	0.54						1,114					$	0.54
$0.75 – $1.73					1,186						4.95					$	1.36						769					$	1.28
$1.75 – $2.24					1,259						7.84					$	2.08						918					$	2.14
$2.36 – $4.21					1,700						7.31					$	3.48						1,684					$	3.49
$6.00 – $6.25					474						3.77					$	6.02						475					$	6.02
					5,830																		4,960

Non-Vested Stock

Compensation expense for non-vested stock was historically recorded based on its market value on the date of grant and recognized ratably over the associated service period, the period in which restrictions are removed. Compensation expense for non-vested stock was reported as unamortized stock compensation on the Consolidated Balance Sheets. With the adoption of SFAS 123R, effective January 1, 2006, unamortized stock compensation has been offset against additional paid-in capital where it is reflected on the Consolidated Balance Sheet as of June 30, 2006. During the three and six months ended June 30, 2006 there were 30 and 410, respectively, shares of restricted stock granted. All shares were issued to employees with 4-year vesting. In the year ended December 31, 2005, 120 shares of non-vested stock were granted with a vesting term of five years subject to acceleration in accordance with the grant stipulations. During fiscal 2005, 25 shares issued were forfeited as a result of employee terminations and the corresponding compensation expense and remaining unamortized stock compensation amounts were reversed. During the three and six months ended June 30, 2006, 25 shares were forfeited as a result of employee terminations. As of June 30, 2006, 480 shares are unvested.

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The following table summarizes transactions related to non-vested stock for the six months ended June 30, 2006:

			Number of shares						Weighted average price per share
Balance, December 31, 2005					95					$	2.16
Granted					410					$	2.45
Forfeited					(25	)				$	2.58
Balance, June 30, 2006					480					$	2.39

As of June 30, 2006, there was approximately $716 of total unrecognized compensation cost related to non-vested stock granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

As of June 30, 2006, the Company also had warrants to purchase 1,423 shares of common stock outstanding at a weighted average price of $2.83. At December 31, 2005, these warrants were exercisable; therefore, no expense has been recognized during 2006. 516 of these warrants expire in April 2007 and 907 of these warrants expire in June 2008.

Stock options and non-vested stock awards available for grant under all plans were 1,399 at June 30, 2006.

(2)    REVOLVING LINE OF CREDIT  

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

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

Borrowings under the revolving line of credit, per the Amended Agreement, bear interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial covenants set forth in the Amended Agreement, the interest rate will increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment fee of $30 per year and an unused revolving line facility fee of .25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additional $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Loan Agreement, the loan is subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company's EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There is also a monthly transition event covenant which requires the Company to maintain an adjusted quick ratio greater than or equal to 1.6 to 1.0.

On March 14, 2006, the Company and the Bank agreed to extend the maturity date of the loan to February 15, 2007. All other terms of the loan remain the same.

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

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

As of June 30, 2006, there were no amounts outstanding under the Amended Agreement and availability under the Amended Agreement was $1,685 based on the lesser of $4,000 or 80% of eligible accounts receivable. As of June 30, 2006, the Company was in compliance with the quarterly EBITDAS covenant and the monthly adjusted quick ratio covenant, but was not in compliance with the transition event covenant, which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.00. The Company’s adjusted quick ratio covenant on June 30, 2006 was 1.48 to 1.0. The Company is currently in discussions the Bank regarding this issue and expects that it will be moved to the higher interest rate facility.

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

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

Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share for the three and six months ended June 30, 2006 and 2005 does not include the effects of outstanding options to purchase 5,830 and 6,580 shares of common stock, respectively, 480 and 50 shares of non-vested stock, respectively, and outstanding warrants to purchase 1,423 and 1,332 shares of common stock, respectively, as the effect of their inclusion is anti-dilutive for the periods.

