**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**


**FORM
      10-K**


**(Mark
      one)**




**[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**


**FOR
      THE FISCAL YEAR ENDED JUNE 30, 2006**




**OR**




**[
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**




**FOR
      THE TRANSITION PERIOD FROM_______** **TO_______**




**COMMISSION
      FILE NUMBER:**  **0-24077**




**Mobius
      Management Systems, Inc.**


(Exact
      name of registrant as specified in its charter)


**Delaware** **13-3078745**


(State
      or
      other jurisdiction of (I.R.S.
      Employer


incorporation
      or organization) Identification
      Number)




**120
      Old Post Road, Rye, New
      York** **10580**


(Address
      of principal
      executive offices) (Zip
      code)




**914-921-7200**


(Registrant’s
      telephone number, including area code)




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) of the Act:




Title
      of
      Each Class Name
      of
      Each Exchange on Which Registered




Common
      Stock, $.0001 par value The
      NASDAQ Stock Market LLC




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes |  |  No |x|





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes |  |  No
      |x|





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes |x|   No |  |





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to this
      Form 10-K | |





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act).





Large
      Accelerated Filer ||
      Accelerated Filer |X| Non-accelerated Filer ||





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes |  |  No |x|





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant, based upon the closing sale price of Common Stock on December 31,
      2005, the last business day of the
      registrant’s most recently completed second fiscal quarter, as reported on
      NASDAQ, was approximately $63.0 million.













As
      of
      August 18, 2006, the Registrant had 19,043,443 outstanding shares of Common
      Stock.




DOCUMENTS
      INCORPORATED BY REFERENCE




None











2


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**FISCAL
      YEAR 2006 FORM 10-K ANNUAL REPORT**





**TABLE
      OF CONTENTS**





PART
                IITEM
                1.Business
                ........................................................................................................................................................................................................................................................................
            4ITEM
                1A.Risk
                Factors
                ...............................................................................................................................................................................................................................................................
            9ITEM
                1B.Unresolved
                Staff Comments
                ....................................................................................................................................................................................................................................
            15ITEM
                2.Properties
                ......................................................................................................................................................................................................................................................................
            16ITEM
                3.Legal
                Proceedings
                .......................................................................................................................................................................................................................................................
            16ITEM
                4.Submission
                of Matters to a Vote of Security Holders
                ...........................................................................................................................................................................................
            16PART
                II.ITEM
                5.Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
                .................................................................................
            17ITEM
                6.Selected
                Financial Data
                .............................................................................................................................................................................................................................................
            18ITEM
                7.Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                .......................................................................................................................
            19ITEM
                7A.Quantitative
                and Qualitative Disclosures About Market Risk
                ........................................................................................................................................................................
            34ITEM
                8.Financial
                Statements and Supplementary Data
                .....................................................................................................................................................................................................
            35ITEM
                9.Changes
                in and Disagreements with Accountants on Accounting and
              Financial
                Disclosure
                ..................................................................................................................................................................................................................................................................
            35ITEM
                9A.Controls
                and Procedures
                .......................................................................................................................................................................................................................................
            36ITEM
                9B.Other
                Information
                ....................................................................................................................................................................................................................................................
            36PART
                III.ITEM
                10.Directors
                and Executive Officers of the Registrant
                ............................................................................................................................................................................................
            37ITEM
                11.Executive
                Compensation
                ........................................................................................................................................................................................................................................
            42ITEM
                12.Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
                ..................................................................................................
            48ITEM
                13.Certain
                Relationships and Related Transactions
                ................................................................................................................................................................................................
            50ITEM
                14Principal
                Accounting Fees and Services
                .............................................................................................................................................................................................................
            51PART
                IV.ITEM
                15.Exhibits
                and Financial Statement Schedules
                .......................................................................................................................................................................................................
            52SIGNATURES
                ............................................................................................................................................................................................................................................................................
            81








3


**FORWARD-LOOKING
      STATEMENTS**





Statements
      contained in this annual report, other than historical financial results, may
      contain forward-looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995. Forward-looking statements involve risks and
      uncertainties. They are not historical facts or guarantees of future performance
      or events. They are based on current expectations, estimates, beliefs,
      assumptions, goals and objectives, and are subject to uncertainties that are
      difficult to predict. In particular, any statements contained herein regarding
      expectations with respect to future sales and profitability, as well as product
      development and/or introductions, are subject to known and unknown risks,
      uncertainties and contingencies, many of which are beyond our control, which
      may
      cause actual results, performance or achievements to differ materially from
      those projected or implied in such forward-looking statements. Important factors
      that might affect actual results, performance or achievements are described
      in
      detail from time to time in our filings with the Securities and Exchange
      Commission, including without limitation, as set forth under Item 1A, Risk
      Factors. Forward-looking statements included in this annual report are based
      on
      information known to us as of the date of this annual report and we accept
      no
      obligation (and expressly disclaim any obligation) to update these
      forward-looking statements and do not intend to do so.





**ITEM
      1. BUSINESS**





Mobius
      Management Systems, Inc. (together with its consolidated subsidiaries, “Mobius,”
or the “Company” or “we”) is a leading provider of integrated solutions for
      records and content management. We were incorporated in New York in 1981 and
      reincorporated in Delaware in 1997. We have international subsidiaries in the
      United Kingdom, Canada, France, Germany, Italy, Sweden, the Netherlands,
      Switzerland, Australia and Japan. Our corporate headquarters is located at
      120
      Old Post Road, Rye, NY 10580 and the telephone number is (914)
      921-7200.





For
      twenty-five years, we have delivered innovative software that helps
      major corporations and other organizations manage and derive value from vast
      amounts of digital records, documents and images created in multiple formats
      and
      captured from multiple sources.





Our
      solutions manage the entire lifecycle of information - from the moment it is
      created until it is no longer needed - and ensure its long-term integrity and
      availability, both to meet the operational needs of the entity and to ensure
      legal and regulatory compliance.





By
      integrating information across the enterprise and managing its retention and
      disposition, we help our customers reduce operating costs, streamline critical
      business processes, and protect critical information assets.





**Industry
      Background**





It
      is
      estimated that there are billions of pages of information available on the
      Web
      alone, in addition to vast quantities of business- and operations-critical
      documents, reports, images and transactions that support internal operations.
      Organizations struggle to gather disparate information and deliver it in the
      necessary form for the appropriate audience. The challenge is compounded by
      the
      variety of documents and formats now used in day-to-day business operations.
      These include bills, statements, check images, report output, scanned forms,
      e-mail, transactions, policies, correspondence, Web elements, audio, video
      and
      more.





This
      broad diversity of electronic information is dispersed throughout the global
      enterprise in diverse content management applications, databases, e-mail
      applications, and file systems. As a result of mergers and acquisitions, and
      the
      use of departmental solutions and home-grown applications, a typical global
      enterprise today has many separate applications that generate content for
      storage in multiple, dedicated repositories. When an employee needs all the
      information about a transaction, or when a customer wants access to all the
      information about her account, or when legal and/or regulatory requirements
      make
      it necessary to find the needle in







4


the
      haystack, this complex infrastructure makes retrieval difficult and time
      consuming.





Our
      software suite addresses the critical, strategic imperative to integrate and
      manage this diverse information and make it available to employees, customers,
      partners and suppliers in support of e-business initiatives, internal operations
      and legal/regulatory compliance. Our solutions are based on a highly scalable,
      platform-independent archive that serves as both a long-term repository and
      a
      real-time engine for Web delivery of document-based content. Our primary
      solutions include:




·
            **Content
                integration:**via
                a single integrated repository or by direct access to multiple, disparate
                repositories;




·
            **Records
                management:**a
                full lifecycle management capability for all electronic and non-electronic
                records;




·
            **E-mail
                management:**enables the capture, classification, access and retention of incoming
                and
                outgoing e-mails;




·
            **Web
                site management:**enabling the creation, reviewing, staging, approval and publishing
                of
                content for Web sites;




·
            **Imaging:**support for high-volume image capture, storage, access and
                delivery;




·
            **Business
                process management:**a
                solution for automating both internal and outward-facing business
                processes;




·
            **Enterprise
                report management:**distributing
                reports from enterprise resource planning (ERP), customer relationship
                management (CRM) and other enterprise applications to users around
                the
                globe, each with different requirements and access authorizations;




·
            **Audit
                and balancing:**validating
                data within and across business applications and platforms to ensure
                correctness and consistency, including a specialized application
                to manage
                the lifecycle of spreadsheets; and,




·
            **SAP
                integration**:
                providing a complete, SAP-certified archiving, viewing and distribution
                infrastructure for SAP applications.





Our
      products are noted for scalability and an open architecture that supports a
      broad range of information formats, computing platforms and storage media.
      Technological innovation provides uniquely robust functionality, efficiency
      and
      ease-of-use.





**Products**





Our
      products manage digital information in its many forms and make it available
      for
      many purposes. The suite includes products for storing, integrating, viewing
      and
      delivering content as well as specialized tools for automating business
      processes, accessing content across disparate repositories, building and
      maintaining Internet/intranet sites, and monitoring data for
      accuracy.




·
            **ViewDirect**®is
                market-leading software for high-volume archiving, high-speed indexed
                access and electronic distribution of enterprise information.ViewDirect
                supports both the “human-created” content -- generated by users of desktop
                applications -- and the “application-created” content -- generated by
                production systems -- that is needed to support business operations
                and
                address legal and regulatory requirements. Key ViewDirect options
                and
                components include:




·
            **ViewDirect
                Records Manager**,
                for managing enterprise-wide corporate records, including e-mail,
                from
                capture to processing, archiving, retention, holding and final
                disposition. A built-in capability of ViewDirect, Records Manager
                enables
                high-volume archiving and integration of records and content in any
                format
                from any source and is certified to the DoD 5015.2 electronic records
                management standard.




·
            **DocumentDirect****®****for the Internet**and**e-Search & View****TM**provide Web browser-based searching and viewing;**DocumentDirect****®******and**DocuAnalyzer****TM******are
                Windows-based tools. These viewing clients have powerful features
                for
                customized display and the ability to analyze the data in documents.






5






·
            **Options,
                interfaces and connectors**provide integration interfaces to ERP and CRM systems, interfaces
                to
                scanning software and storage hardware, APIs and options for migrating
                and
                viewing stored content directly from different storage media.




·
            **TCI**provides
                fast, easy, and secure access to all records, documents and content,
                stored anywhere in the enterprise. It gives authorized users a single,
                consistent interface to multiple, disparate repositories, databases
                and
                file systems and delivers content to business-critical
                applications.




·
            **Audit
                and Balancing System (ABS)**reconciles data across applications and platforms, providing data
                integrity and quality control.**ABS
                for Spreadsheet Compliance**is
                a specialized application thatreduces
                the risk of errors in financial reporting by centralizing and managing
                the
                lifecycle of enterprise spreadsheets.




·
            **Web
                Content Manager**is
                a comprehensive platform for Web site implementation and management,
                document and digital asset management and content
                publishing.




·
            **Workflow
                Manager**is
                a Java-based business process platform for designing and building
                workflow
                applications that connect the enterprise with customers, partners
                and
                suppliers.





**Sales
      and Marketing**





We market
      and sell our products primarily through a direct sales force located in 20
      offices worldwide. These sales offices are located in the United States, Canada,
      the United Kingdom, France, Germany, Italy, Switzerland, Sweden, the
      Netherlands, Australia and Japan. We also market through a network of agents
      in
      Central and South America, Europe, Middle East, Africa and Asia.





We
      believe that certain of our products, including TCI, our content integration
      solution, and ABS for Spreadsheet Compliance, a solution that centralizes and
      manages the lifecycle of business-critical spreadsheets, are well positioned
      to
      be licensed through channels and we are working to initiate channel and OEM
      partnerships. In connection with this strategy, we created a new position -
      Vice
      President of Channel Sales and Marketing - to lead this effort. This position
      was filled in the fourth quarter of fiscal 2006.





In
      marketing some of our products, we offer extended payment terms to certain
      of
      our customers, which we believe enhances our competitive position. For a further
      discussion of our policy on offering extended payment terms to our customers,
      see “Item 7, Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” below.





**Professional
      Services**





Our
      professional services group offers installation and conversion services, and
      to
      a lesser extent, business consulting and training to our customers. The Mobius
      suite of products are generally not difficult to install and do not require
      significant installation services. As such, while this line of our business
      provides a valuable service to our customers, revenues from professional
      services are not a significant percentage of overall revenue.





**Customer
      Support**





We
      provide twenty-four hour, seven-day-a-week customer support and product support
      services for all of our products through support centers in the United States,
      the United Kingdom and Australia.





**Research
      and Development**





We
      employ
      developers in Rye, NY; Orlando, FL; and Ottawa, Canada, and utilize
      subcontractors in India and the Ukraine. Expenditures for research and
      development were $20.8 million
      for the fiscal year ended June 30, 2004, and $22.7 million for both the fiscal
      years ended June 30, 2005 and 2006. We intend to continue to make investments
      in
      research and development to enhance our product lines. We believe that our
      future success will, in large part, depend on our ability to maintain and
      improve current products and develop and acquire new products that meet the
      emerging needs of







6


the
      marketplace. Our research and development efforts focus on designing and
      developing reliable and easy-to-use products. Our product development cycle
      (from funding a product development project until the new product is shipped
      to
      the marketplace) is generally less than six months, which enables us to take
      advantage of market opportunities and be responsive to customer demands. Larger
      projects are broken down so that a specific product or product enhancement
      can
      be available in the marketplace as quickly as possible. We divide our
      development team into groups delineated by product functionality and employ
      development tools to facilitate short development cycles for functional
      enhancements, while maintaining product reliability.





**Employees**





As
      of
      June 30, 2006, we employed 443 people: 140 in Sales and Marketing; 130 in
      Research and Development; 63 in Customer Satisfaction; 66 in General and
      Administrative; and 44 in Professional Services. None of the employees located
      in the United States are represented by a labor union or are subject to a
      collective bargaining agreement. Employees located in international countries
      are covered by the general labor practices of the local country. We have not
      experienced any work stoppages and believe we have a good relationship with
      our
      employees. We believe that our future success will depend upon our ability
      to
      attract, train and retain highly skilled technical, management, sales and
      marketing personnel.





**Customers**





No
      single
      customer accounted for 10% or more of our total consolidated revenues in fiscal
      years 2004,
      2005 or 2006. In fiscal 2005, however, we had revenue from one customer which
      accounted for approximately 9% of total revenues and approximately 21% of
      software license revenues.





**Competition**





The
      market for our products is intensely competitive, subject to rapid change and
      significantly affected by new product introductions and other market activities
      of industry participants. We
      currently encounter direct competition from a number of public and private
      companies including IBM Corp., EMC Corporation and FileNet Corporation, as
      well
      as a number of smaller competitors in niche markets. On August 10, 2006, IBM
      announced its intention to acquire FileNet. The acquisition, expected to close
      in the fourth quarter of 2006, is subject to FileNet shareholder approval,
      regulatory reviews and other customary closing conditions. As a result of this
      acquisition, IBM plans to build upon the advanced content management
      technologies of both companies, which could have a negative impact on our
      competitive position. A description of the competitive environment in which
      the
      Company does business is set forth below under Item 1A, Risk
      Factors.





**Intellectual
      Property**





Our
      success is heavily dependent upon our confidential and proprietary intellectual
      property. We rely primarily on a combination of confidentiality agreements,
      copyright, patent, trademark and trade secret laws and confidentiality
      procedures to protect our proprietary rights. A description of the risks
      involved in the protection of the Company’s intellectual property is set forth
      below under Item 1A, Risk Factors. In addition, a discussion of an action we
      filed in the U.S. District Court for the District of Delaware against Acartus,
      Inc. can be found in Item 7, Management’s Discussion and Analysis of Financial
      Condition and Results of Operations, under the section entitled, “Other Matters
      - Acartus Litigation.”







7






**Available
      Information**





Our
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K and any amendments to these reports filed or furnished pursuant to
      Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
      free
      of charge on our web site at www.mobius.com ,
      by
      clicking on Investor Relations, then SEC Filings. These documents are provided
      as soon as reasonably practicable after such reports are filed with or furnished
      to the Securities and Exchange Commission (“SEC”). Alternatively, you may access
      these reports at the SEC’s Internet web site at www.sec.gov .











8





**ITEM
      1A. RISK FACTORS**





*We
      operate in a rapidly changing economic and technological environment that
      involves numerous risks and uncertainties. Prospective and existing investors
      are strongly urged to carefully consider the various cautionary statements
      and
      risks set forth in this annual report and our other public filings. The
      following section describes the material risks and uncertainties that we believe
      may adversely affect our business, operating results or financial condition.
      Many of these risks and uncertainties are beyond our control and are driven
      by
      factors that we cannot predict.*





**Our
      operating results are subject to significant fluctuations and uncertainties,
      our
      business has experienced significant seasonality, and it is difficult for us
      to
      predict future revenues.**





Our
      quarterly revenues and operating results have varied significantly in the past
      and are likely to vary substantially from quarter to quarter in the future.
      Quarterly revenues and operating results are expected to fluctuate as a result
      of a variety of factors, including mix of products, lengthy product sales
      cycles, general domestic and international economic conditions, demand for
      our
      products, changes in the level of operating expenses, introductions of new
      products and product enhancements by us or our competitors and competitive
      conditions in the industry.





Currently,
      we believe that external market factors are driving customers to cautiously
      spend on enterprise software which can result in unpredictability in the timing
      of orders. This condition may continue to impact future quarterly operating
      results and have an adverse effect on Mobius.





The
      timing, size and nature of individual license transactions are important factors
      in our quarterly operating results. Many of our license transactions involve
      large dollar commitments by customers, and the sales cycles for these
      transactions are often lengthy and unpredictable. There can be no assurance
      that
      we will be successful in closing large license transactions within the fiscal
      period in which they are budgeted, if at all.





Historically,
      our business has experienced significant seasonality, with revenues typically
      peaking in the fourth fiscal quarter (ending June 30) and to a lesser extent
      in
      the second fiscal quarter (ending December 31). Fluctuations have historically
      been caused by customer purchasing patterns and our sales force incentive
      programs, which recognize and reward sales personnel on the basis of achievement
      of annual and other periodic performance quotas, as well as by the factors
      described above. Changes in buying patterns, product mix and sales force
      incentive programs, as well as other factors discussed below, may alter these
      historical seasonality patterns.





Due
      to
      all of the foregoing factors and other factors described below, revenues for
      any
      period are subject to significant variation, and we believe that
      period-to-period comparisons of our operating results are not necessarily
      meaningful and may not be reliable indicators of future
      performance.





**Our
      products have a long and unpredictable sales cycle, which could result in
      significant fluctuations in license revenue being recognized from quarter to
      quarter.**





The
      period between initial contact with a prospective customer or existing customer
      and the licensing of our software applications can range from six to more than
      twelve months. Our sales cycle involves complexity as customers consider a
      number of factors before committing to purchase our products. Factors considered
      by customers when evaluating our products include product benefits, cost and
      time of implementation, return on investment, ability to operate with existing
      and future computer systems and the ability to accommodate increased transaction
      volume and product reliability. Customer evaluation, purchasing and budgeting
      processes vary significantly from company to company. As a result, we spend
      a
      significant amount of time and resources informing prospective customers about
      our software products, which may not result in a completed transaction. Even
      if
      our software products have been chosen by the customer, completion of the sales
      transaction is subject to a number of







9


factors,
      which makes our quarterly revenues difficult to forecast. Particularly in the
      current economic environment of reduced information technology spending, it
      can
      take several months, or even quarters, for sales transactions to
      close.





Generally,
      our sales cycles have lengthened due to increased organizational review by
      sales
      prospects and protracted contract negotiations, regardless of transaction size.
      A continued lengthening in sales cycles and our inability to predict these
      trends could result in lower than expected future revenues, which could have
      a
      material adverse effect on our business and operating results.





**If
      we are unable to keep pace with technological changes in our industry, our
      products may become obsolete or fail to achieve market
      acceptance.**





The
      market for our software products is characterized by a high degree of
      technological change, frequent new product introductions, evolving industry
      standards and changes in customer demands. The introduction of competitive
      products embodying new technologies and the emergence of new industry standards
      could render our existing products obsolete and unmarketable. Our future success
      will depend in part on our ability to enhance existing products, develop and
      introduce new products to meet diverse and evolving customer requirements,
      and
      keep pace with technological developments and emerging industry standards such
      as Web-based functionality, new operating systems, hardware platforms, user
      interfaces and storage media.





Recent additions
      to our product portfolio include:





·
            ABS
                for Spreadsheet Compliance, which allows organizations of all sizes
                to
                manage and control the lifecycle of spreadsheets while ensuring the
                integrity and reliability of the data
                within;


·
            TCI,
                our solution for accessing information from any repository and making
                it
                available to any user or business application;
                and


·
            new
                enterprise records and email management capabilities available as
                part of
                our core ViewDirect product.





The
      development of new products or enhanced versions of existing products and
      services entails significant technical risks. There can be no assurance that
      we
      will be successful in developing and marketing product enhancements or that
      new
      products will respond to technological change or evolving industry standards,
      or
      that we will not experience difficulties that could delay or prevent the
      successful development, introduction, implementation and marketing of these
      products and enhancements, or that any new products and product enhancements
      we
      may introduce will achieve market acceptance.





**We
      rely significantly on one suite of products for our
      revenues.**





To
      date,
      a substantial portion of our revenues is attributable to the licensing and
      related maintenance service of our ViewDirect suite of products. We currently
      expect this to continue for the foreseeable future. As a result, factors
      adversely affecting the pricing of, or demand for, these products and services,
      such as economic downturns, competition or technological change, could have
      a
      material adverse effect on our business, operating results and financial
      condition.





**We
      face intense competition in our business, and we may be unable to compete
      successfully against our current and future competitors.**





The
      market for our products is intensely competitive, subject to rapid change and
      significantly affected by new product introductions and other market activities
      of industry participants. We believe that the most important competitive factors
      in the market for content management software are breadth of functionality,
      scalability, breadth of supported operating systems and content formats, vendor
      viability, ease of use, product reputation, quality, performance, price, sales
      and marketing effort and customer service. We currently encounter direct
      competition from a number of public and private companies including IBM Corp.,
      EMC Corporation and FileNet Corporation, as well as a number of smaller
      competitors in niche markets. On August 10, 2006, IBM announced its intention
      to
      acquire FileNet. The acquisition, expected to close in the fourth quarter of
      2006, is subject to FileNet shareholder approval, regulatory
      reviews







10


and
      other
      customary closing conditions. As a result of this acquisition, IBM plans to
      build upon the advanced content management technologies of both companies,
      which
      could have a negative impact on our competitive position.





Some
      of
      our competitors are substantially larger than we are, have significantly greater
      financial, technical and marketing resources, and have a larger installed base
      of customers. Some of these competitors also have extensive direct and indirect
      channels of distribution. As a result, they may be able to respond more quickly
      to new or emerging technologies and changes in customer requirements, or to
      devote greater resources to the development, promotion and sale of their
      products than we are able to. In addition, current and potential competitors
      have established or may establish cooperative relationships among themselves
      with prospective customers. Due to the relatively low barriers to entry in
      the
      software market, additional competition from other established and emerging
      companies is likely as the market for records and content management software
      continues to develop and expand. Accordingly, it is possible that new
      competitors or alliances among competitors may emerge and rapidly acquire
      significant market share. Some of our competitors may also combine with, or
      be
      acquired by other parties, providing them with additional resources with which
      to compete.





Increased
      competition may result in price reductions, reduced gross margins and loss
      of
      market share, any of which would have a material adverse effect on our business,
      operating results and financial condition. There can be no assurance that we
      will be able to compete successfully against current or future competitors
      or
      that competitive pressures will not have a material adverse effect on our
      business, operating results and financial condition.