The following represents the reconciliation of the shares used in the basic and diluted net loss per common share calculation for the three and six months ended June 30, 2006 and 2005:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Weighted average basic common shares
Outstanding during the periods					34,354						30,016						34,301						29,300
Dilutive effect of stock options and warrants					—						—						—						—
Weighted average diluted common shares outstanding during the periods					34,354						30,016						34,301						29,300

(4)    OPERATING SEGMENTS

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

a)

AXS-One Enterprise Solutions provides an integrated suite of internet-enabled financial management and accounting applications to global 2000 organizations, enabling them to achieve process transparency while maintaining secure access required to meet reporting, control and governance requirements. AXS-One has an extensive installed customer base for its core financial management products as well as for its Time and Billing components, a full suite of business solutions and services optimized to address the requirements of organizations that primarily sell professionals’ time.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

b)

AXS-One Records Compliance Platform Solutions enable organizations to utilize documents and data generated by their corporate applications as an asset while reducing corporate risk and operational overheads and addressing requirements for corporate governance, legal discovery and industry regulations associated with how corporate records are managed and retained. Utilizing AXS-One Compliance Platform Solutions, organizations can capture, archive, manage, search, supervise, integrate, share and audit their electronic records, regardless of originating platform. Disparate document and data types can be managed including e-mail, instant messages, images, voice and video, office documents, ERP-generated data such as SAP, and electronic print reports generated by host systems. AXS-One Compliance Platform Solutions target large information-centric organizations that can utilize self-service information systems to reduce costs, increase efficiency, improve communications with their customers and improve access to business intelligence.

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

			Enterprise Solutions						Records Compliance Platform Solutions						Total
Three Months Ended June 30, 2006
Revenues:
License fees				$	96					$	856					$	952
Services					4,646						2,360						7,006
Total Revenues, excluding related party revenue					4,742						3,216						7,958
Operating income (loss)					2,553						(3,030	)					(477	)
Total assets					2,385						7,414						9,799
Capital expenditures					16						123						139
Depreciation and amortization					57						180						237
Three Months Ended June 30, 2005
Revenues:
License fees				$	256					$	262					$	518
Services					5,076						1,868						6,944
Total Revenues, excluding related party revenue					5,332						2,130						7,462
Operating income (loss)					1,549						(3,624	)					(2,075	)
Total assets					10,898						2,179						13,077
Capital expenditures					53						6						59
Depreciation and amortization					202						116						318

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

			Enterprise Solutions						Records Compliance Platform Solutions						Total
Six Months Ended June 30, 2006
Revenues:
License fees				$	657					$	1,260					$	1,917
Services					9,227						4,267						13,494
Total Revenues, excluding related party revenue					9,884						5,527						15,411
Operating income (loss).					5,245						(6,625	)					(1,380	)
Total assets					2,385						7,414						9,799
Capital expenditures					23						177						200
Depreciation and amortization					223						281						504
Six Months Ended June 30, 2005
Revenues:
License fees				$	750					$	790					$	1,540
Services					10,141						3,819						13,960
Total Revenues, excluding related party revenue					10,891						4,609						15,500
Operating income (loss)					3,420						(6,609	)					(3,189	)
Total assets					10,898						2,179						13,077
Capital expenditures					103						12						115
Depreciation and amortization					377						214						591

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Operating loss from reportable segments				$	(477	)				$	(2,075	)				$	(1,380	)				$	(3,189	)
Unallocated revenue, other – related parties					25						17						64						37
Unallocated general and administrative expense					(1,485	)					(1,437	)					(2,747	)					(2,785	)
Other corporate unallocated expenses					(619	)					(672	)					(1,186	)					(1,232	)
Total consolidated operating loss				$	(2,556	)				$	(4,167	)				$	(5,249	)				$	(7,169	)

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

(5)    CONTINGENCIES

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

(6)    PRIVATE PLACEMENT

On June 17, 2005, the Company entered into a definitive agreement with a number of investors as well as members of AXS-One management and Board members to sell 4,534 shares of its common stock for total consideration of $6,750. On June 21, 2005, the initial closing date, the Company received net proceeds of approximately $5,775 from the investors and issued 4,081 shares of common stock. This excluded amounts due from members of the Company’s management and Board members which together represented 10% of the investment. The closing with respect to the shares offered to members of the Company’s management and Board members was subject to shareholder approval. The Company also issued, at the same time, warrants to purchase an aggregate of 408 shares of common stock at $1.90 per share and warrants to purchase 408 shares of common stock at $2.15 per share. These warrants are exercisable for a period of three years beginning June 21, 2005. The warrants were classified within permanent equity in accordance with EITF 00-19, ‘‘Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock.’’ Warrants to purchase an additional 45 shares of common stock at $1.90 per share and 45 shares of common stock at $2.15 per share were issuable to members of the Company’s management and Board member investors upon approval of the shareholders. This private placement and issuance of warrants was made pursuant to the terms of a Unit Subscription Agreement, dated as of June 17, 2005, among the Company and several investors.