**We
      may be unable to maintain or expand our international
      operations.**





We
      believe that our revenues and future operating results will depend in part
      on
      our ability to increase sales in international markets. There can be no
      assurance that we will be able to maintain or increase international market
      demand for our products or attract and retain qualified personnel who will
      be
      able to successfully market our products internationally. The majority of our
      current international revenues are derived from the direct sales force of our
      wholly-owned subsidiaries. These subsidiaries also derive revenue in certain
      geographic areas through third-party agents. Our international sales are subject
      to the general risks inherent in doing business internationally,
      including:





·
            unexpected
                changes in regulatory requirements;


·
            tariffs
                and other trade barriers;


·
            costs
                and difficulties of localizing products for international countries;


·
            lack
                of acceptance of localized products in international countries;


·
            longer
                accounts receivable payment cycles;


·
            difficulties
                in managing international operations;


·
            fluctuations
                in currency exchange rates;


·
            potentially
                adverse tax consequences;


·
            restrictions
                on the repatriation of earnings;


·
            the
                burdens of complying with a wide variety of international laws; and


·
            economic
                or political instability.





Any
      or
      all of the foregoing factors may have a material adverse effect on our future
      international revenues, and consequently, on our business, operating results
      and
      financial condition.





An
      increase in the value of the U.S. dollar relative to foreign currencies
      could make our products more expensive, and, therefore, potentially less
      competitive in those markets. To the extent that the U.S. dollar
      strengthens against foreign currencies in international markets in which we
      maintain operations, our net assets that are denominated in such foreign
      currencies will be devalued, resulting in a foreign currency translation
      loss.







11





**We
      may be unable to successfully protect our confidential and proprietary
      technology, and we may be required to defend our products against infringement
      claims.**





Our
      success depends heavily on our confidential and proprietary intellectual
      property. We rely primarily on a combination of confidentiality agreements,
      copyright, patent, trademark and trade secret laws and confidentiality
      procedures to protect our proprietary rights. Trade secret, patent and copyright
      laws afford only limited protection. Despite our efforts to protect our
      proprietary rights, unauthorized parties may attempt to copy aspects of our
      products or obtain and use information that we regard as proprietary. In
      addition, the laws of some countries do not protect our proprietary rights
      to as
      great an extent as do the laws of the United States. There can be no assurance
      that our means of attempting to protect our proprietary rights will be adequate
      or that our competitors will not independently develop similar or competitive
      technology.





Our
      products are generally provided to customers in object code format only.
      However, we enter into arrangements with some of our customers that provide
      for
      the release of our source code to the customer upon the occurrence of certain
      events, such as our bankruptcy or insolvency or certain material breaches by
      us
      of the license agreement between us and our customer. In the event of any
      release of the source code pursuant to these arrangements, the customer’s
      license is generally limited to use of the source code to maintain, support
      and
      configure our software products. Notwithstanding this protection, the delivery
      of source code to customers may increase the likelihood of misappropriation
      or
      other misuse by third parties of our intellectual property.





We
      are
      not aware that any of our products infringe on the proprietary rights of any
      third party. From time to time, however, a third party may claim infringement
      by
      us with respect to current or future products. Defense of any such claims,
      with
      or without merit, could be time-consuming, result in costly litigation, cause
      product shipment delays or require us to enter into royalty or licensing
      agreements for the right to use any such third party’s proprietary rights. Such
      royalty or licensing agreements, if required, may not be available on terms
      acceptable to us or at all, which could have a material adverse effect on our
      business, operating results and financial condition.





**We
      offer extended payment terms to many of our customers, which could impact our
      cash flow.**





We
      offer
      extended payment terms to some of our customers. For software license contracts
      with extended payment terms, the related financing period is generally three
      to
      five years. As of June 30, 2006, software license installments receivable
      totaled $21.5 million, as compared with the June 30, 2005 balance of $30.9
      million. We entered into an arrangement during our fiscal first quarter of
      2005
      that provides us with the option of selling installments receivable to General
      Electric Capital Corporation (“GECC”). During fiscal 2005 and 2006, we sold
      approximately $2.7 million and $3.1 million, respectively, of installments
      receivable to GECC under this arrangement. If the level of software license
      revenues financed by installments receivable increases and we are unable to
      assign a substantial percentage of such receivables to GECC or other vendor
      financing firms, our cash position is likely to be adversely affected. We
      continue to monitor the level of sales that include extended payment terms
      to
      manage the use of cash associated with these sales.





We
      believe that these installment contracts are enforceable, that the underlying
      companies provided financing have strong credit profiles, that we have a history
      of successfully enforcing original payment terms and that ultimate collection
      is
      probable. There can be no assurances, however, that customers will not default
      under such financing arrangements. A significant default could have a material
      adverse effect on our business, operating results and financial
      condition.







12





**We
      may be unable to generate sufficient revenues from our professional services
      business.**





There
      is
      no assurance that we will continue to generate significant revenues in the
      professional services marketplace, or that the direct and indirect costs
      associated with operating the professional services business will not be greater
      than revenues generated therefrom.





**If
      we are unable to license the technology that we need from third parties, our
      sales may be negatively impacted and our products may become
      obsolete.**





We
      rely
      on certain software and other information that we license from third parties,
      including software that is used to perform certain functions in our products.
      Although we believe that there are alternatives for these products, any
      significant interruption in the availability of such third party software could
      have a material adverse impact on our sales unless and until we can replace
      the
      functionality provided by these products. In addition, to a certain extent,
      we
      depend upon such third parties’ abilities to enhance their current products, to
      develop new products on a timely and cost-effective basis and to respond to
      emerging industry standards and other technological changes. There can be no
      assurance that we would be able to replace the functionality provided by the
      third party software currently offered in conjunction with our products in
      the
      event that such software becomes obsolete or incompatible with future versions
      of our products or is otherwise not adequately maintained or updated. The
      absence of or any significant delay in the replacement of that functionality
      could have a material adverse effect on our business, operating results and
      financial condition.





**Our
      products may contain defects, and we may be required to pay damages for product
      liability claims.**





Software
      products as complex as those offered by us frequently contain defects,
      especially when first introduced or when new versions are released. Although
      we
      conduct extensive product testing, we have in the past discovered software
      defects in certain of our new products and enhancements after their
      introduction. In the future, we could lose, or delay recognition of, revenues
      as
      a result of software errors or defects. We believe that our customers and
      potential customers are highly sensitive to defects in our software. Our
      business has not been materially adversely affected by any such errors to date.
      There can be no assurance, however, that despite testing by us and by our
      current and potential customers, errors will not be found in new products or
      releases after commencement of commercial shipments. If there are errors, it
      could result in loss of revenue or delay in market acceptance, diversion of
      development resources, damage to our reputation, or increased service and
      warranty costs, any of which could have a material adverse effect on our
      business, operating results and financial condition.





Our
      license agreements with our customers typically contain provisions designed
      to
      limit our exposure to potential product liability claims. However, it is
      possible that the limitation of liability provisions contained in our license
      agreements may not be effective under the laws of certain jurisdictions.
      Although we have not experienced any product liability claims to date, the
      sale
      and support of products by us may entail the risk of such claims, and there
      can
      be no assurance that we will not be subject to such claims in the future. A
      successful product liability claim brought against us could have a material
      adverse effect on our business, operating results and financial
      condition.





**We
      may be unable to successfully expand or develop relationships with strategic
      partners which could adversely affect our future revenue
      growth.**





To
      date,
      sales through indirect sales channels have not been significant although we
      continue to invest resources to develop these channels. We believe that certain
      of our products, including TCI, our content integration solution, and ABS for
      Spreadsheet Compliance, a solution that centralizes and manages the lifecycle
      of
      business-critical spreadsheets, are well positioned to be licensed through
      channels and we are working to initiate channel and OEM partnerships. In
      connection with this







13


strategy,
      we created a new position - Vice President of Channel Sales and Marketing -
      to
      lead this effort. This position was filled in the fourth quarter of fiscal
      2006.
      Our revenue growth in the future may be adversely affected if we do not expand
      existing relationships, if we are unable to establish additional relationships
      with strategic partners and if the newly-hired Vice President of Channel Sales
      and Marketing is unsuccessful in building our channel sales
      program.





**We
      may be unable to effectively manage our future growth, if
      any.**





Our
      ability to effectively manage our future growth, if any, will require us to
      continue to improve our operational, financial and management controls,
      accounting and reporting systems, and other internal processes. There can be
      no
      assurance that we will be able to make such improvements in an efficient or
      timely manner or that any such improvements will be sufficient to manage our
      growth, if any. In addition, management has stated that part of our growth
      strategy is to make acquisitions of other businesses or certain assets of other
      businesses. There are no assurances that we will be able to identify attractive
      acquisition candidates, consummate acquisition transactions or effectively
      integrate an acquired business into our operations. If we are unable to manage
      growth organically or by acquisition effectively, our business, operating
      results or financial condition would be materially adversely
      affected.





**If
      we lose key personnel or subcontractors, then we may be unable to successfully
      develop our business or our research and development
      efforts.**





Our
      success depends to a significant extent upon our executive management and
      certain other key employees. The loss of the service of executive management
      or
      other key employees could have a material adverse effect on us. Furthermore,
      we
      believe that our future success also will depend to a significant extent upon
      our ability to attract, train and retain highly skilled technical, management,
      sales and marketing personnel. Competition for such personnel is intense, and
      we
      expect that such competition will continue for the foreseeable future. We have
      from time to time experienced difficulty in locating candidates with appropriate
      qualifications. The failure to attract or retain such personnel could have
      a
      material adverse effect on our business, operating results and financial
      condition.





We
      utilize development subcontractors in India and the Ukraine. The loss of
      services of these subcontractors could have a material adverse effect on our
      research and development.





**Consolidation
      in the industries we market and sell in could adversely impact our business
      by
      eliminating a number of existing and potential customers.**





There
      has
      been and continues to be merger, acquisition and consolidation activity in
      the
      industries we market and sell in. This could reduce the number of our clients
      and potential clients. A smaller market for our products and services could
      have
      a material adverse effect on our business, operating results and financial
      condition.





In
      addition, consolidation of our customer base, as well as the consolidation
      of
      customer data centers and the scaling back of obsolete customer operating
      systems results in non-renewals and reductions in our maintenance revenues.
      If
      this trend continues, it could have a material impact on the level of our
      maintenance revenues.





**Customer
      concerns about the security of transactions conducted over the Internet may
      hinder our product sales.**





A
      significant barrier to electronic commerce and communications is the secure
      transmission of private information over public networks. Our products rely
      on
      encryption and authentication technology, some of which we have developed and
      some of which may be licensed from third parties, to provide the required
      security and authentication to ensure the privacy of Internet transactions.
      Advances in computer capabilities, new discoveries in the field of cryptography
      or other events or developments may result in a compromise or breach of the
      algorithms our products use to protect customer transaction data. Any breaches
      in security could cause a







14







significant
      decrease in the use of our products, which could undermine future product
      sales.





**Revised
      accounting pronouncements related to share-based payments have and will continue
      to reduce our reported earnings and could adversely affect our ability to
      attract and retain key personnel by reducing the share-based payments we are
      able to provide.**





As
      more
      fully discussed in Note 9, Stock-Based Compensation, to the accompanying
      Consolidated Financial Statements, effective July 1, 2005, we adopted the fair
      value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using
      the modified-prospective-transition method. As a result of adopting SFAS No.
      123(R), our income before income taxes and net income for the year ended June
      30, 2006, were $855,000 and $700,000 lower, respectively, than if we had
      continued to account for share-based compensation under APB No. 25.





Beginning
      in fiscal 2007, we intend to issue a combination of stock options and restricted
      stock to tailor and enhance the incentive nature of such instruments and to
      better manage the related expense charged to earnings, as required under SFAS
      No. 123(R). The number of equity-based compensation units granted to employees
      as a form of non-cash compensation will be based on guidelines established
      by us
      that consider, among other factors, market trends and the level of expense
      that
      will be charged to earnings. Vesting of such grants will be dependent on the
      achievement of certain corporate financial goals. The
      issuance of new equity-based compensation, if any, would increase the negative
      impact of SFAS No. 123(R).





In
      addition, the Nasdaq listing requirements requiring stockholder approval for
      all
      stock option plans could make it more difficult for us to adopt plans to grant
      options to employees in the future. To the extent that it becomes more difficult
      or costly to grant options and/or other stock-based compensation to employees,
      we may incur increased cash compensation costs or find it difficult to attract,
      retain and motivate employees, either of which could materially affect our
      business.





**We
      have incurred increased costs in response to recently enacted or proposed
      regulations.**





Recently
      enacted or proposed changes in the laws and regulations affecting public
      companies, including but not limited to the Sarbanes-Oxley Act of 2002 (“SOX”),
      have caused us to incur increased costs as we evaluate and respond to the
      resulting requirements. It is anticipated that the ongoing direct cost to comply
      with the SOX requirements will continue to be substantial.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.







15







**ITEM
      2. PROPERTIES**





We
      are
      headquartered in Rye, New York, where we lease an aggregate of 70,500 square
      feet of space. Administrative, marketing, product development and customer
      support, service and sales operations are located in the Rye space. We lease
      an
      aggregate of approximately 60,000
      additional square feet of space domestically and internationally for our sales
      offices, as well as for customer support and development in certain locations.
      We believe that these facilities are adequate to meet our current
      needs.





**ITEM
      3. LEGAL PROCEEDINGS**





From
      time
      to time, we are involved in litigation relating to claims arising out of our
      operations in the normal course of business. We are not a party to any legal
      proceedings, the adverse outcome of which, individually or in the aggregate,
      would have a material adverse effect on our business, operating results, cash
      flow or financial condition. For a discussion of two legal proceedings initiated
      by us, reference is made to Item 7, Management’s Discussion and Analysis of
      Financial Condition and Results of Operations, under the section entitled,
      “Other Matters.”





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a vote of security holders during the fiscal quarter
      ended June 30, 2006.









16





**PART
      II.**


**ITEM
      5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**





Our
      common stock has been quoted on the NASDAQ National Market under the symbol
      of
      MOBI since our initial public offering on April 27, 1998. According to the
      records of our transfer agent, we had approximately 49 stockholders of record
      as
      of August 18, 2006. Because many shares are held by brokers and other
      institutions on behalf of stockholders, we are unable to estimate the total
      number of stockholders represented by the record holders. The following table
      sets forth the high and low sales prices of our common stock on the NASDAQ
      National Market for the periods indicated.





**Quarter
      ended:**  **** **High**  **** **Low**


September
                30, 2004
            $9.68
            $5.06December
                31, 2004
            $9.19
            $6.31March
                31, 2005
            $7.85
            $5.57June
                30, 2005
            $7.00
            $5.76September
                30, 2005
            $6.65
            $5.01December
                31, 2005
            $7.00
            $5.10March
                31, 2006
            $7.40
            $5.57June
                30, 2006
            $6.55
            $5.34





We
      have
      never paid any cash dividends on our common stock and do not anticipate paying
      any cash dividends in the foreseeable future. We currently intend to retain
      future cash flows to fund the development and growth of our business. Payment
      of
      future dividends, if any, will be at the discretion of our Board of Directors
      after taking into account various factors, including Mobius’s financial
      condition, operating results, current and anticipated cash needs and plans
      for
      expansion.







17


**ITEM
      6. SELECTED FINANCIAL DATA**





The
      selected consolidated financial data presented below under the captions
      "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet
      Data" as of and for each of the years in the five year period ended
      June 30, 200 6
      are
      derived from our audited consolidated financial statements. The consolidated
      financial statements as of June 30, 2005 and 2006 and for each of the years
      in the three-year period ended June 30, 2006, and the reports thereon, are
      included elsewhere in this Form 10-K. The data set forth below should be read
      in
      conjunction with, and are qualified by reference to, "Management's Discussion
      and Analysis of Financial Condition and Results of Operations" and the
      Consolidated Financial Statements and Notes thereto, included elsewhere in
      this
      Annual Report on Form 10-K.





Years
                Ended June 30,2002
            
            2003
            
            2004
            
            2005
            
            2006**Consolidated
                Statement of Operations Data****(in thousands, except per share data):**Revenues:Software license
            
            $
            28,026
            
            $
            38,353
            
            $
            42,858
            
            $
            30,883
            
            $
            39,167Maintenance
            
            
            34,776
            
            
            38,448
            
            
            40,151
            
            
            41,416
            
            
            42,131Professional service and other
            
            
            5,111
            
            
            5,855
            
            
            5,079
            
            
            5,374
            
            
            7,933Total
                revenues
            
            
            67,913
            
            
            82,656
            
            
            88,088
            
            
            77,673
            
            
            89,231Cost
                of revenues:Software license
            
            
            1,128
            
            
            1,146
            
            
            1,115
            
            
            1,773
            
            
            1,110Maintenance
            
            
            5,919
            
            
            6,631
            
            
            7,048
            
            
            8,094
            
            
            7,721Professional service and other
            
            
            5,035
            
            
            5,934
            
            
            5,506
            
            
            4,782
            
            
            6,277Total
                cost of revenues
            
            
            12,082
            
            
            13,711
            
            
            13,669
            
            
            14,649
            
            
            15,108Gross
                profit
            
            
            55,831
            
            
            68,945
            
            
            74,419
            
            
            63,024
            
            
            74,123Operating
                expenses (1):Sales and marketing
            
            
            38,151
            
            
            34,776
            
            
            35,090
            
            
            36,402
            
            
            37,447Research and development
            
            
            15,741
            
            
            18,025
            
            
            20,797
            
            
            22,722
            
            
            22,726General and administrative
            
            
            10,380
            
            
            10,838
            
            
            11,397
            
            
            12,000
            
            
            13,356Acquired in-process research and development
            
            
            -
            
            
            910
            
            
            956
            
            
            -
            
            
            -Facilities restructuring
            
            
            1,394
            
            
            194
            
            
            -
            
            
            -
            
            
            -Total
                operating expenses
            
            
            65,666
            
            
            64,743
            
            
            68,240
            
            
            71,124
            
            
            73,529Income
                (loss) from operations
            
            
            (9,835
            )
            
            4,202
            
            
            6,179
            
            
            (8,100
            )
            
            594Interest
                income, net
            
            
            1,659
            
            
            1,514
            
            
            1,840
            
            
            2,264
            
            
            2,334Other
                income (expense)
            
            
            143
            
            
            220
            
            
            (90
            )
            
            104
            
            
            7Income
                (loss) before income taxes
            
            
            (8,033
            )
            
            5,936
            
            
            7,929
            
            
            (5,732
            )
            
            2,935Provision
                for (benefit from) income taxes
            
            
            (2,812
            )
            
            1,860
            
            
            3,127
            
            
            (3,037
            )
            
            855Net
                income (loss)
            
            $
            (5,221
            )
            $
            4,076
            
            $
            4,802
            
            $
            (2,695
            )
            $
            2,080Basic
                earnings (loss) per share (2)
            
            $
            (0.30
            )
            $
            0.23
            
            $
            0.27
            
            $
            (0.15
            )
            $
            0.11Basic
                weighted average shares outstanding (2)
            
            
            17,459
            
            
            17,363
            
            
            17,964
            
            
            18,409
            
            
            18,765Diluted
                earnings (loss) per share (2)
            
            $
            (0.30
            )
            $
            0.23
            
            $
            0.24
            
            $
            (0.15
            )
            $
            0.10Diluted
                weighted average shares outstanding (2)
            
            
            17,459
            
            
            18,089
            
            
            19,937
            
            
            18,409
            
            
            19,831**Consolidated
                Balance Sheet Data****(in thousands):**Total
                assets
            
            $
            71,392
            
            $
            81,818
            
            $
            95,576
            
            $
            90,315
            
            $
            93,340Total
                long-term obligations
            
            
            1,406
            
            
            5,560
            
            
            4,943
            
            
            3,812
            
            
            2,601Stockholders'
                equity
            
            
            31,120
            
            
            36,357
            
            
            45,139
            
            
            43,567
            
            
            49,500








(1)
            Included
                within sales and marketing, research and development and general
                and
                administrative expense is stock compensation expense associated with
                the
                granting of stock options to employees immediately prior to the Company’s
                IPO for the years ended June 30, 2002 and 2003 aggregating $125 and
                $43,
                respectively. There was no such expense during fiscal 2004, 2005
                and 2006
                since the entire expense was recognized prior to July 1, 2003. Effective
                July 1, 2005, we adopted the provisions of SFAS No. 123(R), “Share-Based
                Payment (revised).” For additional information, see Note 9 to the
                accompanying Consolidated Financial
                Statements.





(2)
            For
                a description of the basic and diluted earnings per share ("EPS")
                calculations and the basic and diluted weighted average shares
                outstanding, see Notes 2 and 3 of Notes to Consolidated Financial
                Statements.







18








**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF** **OPERATIONS**





In
      this
      section, readers are given a more detailed assessment of our operating results
      and changes in financial position over the periods discussed. This section
      should be read in conjunction with our Consolidated Financial Statements and
      related Notes. Please note that references in this section to “this year” and
“last year” refer to our fiscal years ended June 30, 2006 and June 30, 2005,
      respectively.





***Executive
      Overview***





We
      are a
      leading provider of integrated solutions for records and content management.  For
      twenty-five years, we have delivered innovative software that helps major
      corporations manage and derive value from vast amounts of digital records,
      documents and images of any type. Our technology has achieved industry-wide
      recognition for its breadth of functionality, breadth of supported information
      formats and the ability to meet high-volume, high-performance requirements
      in
      distributed environments that range from the desktop to the mainframe.





Our solutions manage the entire lifecycle of information - from the moment it is
      created until it is no longer needed - and ensure its long-term integrity and
      availability, both to meet the operational needs of the entity and to ensure
      legal and regulatory compliance.





By
      integrating information across the enterprise and managing its retention and
      disposition, we help our customers reduce operating costs, streamline critical
      business processes, and protect critical
      information assets.





Our
      flagship product, ViewDirect®, is market-leading software for enterprise high-volume storage, high-speed indexed access and electronic
      distribution and disposal of anything that is either connected to or created
      in
      a digital format. ViewDirect incorporates complete facilities for managing
      the
      entire lifecycle of anything kept in digital format that serves the needs of
      the
      business and addresses legal and regulatory requirements. Additional Mobius
      products provide integrated access to disparate digital repositories, monitor
      the accuracy of enterprise data, build and maintain Web sites, and automate
      business processes.





Our
      total
      revenues decreased from $88.1 million in fiscal 2004 to $77.7 million in
      fiscal 2005 and increased to $89.2 million in fiscal 2006. Operating income
      was $6.2 million, or 7.0% of revenues, in fiscal 2004, as compared with an
      operating loss of $8.1 million, or (10.4)% of revenues, in fiscal 2005 and
      operating income of $594,000, or 0.7% of revenues, in fiscal 2006. In fiscal
      2004, excluding the charge for acquired in-process research and development
      of
      $956,000, operating income was $7.1 million, or 8.1% of revenues. In fiscal
      2005, we recorded a $250,000 pre-tax charge related to the accelerated vesting
      of certain employee stock options. Excluding this charge, operating loss in
      fiscal 2005 was $7.9 million, or (10.1)% of revenues. In fiscal 2006, we
      recorded a pre-tax charge of approximately $855,000 for stock-based compensation
      expense recognized pursuant to the provisions of SFAS No. 123(R). We adopted
      SFAS No. 123(R) as of July 1, 2005. Excluding this charge, operating income
      was
      $1.4 million, or 1.6% of revenues, in fiscal 2006. Net income was $4.8 million,
      or $0.24 per diluted share, in fiscal 2004, as compared with a net loss of
      $2.7
      million, or ($0.15) per share, in fiscal 2005 and net income of $2.1 million,
      or
      $0.10 per diluted share, in fiscal 2006.