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

(7)    RESTRUCTURING AND OTHER COSTS

On June 30, 2005 the Company eliminated 22 positions in the United States and 6 positions in its foreign operations in order to further streamline the organization. The Company recorded a charge to operations in the second quarter of 2005 totaling approximately $863 related to involuntary termination benefits to be paid to the terminated employees. The remaining restructuring liability is recorded as accrued expenses on the June 30, 2006 balance sheet and will be paid in its entirety during 2006. The 2006 activity related to the restructuring is as follows:

			2006
Restructuring liability at January 1				$	319
Involuntary termination costs					—
Cash payments in 2006					(206	)
Restructuring liability at June 30				$	113

(8) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

SFAS No. 131, ‘‘Disclosure about Segments of an Enterprise and Related Information,’’ establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reporting

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AXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

segments in interim financial reports issued to shareholders. See Note (4). It also establishes standards for related disclosures about products and services, geographic areas and major customers.

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

			Three Months Ended June 30, 2006												Six Months Ended June 30, 2006
Revenues: (1)			2006						2005						2006						2005
United States				$	5,072					$	5,238					$	10,008					$	10,633
United Kingdom					653						536						1,162						1,724
Australia and Southeast Asia					1,118						934						2,209						1,841
South Africa					1,140						771						2,096						1,339
Total Consolidated				$	7,983					$	7,479					$	15,475					$	15,537

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

			June 30, 2006						December 31, 2005
Long-Lived Assets:
United States				$	825					$	1,184
United Kingdom					71						75
Australia and Southeast Asia					183						151
South Africa					24						23
Total Consolidated				$	1,103					$	1,433

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

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

This Report contains statements of a forward-looking nature within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events or the future financial performance of AXS-One. Investors are cautioned that actual events or results may differ materially. In evaluating such statements, investors should specifically consider the various factors identified in this Report which could cause actual results to differ materially from those indicated by such forward-looking statements, in addition to the matters set forth in ‘‘Risk Factors’’ in our 2005 Annual Report on Form 10-K.

Executive Overview

We are a leading provider of Records Compliance Management and Financial Management software solutions designed to reduce the inherent risks associated with retaining and managing corporate records as well as to efficiently manage complex business processes. We have implemented high-volume, interoperable, scalable and secure business solutions for Global 2000 companies. Our Web Services-based technology has been critically acclaimed as best of class. Our Records Compliance Management software delivers an integrated solution that enables organizations to manage growing volumes of disparate electronic records, including e-mail and instant messages, images, voice, office documents, ERP-generated data such as SAP and electronic print reports. All records are archived and managed according to corporate records policies from initial capture and indexing through archival, search and ultimate destruction. These products have been developed and optimized to address global issues of regulatory compliance, corporate governance, supervision and privacy as they relate to the retention and disposition of electronic records, as well as to significantly reduce infrastructure costs (primarily storage and associated management costs). Patent-pending search technology enables organizations to respond quickly and accurately to the growing pressures of e-discovery and litigation support.

Our revenues are derived mainly from license fees from software license agreements entered into with our customers, including through resellers, for both our products and, to a lesser degree, third party products resold by us and services revenues from software maintenance agreements, training, consulting services including installation and custom programming. We also derive a small amount of revenue (less than 3% and 1% of total revenues for the first six months of 2006 and 2005, respectively) from subscription revenue arrangements.

We are based in Rutherford, New Jersey with approximately 229 full-time employees, as of June 30, 2006, in offices worldwide, including Asia, Australia, South Africa, the United Kingdom and the United States. Our foreign offices generated approximately 36.5% and 35.3% of our total revenues for the three and six months ended June 30, 2006, respectively, as compared to 30.0% and 31.6%, respectively, for the corresponding prior year periods. We expect that such revenues will continue to represent a significant percentage of our total revenues in the future. Most of our international license fees and services revenues are denominated in foreign currencies. Fluctuations in the value of foreign currencies relative to the US dollar in the future could result in fluctuations in our revenue.

Until May 31, 2006, the Company had a 49% ownership in a joint venture in its South African operation, AXS-One African Solutions (Pty) Ltd (‘‘African Solutions’’). African Solutions sells and services our suite of products. The joint venture was considered to be a variable interest entity as defined in FASB Interpretation No. 46R, ‘‘Consolidation of Variable Interest Entities’’ (FIN 46R). However, the Company had determined that it was not the primary beneficiary. Accordingly, until May 31, 2006, the Company used the equity method of accounting for the joint venture whereby investments, including loans to the joint venture, were stated at cost plus or minus the Company’s equity in undistributed earnings or losses. On May 31, 2006, the Company purchased the remaining 51% share of African Solutions from African Legends Technology for a nominal amount to make it a wholly owned subsidiary. As of June 1, 2006, the results of African Solutions are included in the consolidated results of the Company.