We
      derive
      our revenues from product licenses, related annual maintenance and professional
      services and other. Software license revenues decreased from $42.9 million
      in
      fiscal 2004 to $30.9 million last year, and increased to $39.2 million this
      year. Software license revenues in fiscal 2005 included an individual contract
      for $5.7 million in software license fees with a major financial institution.
      Maintenance revenues increased from $40.2 million in fiscal 2004 to $41.4
      million last year to $42.1 million this year. Professional service and other
      revenue increased from $5.1 million in fiscal 2004 to $5.4 million last year
      and
      increased to $7.9 million this year. This year, 43.9% of total revenues were
      generated from software licenses, 47.2%







19


were
      generated from maintenance and 8.9% were generated from professional services
      and other sources. Our professional services group offers installation and
      conversion services, and to a lesser extent, business consulting and training
      to
      our customers. The Mobius suite of products are generally not difficult to
      install and do not require significant installation services. As such, while
      this line of our business provides a valuable service to our customers, revenues
      from professional services are not a significant percentage of overall revenue.
      International revenues increased from $18.4 million in fiscal 2004 to $19.2
      million last year to $22.1 million this year. The majority of our current
      international revenues are derived from the direct sales force of our
      wholly-owned subsidiaries. These subsidiaries also derive revenue in certain
      geographies through third-party agents. Our subsidiaries conduct business in
      the
      currency of the country in which they operate, exposing us to currency
      fluctuations and currency transaction losses or gains, which are outside of
      our
      control.





The
      increase in revenues for fiscal 2006 was primarily due to increased software
      license revenue, and to a lesser extent, increased professional service
      activity. Software license revenue increased primarily as a result of
      improvements in sales and marketing management and effectiveness stemming
      largely from changes in our sales and marketing organization and the
      introduction of new processes and initiatives. Professional service revenue
      benefited from increased activity in Europe.





We
      have
      also achieved various internal goals that we believe have set the stage for
      growth in fiscal 2007 and beyond. In addition to our increases in revenue and
      profitability in fiscal 2006, other accomplishments include:





·
            Enhanced
                and strengthened our senior management team, including the addition
                of a
                Vice President of Channel Sales and Marketing to build our channel
                sales
                program;


·
            Obtained
                positive market reception for our newer product offerings described
                below;
                and


·
            Increased
                cash and cash equivalents balances by more than $6.0
                million.





We
      believe we are well positioned to meet the growing demand for content management
      solutions as companies intensify their search for ways to integrate content
      across various applications, to comply with government regulations, such as
      those mandated by the Sarbanes-Oxley Act and to reduce operating costs. We see a
      large and growing market leveraging our core competencies in the integrated
      document archive and retrieval systems and records management business. In
      addition to improving our overall execution, we intend to enhance our market
      position through our strong set of base products, along with recent additions
      to
      our product portfolio, including:





·
            ABS
                for Spreadsheet Compliance, which allows organizations of all sizes
                to
                manage and control the lifecycle of spreadsheets while ensuring the
                integrity and reliability of the data
                within;


·
            TCI,
                our solution for accessing information from any repository and making
                it
                available to any user or business application;
                and


·
            new
                enterprise records and email management capabilities available as
                part of
                our core ViewDirect product.





There
      can
      be no assurance, however, that such additions to our product portfolio
      will enhance our market position.





We
      believe that market factors continue to drive customers to cautiously spend
      on
      enterprise software and that we compete not only against other companies in
      our
      market space, but with other unrelated technologies vying for our customers’
spending budgets. These factors can result in unpredictability in the timing
      of
      orders. Additionally, the sales cycle is long and involves complexity as
      customers consider a number of factors before committing to purchase enterprise
      software. Factors considered by customers include product benefits (including
      its ability to meet various regulatory compliance requirements), cost, time
      of
      implementation, return on investment, the ability to operate with existing
      and
      future computer systems, the ability to accommodate increased transaction volume
      and product reliability.







20







There
      are
      no assurances that the growth in the overall content management market or the
      success of our newer products, such as ViewDirect E-mail Manager, TCI and Audit
      and Balancing System, will develop as anticipated, that the improvements in
      sales and marketing productivity and efficiency will continue or that the
      newly-hired Vice President of Channel Sales and Marketing will be successful
      building our channel sales program.





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with GAAP. The preparation of financial statements in accordance
      with
      GAAP requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements, and the reported
      amounts of revenue and expenses during the reporting period. Management bases
      its estimates and judgments on historical experience and on various other
      factors that are believed to be reasonable under the circumstances. These
      estimates are evaluated on an on-going basis. Actual results could differ from
      those estimates.





Management
      believes that its significant judgments and estimates used in the preparation
      of
      our consolidated financial statements are influenced by the following critical
      accounting policies:





***Revenue
      Recognition***





We
      recognize license and maintenance revenue in accordance with the provisions
      of
      Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended
      by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With
      Respect to Certain Transactions.” We generate license revenues from licensing
      the rights to use our software products to our customers. We also generate
      maintenance revenues from renewable support and software enhancements and
      professional service revenues from performing consulting activities for license
      customers. Software license contracts generally have terms of three, five or
      fifteen years.





Revenues
      from software license agreements are recognized upon delivery of the software
      if
      evidence of an arrangement exists, pricing is fixed and determinable, and
      collectibility is probable. If an acceptance period is required, revenues are
      recognized upon the earlier of customer acceptance or the expiration of the
      acceptance period. We allocate revenue on software arrangements involving
      multiple elements to each element based on vendor-specific objective evidence
      of
      the fair value allocable to each element. During the first half of fiscal 2004,
      our contracts included a software license and an obligation to provide
      maintenance. Assuming all other revenue recognition criteria were met, revenue
      was recognized upon delivery using the residual method in accordance with SOP
      98-9, whereby the fair value of the undelivered elements was deferred and the
      remaining portion of the arrangement fee was recognized as revenue. Accordingly,
      when we entered into a contract that included both a software license and an
      obligation to provide maintenance, the maintenance revenue was unbundled from
      the initial license fee and recognized ratably over the maintenance period,
      starting from the inception of the software license agreement. We determined
      the
      portion of the contract price attributable to maintenance (which did not
      necessarily track the allocation between license and maintenance fees set out
      in
      the contract) using a percentage derived from our pricing structure. The
      unbundled portion of such maintenance revenue was classified as deferred
      revenue, with amounts extending beyond one year reported as non-current deferred
      revenue. If evidence of the fair value for undelivered elements did not exist,
      all revenue from the arrangement was deferred until such evidence materialized
      or until all elements were delivered. While we still recognize revenue using
      the
      residual method in accordance with SOP 98-9, beginning in the third quarter
      of
      fiscal 2004, the vast majority of our software license revenue contracts provide
      for optional maintenance in the first year, billed separately from the software
      license arrangement. Maintenance revenue is generally recognized ratably over
      the term of the support, typically twelve months. The unearned portion of
      maintenance revenue is classified as deferred revenue.





21






We
        offer
        installment contracts to our customers, which provide for periodic payments,
        with terms ranging from six months to five years, with the majority in the range
        of
        three years to five years, with generally the first payment due at the beginning
        of the contract period. Under such contracts, software license revenue reflects
        the present value of future payments under non-cancelable license arrangements.
        The discount is recognized as interest income over the term of the arrangement.
        We have an established business practice of offering installment contracts
        to
        customers and have a history of successfully enforcing original payment terms
        on
        these contracts without making concessions. In addition, the payment obligations
        are unrelated to product implementation or any other post-transaction activity.
        Therefore, revenues from installment contracts are generally recognized in
        the
        same manner as those requiring current payment. We entered into an arrangement
        during our fiscal first quarter of 2005 that provides us with the option
        of
        selling installments receivable to General Electric Capital Corporation.
        This
        arrangement gives us enhanced flexibility in offering financing alternatives
        to
        our customers and in managing our cash flows.





Professional
      service revenue is generally recognized using the percentage of completion
      method of accounting. In accordance with this method, revenue from professional
      service contracts is recognized based on the percentage of costs incurred to
      date to the total estimated costs of the project. The financial reporting for
      these contracts depends on estimates, which are regularly assessed and subject
      to revision as the contract progresses to completion. When the current estimate
      of total contract costs indicates that a contract will result in a loss, a
      provision for the full loss is recognized. Professional service revenue
      associated with new products is generally deferred until completion of the
      project and acceptance by the customer.





***Software
      Development Costs***





Statement
      of Financial Accounting Standards (SFAS) No. 86,
      "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed," requires that certain software development costs be capitalized
      once
      technological feasibility is established. The capitalized costs are then
      amortized on a straight-line basis over the estimated product life, or on the
      ratio of current revenues to total projected product revenues, whichever is
      greater.





We
      determine technological feasibility based on the working model method. The
      period between establishment of a working model and the general availability
      of
      our software has historically been short. Accordingly, software development
      costs qualifying for capitalization have been insignificant. As a result, we
      have expensed all software development costs.





***Income
      Taxes***





We
      account for income taxes under SFAS No. 109, "Accounting for Income Taxes."
      SFAS No. 109 requires the use of the asset and liability method of
      accounting for income taxes. Under this method, deferred tax assets and
      liabilities are recognized for the future tax consequences attributable to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and their respective tax bases. Deferred tax assets are
      recognized for deductible temporary differences, net operating loss
      carryforwards, and tax credit carryforwards. A valuation allowance is
      established if it is more likely than not that a deferred tax asset will not
      be
      realized.





Beginning
      July 1, 2005, we record windfall tax benefits associated with the exercise
      of
      stock options directly to stockholders’ equity when realized. Accordingly,
      deferred tax assets are not recognized for net operating loss carryforwards
      resulting from windfall tax benefits occurring from July 1, 2005 onward. A
      windfall tax benefit occurs when the actual tax benefit realized by us upon
      an
      employee’s disposition of an equity-based award exceeds the deferred tax asset,
      if any, associated with the award that we had recorded.








22





***Stock-Based
      Compensation***





Prior
      to
      July 1, 2005, we accounted for employee stock options and employee stock
      purchase grants under the intrinsic value method of Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations (APB No. 25). During that period, we applied the disclosure
      requirements of SFAS No. 148, “Accounting for Stock-Based Compensation
      Transition and Disclosure, an amendment of FASB Statement No. 123.”





Beginning
      July 1, 2005, we account for share-based compensation in accordance with SFAS
      No. 123(R), “Share-Based Payment (revised 2004),” (SFAS No. 123(R)), which
      replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
      APB Opinion No. 25. Under SFAS No. 123(R), we expense the grant date fair value
      of share-based compensation awards over the requisite service period. For
      additional information regarding the adoption of SFAS No. 123(R), see the
      section entitled “Stock-Based Compensation” below and Note 9 to the accompanying
      Consolidated Financial Statements.











23





**Results
      of Operations**





The
      following table sets forth certain items from our Consolidated Statement of
      Operations as a percentage of total revenues for the fiscal years
      indicated:




Years
                Ended June 30,2004
            
            2005
            
            2006Revenues:Software license
            
            
            48.6
            %
            
            39.7
            %
            
            43.9
            %Maintenance
            
            
            45.6
            
            
            53.4
            
            
            47.2Professional service and other
            
            
            5.8
            
            
            6.9
            
            
            8.9Total
                revenues
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of revenues:Software license
            
            
            1.3
            
            
            2.3
            
            
            1.2Maintenance
            
            
            8.0
            
            
            10.4
            
            
            8.7Professional service and other
            
            
            6.2
            
            
            6.2
            
            
            7.0Total
                cost of revenues
            
            
            15.5
            
            
            18.9
            
            
            16.9Gross
                profit
            
            
            84.5
            
            
            81.1
            
            
            83.1Operating
                expenses:Sales and marketing
            
            
            39.8
            
            
            46.9
            
            
            42.0Research and development
            
            
            23.6
            
            
            29.2
            
            
            25.4General and administrative
            
            
            13.0
            
            
            15.4
            
            
            15.0Acquired in-process research and development
            
            
            1.1
            
            
            -
            
            
            -Total
                operating expenses
            
            
            77.5
            
            
            91.5
            
            
            82.4Income
                (loss) from operations
            
            
            7.0
            
            
            (10.4
            )
            
            0.7Interest
                income, net
            
            
            2.1
            
            
            2.9
            
            
            2.6Other
                income (expense)
            
            
            (0.1
            )
            
            0.1
            
            
            -Income
                (loss) before income taxes
            
            
            9.0
            
            
            (7.4
            )
            
            3.3Provision
                for (benefit from) income taxes
            
            
            3.5
            
            
            (3.9
            )
            
            1.0Net
                income (loss)
            
            
            5.5
            %
            
            (3.5
            )%
            
            2.3
            %




***Year
      Ended June 30, 2004 Compared to Year Ended June 30, 2005 Compared to
      Year Ended June 30, 2006***





***Revenues:***





·
            **Total
                revenues**decreased 11.8% from $88.1 million in fiscal 2004 to $77.7 million in
                fiscal 2005 and increased 14.9% to $89.2 million in fiscal 2006.
                Domestic
                revenues decreased 16.0% from $69.7 million in fiscal 2004 to
                $58.5 million in fiscal 2005 and increased 14.7% to $67.1 million in
                fiscal 2006. International revenues increased 4.0% from $18.4 million
                in
                fiscal 2004 to $19.2 million in fiscal 2005 and increased 15.3% to
                $22.1 million in fiscal 2006. The nature, size and timing of any
                individual license contract from time to time impacts the relative
                growth
                rates in the domestic and international markets. Included in international
                revenues during fiscal 2005 was an individual contract for $5.7 million
                in
                software license fees with a major financial institution. The following
                provides a discussion of the changes in software license revenues,
                maintenance revenues and professional service and other revenues
                for the
                fiscal years ended June 30, 2004, 2005 and
                2006.





·
            **Software
                license revenues**decreased 27.9% from $42.9 million in fiscal 2004 to
                $30.9 million in fiscal 2005 and increased 26.8% to $39.2 million in
                fiscal 2006. We believe that our results in fiscal 2005 were negatively
                impacted by several factors, including underperformance due to poor
                execution in (a) closing contracts for existing products, (b) order
                pipeline building for new and existing products and (c) new product
                integration. In addition, performance was adversely impacted by
                health-related senior management changes in the sales and marketing
                functions. In fiscal 2006, the increase in software license revenues
                primarily reflects improvements in sales and marketing management
                and
                effectiveness stemming largely from organizational changes, including
                the
                addition of a new Senior Vice President of Worldwide Sales and a
                Senior
                Vice President of Marketing in the second half of fiscal 2005, and
                the
                related introduction of new processes and
                initiatives.







24








**·**
            **Maintenance
                revenues**increased
                3.2% from $40.2 million in fiscal 2004 to $41.4 million in
                fiscal 2005 and increased 1.7% to $42.1 million in fiscal 2006. The
                increases in maintenance revenues during these years were primarily
                due to
                new software licenses covered by maintenance agreements and increased
                maintenance fees on renewals, which were substantially offset by
                the
                non-renewal or reduction of existing maintenance contracts and lower
                maintenance rates on Solution Packs relative to other licenses.





Non-renewals
      and reductions in maintenance are the result of a number of factors, including
      the licensing of Solution Packs to our customers, the consolidation of our
      customer base, the consolidation of customer data centers and the scaling back
      of obsolete customer operating systems. Annual maintenance for new 15 year
      enterprise licenses for server and client products is generally based on 15%
      of
      the contract value. Annual maintenance for Solution Packs, which represented
      approximately 56.0%, 25.0% and 25.3% of total software license revenues during
      fiscal 2004, 2005 and 2006, respectively, is generally based on 10% of contract
      value. Solution Packs are combinations of certain server and client products
      designed to address specific customer requirements, which typically have five
      year license terms.





·
            **Professional
                service and other****revenues**increased 5.8% from $5.1 million in fiscal 2004 to $5.4 million in
                fiscal
                2005 and increased 47.6% to $7.9 million in fiscal 2006. Professional
                service revenues for fiscal 2004 included approximately $500,000
                relating
                to services associated with new products that was deferred in prior
                periods pending acceptance by the customer. Excluding this item,
                professional service revenues increased 17.4% during fiscal 2005,
                reflecting several large contracts that closed during the second
                half of
                last year. The 47.6% increase during fiscal 2006 principally reflects
                significantly higher service activity in Europe. During fiscal 2006,
                we
                hired or transferred from other departments additional personnel
                to
                address this increased demand.





Our
      professional services group offers installation and conversion services, and
      to
      a lesser extent, business consulting and training to our customers. The Mobius
      suite of products are generally not difficult to install and do not require
      significant installation services. As such, while this line of our business
      provides a valuable service to our customers, revenues from professional
      services are not a significant percentage of overall revenue. Other revenues
      for
      all years were not significant.





***Cost
      of Revenues:***





·
            **Cost
                of software license revenues**consists primarily of the cost of royalties and sublicense fees.
                The cost
                of software license revenues increased 59.0% from $1.1 million in
                fiscal
                2004 to $1.8 million in fiscal 2005 and decreased 37.4% to $1.1 million
                in
                fiscal 2006, representing 2.6%, 5.7% and 2.8%, respectively, of software
                license revenues in those years. The cost of software license revenues
                is
                a variable expense related to software license revenues that are
                subject
                to third-party royalties and sub-license fees. The percentage of
                cost of
                software license revenues to total revenues is generally low since
                most of
                the products we license are developed in-house. The increase during
                fiscal
                2005 is primarily due to higher royalties related to an increase
                in
                software license revenue subject to third-party royalties, in particular,
                a significant imaging solution licensed to a customer that included
                third-party software during the fiscal third quarter of 2005. The
                decrease
                during fiscal 2006 was primarily due to the significant imaging solution
                licensed to a customer during fiscal
                2005.





·
            **Cost
                of maintenance****revenues**consists primarily of personnel costs related to our Customer Support
                group. The cost of maintenance revenues increased 14.8% from $7.0
                million
                in fiscal 2004 to $8.1 million in fiscal 2005 and decreased 4.6% to
                $7.7 million in fiscal 2006, representing 17.6%, 19.5% and 18.3%,
                respectively, of maintenance revenues in those years. In fiscal 2005,
                the
                increase in cost of maintenance revenues is primarily due to
                personnel-related costs resulting from increased staffing, as well
                as
                increased utilization of Professional Services personnel
                in Customer Support projects, resulting in a higher allocation of
                these
                costs to cost of maintenance revenues. The decrease during fiscal
                2006 was
                primarily due to a reduction in maintenance-related staffing in fiscal
                2006 as compared with fiscal
                2005.








25






·
            **Cost
                of professional service and other revenues**consists
                primarily of personnel costs associated with providing professional
                services, as well as third party subcontractor costs. The cost of
                professional service and other revenues decreased 13.1% from $5.5
                million
                in fiscal 2004 to $4.8 million in fiscal 2005 and increased 31.3%
                to $6.3
                million in fiscal 2006, representing 108.4%, 89.0% and 79.1% respectively,
                of professional service and other revenues in those years. The cost
                of
                professional service for fiscal 2004 included approximately $500,000
                of
                costs relating to services associated with new products that we had
                deferred as of June 30, 2003 pending acceptance by the customer.
                Excluding
                this item, the cost of professional service decreased 5.2% in fiscal
                2005.
                The cost of professional service decreased in fiscal 2005 due to
                lower
                personnel costs (reflecting decreased headcount), as well as the
                allocation of some of the personnel costs to cost of maintenance
                revenues
                due to the utilization of Professional Services personnel in Customer
                Support projects. These decreases were partially offset by an increase
                in
                third-party subcontractor costs. In fiscal 2006, the cost of professional
                services and other revenues increased primarily due to an increase
                in
                personnel costs in Europe. During 2006, the cost of professional
                service
                and other revenues as a percentage of professional service and other
                revenues decreased almost ten percentage points as compared with
                last
                year, primarily due to improved professional staff utilization. Partially
                offsetting this improvement was an increase in third-party subcontractor
                costs and a decrease in the allocation of Professional Services personnel
                to other departments.





***Operating
      Expenses:***





·
            **Sales
                and marketing**expenses consist primarily of the cost of personnel associated with
                the
                selling and marketing of our products, including incentive compensation
                costs associated with revenues. Sales and marketing costs also include
                the
                cost of branch sales offices, marketing, promotional materials,
                advertising, food, travel and lodging expenses and bad debt expense.
                These
                expenses increased 3.7% from $35.1 million in fiscal 2004 to
                $36.4 million in fiscal 2005 and increased 2.9% to $37.4 million for
                fiscal 2006, representing 39.8%, 46.9% and 42.0%, respectively, of
                total
                revenues in those years.In
                fiscal 2005, sales and marketing expenses increased due to higher
                personnel costs (reflecting increased average headcount and severance
                expense), travel expenses and payroll taxes and benefits (due to
                higher
                mix of revenue and incentive compensation earned by employees in
                countries
                with higher social costs). These increases were partially offset
                by lower
                incentive compensation costs earned on lower total software license
                revenues. In fiscal 2006, sales and marketing expenses increased
                primarily
                due to increased sales incentive costs as a result of higher software
                license and professional service revenues and a new compensation
                plan for
                marketing personnel. Also contributing to the increase were higher
                travel
                expenses and increased subcontractor fees, primarily related to higher
                marketing campaign costs.





·
            **Research
                and development**expenses consist primarily of personnel and subcontractor costs
                attributable to the development of new software products and the
                enhancement of existing products. We employ developers in Rye, NY;
                Orlando, FL; and Ottawa, Canada, and utilize subcontractors in India
                and
                the Ukraine. Research and development expenses increased 9.3% from
                $20.8 million in fiscal 2004 to $22.7 million in fiscal 2005 and
                were also $22.7 million in fiscal 2006, representing 23.6%, 29.2%
                and
                25.4%, respectively, of total revenues in those years. The increase
                in
                fiscal 2005 is primarily due to higher personnel costs on increased
                headcount, including personnel added as a result of the acquisition
                on
                April 26, 2004 of the technology and certain other assets of eManage
                Inc.
                (“eManage”) and increased depreciation and amortization primarily related
                to intangible assets recorded in connection with the eManage asset
                acquisition. For a further discussion of the acquisition of the technology
                and certain other assets of eManage, see the section entitled, “Liquidity
                and Capital Resources” below. In fiscal 2006, increases in personnel
                costs, primarily salaries and overtime, and a higher allocation of
                expenses from Customer Support due to increased utilization of their
                personnel in development projects, were substantially offset by lower
                third-party development
                fees.




·
            **General
                and administrative**expenses consist primarily of personnel costs related to management,
                accounting, human resources, information technology services,
                administration and associated overhead costs, as well as fees for
                professional services, primarily legal and accounting. General and
                administrative expenses increased 5.3% from $11.4 million in fiscal
                2004 to $12.0 million in fiscal 2005 and increased 11.3% to $13.4
                million
                in fiscal 2006, representing 13.0%, 15.4% and 15.0%, respectively,
                of
                total revenues in those years. The increase in 2005 is due to higher
                personnel costs, primarily as a result of increased headcount and
                salary
                increases, and increased subcontractor and accounting fees related
                to
                Sarbanes-Oxley compliance work. In fiscal 2006, the increase in general
                and administrative expenses was due to increases in a number of items
                including: personnel costs, primarily as a result of salary increases
                and
                bonus compensation costs; compensation expense on stock options relating
                to SFAS No. 123(R); and, professional fees, primarily as a result
                of
                increased legal fees.





·
            **Acquired
                in-process research and development**expense relates to the acquisition of the technology and certain
                other
                assets of eManage. A portion of the purchase price in the acquisition
                was
                allocated to acquired in-process research and technology. Since the
                technological feasibility of the research and development projects
                had not
                yet been achieved and we believed such projects had no alternative
                future
                use, the acquired in-process research and development was expensed
                in the
                year of acquisition. As a result, we recorded a charge of $956,000
                in
                fiscal 2004 relating to the eManage asset acquisition. A valuation
                prepared using the discounted net cash flow method was utilized to
                value
                the acquired in-process research and development expenses for the
                eManage
                asset acquisition.





***Interest
      income and other income (expense):***





Interest
      income, net of interest expense, was $1.8 million in fiscal 2004, and
      $2.3 million in both fiscal 2005 and 2006. The increase in interest income
      during fiscal 2005 is primarily attributable to higher interest rates on
      installments receivable balances and slightly higher interest rates on invested
      cash balances. During fiscal 2006, increases in interest income due to higher
      cash balances and higher interest rates on invested cash balances and
      installments receivable was offset by a decrease in interest income from lower
      installments receivable balances due to a decrease in financed deals. Other
      income (expense) is comprised of foreign currency transactions and other
      miscellaneous income (expense). Foreign currency losses were $90,000 in fiscal
      2004, as compared with foreign currency gains of $61,000 and $10,000 in fiscal
      2005 and 2006, respectively. Other miscellaneous income (expense) was
      insignificant for fiscal 2004, 2005 and 2006, respectively.





***Provision
      for (benefit from) income taxes:***





The
      tax
      provision for income taxes was $3.1 million in fiscal 2004 (effective tax
      provision rate of 39.4%), compared with a tax benefit of $3.0 million (effective
      tax benefit rate of (53.0)%) in fiscal 2005 and a tax provision of $855,000
      (effective tax provision rate of 29.1%) in fiscal 2006. The effective tax rates
      in both fiscal year 2005 and 2006 were favorably impacted by the reversal of
      previously accrued taxes as a result of the expiration of the IRS statute of
      limitations on the tax years for which the accruals were established. The
      effective tax rate for fiscal 2006 was negatively impacted by our inability
      to
      claim a full year U.S. research and development tax credit due to the expiration
      of the credit effective December 31, 2005. Adjusting for the impact of these
      items, the effective tax benefit rate for fiscal 2005 would have approximated
      (42.5%), and the effective tax provision rate for fiscal 2006 would have
      approximated 26.2% (the “adjusted tax rates”). If the research and development
      tax credit is extended, we will record a “catch-up” adjustment in the period in
      which the related tax bill is passed.







26





The
      higher adjusted tax benefit rate in fiscal 2005 as compared with the tax rate
      in
      fiscal 2004 was primarily due to two substantially offsetting items: (i) the
      additive impact of the research and development credit on the tax benefit rate
      calculated on a loss in fiscal 2005 versus the reduction of the tax provision
      rate calculated on a profit in fiscal 2004, offset by (ii) lower foreign taxes
      in fiscal 2005. The lower adjusted tax rate in fiscal 2006 as compared with
      the
      adjusted tax benefit rate in fiscal 2005 also reflects the additive impact
      of
      the research and development credit on the tax benefit rate calculated on a
      loss
      in fiscal 2005 versus the reduction of a tax provision rate calculated on the
      profit in fiscal 2006.















27








**Selected
      Unaudited Quarterly Operating Results**





The
      following table presents certain unaudited consolidated statement of operations
      data for the eight fiscal quarters in the two-year period ended June 30, 2006.
      In management's opinion, this unaudited information has been prepared on the
      same basis as the audited Consolidated Financial Statements appearing elsewhere
      in this Form 10-K and includes all adjustments (consisting only of normal
      recurring adjustments) necessary for a fair presentation of the information
      for
      the quarters presented, when read in conjunction with the audited Consolidated
      Financial Statements and Notes thereto included elsewhere herein. The results
      of
      operations for any quarter are not necessarily indicative of results for any
      future period.





**Quarters
                Ended****Sept.
                30,**
            
            **Dec.
                31,**
            
            **March
                31,**
            
            **June
                30,**
            
            **Sept.30,**
            
            **Dec.
                31,**
            
            **March
                31,**
            
            **June
                30,****2004**
            
            **2004**
            
            **2005**
            
            **2005**
            
            **2005**
            
            **2005**
            
            **2006**
            
            **2006**Revenues:Software license revenues
            
            $
            6,204
            
            $
            6,875
            
            $
            6,751
            
            $
            11,053
            
            $
            8,995
            
            $
            9,507
            
            $
            9,126
            
            $
            11,539Maintenance
            
            
            10,003
            
            
            10,216
            
            
            10,586
            
            
            10,611
            
            
            10,679
            
            
            10,377
            
            
            10,435
            
            
            10,640Professional services and other
            
            
            921
            
            
            1,081
            
            
            1,946
            
            
            1,426
            
            
            1,747
            
            
            1,874
            
            
            2,070
            
            
            2,242Total
                revenues
            
            
            17,128
            
            
            18,172
            
            
            19,283
            
            
            23,090
            
            
            21,421
            
            
            21,758
            
            
            21,631
            
            
            24,421Cost
                of revenues:Software license revenues
            
            
            216
            
            
            240
            
            
            1,050
            
            
            267
            
            
            285
            
            
            370
            
            
            183
            
            
            272Maintenance
            
            
            2,079
            
            
            1,908
            
            
            2,095
            
            
            2,012
            
            
            1,865
            
            
            1,853
            
            
            1,930
            
            
            2,073Professional service and other
            
            
            840
            
            
            1,041
            
            
            1,470
            
            
            1,431
            
            
            1,386
            
            
            1,453
            
            
            1,566
            
            
            1,872Total
                cost of revenues
            
            
            3,135
            
            
            3,189
            
            
            4,615
            
            
            3,710
            
            
            3,536
            
            
            3,676
            
            
            3,679
            
            
            4,217Gross
                profit
            
            
            13,993
            
            
            14,983
            
            
            14,668
            
            
            19,380
            
            
            17,885
            
            
            18,082
            
            
            17,952
            
            
            20,204Operating
                expenses (1):Sales and marketing
            
            
            8,128
            
            
            9,128
            
            
            8,617
            
            
            10,529
            
            
            9,210
            
            
            9,019
            
            
            9,085
            
            
            10,133Research and development
            
            
            5,646
            
            
            5,850
            
            
            5,679
            
            
            5,547
            
            
            5,521
            
            
            5,793
            
            
            6,002
            
            
            5,410General and administrative
            
            
            2,712
            
            
            3,013
            
            
            3,140
            
            
            3,135
            
            
            3,257
            
            
            3,390
            
            
            3,319
            
            
            3,390Total
                operating expenses
            
            
            16,486
            
            
            17,991
            
            
            17,436
            
            
            19,211
            
            
            17,988
            
            
            18,202
            
            
            18,406
            
            
            18,933Income
                (loss) from operations
            
            
            (2,493
            )
            
            (3,008
            )
            
            (2,768
            )
            
            169
            
            
            (103
            )
            
            (120
            )
            
            (454
            )
            
            1,271Interest
                income, net
            
            
            527
            
            
            556
            
            
            531
            
            
            650
            
            
            594
            
            
            588
            
            
            577
            
            
            575Other
                income (expense)
            
            
            34
            
            
            (12
            )
            
            (3
            )
            
            85
            
            
            1
            
            
            24
            
            
            20
            
            
            (38
            )Income
                (loss) before income taxes
            
            
            (1,932
            )
            
            (2,464
            )
            
            (2,240
            )
            
            904
            
            
            492
            
            
            492
            
            
            143
            
            
            1,808Provision
                for (benefit from) income taxes
            
            
            (659
            )
            
            (1,363
            )
            
            (1,304
            )
            
            289
            
            
            177
            
            
            175
            
            
            (149
            )
            
            652Net
                income (loss)
            
            $
            (1,273
            )
            $
            (1,101
            )
            $
            (936
            )
            $
            615
            
            $
            315
            
            $
            317
            
            $
            292
            
            $
            1,156Basic
                earnings (loss) per share
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.05
            )
            $
            0.03
            
            $
            0.02
            
            $
            0.02
            
            $
            0.02
            
            $
            0.06Diluted
                earnings (loss) per share
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.05
            )
            $
            0.03
            
            $
            0.02
            
            $
            0.02
            
            $
            0.01
            
            $
            0.06As
                a Percentage of Total RevenuesRevenues:Software license revenues
            
            
            36.2
            %
            
            37.8
            %
            
            35.0
            %
            
            47.9
            %
            
            42.0
            %
            
            43.7
            %
            
            42.2
            %
            
            47.3
            %Maintenance
            
            
            58.4
            
            
            56.2
            
            
            54.9
            
            
            45.9
            
            
            49.8
            
            
            47.7
            
            
            48.2
            
            
            43.5Professional service and other
            
            
            5.4
            
            
            6.0
            
            
            10.1
            
            
            6.2
            
            
            8.2
            
            
            8.6
            
            
            9.6
            
            
            9.2Total revenues
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of revenues:Software license revenues
            
            
            1.3
            
            
            1.3
            
            
            5.4
            
            
            1.2
            
            
            1.3
            
            
            1.7
            
            
            0.9
            
            
            1.1Maintenance
            
            
            12.1
            
            
            10.5
            
            
            10.9
            
            
            8.7
            
            
            8.7
            
            
            8.6
            
            
            9.0
            
            
            8.6Professional service and other
            
            
            4.9
            
            
            5.8
            
            
            7.6
            
            
            6.2
            
            
            6.5
            
            
            6.6
            
            
            7.2
            
            
            7.7Total cost of revenues
            
            
            18.3
            
            
            17.6
            
            
            23.9
            
            
            16.1
            
            
            16.5
            
            
            16.9
            
            
            17.1
            
            
            17.4Gross
                profit
            
            
            81.7
            
            
            82.4
            
            
            76.1
            
            
            83.9
            
            
            83.5
            
            
            83.1
            
            
            82.9
            
            
            82.6Operating
                expenses (1):Sales and marketing
            
            
            47.4
            
            
            50.2
            
            
            44.7
            
            
            45.6
            
            
            43.0
            
            
            41.4
            
            
            42.0
            
            
            41.5Research and development
            
            
            33.0
            
            
            32.2
            
            
            29.5
            
            
            24.0
            
            
            25.8
            
            
            26.6
            
            
            27.8
            
            
            22.1General and administrative
            
            
            15.8
            
            
            16.6
            
            
            16.3
            
            
            13.6
            
            
            15.2
            
            
            15.6
            
            
            15.3
            
            
            13.9Total
                operating expenses
            
            
            96.2
            
            
            99.0
            
            
            90.5
            
            
            83.2
            
            
            84.0
            
            
            83.6
            
            
            85.1
            
            
            77.5Income
                (loss) from operations
            
            
            (14.5
            )
            
            (16.6
            )
            
            (14.4
            )
            
            0.7
            
            
            (0.5
            )
            
            (0.5
            )
            
            (2.2
            )
            
            5.1Interest
                income, net
            
            
            3.1
            
            
            3.1
            
            
            2.7
            
            
            2.8
            
            
            2.8
            
            
            2.7
            
            
            2.7
            
            
            2.3Other
                income (expense)
            
            
            0.2
            
            
            (0.1
            )
            
            -
            
            
            0.4
            
            
            -
            
            
            0.1
            
            
            0.1
            
            
            (0.1
            )Income
                (loss) before income taxes
            
            
            (11.2
            )
            
            (13.6
            )
            
            (11.7
            )
            
            3.9
            
            
            2.3
            
            
            2.3
            
            
            0.6
            
            
            7.3Provision
                for (benefit from) income taxes
            
            
            (3.8
            )
            
            (7.5
            )
            
            (6.8
            )
            
            1.2
            
            
            0.8
            
            
            0.9
            
            
            (0.7
            )
            
            2.7Net
                income (loss)
            
            
            (7.4
            )%
            
            (6.1
            )%
            
            (4.9
            )%
            
            2.7
            %
            
            1.5
            %
            
            1.4
            %
            
            1.3
            %
            
            4.6
            %





(1)
      In
      the fiscal fourth quarter of 2005, we recorded a $250,000 pre-tax charge related
      to the accelerated vesting of certain employee stock options. Effective July
      1,
      2005, we adopted the provisions of SFAS No. 123(R). For additional information,
      see Note 9 to the accompanying Consolidated Financial Statements.





Our
      quarterly revenues and operating results have varied significantly in the past
      and are likely to vary substantially from quarter to quarter in the future.
      For
      a further discussion of the factors that could impact quarterly results, see
      the
      section entitled “Factors Affecting Future Performance” above. Historically,
      license revenues typically peak primarily in the fourth fiscal quarter (ending
      June 30) and to a lesser


28


extent
      in
      the second fiscal quarter (ending December 31). These
      fluctuations are caused primarily by customer purchasing patterns and our sales
      force incentive programs, which recognize and reward sales personnel on the
      basis of achievement of annual and other periodic performance quotas, as well
      as
      by the factors described above. Changes in buying patterns, product mix and
      sales force incentive programs may alter these historical seasonality
      patterns.





**Liquidity
      and Capital Resources**





***Executive
      Overview***





Since
      our
      inception, we have funded our operations principally through cash flows from
      operating activities. As of June 30, 2006, we had cash and cash equivalents
      of
      approximately $40.0 million, an increase of $6.3 million from the
      $33.7 million held at June 30, 2005. The increase was primarily due to
      a reduction in software license installments receivable, net income adjusted
      for
      depreciation and amortization, deferred income taxes and other non-cash charges,
      and cash received from equity-based benefit plans. These increases were
      partially offset by an increase in accounts receivable and capital expenditures.
      As of June 30, 2006 and 2005, the Company had no bank debt
      outstanding.





We
      believe that our existing cash balances and cash flows expected from future
      operations will be sufficient to meet our capital requirements through fiscal
      2007. As discussed in the section entitled, “Software License Installments
      Receivable” below, we have entered into a number of license contracts having
      extended payment terms. We continue to monitor the level of sales that include
      extended payment terms to manage the use of cash associated with these sales.
      We
      entered into an arrangement during our fiscal first quarter of 2005 that
      provides us with the option of selling installments receivable to General
      Electric Capital Corporation (“GECC”). This arrangement gives us enhanced
      flexibility in offering financing alternatives to our customers and in managing
      our cash flows. During fiscal 2006, we sold approximately $3.1 million of
      installments receivable, bringing total sales through June 30, 2006 under this
      arrangement to approximately $5.8 million. If the level of software license
      revenues financed by installments receivable increases and we are unable to
      assign a substantial percentage of such receivables to GECC or other vendor
      financing firms, our cash position is likely to be adversely
      affected.





*****





Net
      cash
      used in operating activities was $5.0 million in fiscal 2004, as compared with
      net cash provided by operating activities of $610,000 and $4.9 million in fiscal
      2005 and 2006, respectively. Our uses of cash during fiscal 2004 were primarily
      due to increases in software license installments receivable, partially offset
      by net income adjusted for non-cash items and increases in accounts payable
      and
      accrued expenses. Our sources of cash during fiscal 2005 were collections in
      accounts receivable and software license installments receivable, partially
      offset by net loss adjusted for non-cash items and reductions in accounts
      payable and accrued expenses. Our sources of cash during fiscal 2006 were from
      a
      reduction in software license installments receivable and net income adjusted
      for depreciation and amortization, deferred income taxes and other non-cash
      charges. These sources were partially offset by an increase in accounts
      receivable as a result of a decrease in the percentage of financed licenses
      (which would have been recorded as software license installments receivable)
      and
      a corresponding increase in licenses with one-time payment terms (recorded
      in
      accounts receivable) and a reduction in deferred revenue, primarily due to
      timing of maintenance billings. Software license installments, which decreased
      15.4% from $36.5 million at June 30, 2004 to $30.9 million at June 30, 2005,
      and
      decreased 30.6% to $21.5 million at June 30, 2006, represent payments due from
      customers for license fees that are paid over the term of the installment
      agreement. The decreases during fiscal 2005 and 2006 were due to collections,
      the sale of approximately $2.7 million in fiscal 2005 and $3.1 million in fiscal
      2006 of installments receivable to GECC and a lower percentage of financed
      deals. For additional
      information, see the section entitled, “Software License Installments
      Receivable” below.




Net
      cash
      used in investing activities was $1.3 million, $0.9 million and $1.6 million
      in
      fiscal 2004, 2005 and 2006, respectively. Net cash used in investing activities
      during all three fiscal years represented the purchase of computer equipment,
      furniture and fixtures and leasehold improvements.






29





Net
      cash
      provided by financing activities was $2.3 million, $765,000 and $1.6 million
      in
      fiscal 2004, 2005 and 2006, respectively. During fiscal 2004 and 2005, cash
      was
      provided by the exercise of stock options by employees of $2.0 million and
      $483,000, respectively, and employee stock purchases under the employee stock
      purchase plan of $291,000 and $282,000, respectively. Net cash provided by
      financing activities during fiscal 2006 was due to the exercise of stock options
      by employees of $698,000, employee stock purchases under the employee stock
      purchase plan of $575,000 and the net tax benefit attributable to stock options
      of $312,000.




Our
      material obligations and commitments to make future payments under contracts
      consist of our operating leases for our office facilities. These leases expire
      on various dates through fiscal 2011 and provide for additional payments
      relating to utility costs. As of June 30, 2006, the future minimum lease
      payments for these operating leases are as follows (in thousands):





























**Operating**


**Year
      Ended:        **Leases****




June 30,
      2007 $2,833


June 30,
      2008 2,621


June 30,
      2009 2,212


June 30,
      2010 1,701


June
      30,
      2011 129


Total
      minimum lease payments $9,496







In
      addition to the commitments shown above, we have commitments at June 30, 2006
      for future purchases of goods and services of approximately
      $220,000.





In
      compliance with the
      lease of our corporate headquarters in Rye, NY, the landlord holds a letter
      of
      credit issued by a bank totaling $275,000, collateralized by a certificate
      of
      deposit.





On
      April
      26, 2004 (the “eManage Closing Date”), the Company, through a wholly-owned
      subsidiary, acquired technology and certain other assets of eManage, a privately
      held company, for an aggregate of approximately $2.4 million in cash, which
      was
      paid from our existing cash balances. In addition, we assumed liabilities of
      $111,000 and incurred acquisition-related expenses of $250,000, for an aggregate
      purchase price of approximately $2.7 million. eManage develops software
      solutions for e-mail archiving, records management and lifecycle management
      that
      enable organizations to manage corporate records at an enterprise level. The
      eManage software suite includes a complete records management facility for
      Microsoft’s SharePoint Portal Server. It extends full records management
      functionality, including lifecycle management and records security, to the
      collaborative SharePoint document management environment. Under the terms of
      the
      agreement, we were obligated to pay eManage up to an additional $1.2 million
      if
      certain revenue and other operating targets were achieved as of the end of
      each
      quarter through June 30, 2005. During the fiscal fourth quarter of 2004, certain
      targets were met, and, accordingly, we recorded incremental goodwill and a
      payable to eManage of $340,000, which was paid during the fiscal first quarter
      of 2005. During the fiscal second and fourth quarters of 2005, certain
      additional targets were met, and accordingly, we recorded incremental goodwill
      of $85,000 and $93,000, respectively, which was paid in the fiscal second
      quarter of 2005 and the fiscal first quarter of 2006,
      respectively.


We
      continue to evaluate potential acquisition candidates whose products, technology
      and expertise or market share would enhance our strategic market
      position.





**Accounts
      Receivable Reserves**





Accounts
      receivable reserves are provided for potential problem accounts and for the
      potential that some customers decide to cancel or reduce the number of products
      covered by maintenance arrangements upon their anniversary but do not always
      notify us in sufficient time to prevent some portion of the annual






30




maintenance
      billings from being recognized. We specifically identify problem accounts based
      on the age of the receivable and through discussions with the customer and
      our
      sales representatives. Based on the specific account information and the
      historical relationship of actual losses to revenues and receivable balances,
      we
      exercise our judgment as to what portion of the accounts receivable balance
      requires a reserve. As of June 30, 2005 and June 30, 2006, approximately 74%
      and
      63%, respectively, of the total accounts receivable reserve balances were
      related to specific accounts. To the extent that an account for which a specific
      reserve was provided is subsequently collected, we reduce the reserves in the
      period of collection. ** Accounts
      receivable reserves were $595,000 and $559,000 at June 30, 2005 and June 30,
      2006, respectively.





**Software
      License Installments Receivable**





As
      of
      June 30, 2006, software license installments amounted to $21.5 million, a
      decrease of 30.6% compared with the June 30, 2005 balance of $30.9
      million. This
      decrease was primarily due to collections, the sale of approximately $3.1
      million of installments receivable to GECC and a lower percentage of financed
      licenses during fiscal 2006. We
      entered into an arrangement during our fiscal first quarter of 2005 that
      provides us with the option of selling certain installments receivable to GECC,
      which gives us enhanced flexibility in offering financing alternatives to our
      customers and in managing our cash flows. Through June 30, 2006, we have sold
      approximately $5.8 million of installments receivable to GECC. We offer extended
      payment terms to our customers that meet specified standards of
      creditworthiness, which we believe enhances our competitive position. Software
      license installments are discounted at a market rate of interest at the date
      the
      software license contract revenue is recognized. The discount is amortized
      to
      interest income using the interest method over the term of the financing.
      Software license installments receivable will fluctuate with the amount of
      license revenue sold on an installment basis.





As
      of
      June 30, 2006, one customer had a balance equal to 15.7% of total software
      license installments. No other customer had a balance in excess of 4.4% of
      total
      software license installments. As of June 30, 2006, total software license
      installments receivable have an average remaining term of approximately 1.3
      years.





We
      determine the reserve for software license installments based upon
      customer-specific information, including a credit review of the customer,
      historical write-off experience, our ability to enforce original payment terms
      and current economic conditions.





**Deferred
      Revenues**





Deferred
      revenues consist primarily of the unearned portion of maintenance revenues
      and
      license contracts. Current and non-current deferred revenues totaled $26.4
      million at June 30, 2005 and $24.9 million at June 30, 2006. Deferred revenues
      can fluctuate due to the timing of annual maintenance billings, increases or
      decreases in current license revenues and increases or decreases in license
      contracts that include more than one year of maintenance. As of June 30, 2006,
      current deferred revenues totaled $22.8 million and non-current deferred
      revenues totaled $2.1 million. It is anticipated that current deferred revenues
      of $22.8 million will be recognized as revenue within the next twelve
      months.







31





**Stock-Based
      Compensation**





As
      of
      June 30, 2006, we had the following stock-based compensation plans: the 2006
      Stock Incentive Plan (2006 Stock Plan), the Non-Employee Directors' 1998 Stock
      Option Plan (Directors’ Plan) and the 1998 Employee Stock Purchase Plan (ESPP).
      At our annual meeting of stockholders on February 7, 2006, the stockholders
      approved our 2006 Stock Plan, which replaces the 1996 Stock Incentive Plan
      (1996
      Stock Plan). As a result of the termination of the 1996 Stock Plan, option
      grants will no longer be made under the 1996 Stock Plan but it will continue
      in
      effect with respect to options previously granted thereunder. Key terms of
      these
      plans are summarized in Note 9 to the accompanying Consolidated Financial
      Statements.





Prior
      to
      July 1, 2005, we accounted for these stock-based compensation plans under the
      recognition and measurement provisions of APB Opinion No. 25, “Accounting for
      Stock Issued to Employees” (APB 25), and related Interpretations, as permitted
      by SFAS No. 123, “Accounting for Stock-Based Compensation.” Except for the
      one-time charge discussed in the following paragraph, no stock-based employee
      compensation cost was recognized in the Consolidated Statements of Operations
      for the years ended June 30, 2004 and 2005, as the ESPP was considered
      non-compensatory pursuant to APB 25 and all options granted under the 1996
      Stock
      Plan and the Directors’ Plan had an exercise price equal to the market value of
      the underlying common stock on the date of grant.





On
      June
      14, 2005, our Board of Directors approved a plan to accelerate the vesting
      of
      all unvested employee stock options issued under the 1996 Stock Plan, other
      than
      those options awarded to officers. Our Board took this action with the belief
      that it is in the best interest of stockholders, as it will reduce our reported
      compensation expense associated with those stock options in future periods.
      As a
      result of this acceleration, during the fiscal fourth quarter of 2005, we
      recorded pre-tax compensation expense of $250,000, which represents the
      intrinsic value measured at the acceleration date for the estimated number
      of
      options that, absent the acceleration, would have expired
      unexercised.





Beginning
      in fiscal 2007, we intend to issue a combination of stock options and restricted
      stock to tailor and enhance the incentive nature of such instruments and to
      better manage the related expense charged to earnings, as required under SFAS
      No. 123(R). The number of equity-based compensation units granted to employees
      as a form of non-cash compensation will be based on guidelines established
      by
      the Company that consider, among other factors, market trends and the level
      of
      expense that will be charged to earnings. Vesting of such grants will be
      dependent on the achievement of certain corporate financial goals.