We encounter competition for all of our products in all markets and compete primarily based on the quality of our products, our price, our customer service and our time to implement. The timing of the

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release of new products is also important to our ability to generate sales. During the second half of 2003, we launched our Records Compliance Management solution for e-mail and instant messaging archival, supervision, and legal discovery in response to new regulatory requirements for financial institutions in the United States as well as to address the need to reduce costs in the email management area. During 2005, AXS-One announced further significant development on the AXS-One Records Compliance Platform, focusing primarily on performance-based enhancements. Version 3.5, featuring Rapid-AXS, was launched in May 2005, and introduced patent-pending search functionality. Rapid-AXS takes advantage of grid computing architecture and leverages commodity hardware to deliver what AXS-One believes to be an unmatched price-performance ratio. Version 3.5 also introduced a Search Wizard, reducing the potential complexity of searches for non-IT staff and ensuring error-proof search capabilities for legal discovery. Finally in 2005 AXS-One announced AXS-Link for Desktop, a desktop archiving product available both as an integrated component of the AXS-One Compliance Platform, as well as a stand-alone solution. Our Records Compliance Management software, including this new solution, accounted for approximately 74% of our total license fee revenues for the year ended December 31, 2005 and 66% of total license revenue for the six months ended June 30, 2006.

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

We have experienced, and may in the future experience, significant fluctuations in our quarterly and annual revenues, results of operations and cash flows. We believe that domestic and international operating results and cash flows will continue to fluctuate significantly in the future as a result of a variety of factors. For a description of these factors that may affect our operating results, see ‘‘Risk Factors’’ in our 2005 Annual Report on Form 10-K.

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Results of Operations

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

			Three Months Ended June 30, 2006												Three Months Ended June 30, 2005
(in thousands)			As Reported						Data as a % of total revenue						As Reported						Data as a % of total revenue
			(Unaudited)												(Unaudited)
Revenues:
License fees				$	952						11.9	%				$	518						6.9	%
Services					7,006						87.8						6,944						92.9
Other-related parties					25						0.3						17						0.2
Total revenues					7,983						100.0						7,479						100.0
Operating expenses:
Cost of license fees					456						5.7						406						5.4
Cost of services					3,922						49.1						4,383						58.6
Sales and marketing					2,481						31.1						2,523						33.7
Research and development					2,195						27.5						2,034						27.2
General and administrative					1,485						18.6						1,437						19.2
Restructuring and other costs					—						—						863						11.6
Total operating expenses					10,539						132.0						11,646						155.7
Operating loss					(2,556	)					(32.0	)					(4,167	)					(55.7	)
Other income (expense), net					68						0.8						(217	)					(2.9	)
Loss before taxes					(2,488	)					(31.2	)					(4,384	)					(58.6	)
Income tax benefit					—						—						25						0.3
Net loss				$	(2,488	)					(31.2	)%				$	(4,359	)					(58.3	)%

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			Six Months Ended June 30, 2006												Six Months Ended June 30, 2005
(in thousands)			As Reported						Data as a % of total revenue						As Reported						Data as a % of total revenue
			(Unaudited)												(Unaudited)
Revenues:
License fees				$	1,917						12.4	%				$	1,540						9.9	%
Services					13,494						87.2						13,960						89.9
Other-related parties					64						0.4						37						0.2
Total revenues					15,475						100.0						15,537						100.0
Operating expenses:
Cost of license fees					899						5.8						770						4.9
Cost of services					7,357						47.5						9,042						58.2
Sales and marketing					5,300						34.2						5,111						32.9
Research and development					4,421						28.6						4,135						26.6
General and administrative					2,747						17.8						2,785						17.9
Restructuring and other costs					—						—						863						5.6
Total operating expenses					20,724						133.9						22,706						146.1
Operating loss					(5,249	)					(33.9	)					(7,169	)					(46.1	)
Other income (expense), net					15						0.1						(384	)					(2.5	)
Loss before taxes					(5,234	)					(33.8	)					(7,553	)					(48.6	)
Income tax benefit					—						—						25						0.1
Net loss				$	(5,234	)					(33.8	)%				$	(7,528	)					(48.5	)%

Comparison of Three Months Ended June 30, 2006 to 2005

Revenues

Total revenues increased $0.5 million or 6.8% for the three months ended June 30, 2006 as compared to the corresponding prior year period due to a $0.4 million or 83.8% increase in license fees and a $0.1 million or 1.0% increase in services revenues.