Effective
      July 1, 2005, we adopted the fair value recognition provisions of SFAS No.
      123(R), “Share-Based Payment (revised 2004),” using the
      modified-prospective-transition method. Under the
      modified-prospective-transition method, prior period financial statements are
      not restated. As
      a
      result of adopting SFAS No. 123(R) on July 1, 2005, our income before income
      taxes and net income for the year ended June 30, 2006, were $855,000 and
      $700,000 lower, respectively, than if we had continued to account for
      share-based compensation under APB No. 25. Basic and diluted earnings per share
      for the year ended June 30, 2006 would have been $0.15 and $0.14 respectively,
      if we had not adopted SFAS No. 123(R), compared to reported basic and diluted
      earnings per share of $0.11 and $0.10, respectively.







32





The
      following table illustrates the effect on income (loss) before income taxes,
      net
      income (loss) and income (loss) per share if we had applied the fair value
      recognition provisions of SFAS No. 123(R) to options granted under our 1996
      Stock Plan, Directors’ Plan and ESPP during the years ended June 30, 2004 and
      2005. For purposes of this pro forma disclosure, the value of the options is
      estimated using a Black Scholes options-pricing formula and amortized to expense
      over the options’ vesting periods.





**Year
                Ended June 30,****2004**
            
            **2005**Income
                (loss) before income taxes- as reported
            
            $
            7,929
            
            $
            (5,732
            )Income
                (loss) before income taxes- pro forma
            
            $
            5,960
            
            $
            (9,413
            )Net
                income (loss)- as reported
            
            $
            4,802
            
            $
            (2,695
            )Net
                income (loss)- pro forma
            
            $
            3,452
            
            $
            (5,805
            )Basic
                net income (loss) per share- as reported
            
            $
            0.27
            
            $
            (0.15
            )Basic
                net income (loss) per share- pro forma
            
            $
            0.19
            
            $
            (0.32
            )Diluted
                net income (loss) per share- as reported
            
            $
            0.24
            
            $
            (0.15
            )Diluted
                net income (loss) per share- pro forma
            
            $
            0.17
            
            $
            (0.32
            )





It
      is
      expected that the unrecognized stock-based compensation expense of approximately
      $950,000 at June 30, 2006, will be recognized against income over a
      weighted-average period of approximately 1.45 years.





**Other
      Matters**





**INFOPAC-Tapesaver:** In
      January 1999, we sold the INFOPAC-TapeSaver product to a third party for
      approximately $3.0 million payable over a five-year period. As a result of
      this
      arrangement, we were going to recognize $3.0 million of license revenues as
      the
      buyer made payments over a five-year period ended December 31, 2003. The buyer
      has been delinquent on these payments since June 2001 and, as such, no license
      revenue relating to this agreement was recognized in fiscal 2004, 2005 and
      2006.





We
      commenced arbitration proceedings against the buyer to enforce the payment
      terms
      in the sales agreement. On March
      26, 2002, the arbitrator issued an award in our favor against the buyer and
      its
      president in the amount of $381,750, which represented the amount past due
      under
      such agreement. The arbitrator also directed the buyer and its president to
      pay
      us $37,500 per month from March 31, 2002 through December 31, 2003 and to pay
      our share of the arbitration expenses. In April 2002, Mobius commenced an action
      against the buyer and its president in the United States District Court for
      the
      Southern District of New York to confirm the arbitration award. The
      Court
      entered an order confirming the award on September 23, 2002. We have docketed
      the judgment in California for the full amount of the debt due of approximately
      $1.2 million. During January 2005, the buyer’s president filed for personal
      bankruptcy protection. In April 2005, we filed a complaint in the bankruptcy
      proceeding alleging that the buyer’s president’s debt to us is not dischargeable
      in the bankruptcy proceeding. The buyer’s president answered the complaint,
      denying those allegations. On May 17, 2006, the parties settled the action,
      with
      the buyer’s president agreeing to pay certain sums to be realized from the sale
      of his residence after settlement of an existing mortgage on the property.
      At
      this time, we can not estimate the amount, if any, that will be received from
      this sale. To date, we have not recorded any amounts due in connection with
      the
      arbitration. As a result of the uncertainty of collection, any amounts
      ultimately recorded will be accounted for on the cash basis.





**Acartus
      Litigation:** On May
      31, 2005, we filed an action in the U.S. District Court for the District of
      Delaware against Acartus, Inc. The complaint pleaded claims for trademark
      infringement, false representation/designation of origin and false advertising
      in violation of the Lanham Act (the “Lanham Claims”), and for violations of
      state statutory and common law. The complaint sought injunctive relief,
      compensatory damages in an amount no less than $500,000, plus costs
      and







33


attorneys’
      fees. On July 5, 2005, we moved for preliminary injunction with respect to
      the
      Lanham Act Claims, seeking to enjoin Acartus from improperly using the Mobius
      mark in violation of our trademark and other rights, and from making false
      statements in advertising about our products. We also sought expedited
      discovery. By Order dated July 6, 2005, the Court granted our request for
      expedited discovery and scheduled a hearing on our preliminary injunction motion
      for August 1, 2005. On July 22, 2005, Acartus agreed to a stipulated order
      entering a preliminary injunction with respect to the Lanham Act Claims, thereby
      mooting the August 1, 2005 hearing. Because Acartus has since declined to
      convert the preliminary injunction to a permanent injunction, we continue to
      prosecute all of our claims. On September 20, 2005, we amended our complaint
      to
      add a claim for violation of the Delaware Uniform Trade Secrets Act (the
“Amended Complaint”). On October 4, 2005, Acartus moved to strike, dismiss or
      stay the Amended Complaint. Acartus also declined to provide discovery while
      its
      motion was pending, notwithstanding the July 6, 2005 Order, necessitating a
      motion by us on November 2, 2005 to compel discovery. On June 28, 2006, the
      Court denied Acartus’s motion to strike, dismiss or stay the Amended Complaint
      and granted our motion to compel discovery. On July 13, 2006, Acartus answered
      the Amended Complaint. We then again amended the complaint in August 2006,
      to
      add new claims and allegations based on documents obtained thus far from Acartus
      in discovery, and to add EMC Corporation, which acquired Acartus, as a
      defendant. We also increased our request for damages to not less than $10
      million. The parties are now engaged in ongoing discovery. Pursuant to the
      Scheduling Order, fact discovery must be completed by December 1, 2006, expert
      discovery must be completed by January 24, 2007, summary judgment motions must
      be filed no later than January 31, 2007, and the case is scheduled for a
      two-week jury trial beginning on August 6, 2007. A mediation is also scheduled
      before a Magistrate Judge on October 26, 2006. At this time, we cannot predict
      the outcome or estimate the amount, if any, that will be received in the event
      we prevail in this matter.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes.” Under FIN 48, the tax effects of a position taken
      on a tax return should be recognized only if it is “more-likely-than-not” to be
      sustained based solely on its technical merits as of the reporting date. FIN
      48
      also provides guidance on derecognition, measurement, classification, interest
      and penalties, accounting in interim periods, disclosure and transition, and
      also requires significant new annual disclosures in the notes to the
      consolidated financial statements. The interpretation applies to all tax
      positions related to income taxes subject to SFAS No. 109.





Differences
      between the amounts recognized in the statements of financial position prior
      to
      the adoption of FIN 48 and the amounts reported after adoption must be accounted
      for as a cumulative-effect adjustment recorded to the beginning balance of
      retained earnings. FIN 48 is effective for fiscal years beginning after December
      15, 2006. As such, we are required to adopt FIN 48 at the beginning of our
      fiscal year 2008. We are currently evaluating the various requirements of FIN
      48, but we are unable at this time to assess what, if any, the financial
      statement impacts might be.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Our
      investment portfolio is comprised primarily of money market accounts and is
      subject to interest rate sensitivity. The primary objective of our investment
      activities is to preserve principal, while at the same time maximizing interest
      income. As of June 30, 2006, we held no marketable securities.





We
      may be
      subject to foreign exchange gains or losses on transactions denominated in
      other
      than the functional currency of us or our subsidiaries. Net gains and losses
      resulting from foreign exchange transactions are included in the determination
      of net income or loss. We do not use derivative financial investments to hedge
      potential foreign exchange losses.







34





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      Consolidated Financial Statements and Notes thereto are included in Item
      15(a)(1). Selected Quarterly Financial Data is included in Item 7 - Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





Not
      applicable.











35






**ITEM
      9A. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer
      and
      Chief Financial Officer have concluded that our disclosure controls and
      procedures were effective as of June 30, 2006 to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Securities Exchange Act of 1934 was recorded, processed, summarized and reported
      within the time periods specified in Securities and Exchange Commission rules
      and forms.





Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      do not expect that our disclosure controls and procedures or internal control
      over financial reporting will prevent all errors or fraud. An internal control
      system, no matter how well designed and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Further, the design of a control system must reflect the fact that there are
      resource constraints and the benefits of the controls must be considered
      relative to their costs. Because of the inherent limitations in all internal
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues, errors and instances of fraud, if any, with us have been
      detected.





**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rule
      13a-15(f). Our management, including our Chief Executive Officer and Chief
      Financial Officer, conducted an evaluation of the effectiveness of our internal
      control over financial reporting based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on the results of this evaluation, our management concluded that our internal
      control over financial reporting was effective as of June 30, 2006.





Management’s
      assessment of the effectiveness of our internal control over financial reporting
      as of June 30, 2006 has been audited by PricewaterhouseCoopers LLP, an
      independent registered public accounting firm, as stated in their report which
      is included herein.





**Changes
      in Internal Control Over Financial Reporting**





There
      were no changes in our internal control over financial reporting during our
      fiscal quarter ended June 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**ITEM
      9B. OTHER INFORMATION**





None.







36


**PART
      III.**


**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





There
      are
      currently nine members of the Board of Directors. The Board is divided into
      three classes with terms expiring, respectively, at the 2006, 2007 and 2008
      annual meeting of stockholders. Generally, our directors are elected for
      three-year terms.




The
      Board
      oversees the management of the Company on the stockholders’ behalf. It reviews
      our long-term strategic plans and exercises direct decision-making authority
      in
      a number of key areas. The Board chooses the Chief Executive Officer, sets
      the
      scope of his authority to manage Mobius’s business day to day, and evaluates his
      performance.





The
      Board
      of Directors complies with the Nasdaq listing standards and reviews all
      commercial and other relationships of each director in making its determination
      as to the independence of its directors. After such review, the Board has
      determined that each of Messrs. Albracht, Cattini, Greenfield, P. Gross,
      Hernandez, Levitan and Perakis qualify as independent under the requirements
      of
      the Nasdaq listing standards. Mr. Patrick Gross is not related to Mr. Mitchell
      Gross. Only independent directors serve on Mobius’s Audit, Compensation and
      Corporate Governance and Nominating Committees. The Board met six times during
      fiscal 2006 and acted by unanimous written consent three times. Each director
      attended all of the meetings of the Board, except that Mr. Greenfield attended
      five of the six Board meetings. In addition, Messrs. Cattini and Perakis, who
      were elected to our Board on May 4, 2006, attended all of the Board meetings
      subsequent to their election. In addition, Mr. Arthur J. Marks served as a
      Director until his resignation from the Board effective September 20, 2005.
      Mr.
      Marks attended the one Board meeting held during fiscal 2006 prior to his
      resignation.





**INFORMATION
      CONCERNING DIRECTORS**





Set
      forth
      below are the names, ages, positions and certain other information concerning
      our current Directors.





Mitchell
                Gross.....................................................
              Age
                56
              Director
                since 1981
            Co-founder
                of Mobius. President since 1981 and Chairman of the Board and Chief
                Executive Officer since 1996. Mr. Gross was an officer in the U.S.
                Navy,
                serving on nuclear submarines, from 1971-1976. Holds a B.S. in mechanical
                engineering from Columbia University School of Engineering and Applied
                Science and an M.B.A. in finance from The Wharton School at the University
                of Pennsylvania.Joseph
                J. Albracht..............................................
              Age
                56
              Director
                since 1981
            Co-founder
                of Mobius. Executive Vice President and Secretary from 1981 to 1999,
                Chief
                Operating Officer from 1996 to 1999 and Treasurer from 1981 to 1996.
                Holds
                a B.S. in operations research and an M.B.A. from Pennsylvania State
                University.






37






Mark
                P.
                Cattini....................................................
              Age
                44
              Director
                since May 4, 2006
            President
                and Chief Executive Officer of MapInfo Corporation, the leading provider
                of location intelligence solutions, integrating software, data and
                services to provide greater value from location-based information,
                since
                January 2001 and a Director of MapInfo Corporation since February
                2001.
                Holds a B.A. in business studies, with honors, from Thames Valley
                University, London. Serves as a Director of Open Geospatial Consortium,
                Inc.Gary
                G. Greenfield..............................................
              Age
                51
              Director
                since 1998
            President
                and Chief Executive Officer of GXS, a company that operates one of
                the
                largest B2B e-commerce networks in the world, since December 2003.
                In
                addition, an Operating Partner for Francisco Partners, one of the
                world’s
                largest technology-focused buyout funds, since December 2003. Former
                Chief
                Executive Officer of Peregrine Systems, Inc., a global provider of
                consolidated asset and service management software, from 2002 until
                2003.
                (1) Formerly, President and Chief Executive Officer of MERANT plc
                from
                1998 to 2001. Holds a B.S. from the U.S. Naval Academy, an M.S.
                Administration from George Washington University and an M.B.A from
                Harvard
                Business School. Serves as a director of Hyperion Solutions and FrontRange
                Solutions, and is Chairman of Intellitactics and ADERANT Holdings,
                Inc.
                Former Chairman of the Information Technology Association.Patrick
                W. Gross (2)...........................................
              Age
                62
              Director
                Since 2002
            Chairman
                of The Lovell Group, a private business and technology advisory and
                investment firm, since October 2002. Founder and former principal
                executive officer of American Management Systems, Inc., an international
                business and technology consulting and systems integrations firm,
                since
                February 1970. Holds a B.S. in Engineering Science from Rensselear
                Polytechnic Institute, an M.S. in Engineering from the University
                of
                Michigan and an M.B.A from Stanford University. Serves as a director
                of
                Capital One Financial Corporation, Career Education Corporation,
                Liquidity
                Services, Inc. and Waste Management, Inc., and several private
                companies.Louis
                Hernandez, Jr...........................................
              Age
                39
              Director
                since 2005
            Chairman
                of the Board of Open Solutions Inc., a leading provider of enterprise-wide
                enabling technologies for financial institutions throughout North
                America,
                since March 2000, and Chief Executive Officer of Open Solutions,
                Inc.
                since November 1999. Holds a B.S. in Business Administration (Accounting)
                and an M.B.A. in Business Administration, both from San Diego State
                University, and is a Certified Public
                Accountant.








38






Kenneth
                P. Kopelman.........................................
              Age
                54
              Director
                since 1997
            Partner
                of Kramer Levin Naftalis & Frankel LLP (3), a law firm in New York
                City. Attended Cornell University (A.B.) and the London School of
                Economics and received his J.D. from Columbia University School of
                Law.
                Serves as a director of Liz Claiborne, Inc.Robert
                H. Levitan................................................
              Age
                45
              Director
                since 2000
            New
                media and technology entrepreneur. Co-founder and CEO of Pando Networks,
                Inc., a company that is developing an Internet distribution platform
                to
                facilitate the sharing of digital media, since September 2004. Previously
                an executive coach and marketing consultant to AT&T Wireless Services,
                Inc., a wireless carrier, from May 2003 through February 2004. During
                2002, a consultant to Pearson PLC. Co-founder and Chief Executive
                Officer
                of Flooz.com, Inc. from 1999 to 2001 (4). Co-founder of iVillage.com,
                Inc.
                Holds a B.A. in history and public policy studies from Duke University.
                Serves as a director of New York Cares.James
                A. Perakis..................................................
              Age
                62
              Director
                since May 4, 2006
            Former
                Chairman and CEO of Hyperion Software Corporation, a provider of
                enterprise financial management and planning software (now Hyperion
                Solutions Corp.), from 1985 to 1998. Currently Chairman of the Board
                of
                Netkey Inc., a provider of self-service software, since October 2001.
                Holds a B.S. degree in electrical engineering from the University
                of South
                Carolina and an M.B.A. degree from the Columbia University Graduate
                School
                of Business. Serves as a Director of Unica Corporation and privately-held
                Bristol Technology, Inc.


(1)
            Peregrine
                Systems, Inc. filed for bankruptcy protection in September 2002 and
                emerged in August 2003.


(2)
            Mr.
                Patrick Gross is not related to Mr. Mitchell
                Gross.


(3)
            Kramer
                Levin has served as legal counsel to Mobius since the Company's founding
                in 1981. For a further discussion of our relationship with Kramer
                Levin,
                see Item 13, “Certain Relationships and Related Transactions -
                Relationship with Kramer Levin Naftalis & Frankel LLP”
                below.


(4)
            Flooz.com,
                Inc. filed for bankruptcy liquidation in August
                2001.









39





**INFORMATION
      CONCERNING EXECUTIVE OFFICERS**





Set
      forth
      below are the names, ages, positions and certain other information concerning
      our current Executive Officers. Information regarding Mitchell Gross is provided
      above. Executive officers shall hold office until their successors have been
      duly elected and qualified or until their earlier resignation or
      removal.




Name
            PositionMitchell
                Gross
              Age
                56
            Chairman
                of the Board, Chief Executive Officer and President.Mauricio
                Barberi
              Age
                38
            Senior
                Vice President, Marketing, since he joined Mobius in February 2005.
                Formerly served as Vice President, Marketing and Product Management
                at
                C3i, Inc., a provider of information technology and outsourcing services
                to the life sciences industry, from August 2001 through February
                2005, and
                Vice President, Strategic and Product Marketing at Notara, Inc.,
                a
                provider of Web-based marketing process management software, from
                December
                1999 through July 2001. Holds a B.S. in Mechanical Engineering from
                Massachusetts Institute of Technology and an M.B.A. from Harvard
                Business
                School.David
                Barton
              Age
                49
            Senior
                Vice President, Worldwide Sales, since he joined Mobius in June 2005.
                Formerly Vice President, Financial Services Global Accounts at Storage
                Technology Corporation (“StorageTek”), a storage and management of
                critical business information, from February 2005 through June 2005,
                and
                Vice President & General Manager - Worldwide Professional Services at
                Computer Network Technology Corporation (“CNT”), a storage networking
                solutions company, from July 2003 through January 2005. Also served
                in
                various other positions with CNT from December 1999, when he joined
                as
                Director of Northeast Area Sales, and became Vice President of Northeast
                Field Operations in May 2001 and Vice President of North America
                Sales in
                March 2002. Holds a B.S. in Biology from Middlebury College.David
                J. Gordon
              Age
                50
            Vice
                President, Finance and Treasurer since 2001. Interim Chief Financial
                Officer from June 2000 until January 2002. Joined Mobius in 1987
                and
                served as Director of Finance from 1999-2000 and Controller from
                1987-1999. Holds a B.A. in Accounting from Queens College
                N.Y.Raymond
                F. Kunzmann
              Age
                49
            Senior
                Vice President, Finance and Chief Financial Officer since he joined
                Mobius
                in December 2003. Formerly served as Vice President, Finance and
                CFO of
                LeCroy Corporation, a manufacturer of oscilloscopes, from February
                2000
                through February 2003, and Vice President, Finance and CFO of Axsys
                Technologies, Inc., a manufacturer of motion control products, from
                May
                1994 through February 2000. Holds a B.S. in Accounting from Fordham
                University and an M.B.A. in Finance from Iona College and is a Certified
                Public Accountant.






40






Robert
                H. Lawrence
              Age
                54
            Vice
                President, Product Engineering since 1992. Joined Mobius in 1985.
                Holds a
                B.S. in physics from the University of Massachusetts. Effective June
                30,
                2006, Mr. Lawrence retired from the Company.Dennis
                Levesque
              Age
                56
            Vice
                President, Product Development since February 2005. Vice President,
                Customer Satisfaction, from 1999 through 2005. Joined Mobius in September
                1998 as Senior Manager of Product Support. Holds a B.S. and an M.S.
                in
                Mathematics from Western Connecticut State
                University.








There
      are
      no family relationships between any of our directors and executive
      officers.





**SECTION
      16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
      and executive officers, and persons who own more than 10% of our common stock,
      to file reports of ownership on Form 3 and changes in ownership on Form 4 or
      5
      with the SEC. Such directors, executive officers and 10% stockholders are also
      required by SEC rules to furnish us with copies of all Section 16(a) forms
      they
      file. Based solely upon our review of copies of such forms received, or on
      written representations from certain reporting persons for which no other
      filings were required, we believe that during the fiscal year ended June 30,
      2006, there was compliance with all Section 16(a) filing requirements applicable
      to our directors, executive officers and 10% stockholders.





**CODE
      OF ETHICS**





We
      have
      adopted a Code of Ethics and Business Conduct (“Code”) that applies to our
      officers, directors and employees. The purpose of the Code is to promote a
      culture of honesty, integrity and respect for the law and the people who work
      at
      Mobius. A copy of the Code is available free of charge on our web site at www.mobius.com ,
      by
      clicking on the Investor Relations link, then the Corporate Governance link.
      We
      intend to timely disclose any amendments to or waivers of certain provisions
      of
      the Code applicable to our directors, executive officers, including our
      principal executive officer, principal financial officer and principal
      accounting officer, and controller on our web site at www.mobius.com .







41





**ITEM
      11. EXECUTIVE COMPENSATION**





The
      following table sets forth the compensation earned by our Chief Executive
      Officer and the six other highest-paid executive officers for the past three
      fiscal years. The individuals included in the table will be collectively
      referred to as the “Named Officers.”





**SUMMARY
      COMPENSATION TABLE**


Annual
                  Compensation (1)**Name
                  and Principal Position**
              **Year**
              **Salary**
              **Bonus**
              **Other
                  Annual****Compensation
                  (2)**
              **All
                  Other**
                **Compensation**Mitchell
                  Gross
                Chairman of the Board,
                Chief Executive
                Officer and President
              2006
                2005
                2004
              $200,000
                200,000
                200,000
              $197,000
                --
                75,000
              --
                --
                --
              $53,522(3)
                60,005(3)
                54,854(3)Mauricio
                  Barberi (4)
                Senior
                  Vice President,
                Marketing
              2006
                2005
                2004
              200,000
                67,436
                --
              112,523
                52,500
                --
              --
                --
                --
              --
                --
                --David
                  Barton (5)
                Senior
                  Vice President,
                Worldwide Sales
              2006
                2005
                2004
              225,000
                6,058
                --
              88,063
                40,000
                --
              $56,357
                --
                --
              --
                --
                --Raymond
                  F. Kunzmann (6)
                Senior
                  Vice President,
                Finance and Chief
                Financial Officer
              2006
                2005
                2004
              234,000
                212,500
                94,792
              116,024
                72,750
                81,250
              --
                --
                --
              --
                --
                --Dennis
                  Levesque
                Vice
                  President, Product
                Development
              2006
                2005
                2004
              228,800
                210,833
                184,854
              42,613
                45,555
                23,948
              --
                --
                --
              --
                --
                --Michael
                  J. Festa (7)
                Vice
                  President, Sales
                (The Americas)
              2006
                2005
                2004
              150,000
                135,000
                125,000
              117,592
                33,500
                50,000
              67,035
                68,207
                247,502
              --
                --
                62,114(7)Karry
                  D. Kleeman
                Vice
                  President, Sales
                (Europe, Middle East
                and Africa)
              2006
                2005
                2004
              175,000
                135,000
                125,000
              167,451
                43,200
                --
              43,143
                101,601
                288,109
              433,901(8)
                350,121(8)
                350,954(8)








(1)
            In accordance with the rules of the SEC, other
              compensation in the form of perquisites and other personal benefits
              has
              been omitted in those instances where the aggregate amount of such
              perquisites and other personal benefits constituted less than the lesser
              of $50,000 or 10% of the total annual salary and bonuses for the named
              executive officer for such year. (2)
            Consists
                of sales commissions and non-recoverable
                draws. (3)
            Includes
                premiums on insurance (2006- $22,107; 2005- $30,207; 2004- $27,894),
                car
                payments (2006- $21,952; 2005- $10,508; 2004- $8,839), tax preparation
                fees (2005- $9,763; 2004- $8,423) and miscellaneous (2006- $9,463;
                2005-
                $9,527; 2004- $9,698) added to compensation. These amounts have been
                grossed up to include taxes.


(4)
            Mr.
                Barberi was employed by Mobius effective February 28,
                2005.


(5)
            Mr.
                Barton was employed by Mobius effective June 22,
                2005.


(6)
            Mr.
                Kunzmann was employed by Mobius effective December 16,
                2003.


(7)
            Mr.
                Festa was no longer an executive officer effective May 4, 2006. If
                Mr.
                Festa had been an executive officer as of June 30, 2006, he would
                have
                been required to be included in this disclosure. For fiscal 2004,
                includes
                disqualifying dispositions on the exercise of stock
                options.


(8)
            Mr.
                Kleeman was no longer an executive officer effective May 4, 2006.
                If Mr.
                Kleeman had been an executive officer as of June 30, 2006, he would
                have
                been required to be included in this disclosure.
                For fiscal 2006, includes $356,228 of expatriate allowances and $77,673
                of
                disqualifying dispositions on the exercise of stock options. For
                fiscal
                2005, represents expatriate allowances. For fiscal 2004, includes
                $280,684
                of expatriate allowances and $70,270 of disqualifying dispositions
                on the
                exercise of stock options. The value of the expatriate allowances
                has been
                grossed up to include taxes.






42





**STOCK
      OPTIONS**





None
      of
      the Named Officers received stock option grants under our 1996 Stock Incentive
      Plan or 2006 Stock Incentive Plan during fiscal year 2006.




**OPTION
      EXERCISES AND HOLDINGS**





The
      table
      below sets forth information with respect to the Named Officers concerning
      their
      exercise of options during fiscal year 2006 and the unexercised options held
      by
      them as of the end of such year.





**AGGREGATED
      OPTION/SAR EXERCISES IN LAST FISCAL YEAR**


**AND
      FISCAL YEAR-END OPTION/SAR VALUES**


**Name**
            
            **Shares**
              **Acquired********on**
              **Exercise**
              **(#)**
            
            **Value**
              **Realized****($)**
            
            **Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at Fiscal**
              **Year-End**
            
            **Value
                of Unexercised**
              **in-the
                Money Options**
              **at
                Fiscal**
              **Year-End
                ($)(1)****Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Mitchell
                Gross
            
            
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Mauricio
                Barberi
            
            
            --
            
            
            --
            
            
            18,750
            
            
            56,250
            
            
            14,063
            
            
            42,188David
                Barton
            
            
            --
            
            
            --
            
            
            20,000
            
            
            80,000
            
            
            2,000
            
            
            8,000Raymond
                F. Kunzmann
            
            
            --
            
            
            --
            
            
            85,000
            
            
            85,000
            
            
            --
            
            
            --Dennis
                Levesque
            
            
            --
            
            
            --
            
            
            61,500
            
            
            23,500
            
            
            89,915
            
            
            37,985Michael
                J. Festa
            
            
            --
            
            
            --
            
            
            130,500
            
            
            14,500
            
            
            332,575
            
            
            50,125Karry
                Kleeman
            
            
            16,000
            
            
            80,240
            
            
            320,000
            
            
            --
            
            
            1,026,900
            
            
            --


__________________


(1)  Based
      on
      the closing sales price on the Nasdaq National Market of the Company’s common
      stock on June 30, 2006 of $5.80.





**DIRECTOR
      COMPENSATION**





Effective
      February 1, 2006, non-employee directors are each paid a $25,000 annual retainer
      fee for serving on the Board, payable quarterly. Audit Committee members (except
      for the Audit Committee Chairperson) receive an additional annual fee of $4,000,
      payable quarterly. The Audit Committee Chairperson receives an additional annual
      fee of $10,000, payable quarterly, and the Compensation Committee Chairperson
      and the Corporate Governance and Nominating Committee Chairperson each receive
      an additional annual fee of $2,500, payable quarterly. The fee for each Board
      meeting attended is $2,000 and the fee for each telephonic Board meeting
      attended is $1,250. The fee for each Committee meeting attended is $750, except
      that no fees are payable for Committee meetings held proximate to Board
      meetings. Board meeting fees are payable promptly after each meeting. Mr.
      Kopelman’s fees are net of the amounts paid to Kramer Levin for time Mr.
      Kopelman devotes to preparation for and attendance at Board
      meetings.





Our
      non-employee directors receive an initial grant of 20,000 options upon first
      election to the Board, of which 10,000 options are granted under the
      Non-Employee Directors’ 1998 Stock Option Plan and 10,000 options are granted
      under the 2006 Stock Incentive Plan. In addition, non-employee directors receive
      an annual grant of 10,000 options under the Non-Employee Directors’ 1998 Stock
      Option Plan, made at each annual meeting to those directors having at least
      nine
      months of Board service on the grant date. All such options have an exercise
      price equal to the fair market value of the underlying Mobius shares on the
      date
      of grant.







43


**BOARD
      COMMITTEES**





The
      Board
      appoints committees to help carry out its duties. The Board has established
      three Committees: the Audit Committee, the Compensation Committee and the
      Corporate Governance and Nominating Committee. Each Committee’s membership is
      composed exclusively of independent directors. Each Committee has a written
      charter, copies of which can be found on our Web site at www.mobius.com, by
      clicking on the Investor Relations link, then the Corporate Governance link.
      Each Committee reviews and reassesses its charter annually, and recommends
      any
      proposed changes to the full Board for approval. Each Committee reviews the
      results of its meetings with the full Board.





***Audit
      Committee.*** The
      Audit Committee assists the Board in fulfilling its responsibility for oversight
      of the quality and integrity of our accounting, auditing and financial reporting
      practices and financial statements and the independence, qualifications and
      performance of our independent registered public accounting firm. The Committee
      also has the sole authority and responsibility to select, evaluate and, where
      appropriate, replace the independent registered public accounting firm (or
      to
      nominate the independent registered public accounting firm for stockholder
      approval) and to pre-approve all auditing services and permitted non-audit
      services, including fees and other terms. The Audit Committee consists of
      Messrs. Greenfield (Chair), P. Gross and Hernandez, all of whom have been
      determined by the Board of Directors to be independent under the Nasdaq listing
      standards and under the rules of the SEC. Mr. Patrick Gross is not related
      to
      Mr. Mitchell Gross. The Board of Directors has also determined that each of
      Messrs. Greenfield, P. Gross and Hernandez qualify as audit committee financial
      experts within the meaning of the SEC rules. The Audit Committee held seven
      meetings during fiscal 2006, and each member of the Audit Committee attended
      all
      of the meetings of the Audit Committee. In addition, Mr. Levitan served on
      the
      Audit Committee until October 2005. He attended one of the two Audit Committee
      meetings held during fiscal 2006 prior to his resignation from the Audit
      Committee. The Audit Committee also serves as our Qualified Legal Compliance
      Committee (“QLCC”). The QLCC is responsible for investigating reports, made by
      attorneys appearing and practicing before the SEC in the representation of
      the
      Company, of perceived material violations of law, breaches of fiduciary duty
      or
      similar violations by us or any of our agents.





***Compensation
      Committee.*** The
      Compensation Committee is directly responsible for setting, reviewing and
      approving compensation for our Chief Executive Officer and compensation of
      our
      other executive officers, including salary, bonus and incentive awards. The
      Compensation Committee is also responsible for administering our 1996 Stock
      Incentive Plan, 2006 Stock Incentive Plan, 1998 Employee Stock Purchase Plan
      and
      1998 Executive Incentive Plan. In
      addition, in accordance with the 2006 Stock Plan, the Board of Directors has
      delegated authority to Mr. Mitchell Gross to grant up to 200,000 stock options
      or other equity grants per year in accordance with the guidelines approved
      by
      the Compensation Committee. Such grants may only be made to employees who are
      non-Section 16(b) persons under the Securities Exchange Act of 1934, as amemded,
      and to those employees whose awards could not reasonably be expected to be
      subject to the deduction limitations of Section 162(m) of the Internal Revenue
      Code of 1986. Within one business day of granting such options or other grants,
      Mr. Mitchell Gross will provide the Board of Directors a notice including:
      the
      date of each grant, the name of each recipient, the number of shares subject
      to
      each grant, the fair market value of the Company's shares on the grant date
      and,
      if applicable, the exercise price of the options granted.





The
      Compensation Committee consists of Messrs. Levitan (Chair), Albracht and
      Hernandez, all of whom have been determined by the Board of Directors to be
      independent in accordance with the Nasdaq listing standards. Mr. Hernandez
      was
      elected to the Compensation Committee on November 4, 2005. The Compensation
      Committee held four meetings during fiscal 2006 and acted by unanimous written
      consent one time. Messrs. Levitan and Albracht attended all of the meetings
      of
      the Compensation Committee, and Mr. Hernandez attended one of the two meetings
      of the Compensation Committee held after his election to the Compensation
      Committee. In addition, Mr. Marks attended the one Compensation Committee
      meeting held during fiscal 2006 prior to his resignation from the Board
      effective September 20, 2005.







44


***Corporate
      Governance and Nominating Committee.*** The
      Corporate Governance and Nominating Committee oversees and advises the Board
      of
      Directors with respect to corporate governance matters and assists the Board
      of
      Directors in identifying and recommending qualified Board candidates. The
      Committee also makes recommendations to the Board of Directors with respect
      to
      the assignments to committees of the Board and oversees the evaluation of the
      Board and its committees. The Corporate Governance and Nominating Committee
      consists of Messrs. P. Gross (Chair), Albracht and Greenfield, all of whom
      have
      been determined by the Board of Directors to be independent in accordance with
      the Nasdaq listing standards. Mr. Patrick Gross is not related to Mr. Mitchell
      Gross. Mr. Greenfield was elected to the Corporate Governance and Nominating
      Committee on November 4, 2005. The Corporate Governance and Nominating Committee
      held three meetings during fiscal 2006 and acted by unanimous written consent
      one time. Messrs. P. Gross and Albracht attended all of the meetings of the
      Corporate Governance and Nominating Committee, and Mr. Greenfield attended
      both
      meetings of the Corporate Governance and Nominating Committee held after his
      election to this Committee.





The
      Corporate Governance and Nominating Committee will consider stockholder
      recommendations of candidates when the recommendations are properly submitted.
      Stockholder recommendations should be submitted to us under the procedures
      discussed in “Procedures for Security Holder Submission of Nominating
      Recommendations,” which is available on our Web site at www.mobius.com ,
      by
      clicking on the Investor Relations link, then the Corporate Governance link.
      Written notice of any nomination must be timely delivered to Mobius Management
      Systems, Inc., 120 Old Post Road, Rye, New York 10580, Attention: Corporate
      Governance and Nominating Committee, c/o the Assistant Secretary.




The
      Corporate Governance and Nominating Committee will evaluate and recommend
      candidates for membership on the Board consistent with criteria established
      by
      the Committee. When considering a potential non-incumbent candidate, the
      Corporate Governance and Nominating Committee will factor into its
      determination, among other relevant considerations, the following qualities
      of a
      candidate: integrity, independence, character, diversity, achievement, judgment,
      business experience and understanding and available time.





***New
      Committee Members.*** On May
      5, 2006, we announced the appointment of Mark P. Cattini and James A. Perakis
      to
      the Board of Directors. Both Messrs. Cattini and Perakis were determined by
      the
      Board to be independent under the requirements of the Nasdaq listing standards.
      At the time of their appointment, the Board had not yet determined the
      Committees on which the newly appointed Directors would serve. On August 31,
      2006, the Board of Directors approved the appointment of Mr. Cattini to serve
      on
      the Audit Committee and the Compensation Committee, and Mr. Perakis to serve
      on
      the Compensation Committee and the Corporate Governance and Nominating
      Committee. They are expected to formally join these Committees in the second
      half of September 2006.





**COMPENSATION
      COMMITTEE INTERLOCKS AND INSIDER** **PARTICIPATION**





The
      current members of our Board’s Compensation Committee are Messrs. Levitan
      (Chair), Albracht and Hernandez. There are no compensation committee interlocks
      which are required to be disclosed according to applicable SEC rules. No member
      of our Compensation Committee serves as a member of the board of directors
      or
      compensation committee of any other entity that has one or more executive
      officers serving as a member of our Board of Directors or Compensation
      Committee.





45




**COMPENSATION
        COMMITTEE REPORT**




**Overview**





The
      Compensation Committee:





·
            reviews
                and approves the compensation of the Chief Executive Officer and
                the other
                executive officers;




·
            participates
                in recommendations to the full Board and senior management with respect
                to
                Mobius’s stock compensation programs;
                and




·
            administers
                Mobius’s stock compensation
                programs.





**Base
      Salary**





We
      determine the base salary of the executive officers, including the Chief
      Executive Officer, based on their knowledge, skills and level of responsibility,
      as well as the economic and business conditions affecting Mobius. Other factors
      we consider are:





·
            competitive
                positioning (comparing Mobius’s salary structure with salaries paid by
                other companies);





·
            Mobius’s
                own business performance; and





·
            general
                economic factors.





**Incentive
      Compensation**





We
      award
      the executive officers, including the Chief Executive Officer, incentive
      compensation in the form of annual cash bonuses and/or sales commissions. We
      award incentive compensation to provide an incentive and reward for short-term
      financial success and long-term Company growth. Incentive compensation was
      awarded to the extent that an executive officer achieved pre-determined
      individual objectives and/or the Company met financial objectives set by the
      Compensation Committee. In addition, the Chief Executive Officer’s judgment of
      other executive officers’ performance was a factor used by the Compensation
      Committee in determining whether those individual objectives were
      satisfied.





**Equity-Based
      Compensation**





We
      have
      historically used stock options as a long-term, non-cash incentive and to align
      the long-term interests of executives and stockholders. The stock options are
      priced at the market price of Mobius’s common stock on the date of grant. The
      options are therefore linked to future performance of our stock because the
      options do not become valuable to the holder unless the price of our stock
      increases above the price on the date of grant.





Beginning
      in fiscal 2007, we intend to issue a combination of stock options and restricted
      stock to tailor and enhance the incentive nature of such instruments and to
      better manage the related expense charged to earnings, as required under SFAS
      No. 123(R). The number of equity-based compensation units granted to an
      executive as a form of non-cash compensation will be based on guidelines
      established by the Company that consider, among other factors, market trends
      and
      the level of expense that will be charged to earnings. Vesting of such grants
      will be dependent on the achievement of certain corporate financial
      goals.





**Compensation
      of the Chief Executive Officer**





Mr.
      Mitchell Gross is one of the founders of Mobius. He beneficially owns
      approximately 5,549,500 shares of common stock constituting approximately 29.1%
      of the total amount outstanding. Accordingly, his interest is aligned with
      the
      interest of the stockholders. Due to the significance of Mr. Gross’s existing
      stock ownership, Mobius has not incorporated long-term stock incentives, such
      as
      restricted stock or stock options, into Mr. Gross’s compensation package, which
      consists primarily of salary and bonus. Based on the factors enumerated above
      under the
      sections entitled “Base Salary” and “Incentive Compensation,” we agreed to
      continue to pay Mr. Gross’s $200,000 annual salary after the expiration of his
      employment agreement on April 27, 2001 and to allow Mr. Gross to participate
      in
      a bonus plan that awards success in achieving annual revenue and net income
      goals set by us. The Compensation Committee awarded Mr. Gross a bonus of
      $197,000, based on his achievement of meeting certain annual revenue and net
      income goals during fiscal 2006.







46





**Employee
      Stock Purchase Plan**





The
      Employee Stock Purchase Plan commenced in fiscal 1999 and provides employees
      who
      wish to acquire Mobius’s common stock with the opportunity to purchase shares
      through the convenience of accumulated payroll deductions. We believe that
      employee participation in the ownership of Mobius on this basis will be to
      the
      mutual benefit of the employees and Mobius.





Robert
      H. Levitan
      (Chair)


Joseph
      J.
      Albracht


Louis
      Hernandez,
      Jr.




**STOCK
      PERFORMANCE CHART**





The
      following chart depicts a comparison of the cumulative total return (assuming
      the reinvestment of dividends) for a $100 investment on June 30, 2001 in each
      of
      the common stock of Mobius, the Goldman Sachs Technology Composite Index (a
      published industry index), and the Nasdaq Composite (a broad market index).
      We
      paid no dividends during the periods shown.





**June****30,2002**
            
            **June****29,2003**
            
            **June****28,2004**
            
            **June****30,2005**
            
            **June****30,2006**Mobius
            
            $
            98.48
            
            $
            229.09
            
            $
            184.24
            
            $
            200.00
            
            $
            175.76Goldman
                Sachs
              Technology Composite
              Index
            
            
            57.93
            
            
            62.26
            
            
            79.13
            
            
            74.58
            
            
            77.43Nasdaq
                Composite
            
            
            67.72
            
            
            75.11
            
            
            94.78
            
            
            95.21
            
            
            100.53







47


**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      following table shows the number of shares of our common stock of each Named
      Officer, each non-employee director and certain stockholders known by us to
      be
      the beneficial owner of more than 5% of the outstanding common stock, owned
      as
      of August 18, 2006.





**Name
                and Address of****Named
                Executive**
              **Officers,
                Certain Stockholders and**
              **Directors
                / Nominees******
            **Shares****Owned (1)**
            **Percent****of Class**Mitchell
                Gross (2)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...............................................................................................................................................................
            5,549,500
            29.1%Joseph
                J. Albracht (3)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...............................................................................................................................................................
            3,863,500
            20.2%Kennedy
                Capital Management, Inc. (4)
              10829
                Olive Blvd.
              St.
                Louis, Missouri 63141
                ......................................................................................................................................................
            2,093,102
            11.0%Disciplined
                Growth Investors, Inc (5)
              100
                South Fifth Street, Suite 2100
              Minneapolis,
                Minnesota 55402
                ...........................................................................................................................................
            1,140,625
            6.0%Karry
                D. Kleeman (6)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580.............................................................................................................................................................
            321,000
            1.7%Michael
                J. Festa (7)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580............................................................................................................................................................
            139,950
            *Raymond
                F. Kunzmann (8)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                NY 10580
                ......................................................................................................................................................................
            93,500
            *Kenneth
                P. Kopelman (9)
              c/o
                Kramer, Levin, Naftalis & Frankel LLP
              1177
                Avenue of the Americas
              New
                York, New York
                10036.................................................................................................................................................
            78,850
            *Gary
                G. Greenfield (10)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...........................................................................................................................................................
            75,481
            *Dennis
                Levesque (11)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                NY 10580
                .....................................................................................................................................................................
            65,250
            *






48




**Name
                and Address of****Named
                Executive**
              **Officers,
                Certain Stockholders and**
              **Directors
                / Nominees******
            **Shares****Owned (1)**
            **Percent****of Class**




Patrick
                W. Gross (12)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580....................................................................................................................................................................
            55,000
            *Robert
                H. Levitan (12)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...................................................................................................................................................................
            55,000
            *Louis
                Hernandez, Jr. (13)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...................................................................................................................................................................
            25,000
            *David
                Barton (13)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580...................................................................................................................................................................
            25,000
            *Mauricio
                Barberi (14)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580..................................................................................................................................................................
            22,500
            *Mark
                P. Cattini (15)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580..................................................................................................................................................................
            5,000
            *James
                A. Perakis (15)
              c/o
                Mobius Management Systems, Inc.
              120
                Old Post Road
              Rye,
                New York
                10580..................................................................................................................................................................
            5,000
            *All
                Executive Officers and Directors
              As
                a group (17 persons)
            10,541,134
            52.4%


___________________


*
      Less
      than 1%


(1)
                  Beneficial
                      ownership is determined in accordance with the rules of the
                      Securities and
                      Exchange Commission (“SEC”), and generally includes voting power and/or
                      investment power with respect to securities. Shares of common
                      stock
                      subject to options currently exercisable or exercisable within
                      60 days
                      (“Currently Exercisable Options”) are deemed outstanding for computing the
                      percentage beneficially owned by the person holding such options
                      but are
                      not deemed outstanding for computing the percentage beneficially
                      owned by
                      any other person.
 (2)
              Includes
                  3,732,259 shares of common stock held by HARMIT, LP, of which Mitchell
                  Gross is the General Partner.
 (3)
              Includes 55,000 shares issuable pursuant to Currently Exercisable
                  Options.
 (4)
              Information provided in Schedule 13G filed on February 14,
                  2006.
 (5)
              Information provided in Schedule 13G filed on February 1,
                  2006.
 (6)
              Includes 320,000 shares issuable pursuant to Currently Exercisable
                  Options.
 (7)
              Includes 133,750 shares issuable pursuant to Currently Exercisable
                  Options.
 (8)
              Includes
                  93,500 shares issuable pursuant to Currently Exercisable
                  Options.
 (9)
              Includes
                  1,500 shares of common stock held in trust by Mr. Kopelman’s wife, as
                  trustee, for Mr. Kopelman’s three minor children. Mr. Kopelman disclaims
                  beneficial ownership of such shares. Also includes 2,350 shares
                  of common
                  stock held jointly by Mr. Kopelman and his wife, as well as 75,000
                  shares
                  issuable pursuant to Currently Exercisable
                  Options.
 (10)
              Includes
                  75,000 shares issuable pursuant to Currently Exercisable
                  Options.
 (11)
              Includes
                  65,250 shares issuable pursuant to Currently Exercisable
                  Options.
 (12)
              Includes
                  55,000 shares issuable pursuant to Currently Exercisable
                  Options.
 (13)
              Includes
                  25,000 shares issuable pursuant to Currently Exercisable
                  Options.
 (14)
              Includes
                  22,500 shares issuable pursuant to Currently Exercisable
                  Options.
 (15)
              Includes
                  5,000 shares issuable pursuant to Currently Exercisable
                  Options.







49





**Equity
      Compensation Plan Information**





The
      following table provides information as of June 30, 2006 with respect to the
      shares of our common stock that may be issued under our existing equity
      compensation plans.





**(a)**
            
            **(b)**
            
            **(c)****Plan
                category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants****and
                rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants****and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in**
              **column
                (a))**Equity
                compensation plans approved by security holders (1)
            
            
            3,684,633(2
            )
            $
            5.30(3
            )
            
            2,648,208(4
            )Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            3,684,633
            
            $
            5.30
            
            
            2,648,208





(1)
      Consists of the 1996 Stock Incentive Plan, the 2006 Stock Incentive Plan, the
      Non-Employee Directors’ 1998 Stock Option Plan and the 1998 Employee Stock
      Purchase Plan. The 2006 Stock Incentive Plan, under which 1,834,407 shares
      were
      available for grant as of June 30, 2006, provides for the issuance of restricted
      stock, restricted stock units and other stock-based compensation, in addition
      to
      stock options and stock appreciation rights.


(2)
      Includes 88,972 shares under the 1998 Employee Stock Purchase Plan, based on
      employee elections under the plan.


(3)
      Does
      not include the exercise price under the 1998 Employee Stock Purchase Plan,
      since that exercise price is 85% of the lesser of the fair market value of
      a
      share of Common Stock on November 1, 2005 and October 31, 2006, and therefore
      was not yet determined on June 30, 2006.


(4)
      The
      2006 Stock Incentive Plan, under which 1,834,407 shares were available for
      grant
      as of June 30, 2006, provides the Board of Directors with the discretion to
      increase the number of available shares as of any January 1 by up to 1% of
      the
      number of shares of the Company’s Common Stock that are issued and outstanding
      on that date. The 2006 Stock Incentive Plan will terminate on December 27,
      2010,
      unless sooner terminated by the Board of Directors.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





**Relationship
      With Kramer Levin Naftalis & Frankel LLP**





Since
      1981, we have engaged, and plan to continue to engage, the law firm of Kramer
      Levin Naftalis & Frankel LLP to provide us with legal counsel. Kenneth P.
      Kopelman, a member of Mobius’s Board of Directors, is a partner of Kramer Levin.
      Fees paid to Kramer Levin during fiscal 2006 were approximately $700,000. We
      believe that fees charged by Kramer Levin are at rates and on terms no less
      favorable to us than could have been obtained from unaffiliated third
      parties.