No one customer represented more than 10% of our total revenues for the three months ended June 30, 2006 or 2005.

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

			Three Months Ended June 30,
(dollars in thousands)			2006												2005
			Amount						% of Total						Amount						% of Total
Maintenance				$	4,110						58.7	%				$	4,235						61.0	%
Consulting					2,629						37.5	%					2,592						37.3	%
Subscription revenue					267						3.8	%					117						1.7	%
Total services revenue				$	7,006						100.0	%				$	6,944						100.0	%

The increase in services revenues is mainly a result of increases in subscription revenue in the Company’s records compliance management segment from our E-delivery travel service in Europe.

Operating Expenses

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

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products. The elements can vary substantially from period to period as a percentage of license fees. Cost of license fees were essentially flat for the three months ended June 30, 2006, as compared to the corresponding prior year period as increased royalty fees for third party software used in conjunction with our software (which includes both embedded software and separately sold software) were offset by decreased amortization of capitalized software development costs.

Cost of services consists primarily of personnel and third party costs for product quality assurance, training, installation, consulting and customer support. Cost of services decreased $0.5 million or 10.5% for the three months ended June 30, 2006, as compared to the corresponding prior year period. The decrease for the three-month period was mainly due to decreases of $0.3 million in personnel related expenses resulting from lower headcount and lower variable compensation expense, cost of third party royalties and other expenses totaling $0.2 million. Service margins improved to 44.2% for the three months ended June 30, 2006 from 37.1% for the corresponding prior year period. This improvement is primarily the result of reduced operating expenses.

Sales and marketing expenses consist primarily of salaries, commissions and bonuses related to sales and marketing personnel, as well as travel and promotional expenses. Sales and marketing expenses were flat for the three months ended June 30, 2006, as compared to the corresponding prior year period. Decreased employee related cost and variable compensation were offset by increased cost for marketing programs, third party consultants and other expenses.

Research and development expenses consist primarily of personnel costs, costs of equipment, facilities and third party software development costs. Research and development expenses are generally charged to operations as incurred. However, certain software development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86 (‘‘SFAS 86’’). Such capitalized software development costs are generally amortized to cost of license fees on a straight-line basis over periods not exceeding three years. There was no significant cost capitalized over the periods ended June 30, 2006 and 2005.

Research and development expenses (net of capitalized software development costs) increased $0.2 million or 7.9% for the three months ended June 30, 2006, as compared to the comparable prior year period. The increase is primarily the result an increased employee related cost and increase in the use and cost of third party consultants.

General and administrative expenses consist primarily of salaries for administrative, executive and financial personnel, and outside professional fees. General and administrative expenses were flat for the three months ended June 30, 2006 as compared to the corresponding prior year period. Decreases in personnel related expenses were offset by increased professional services and bad debt reserves.

On June 30, 2005, in order to reduce operating costs to better position ourselves in the current market, we eliminated 22 positions in the United States and 6 positions in our foreign operations. We recorded a charge to operations in the second quarter of 2005 totaling $0.9 million related to involuntary termination benefits to be paid to the terminated employees. Approximately $0.8 million of these restructuring costs have been paid. The remaining liability at June 30, 2006 is $0.1 million and is expected to be paid in 2006. There was no restructuring cost incurred in 2006.

Operating Loss

Operating loss decreased $1.6 million for the three months ended June 30, 2006 as compared to the corresponding prior year period due mainly to a decrease of $1.1 million in operating expenses and an increase in license revenue of $0.4 million.

Other Income (Expense), Net

Other income (expense), net improved $0.3 million for the three months ended June 30, 2006, as compared to the same period in 2005. The improvement is principally related to foreign currency exchange rate fluctuations.

Net Loss

Net loss decreased $1.9 million to $2.5 million or $(0.07) per diluted share for the three months ended June 30, 2006, as compared to $4.4 million or $(0.15) per diluted share for the same period in 2005 primarily for the reasons stated above.

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Comparison of Six Months Ended June 30, 2006 to 2005

Revenues

Total revenues decreased $0.1 million or 0.4% for the six months ended June 30, 2006 as compared to the corresponding prior year period due to a $0.5 million or 3.3% decrease in services revenue offset by a $0.4 million or 24.5% increase in license fees.