50







**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES**




The
      total
      fees and related expenses for professional services provided by our independent
      registered public accounting firm, PricewaterhouseCoopers LLP, for the fiscal
      years ended June 30, 2005 and 2006 are presented in the table
      below.





**Year
                Ended June 30,****2005**
            
            **2006**Audit
                Fees
            
            $
            748,704
            
            $
            732,919Audit-Related
                Fees
            
            
            32,618
            
            
            18,000Tax
                Fees
            
            
            156,515
            
            
            95,300All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            937,837
            
            $
            846,219




Audit
      Fees consist of fees billed for the audit of our consolidated financial
      statement, reviews of the Company’s annual report on Form 10-K and quarterly
      reports on Form 10-Q and reviews of various Securities and Exchange Commission
      (“SEC”) and other regulatory filings. Additionally, audit fees include fees
      related to the audit of management’s assessment of and the effectiveness of our
      internal control over financial reporting.




Audit-Related
      Fees consist of fees for assurance and related services that are related to
      accounting consultations and consultations concerning financial accounting
      and
      reporting standards, internal control reviews and attest services that are
      not
      required by statute or regulation.




Tax
      Fees
      consist of fees for tax compliance, tax advice and tax planning.




The
      Audit
      Committee considered the compatibility of non-audit services provided by the
      auditors with maintaining the auditors’ independence, and determined that the
      auditors’ independence relative to financial audits was not jeopardized by the
      non-audit services. The auditors did not employ leased personnel in connection
      with their work.




**PRE-APPROVAL
      POLICY**





The
      services performed by the independent registered public accounting firm in
      fiscal 2006 were pre-approved by the Audit Committee on November 4, 2005, in
      accordance with the Audit Committee’s pre-approval policy and procedures. This
      policy describes the permitted audit, audit-related and tax services
      (collectively, the “Disclosure Categories”) that the independent registered
      public accounting firm may perform up to a pre-determined dollar limit per
      project. The policy requires a description of the material services (the
“Service List”) expected to be performed by the independent registered public
      accounting firm in each of the Disclosure Categories be presented to the Audit
      Committee for approval.





Any
      requests for audit, audit-related and tax services not contemplated on the
      Service List or exceeding the pre-determined dollar limit per project must
      be
      submitted to the Audit Committee for specific pre-approval and cannot commence
      until such approval has been granted. Normally, pre-approval is provided at
      regularly scheduled meetings. However, the authority to grant specific
      pre-approval between meetings, as necessary, has been delegated to the Chairman
      of the Audit Committee. The Chairman must update the Audit Committee at the
      next
      regularly scheduled meeting of any services that were granted specific
      pre-approval. On a quarterly basis, the Audit Committee reviews the status
      of
      services and fees incurred year-to-date against the original Service List and
      the forecast of remaining services and fees for the fiscal year.







51


**PART
      IV.**


**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





**(a)(1)
      Financial Statements**





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**








Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets as of June 30, 2005 and 2006


Consolidated
      Statements of Operations for the Years Ended June 30, 2004, 2005 and
      2006


Consolidated
      Statements of Stockholders' Equity and Comprehensive Income for the Years Ended
      June 30, 2004, 2005 and 2006


Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2004, 2005 and
      2006


Notes
      to
      Consolidated Financial Statements





( **a)(2)**  **Financial Statement Schedule**





Schedule
      II - Valuation and Qualifying Accounts and Reserves





**(a)(3)
      Index of Exhibits**




The
      list
      of exhibits required by this Item 15(a)(3) is set forth in the section entitled
      “Exhibits.”













52





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      Board
      of Directors and Stockholders of


Mobius
      Management Systems, Inc.





We
      have
      completed integrated audits of Mobius Management Systems, Inc.’s 2006 and 2005
      consolidated financial statements and of its internal control over financial
      reporting as of June 30, 2006 and an audit of its 2004 consolidated financial
      statements in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). Our opinions, based on our audits, are
      presented below.





Consolidated
      financial statements and financial statement schedule





In
      our
      opinion, the consolidated financial statements listed in the index appearing
      under Item 15(a)(1) present fairly, in all material respects, the financial
      position of Mobius Management Systems, Inc. and its subsidiaries at June 30,
      2006 and 2005, and the results of their operations and their cash flows for
      each
      of the three years in the period ended June 30, 2006 in conformity with
      accounting principles generally accepted in the United States of America. In
      addition, in our opinion, the financial statement schedule listed in the
      accompanying index appearing under Item 15(a)(2) presents fairly, in all
      material respects, the information set forth therein when read in conjunction
      with the related consolidated financial statements. These financial statements
      and financial statement schedule are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements and financial statement schedule based on our audits. We conducted
      our audits of these statements in accordance with the standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement. An audit of financial
      statements includes examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





As
      discussed in Note 9 to the financial statements, effective July 1, 2005, the
      Company changed its method of accounting for stock based
      compensation.





Internal
      control over financial reporting





Also,
      in
      our opinion, management’s assessment, included in Management’s Report on
      Internal Control Over Financial Reporting appearing under item 9A, that the
      Company maintained effective internal control over financial reporting as of
      June 30, 2006 based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      is fairly stated, in all material respects, based on those criteria.
      Furthermore, in our opinion, the Company maintained, in all material respects,
      effective internal control over financial reporting as of June 30, 2006, based
      on criteria established in *Internal
      Control - Integrated Framework* issued
      by the COSO. The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express opinions on management’s assessment and on the effectiveness of
      the Company’s internal control over financial







53







reporting
      based on our audit. We conducted our audit of internal control over financial
      reporting in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). Those standards require that we plan and
      perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. An audit of internal control over financial reporting includes
      obtaining an understanding of internal control over financial reporting,
      evaluating management’s assessment, testing and evaluating the design and
      operating effectiveness of internal control, and performing such other
      procedures as we consider necessary in the circumstances. We believe that our
      audit provides a reasonable basis for our opinions.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (i) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (ii)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (iii) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use, or disposition of the
      company’s assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.







PricewaterhouseCoopers
      LLP


Stamford,
      Connecticut


September
      11, 2006













54


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except share data and per share data)**





**June
                30,****2005**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            33,726
            
            $
            39,967Accounts
                receivable, net of allowance for doubtful accounts of $595 and $559,
                respectively
            
            
            10,519
            
            
            19,654Software
                license installments, current portion
            
            
            12,926
            
            
            12,054Other
                current assets
            
            
            2,310
            
            
            2,480Total
                current assets
            
            
            59,481
            
            
            74,155Software
                license installments, non-current portion, net of allowance for doubtful
                accounts of $161 and $99, respectively
            
            
            17,991
            
            
            9,416Property
                and equipment, net
            
            
            3,663
            
            
            3,912Deferred
                income taxes
            
            
            5,217
            
            
            2,478Other
                assets
            
            
            3,963
            
            
            3,379Total
                assets
            
            $
            90,315
            
            $
            93,340**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            14,363
            
            $
            15,994Deferred
                revenue
            
            
            23,344
            
            
            22,765Deferred
                income taxes
            
            
            5,229
            
            
            2,480Total
                current liabilities
            
            
            42,936
            
            
            41,239Deferred
                revenue
            
            
            3,091
            
            
            2,092Other
                non-current liabilities
            
            
            721
            
            
            509Total
                liabilities
            
            
            46,748
            
            
            43,840Stockholders'
                equity:Common
                stock $.0001 par value; authorized
              40,000,000 shares; issued 23,884,999 and
              24,303,853 shares, respectively; outstanding
              18,530,776 and 18,949,630 shares,respectively
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            55,753
            
            
            58,193Retained
                earnings
            
            
            3,573
            
            
            5,653Accumulated
                other comprehensive income
            
            
            221
            
            
            1,634Treasury
                stock, at cost, 5,354,223 shares
            
            
            (15,982
            )
            
            (15,982
            )Total
                stockholders' equity
            
            
            43,567
            
            
            49,500Total
                liabilities and stockholders' equity
            
            $
            90,315
            
            $
            93,340




See
      accompanying notes to consolidated financial statements.







55


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except per share data)**





**Years
                Ended June 30,****2004**
            
            **2005**
            
            **2006**Revenues:Software
                license
            
            $
            42,858
            
            $
            30,883
            
            $
            39,167Maintenance
            
            
            40,151
            
            
            41,416
            
            
            42,131Professional
                service and other
            
            
            5,079
            
            
            5,374
            
            
            7,933Total
                revenues
            
            
            88,088
            
            
            77,673
            
            
            89,231Costof
                revenues:Software
                license
            
            
            1,115
            
            
            1,773
            
            
            1,110Maintenance
            
            
            7,048
            
            
            8,094
            
            
            7,721Professional
                service and other
            
            
            5,506
            
            
            4,782
            
            
            6,277Total
                cost of revenues
            
            
            13,669
            
            
            14,649
            
            
            15,108Gross
                profit
            
            
            74,419
            
            
            63,024
            
            
            74,123Operating
                expenses:Sales
                and marketing
            
            
            35,090
            
            
            36,402
            
            
            37,447Research
                and development
            
            
            20,797
            
            
            22,722
            
            
            22,726General
                and administrative
            
            
            11,397
            
            
            12,000
            
            
            13,356Acquired
                in-process research and development
            
            
            956
            
            
            --
            
            
            -Total
                operating expenses
            
            
            68,240
            
            
            71,124
            
            
            73,529Income
                (loss) from operations
            
            
            6,179
            
            
            (8,100
            )
            
            594Interest
                income, net
            
            
            1,840
            
            
            2,264
            
            
            2,334Other
                income (expense)
            
            
            (90
            )
            
            104
            
            
            7Income
                (loss) before income taxes
            
            
            7,929
            
            
            (5,732
            )
            
            2,935Provision
                for (benefit from) income taxes
            
            
            3,127
            
            
            (3,037
            )
            
            855Net
                income (loss)
            
            $
            4,802
            
            $
            (2,695
            )
            $
            2,080Basicearnings
                (loss) per share
            
            $
            0.27
            
            $
            (0.15
            )
            $
            0.11Basic
                weighted average shares outstanding
            
            
            17,964
            
            
            18,409
            
            
            18,765Diluted
                earnings (loss) per share
            
            $
            0.24
            
            $
            (0.15
            )
            $
            0.10Diluted
                weighted average shares outstanding
            
            
            19,937
            
            
            18,409
            
            
            19,831








See
      accompanying notes to consolidated financial statements.










56





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
      INCOME**


**(in
      thousands)**


**Common
                Stock******
            
            **Additional
                Paid-in**
            
            **Retained**
            
            **Accumulated**
              **Other
                Comprehensive**
              **I****ncome**
            
            **Treasury
                Stock******
            
            **Total**
              **Stockholders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Earnings**
            
            
            **(Loss)**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Equity****Balance
                at June 30, 2003**
            
            
            17,526
            
            $
            2
            
            $
            50,653
            
            $
            1,466
            
            $
            218
            
            
            5,354
            
            $
            (15,982
            )
            $
            36,357Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,802
            
            
            -
            
            
            -
            
            
            -
            
            
            4,802Change
                in other comprehensive income, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            332
            
            
            -
            
            
            -
            
            
            332Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,134Stock
                options exercised, including tax benefit
            
            
            602
            
            
            -
            
            
            3,219
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,219Stock
                purchase plan, including tax benefit
            
            
            151
            
            
            -
            
            
            429
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            429**Balance
                at June 30, 2004**
            
            
            18,279
            
            
            2
            
            
            54,301
            
            
            6,268
            
            
            550
            
            
            5,354
            
            
            (15,982
            )
            
            45,139Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,695
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,695
            )Change
                in other comprehensive loss, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (329
            )
            
            -
            
            
            -
            
            
            (329
            )Comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,024
            )Stock
                options exercised, including tax benefit
            
            
            203
            
            
            -
            
            
            893
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            893Stock
                purchase plan, including tax benefit
            
            
            49
            
            
            -
            
            
            309
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            309Stock
                option accelerated vesting
            
            
            -
            
            
            -
            
            
            250
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            250**Balance
                at June 30, 2005**
            
            
            18,531
            
            
            2
            
            
            55,753
            
            
            3,573
            
            
            221
            
            
            5,354
            
            
            (15,982
            )
            
            43,567Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,080
            
            
            -
            
            
            -
            
            
            -
            
            
            2,080Change
                in other comprehensive income, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,413
            
            
            -
            
            
            -
            
            
            1,413Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,493Stock
                options exercised, including tax benefit
            
            
            317
            
            
            -
            
            
            999
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            999Stock
                purchase plan, including tax benefit
            
            
            102
            
            
            -
            
            
            586
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            586Stock
                based compensation expense
            
            
            -
            
            
            -
            
            
            855
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            855**Balance
                at June 30, 2006**
            
            
            18,950
            
            $
            2
            
            $
            58,193
            
            $
            5,653
            
            $
            1,634
            
            
            5,354
            
            $
            (15,982
            )
            $
            49,500




See
      accompanying notes to consolidated financial statements.


57





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**





**Years
                Ended June 30,****2004**
            
            **2005**
            
            **2006**Cash
                provided by (used in) operating activities:Net
                income (loss)
            
            
            
            
            $
            4,802
            
            $
            (2,695
            )
            $
            2,080Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Deferred
                income taxes
            
            
            
            
            
            2,025
            
            
            (2,758
            )
            
            (10
            )Depreciation
                and amortization
            
            
            
            
            
            1,904
            
            
            2,135
            
            
            2,016Stock-based
                compensation expense
            
            
            
            
            
            -
            
            
            250
            
            
            855Change
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            
            
            
            (1,323
            )
            
            1,355
            
            
            (9,135
            )Software
                license installments
            
            
            
            
            
            (13,078
            )
            
            5,613
            
            
            9,447Other
                assets
            
            
            
            
            
            (1,465
            )
            
            (93
            )
            
            (189
            )Accounts
                payable and accrued expenses
            
            
            
            
            
            2,313
            
            
            (3,676
            )
            
            1,631Deferred
                revenue
            
            
            
            
            
            (189
            )
            
            (242
            )
            
            (1,578
            )Other
                non-current liabilities
            
            
            
            
            
            -
            
            
            721
            
            
            (212
            )Total
                adjustments
            
            
            
            
            
            (9,813
            )
            
            3,305
            
            
            2,825Net
                cash provided by (used in) operating activities
            
            
            
            
            
            (5,011
            )
            
            610
            
            
            4,905Cash
                used in investing activities:Capital
                expenditures
            
            
            
            
            
            (1,314
            )
            
            (898
            )
            
            (1,640
            )Net
                cash used in investing activities
            
            
            
            
            
            (1,314
            )
            
            (898
            )
            
            (1,640
            )Cash
                provided by financing activities:Cash
                received from exercise of stock options
            
            
            
            
            
            1,998
            
            
            483
            
            
            698Cash
                received from employee stock purchase plan
            
            
            
            
            
            291
            
            
            282
            
            
            575Net
                tax benefit attributable to stock options
            
            
            
            
            
            -
            
            
            -
            
            
            312Net
                cash provided by financing activities
            
            
            
            
            
            2,289
            
            
            765
            
            
            1,585Effect
                of exchange rate changes oncash
                and cash equivalents
            
            
            
            
            
            313
            
            
            (343
            )
            
            1,391Net
                change in cash and cash equivalents
            
            
            
            
            
            (3,723
            )
            
            134
            
            
            6,241Cash
                and cash equivalents at beginning of year
            
            
            
            
            
            37,315
            
            
            33,592
            
            
            33,726Cash
                and cash equivalents at end of year
            
            
            
            
            $
            33,592
            
            $
            33,726
            
            $
            39,967Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Interest
                paid
            
            
            
            
            $
            9
            
            $
            37
            
            $
            10Income
                taxes, net of refunds
            
            
            
            
            
            215
            
            
            482
            
            
            510







See
      accompanying notes to consolidated financial statements.





58


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**(1)
      Organization**





Mobius
      Management Systems, Inc., together with its consolidated subsidiaries (the
      "Company"), is a leading provider of integrated solutions for content and records management. Mobius was incorporated in New
      York in 1981 and reincorporated in Delaware in 1997. The Company has
      international subsidiaries in the United Kingdom, Canada, France, Germany,
      Italy, Sweden, the Netherlands, Switzerland, Australia and Japan.





**(2)
      Significant Accounting Policies**





***Principles
      of Consolidation***





The
      Company and its subsidiaries are consolidated for financial statement purposes.
      All significant intercompany accounts and transactions are
      eliminated.





***Revenue
      Recognition***





The
      Company recognizes license and maintenance revenue in accordance with the
      provisions of Statement of Position (“SOP”) 97-2, “Software Revenue
      Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software
      Revenue Recognition, With Respect to Certain Transactions.” The Company
      generates license revenues from licensing the rights to use its software
      products to its customers. The Company also generates maintenance revenues
      from
      renewable support and software enhancements and professional service revenues
      from performing consulting activities for license customers. Software license
      contracts generally have terms of three, five or fifteen years.





Revenues
      from software license agreements are recognized upon delivery of the software
      if
      evidence of an arrangement exists, pricing is fixed and determinable, and
      collectibility is probable. If an acceptance period is required, revenues are
      recognized upon the earlier of customer acceptance or the expiration of the
      acceptance period. The Company allocates revenue on software arrangements
      involving multiple elements to each element based on vendor-specific objective
      evidence of the fair value allocable to each element. During
      the first half of fiscal 2004, Mobius’s contracts included a software license
      and an obligation to provide maintenance. Assuming all other revenue recognition
      criteria were met, revenue was recognized upon delivery using the residual
      method in accordance with SOP 98-9, whereby the fair value of the undelivered
      elements was deferred and the remaining portion of the arrangement fee was
      recognized as revenue. Accordingly, when the Company entered into a contract
      that included both a software license and an obligation to provide maintenance,
      the maintenance revenue was unbundled from the initial license fee and
      recognized ratably over the maintenance period, starting from the inception
      of
      the software license agreement. The Company determined the portion of the
      contract price attributable to maintenance (which did not necessarily track
      the
      allocation between license and maintenance fees set out in the contract) using
      a
      percentage derived from Mobius’s pricing structure. The unbundled portion of
      such maintenance revenue was classified as deferred revenue, with amounts
      extending beyond one year reported as non-current deferred revenue. If evidence
      of the fair value for undelivered elements did not exist, all revenue from
      the
      arrangement was deferred until such evidence materialized or until all elements
      were delivered. While the Company still recognizes revenue using the residual
      method in accordance with SOP 98-9, beginning in the third quarter of fiscal
      2004, the vast
      majority of the Company’s software license revenue contracts provide for
      optional maintenance in the first year, billed separately from the software
      license arrangement. Maintenance revenue is generally recognized ratably over
      the term of the support, typically twelve months. The unearned portion of
      maintenance revenue is classified as deferred revenue.







59


The
      Company offers installment contracts to its customers, which provide for
      periodic payments, with terms ranging from six months to five years, with the
      majority in the range of three years to five years, with generally the first
      payment due at the beginning of the contract period. Under such contracts,
      software license revenue reflects the present value of future payments under
      non-cancelable license arrangements. The discount is recognized as interest
      income over the term of the arrangement. The Company has an established business
      practice of offering installment contracts to customers and has a history of
      successfully enforcing original payment terms on these contracts without making
      concessions. In addition, the payment obligations are unrelated to product
      implementation or any other post-transaction activity. Therefore, revenues
      from
      installment contracts are generally recognized in the same manner as those
      requiring current payment. The Company entered into an arrangement during its
      fiscal first quarter of 2005 that provides it with the option of selling
      installments receivable to General Electric Capital Corporation. This
      arrangement gives the Company enhanced flexibility in offering financing
      alternatives to our customers and in managing our cash flows.





Professional
      service revenue is generally recognized using the percentage of completion method of accounting.
      In
      accordance with this method, revenue from professional service contracts is
      recognized based on the percentage of costs incurred to date to the total
      estimated costs of the project. The financial reporting for these contracts
      depends on estimates, which are regularly assessed and subject to revision
      as
      the contract progresses to completion. When the current estimate of total
      contract costs indicates that a contract will result in a loss, a provision
      for
      the full loss is recognized. Professional service revenue associated with new
      products is generally deferred until completion of the project and acceptance
      by
      the customer.





***Software
      Development Costs***





Statement
      of Financial Accounting Standards (SFAS) No. 86,
      "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed," requires that certain software development costs be capitalized
      once
      technological feasibility is established. The capitalized costs are then
      amortized on a straight-line basis over the estimated product life, or on the
      ratio of current revenues to total projected product revenues, whichever is
      greater.





The
      Company determines technological feasibility based on the working model method.
      The period between establishment of a working model and the general availability
      of Mobius’s software has historically been short. Accordingly, software
      development costs qualifying for capitalization have been insignificant. As
      a
      result, the Company has expensed all software development costs.





***Property
      and Equipment***





Property
      and equipment are carried at cost. Depreciation is computed on a straight-line
      basis over the estimated life of the related asset, ran ging
      from
      two to fifteen years. Repairs and maintenance are expensed as
      incurred.





***Goodwill
      and Other Intangible Assets***





The
      Company has recorded intangible assets representing completed technology and
      customer relationships. These assets resulted from acquisitions of the
      Contenuity Software and certain other assets of Cytura Corp., and of the
      technology and certain other assets of eManage Inc. (see Note 16, eManage Asset
      Acquisition). Completed technology is stated at cost and is amortized on a
      straight-line basis over the products’ estimated useful lives, which ranges from
      3 years to 3.75 years. Customer relationships are being amortized on a
      straight-line basis over their useful life of 3 years. The portion of a purchase
      which pertains to in-process research and development is expensed in the period
      of acquisition.





Goodwill
      is recorded as the excess of the purchase price over the fair value of assets
      acquired. Under SFAS No. 142, “Goodwill and Other Intangible Assets,”
goodwill







60


and
      intangible assets with indefinite useful lives are not amortized. Rather these
      assets are tested for impairment annually and when events and circumstances
      indicate that their fair value may have been reduced below carrying value.
      The
      Company performed its annual goodwill impairment test as of June 30, 2005 and
      2006. Goodwill was not considered impaired as of either date.





***Income
      Taxes***





The
      Company accounts for income taxes under SFAS No. 109, "Accounting for
      Income Taxes." SFAS No. 109 requires the use of the asset and liability
      method of accounting for income taxes. Under this method, deferred tax assets
      and liabilities are recognized for the future tax consequences attributable
      to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and their respective tax bases. Deferred tax assets are
      recognized for deductible temporary differences, net operating loss
      carryforwards, and tax credit carryforwards. A valuation allowance is
      established if it is more likely than not that a deferred tax asset will not
      be
      realized.





Beginning
      July 1, 2005, the Company recognizes windfall tax benefits associated with
      the
      exercise of stock options directly to stockholders’ equity when realized.
      Accordingly, deferred tax assets are not recognized for net operating loss
      carryforwards resulting from windfall tax benefits occurring from July 1, 2005
      onward. A windfall tax benefit occurs when the actual tax benefit realized
      by
      the Company upon an employee’s disposition of an equity-based award exceeds the
      deferred tax asset, if any, associated with the award that the Company had
      recorded.





***Foreign
      Currency Translation***





Balance
      sheet accounts of the Company's international subsidiaries are translated into
      U.S. dollars at exchange rates in effect at the balance sheet date.
      Revenues, costs and expenses are translated into U.S. dollars each month at
      average exchange rates. Gains or losses that result from translation are shown
      as a separate component of stockholders' equity. Net gains and losses resulting
      from foreign exchange transactions are included in the determination of net
      income or loss.





***Cash
      Equivalents***





The
      Company considers investments with maturities at the date of purchase of three
      months or less to be cash equivalents. At June 30, 2005 and 2006, cash
      equivalents were comprised of overnight deposits and money market investments
      with financial institutions.