No one customer represented more than 10% of our total revenues for the three months ended June 30, 2006 or 2005.

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

			Six Months Ended June 30,
(dollars in thousands)			2006												2005
			Amount						% of Total						Amount						% of Total
Maintenance				$	8,194						60.7	%				$	8,364						59.9	%
Consulting					4,833						35.8	%					5,375						38.5	%
Subscription revenue					467						3.5	%					221						1.6	%
Total services revenue				$	13,494						100.0	%				$	13,960						100.0	%

The decrease in services revenues is mainly a result of decreases of $0.5 million in consulting revenue from our enterprise financials product line, offset partially by an increase of $0.2 million in subscription revenue in the Company’s records compliance management segment from our E-delivery travel service in Europe.

Operating Expenses

Cost of license fees consist primarily of amortization of capitalized software development costs and amounts paid to third parties with respect to products we resell in conjunction with the licensing of our products. The elements can vary substantially from period to period as a percentage of license fees. Cost of license fees increased $0.1 million or 16.8% for the six months ended June 30, 2006, as compared to the corresponding prior year period mainly as a result of an increase in royalty fees for third party software used in conjunction with our software (which includes both embedded software and separately sold software) offset somewhat by decreased amortization of capitalized software development costs.

Cost of services consists primarily of personnel and third party costs for product quality assurance, training, installation, consulting and customer support. Cost of services decreased $1.7 million or 18.6% for the six months ended June 30, 2006, as compared to the corresponding prior year period. The decrease for the six-month period was mainly due to decreases of $1.2 million in personnel related expenses resulting from lower headcount and $0.3 million in third party services expenses, each primarily in the UK and US operations, $0.1 million in lower variable compensation cost and $0.1 million in lower other cost. Service margins improved to 45.7% for the six months ended June 30, 2006 from 35.4% for the corresponding prior year period. This improvement is primarily the result of reduced operating expenses.

Sales and marketing expenses consist primarily of salaries, commissions and bonuses related to sales and marketing personnel, as well as travel and promotional expenses. Sales and marketing expenses increased $0.2 million or 3.7% for the six months ended June 30, 2006, as compared to the corresponding prior year period. The increase is primarily the result of an increase of $0.1 million in marketing programs and $0.1 million in employee related expenses.

Research and development expenses consist primarily of personnel costs, costs of equipment, facilities and third party software development costs. Research and development expenses are generally charged to operations as incurred. However, certain software development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86 (‘‘SFAS 86’’). Such capitalized software development costs are generally amortized to cost of license fees on a straight-line basis over periods not exceeding three years. There was no significant cost capitalized over the periods ended June 30, 2006 and 2005.

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Research and development expenses (net of capitalized software development costs) increased $0.3 million or 6.9% for the six months ended June 30, 2006, as compared to the comparable prior year period. The increase is primarily the result an increase in the use and cost of third party consultants and increased employee related cost.

General and administrative expenses consist primarily of salaries for administrative, executive and financial personnel, and outside professional fees. General and administrative expenses were flat for the six months ended June 30, 2006 as compared to the corresponding prior year period. Decreases in personnel related expenses were offset by increased rent cost.

On June 30, 2005, in order to reduce operating costs to better position ourselves in the current market, we eliminated 22 positions in the United States and 6 positions in our foreign operations. We recorded a charge to operations in the second quarter of 2005 totaling $0.9 million related to involuntary termination benefits to be paid to the terminated employees. Approximately $0.8 million of these restructuring costs have been paid. The remaining liability at June 30, 2006 is $0.1 million and is expected to be paid in 2006. There was no restructuring cost incurred in 2006.

Operating Loss

Operating loss decreased $1.9 million for the six months ended June 30, 2006 as compared to the corresponding prior year period due mainly to a decrease of $2.0 million in operating expenses offset slightly by a decrease in total revenue of $0.1 million.

Other Expense, Net

Other income (expense), net improved $0.4 million for the six months ended June 30, 2006, as compared to the same period in 2005. The improvement is principally related to foreign currency exchange rate fluctuations.

Net Loss

Net loss decreased $2.3 million to $5.2 million or $(0.15) per diluted share for the six months ended June 30, 2006, as compared to $7.5 million or $(0.26) per diluted share for the same period in 2005 due to the reasons stated above.

Liquidity and Capital Resources

On June 21, 2005 and September 21, 2005 we completed a private placement of shares of common stock that resulted in the receipt of net proceeds of approximately $5.8 million and $0.6 million, respectively. (See Note 6 to the Consolidated Interim Financial Statements).

On August 11, 2004, the Company entered into a two-year Loan and Security Agreement (the ‘‘Agreement’’) which contains a revolving line of credit under which the Company has available the lesser of $4.0 million or 80% of eligible accounts, as defined (See Note 2 to the Consolidated Interim Financial Statements).

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

Borrowings under the revolving line of credit, per the Amended Agreement, bear interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial covenants set forth in the Amended Agreement, the interest rate will increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment fee of $30 per year and an unused revolving line facility fee of .25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended

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Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additional $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Amended Agreement, the loan is subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company's EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There is also a monthly transition event covenant which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.0.

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

As of June 30, 2006, there were no amounts outstanding under the Amended Agreement and availability under the Amended Agreement was $1,685 based on the lesser of $4,000 or 80% of eligible accounts receivable. As of June 30, 2006, the Company was in compliance with the quarterly EBITDAS covenant and the monthly adjusted quick ratio covenant, but was not in compliance with the transition event covenant, which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.00. The Company’s adjusted quick ratio covenant on June 30, 2006 was 1.48 to 1.0. The Company is currently in discussions the Bank regarding this issue and expects that it will be moved to the higher interest rate facility.

Our operating activities used cash of $0.1 million for the six months ended June 30, 2006 and $4.6 million for the six months ended June 30, 2005. Net cash used in operating activities during the six months ended June 30, 2006 is primarily the result of the net loss, an increase in prepaid expenses and other current assets and a decrease in due to joint venture, offset partially by an increase in deferred revenue, a decrease in accounts receivable and non-cash depreciation and amortization. The decrease in accounts receivable in 2006, mainly in US operations, resulted from better collections from customers in 2006 compared to 2005. The increase in deferred revenue is mainly the result of a three year prepayment of maintenance fees by a large customer in US operations.

Our investing activities used cash of $0.3 million and $0.1 million for the six months ended June 30, 2006 and 2005, respectively. The use of cash for 2006 was primarily for the purchase of computer equipment for the Company’s internal operations and the acquisition of the remaining interest in the Company’s joint venture in South Africa. The use of cash for 2005 was primarily for the purchase of computer equipment for the Company’s internal operations. During the second quarter of 2006, the Company inventoried all fixed assets in the US operations and determined that a gross fixed asset write-off of $7.9 million, with an identical value for accumulated depreciation, was appropriate. These assets had zero net book value as these assets had been fully depreciated.

Cash provided by financing activities was $0.2 million and $6.7 million for the six months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006, cash was provided by the exercise of stock options during the period offset by debt issuance cost. For the six months ended June 30, 2005, cash was primarily provided by net proceeds received from the private placement and the exercise of stock options during the period.

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We have no significant capital commitments. Planned capital expenditures for the year 2006 are expected to be less than $0.5 million, including any software development costs that may qualify for capitalization under SFAS 86. Our aggregate minimum operating lease payments for 2006 will be approximately $1.9 million. We have $0.3 million remaining aggregate minimum royalties payable to third party software providers in accordance with 2006 agreements for third party software used in conjunction with our software. Future commitments to third party software providers are as follows:

(in thousands)
Year			Amount
2006				$	250
2007					150
2008					75
2009					75
Total				$	550

We generated a net loss of $5.2 million for the six months ended June 30, 2006 and $9.0 million and $5.2 million for the years ended December 31, 2005 and 2004, respectively. We experienced a decline in revenue as our business shifted to focus more heavily on the records compliance management business. Management’s initiatives over the last two years, including the restructurings in June 2005 and 2004, the private placements of common stock in April 2004 and June 2005 and 10% salary cuts of executive management for most of the second half of 2005, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. As a result of these efforts, we expect that our current cash balance, availability of borrowing capacity under our bank line of credit, and operating cash flow should be sufficient to meet the short-term requirements of the business. However, we may in the future be required to seek new sources of financing or future accommodations from our existing lender or other financial institutions, or we may seek equity infusions from private investors or may seek to sell certain Company assets. We may also be required to further reduce operating costs in order to meet our obligations. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations. If we are unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about our ability to fund future operations. Additionally, there is a risk that cash held by our foreign subsidiaries may not be readily available for use in our U.S. operations to pay our obligations as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available.

Critical Accounting Estimates

Our critical accounting policies are as follows:

	•	Revenue recognition and

	•	Capitalized software development costs.

Revenue Recognition

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

We normally license our software products on a perpetual basis. Each license agreement generally includes a provision for initial post-contract support (maintenance). For the majority of license sales we use a signed license agreement as evidence of an arrangement. For maintenance fees, we use a

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maintenance agreement as evidence of the arrangement. We use a professional services agreement as evidence of an arrangement for our training, subscription, custom programming and consulting revenues. Occasionally, where a master license or services agreement with a customer already exists, we accept the customer’s purchase order as evidence of an arrangement.

We recognize revenue in accordance with Statement of Position 97-2, ‘‘Software Revenue Recognition’’ (‘‘SOP 97-2’’), and Statement of Position 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.’’ Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. In multiple element arrangements, we defer revenue based on the vendor-specific objective evidence (’’VSOE’’) of fair value for the undelivered elements and recognize revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of fair value for maintenance is determined by using a consistent percentage of maintenance fees to discounted license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of fair value of services is determined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.

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

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

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

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

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

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

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Capitalized Software Development Costs

Our policy is to capitalize certain software development costs in accordance with Statement of Financial Accounting Standards No. 86, ‘‘Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed’’ (‘‘SFAS 86’’). Under SFAS 86, costs incurred to develop or significantly enhance computer software products are charged to research and development expense as incurred until technological feasibility has been established. We establish technological feasibility upon completion of a working model or completion of a detailed program design. Generally costs related to projects that reach technological feasibility upon completion of a working model are not capitalized as the time period between establishment of the working model and general availability is of short duration. For projects that meet technological feasibility upon completion of a detailed program design, all research and development costs for that project are capitalized from that point until the product is available for general release to customers. The nature of our current development for RCM products is generally such that we can measure technological feasibility most effectively using the working model method where the time between establishment of a working model and general availability is of short duration which results in very little or no costs that qualify for capitalization. We historically used a detailed program design model to measure technological feasibility for our enterprise financial products. This shift in development of our product lines will result in lower capitalized costs in the future. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology. It is reasonably possible that estimates of anticipated future revenues, the remaining estimated economic life of the products, or both will be reduced in the future due to competitive pressures. As a result, the carrying amount of the capitalized software costs may be reduced through a charge to operations in the near term. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized (using the straight-line method) over the estimated life, which is generally three years.

Recently Issued Accounting Standards

On May 5, 2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error Corrections’’ (’’SFAS No. 154’’), which replaces Accounting Principles Board (‘‘APB’’) Opinion No. 20 ‘‘Accounting Changes,’’ and SFAS No. 3 ‘‘Reporting Accounting Changes in Interim Financial Statements.’’ SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance that 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 period specific effects or the cumulative effect of the change. SFAS No. 154 does not change the transition provisions of any existing pronouncement. SFAS No. 154 is effective for the Company for all accounting changes and corrections of errors made beginning January 1, 2006.

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

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

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

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

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Item 4.	Controls and Procedures

Evaluation of disclosure controls and procedures

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

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2006. Based upon the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2006.

Internal controls over financial reporting

There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Stockholders on May 24, 2006, the following directors were nominated and elected by the votes indicated:

			Votes For						Votes Withheld
William P. Lyons					28,431,469						1,448,565
Anthony Bloom					28,644,269						1,235,765
Daniel H. Burch					28,667,269						1,212,765
Harold Copperman					28,667,269						1,212,765
Robert Migliorino					28,640,769						1,239,265
Elias Typaldos					28,606,831						1,273,203
Gennaro Vendome					28,642,566						1,237,468
Allan Weingarten					28,674,269						1,205,765

In addition, the stockholders ratified the appointment of Amper, Politziner & Mattia as the Company’s independent auditors for 2006 by the following vote:

Votes For			Votes Against						Abstentions
29,226,382					623,620						30,031

The stockholders also approved the amendment of the 2005 Stock Incentive Plan by the following vote:

Votes For			Votes Against						Abstentions						Broker Non-votes
15,543,815					2,222,849						62,796						12,050,574

Item 6.	Exhibits

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

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SIGNATURES

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

			AXS-ONE INC.
Date:    August 9, 2006			By:			/s/ William P. Lyons
						William P. Lyons Chief Executive Officer and Chairman of the Board
			By:			/s/ Joseph Dwyer
						Joseph Dwyer Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

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