***Marketable
      Securities***





Marketable
      securities are categorized as available-for-sale securities, as defined by
      SFAS
      No. 115, "Accounting for Certain Investments in Debt and Equity
      Securities." ** Unrealized
      holding gains and losses are reflected as a net amount in a separate component
      of stockholders’ equity until realized. For the purpose of computing realized
      gains and losses, cost is identified on a specific identification basis. For
      the
      years ended June 30, 2004, 2005 and 2006, there were no realized gains or
      losses. As of June 30, 2005 and 2006, there was no unamortized investment
      premium and unrealized holding gains and losses.





***Concentration
      of Credit Risk***





Financial
      instruments that potentially subject the Company to a concentration of credit
      risk consist of substantially all of the trade accounts receivables and software
      license installments. The Company sells its products to a large number of
      customers in diversified industries across many domestic and international
      geographies. As of June 30, 2006 ,
      one
      customer has a software license installment payable to the Company equal to
      15.7% of total software license installments. No other customer has a balance
      in
      excess of 4.4% of total software license installments.







61





**Use
      of Estimates**





The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements,
      and
      the reported amounts of revenue and expenses during the reporting period. The
      Company’s management has used its best efforts in establishing good faith
      estimates and assumptions. Actual results may differ.





***Fair
      Value of Financial Instruments***





SFAS
      No. 107, "Disclosures about Fair Value of Financial Instruments," defines
      the fair value of a financial instrument as the amount at which the instrument
      could be exchanged in a current transaction between willing parties. The fair
      value of the Company's cash and cash equivalents, marketable securities,
      accounts receivable, software license installments, non current investments,
      accounts payable, accrued expenses and deferred maintenance amounts approximate
      their carrying values.





***Earnings
      Per Share***





The
      Company calculates earnings per share in accordance with SFAS No. 128,
      "Earnings Per Share." SFAS No. 128 stipulates the calculation of Basic EPS
      and Diluted EPS for all historical periods. Basic EPS is computed by dividing
      net income (loss) by the weighted average number of common shares outstanding
      during the period. The computation of Diluted EPS is similar to the computation
      of Basic EPS except that it gives effect to all potentially dilutive instruments
      that were outstanding during the period. See Note 3, Earnings Per Share, for
      the
      EPS calculations for the fiscal years ended June 30, 2004, 2005 and
      2006.





***Stock-Based
      Compensation***





Prior
      to
      July 1, 2005, the Company accounted for employee stock options and employee
      stock purchase grants under the intrinsic value method of Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      related interpretations (APB No. 25). During that period, the Company applied
      the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based
      Compensation Transition and Disclosure, an amendment of FASB Statement No.
      123.”





Beginning
      July 1, 2005, the Company accounts for share-based compensation in accordance
      with SFAS No. 123(R), “Share-Based Payment (revised 2004),” (SFAS No. 123(R)),
      which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and
      supersedes APB Opinion No. 25. Under SFAS No. 123(R), the Company recognizes
      the
      grant date fair value of share-based compensation awards over the requisite
      service period.





***Comprehensive
      Income (Loss)***





Statement
      of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
requires the disclosure of comprehensive income, which includes net income
      (loss), foreign currency translation adjustments and unrealized gains and losses
      on marketable securities classified as available-for-sale.





***Segment
      and Geographic Information***





SFAS
      No.
      131, “Disclosures about Segments of an Enterprise and Related Information”,
      establishes standards for reporting information about operating segments in
      annual financial statements and requires that certain selected information
      about
      operating segments be reported in interim financial statements. It also
      establishes standards for related disclosures about products or services, and
      geographic areas. Operating segments are defined as components of an enterprise
      about which separate financial information is evaluated regularly by the
      chief







62







operating
      decision maker, or decision-making group, in deciding how to allocate resources
      and in assessing performance.





***Recent
      Accounting Pronouncements***





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes.” Under FIN 48, the tax effects of a position taken
      on a tax return should be recognized only if it is “more-likely-than-not” to be
      sustained based solely on its technical merits as of the reporting date. FIN
      48
      also provides guidance on derecognition, measurement, classification, interest
      and penalties, accounting in interim periods, disclosure and transition, and
      also requires significant new annual disclosures in the notes to the
      consolidated financial statements. The interpretation applies to all tax
      positions related to income taxes subject to SFAS No. 109.





Differences
      between the amounts recognized in the statements of financial position prior
      to
      the adoption of FIN 48 and the amounts reported after adoption must be accounted
      for as a cumulative-effect adjustment recorded to the beginning balance of
      retained earnings. FIN 48 is effective for fiscal years beginning after December
      15, 2006. As such, the Company is required to adopt FIN 48 at the beginning
      of
      its fiscal year 2008. The Company is currently evaluating the various
      requirements of FIN 48, but is unable at this time to assess what, if any,
      the
      financial statement impacts might be.





***Financial
      Statement Reclassifications***





Certain
      comparative prior year amounts in the Consolidated Financial Statements have
      been reclassified to conform to the current year presentation.







63





**(3)
      Earnings Per Share**





The
      following is a reconciliation of the numerators and denominators for the Basic
      and Diluted
      EPS calculations (in thousands, except per share data):





**** **Years Ended June 30,**


**2004****2005**Net
                Income
            
            Shares
            
            Per
                Share
            
            Net
                Loss
            
            Shares
            
            Per
                Share(Numerator)
            
            (Denominator)
            
            Amount
            
            (Numerator)
            
            (Denominator)
            
            AmountBasic
                EPS:Net
                income (loss)
            
            $
            4,802
            
            
            
            
            
            
            
            $
            (2,695
            )Weighted
                average shares
              outstanding
            
            
            
            
            
            17,964
            
            
            
            
            
            
            
            
            18,409Basic
                earnings (loss)
              per share
            
            
            
            
            
            
            
            $
            0.27
            
            
            
            
            
            
            
            $
            (0.15
            )Diluted
                EPS:Net
                income (loss)
            
            $
            4,802
            
            
            
            
            
            
            
            $
            (2,695
            )Dilutive
                effect of
              stock options
            
            
            
            
            
            1,973
            
            
            
            
            
            
            
            
            -Weighted
                average shares
              outstanding
            
            
            
            
            
            19,937
            
            
            
            
            
            
            
            
            18,409Diluted
                earnings (loss)
              per share
            
            
            
            
            
            
            
            $
            0.24
            
            
            
            
            
            
            
            $
            (0.15
            )











**Year
                Ended June 30,****2006**Net
                Income
            
            Shares
            
            Per
                Share(Numerator)
            
            (Denominator)
            
            AmountBasic
                EPS:Net
                income
            
            $
            2,080Weighted
                average shares
              outstanding
            
            
            
            
            
            18,765Basic
                earnings per share
            
            
            
            
            
            
            
            $
            0.11Diluted
                EPS:Net
                income
            
            $
            2,080Dilutive
                effect of
              stock options
            
            
            
            
            
            1,066Weighted
                average shares
              outstanding
            
            
            
            
            
            19,831Diluted
                earnings per share
            
            
            
            
            
            
            
            $
            0.10





Stock
      options for the years ended June 30, 2004 and 2006, representing an aggregate
      of
      550,981 and 1,663,125 shares, respectively, and all outstanding stock options
      for the year ended June 30, 2005, representing an aggregate of 2,337,904 shares
      of common stock, were excluded from the calculation of diluted earnings (loss)
      per share because the effect would be antidilutive. Stock options were the
      only
      dilutive instruments outstanding for the years ended June 30, 2004 and
      2006.




**(4)
      Software License Installments**





In
      the
      ordinary course of business, the Company offers extended payment terms to some
      of its customers, with terms ranging from six months to five years, with the
      majority in the range of three to five years. Software license installments
      are
      discounted at a market rate of interest. During the years ended June 30, 2004,
      2005 and 2006, the discount rates used for initial year software license
      installment sales ranged between 3.1% and 7.0%, between 5.5% and 7.6% and
      between 6.7% and 8.3%, respectively. The discount is amortized over the term
      of
      the financing to interest income using the interest method. The Company entered
      into an arrangement during its fiscal first quarter of 2005 providing it with
      the option of selling certain







64


installments
      receivable to General Electric Capital Corporation. This arrangement gives
      the
      Company enhanced flexibility in offering financing alternatives to our customers
      and to manage our cash flow. During fiscal 2005 and 2006, the Company sold
      approximately $2.7 million and $3.1 million, respectively, of installments
      receivable under this arrangement.





The
      present values of software license installments to be received after
      June 30, 2006 are as follows (in thousands):





**Year
      Ended:**




June
                30, 2007
            
            $
            13,211June
                  30, 2008
            
            
            7,139June
                  30, 2009
            
            
            3,135June
                  30, 2010
            
            
            312Total
              minimum payments to be received
            
            
            23,797Less
              imputed interest
            
            
            (2,228
            )Less
              allowance for doubtful accounts
            
            
            (99
            )Present
              value of software license installments, net
            
            
            21,470Less
              current portion, net
            
            
            (12,054
            )Non-current
              portion, net
            
            $
            9,416




**(5)
      Property and Equipment**





Property
      and equipment consists of the following (in thousands):




**June
                  30,****Useful****Life**
              
              
              **2005**
              
              
              **2006**Computer
                  equipment
              
              
              2
                  - 5 years
              
              $
              8,711
              
              $
              9,883Furniture,
                  fixtures and office equipment
              
              
              5
                  years
              
              
              1,438
              
              
              1,547Leasehold
                  improvements
              
              
              5
                  - 15 years
              
              
              3,917
              
              
              4,09514,066
              
              
              15,525Less
                  accumulated depreciation and amortization
              
              
              
              
              
              (10,403
              )
              
              (11,613
              )Property
                  and equipment, net
              
              
              
              
              $
              3,663
              
              $
              3,912


Depreciation
      and amortization expense on property and equipment was $1,600,000, $1,509,000
      and $1,386,000 for the years ended June 30, 2004, 2005 and 2006,
      respectively.







65





**(6)
      Accounts Payable and Accrued Expenses**





Accounts
      payable and accrued expenses consist of the following (in
      thousands):




**June
                30,****2005**
            
            **2006**Accounts
              payable
            
            $
            2,903
            
            $
            2,183Compensation
              and related benefits
            
            
            6,030
            
            
            7,424Royalties
              payable
            
            
            974
            
            
            912Other
            
            
            4,456
            
            
            5,475$
            14,363
            
            $
            15,994




**(7)
      Income Taxes**





Income
      (loss) before provision for (benefit from) income taxes is as follows (in
      thousands):




**Years
                Ended June 30,****2004**
            
            **2005**
            
            **2006**Domestic
              income (loss)
            
            $
            7,651
            
            $
            (6,395
            )
            $
            2,150Foreign
              income
            
            
            278
            
            
            663
            
            
            785$
            7,929
            
            $
            (5,732
            )
            $
            2,935





The
      components of the provision for (benefit from) income taxes for the years ended
      June 30, 2004, 2005 and 2006 are as follows (in thousands):




**Years
                Ended June
                30,****2004**
            
            **2005******
            
            **2006****Current**
            ****
            **Deferred**
            ****
            **Total**
            ****
            **Current**
            ****
            **Deferred**
            ****
            **Total**
            ****
            **Current**
            ****
            **Deferred**
            ****
            **Total**Federal
            
            $
            71
            
            $
            1,901
            
            $
            1,972
            
            $
            (614
            )
            $
            (1,837
            )
            $
            (2,451
            )
            $
            6
            
            $
            240
            
            $
            246State
            
            
            71
            
            
            515
            
            
            586
            
            
            28
            
            
            (371
            )
            
            (371
            )
            
            -
            
            
            175
            
            
            175Foreign
            
            
            835
            
            
            (266
            )
            
            569
            
            
            322
            
            
            (565
            )
            
            (243
            )
            
            237
            
            
            197
            
            
            434$
            977
            
            $
            2,150
            
            $
            3,127
            
            $
            (264
            )
            $
            (2,773
            )
            $
            (3,037
            )
            $
            243
            
            $
            612
            
            $
            855







66





The
      following table reconciles the actual provision (benefit) for income taxes
      to
      the provision (benefit) for income taxes calculated at the Federal statutory
      corporate rate of 34% for the years ended June 30, 2004, 2005 and 2006 (in
      thousands):





**Years
      Ended June 30,**


**2004**
            
            **2005**
            
            **2006**Expected
                federal statutory corporate rate
            
            $
            2,696
            
            $
            (1,949
            )
            $
            998State
                income taxes, net
            
            
            387
            
            
            (226
            )
            
            116Foreign
                taxes
            
            
            666
            
            
            168
            
            
            180Non-deductible
                stock compensation
            
            
            -
            
            
            -
            
            
            154Losses
                of international subsidiaries for which no benefit has been
                recognized
            
            
            28
            
            
            51
            
            
            -Research
                credit
            
            
            (650
            )
            
            (643
            )
            
            (337
            )Reversal
                of previously accrued taxes
            
            
            -
            
            
            (601
            )
            
            (250
            )Reduction
                in valuation allowance
            
            
            -
            
            
            (35
            )
            
            (140
            )Other
            
            
            -
            
            
            198
            
            
            134Total
                income tax provision (benefit)
            
            $
            3,127
            
            $
            (3,037
            )
            $
            855Pre-tax
                income (loss)
            
            $
            7,929
            
            $
            (5,732
            )
            $
            2,935Effective
                tax rate
            
            
            39.4
            %
            
            53.0
            %
            
            29.1
            %





In
      March
      of 2005 and March of 2006, due to the expiration of the statute of limitations
      on earlier tax years, the Company reversed previously accrued income taxes,
      reducing the tax provision by $601,000 and $250,000 for fiscal 2005 and 2006,
      respectively.





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities are presented below (in
      thousands):





**June
                30,****2005**
            
            **2006**Deferred
                tax assets:Accounts receivable related
            
            $
            253
            
            $
            215Domestic net operating loss carryforwards attributable to operating
                activities
            
            
            4,215
            
            
            -Domestic net operating loss carryforwards attributable to employee
                stock
                options
            
            
            1,850
            
            
            1,626Foreign net operating loss carryforwards
            
            
            6,680
            
            
            6,404Depreciation and amortization
            
            
            1,385
            
            
            1,530Tax credit carryforwards
            
            
            3,474
            
            
            4,050Capital loss carryforwards
            
            
            1,033
            
            
            1,033Stock compensation
            
            
            -
            
            
            156Other
            
            
            67
            
            
            30418,957
            
            
            15,318Valuation
                allowance
            
            
            (6,974
            )
            
            (6,813
            )Net deferred tax assets
            
            
            11,983
            
            
            8,505Deferred
                tax liabilities:Software license installments
            
            
            11,186
            
            
            7,908U. S. taxes on foreign income
            
            
            779
            
            
            550Other
            
            
            30
            
            
            49Net deferred tax liability
            
            $
            12
            
            $
            2





67





The
      valuation allowance decreased by $161,000 for the year ended June 30, 2006,
      primarily due to a net reduction of the valuation allowance on the Company’s
      foreign net operating loss carryforwards. The Company may further reduce the
      valuation allowance if it is concluded that it is more likely than not that
      additional deferred tax assets will be realized.





As
      of
      June 30, 2006, the Company had net operating loss carryforwards for federal
      income tax purposes of approximately $4.2 million which will begin to expire,
      if
      unused, in the year 2024. The Company also has $17.9 million in foreign net
      operating loss carryforwards as of June 30, 2006. The carryforward period of
      these losses varies by jurisdictions; some begin to expire in fiscal 2007 and
      others extend indefinitely.





As
      of
      June 30, 2005 and 2006, the Company had capital loss carryforwards of
      approximately $2.7 million. These capital loss carryforwards will expire, if
      unused, in fiscal 2007. The Company has established a valuation allowance
      against these capital loss carryforwards as management has concluded that it
      is
      more likely than not that these deferred tax assets will not be
      realized.





**(8)**  **Preferred
      Stock**





The
      Company has authorized 1,000,000 shares of Preferred Stock with a par value
      of
      $.01. Before any shares are issued, the Board of Directors shall fix the
      specific provisions of the shares including the designation of series, voting
      rights, dividend features, redemption and liquidation provision and other
      features. No shares were outstanding as of June 30, 2005 and 2006.





**(9)
      Stock-Based Compensation**





As
      of
      June 30, 2006, Mobius had the following stock-based compensation plans, which
      are described below: the 2006 Stock Incentive Plan (2006 Stock Plan), the
      Non-Employee Directors’ 1998 Stock Option Plan (Directors’ Plan) and the 1998
      Employee Stock Purchase Plan (ESPP).





***2006
      Stock Incentive Plan***





At
      the
      Company’s annual meeting of stockholders on February 7, 2006, the stockholders
      approved the Company’s 2006 Stock Plan, which replaces the 1996 Stock Incentive
      Plan (1996 Stock Plan). As of February 7, 2006, the Company had reserved for
      issuance options to purchase up to 6,902,394 shares of authorized but unissued
      common stock under the 1996 Stock Plan. As a result of the termination of the
      1996 Stock Plan, option grants will no longer be made under the 1996 Stock
      Plan
      but it will continue in effect with respect to options previously granted
      thereunder. The terms of the 2006 Stock Plan are substantially the same as
      the
      1996 Stock Plan.





On
      June
      14, 2005, Mobius’s Board of Directors approved a plan to accelerate the vesting
      of all unvested employee stock options under the 1996 Stock Plan, other than
      those options awarded to officers of the Company. The Board took this action
      with the belief that it is in the best interest of stockholders, as it will
      reduce the Company’s reported compensation expense associated with those stock
      options in future periods. As a result of this acceleration, during the fiscal
      fourth quarter of 2005, the Company recorded pre-tax compensation expense of
      $250,000, which represents the intrinsic value measured at the acceleration
      date
      for the estimated number of options that, absent the acceleration, would have
      expired unexercised.





Under
      the
      2006 Stock Plan, Mobius’s Compensation Committee, whose members have been
      delegated to serve as the Stock Option Committee (as defined under the 2006
      Stock Plan), may grant stock options to officers, employees, directors and
      consultants. Stock options are generally granted with an exercise price equal
      to
      the stock's fair market value at the date of grant, as determined by Mobius’s
      Board of Directors. Stock options generally expire ten years from the grant
      date. As of June 30, 2006, there were 1,834,407 shares available for grant
      under
      the 2006 Stock Plan.







68





Beginning
      in fiscal 2007, the Company intends to issue a combination of stock options
      and
      restricted stock to tailor and enhance the incentive nature of such instruments
      and to better manage the related expense charged to earnings, as required under
      SFAS No. 123(R). The number of equity-based compensation units granted to
      employees as a form of non-cash compensation will be based on guidelines
      established by the Company that consider, among other factors, market trends
      and
      the level of expense that will be charged to earnings. Vesting of such grants
      will be dependent on the achievement of certain corporate financial goals and
      will vest in substantially equal installments over five years.





***Non-Employee
      Directors' 1998 Stock Option Plan***





In
      February 1998, Mobius’s Board of Directors and stockholders approved and adopted
      the Directors’ Plan. The purpose of the Directors' Plan is to provide an
      incentive to Mobius’s non-employee directors to serve on the Board of Directors
      and to maintain and enhance Mobius’s long-term performance. The Directors' Plan
      provides for the issuance of a total of 500,000 authorized and unissued shares
      of common stock, treasury shares and/or shares acquired by Mobius for purposes
      of the Directors' Plan. As of June 30, 2006, there were 90,000 shares available
      for grant under the Directors’ Plan.





Non-employee
      directors receive an initial grant of 20,000 options upon first election to
      the
      Board, of which 10,000 options are granted under the Directors’ Plan and 10,000
      options are granted under the 2006 Stock Plan. In addition, non-employee
      directors receive an annual grant of 10,000 options under the Directors’ Plan,
      made at each annual meeting to those directors having at least nine months
      of
      Board service on the grant date. Each option granted under the Directors' Plan
      has a term of ten years. Options granted under the Directors’ Plan prior to
      February 6, 2006 became exercisable upon grant. Effective February 7, 2006,
      the
      Board of Directors amended the Directors’ Plan such that one-quarter of the
      options granted will vest every three months until the options fully vest on
      the
      one-year anniversary of the grant date. The exercise price of each option
      granted under the Directors' Plan is equal to the fair market value of a share
      of common stock on the date of grant.







***1998
      Employee Stock Purchase Plan***





In
      February 1998, the Board of Directors and stockholders of the Company approved
      and adopted the ESPP. The purpose of the ESPP is to provide eligible employees
      who wish to acquire common stock of the Company the opportunity to purchase
      shares from the Company with accumulated payroll deductions. The ESPP is
      intended to constitute an "employee stock purchase plan" under section 423
      of the Internal Revenue Code. The ESPP provides for the issuance of an aggregate
      of up to 1,650,000 shares. Shares issued under the ESPP during the years ended
      June 30, 2004, 2005 and 2006 totaled 151,003, 48,506 and 101,792, respectively.
      As of June 30, 2006, 88,972 shares are reserved for issuance and there were
      723,801 remaining shares available to purchase under this plan.




*  *  *









69


Prior
      to
      July 1, 2005, Mobius accounted for these plans under the recognition and
      measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to
      Employees” (APB No. 25), and related Interpretations, as permitted by SFAS No.
      123, “Accounting for Stock-Based Compensation.” Except for the one-time charge
      of $250,000 recorded in the fourth quarter of fiscal 2005 related to the
      accelerated vesting of certain employee stock options, as previously discussed,
      no stock-based employee compensation cost was recognized in the Consolidated
      Statements of Operations for the years ended June 30, 2004 and 2005, as the
      ESPP
      was considered non-compensatory pursuant to APB 25 and all options granted
      under
      the Stock Plan and the Directors’ Plan had an exercise price equal to the market
      value of the underlying common stock on the date of grant. Effective July 1,
      2005, Mobius adopted the fair value recognition provisions of SFAS No. 123(R),
      “Share-Based Payment,” using the modified-prospective-transition method, and as
      a result, prior periods have not been restated.





Under
      the
      modified-prospective-transition method, the Company is required to recognize
      stock-based employee compensation cost for: (a) all share-based awards granted
      prior to, but not yet vested as of July 1, 2005, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS No. 123,
      and
      (b) all share-based awards granted subsequent to June 30, 2005, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS No.
      123(R). During the year ended June 30, 2006, 20,000 options, 80,000 options
      and
      101,792 options were granted under the 2006 Stock Plan, the Directors’ Plan and
      the ESPP, respectively.





As
      a
      result of adopting SFAS No. 123(R) on July 1, 2005, Mobius’s income before
      income taxes and net income for the year ended June 30, 2006, were $855,000
      and
      $700,000 lower, respectively, than if we had continued to account for
      share-based compensation under APB No. 25. Basic and diluted earnings per share
      for the year ended June 30, 2006 would have been $0.15 and $0.14, respectively,
      if we had not adopted SFAS No. 123(R), compared to reported basic and diluted
      earnings per share of $0.11 and $0.10, respectively.





Prior
      to
      the adoption of SFAS No. 123(R), the Company presented all tax benefits of
      deductions resulting from the exercise of stock options as operating cash flows
      in the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that
      the
      Company classifies the cash flows resulting from the tax benefits of tax
      deductions in excess of the compensation cost recognized for those options
      (excess tax benefits) as financing cash flows. The $312,000 excess tax benefit
      classified as a financing cash inflow would have been classified as an operating
      cash inflow if we had not adopted SFAS No. 123(R).





The
      following table illustrates the effect on net income (loss) and income (loss)
      per share during the years ended June 30, 2004 and 2005 if the Company had
      applied the fair value recognition provisions of SFAS No. 123 to options
      granted







70


under
      Mobius’s 1996 Stock Plan, Directors’ Plan and ESPP. For purposes of this pro
      forma disclosure, the value of the options is estimated using a Black Scholes
      option-pricing formula and amortized to expense over the options’ vesting
      periods.


**Year
                Ended June 30,****2004**
            
            **2005**Net
                income (loss), as reported
            
            $
            4,802
            
            $
            (2,695
            )Add:
                Stock-based compensation expense included in reported net income
                (loss),
                net of tax
            
            
            -
            
            
            250Less:
                Total stock-based employee compensation expense determined under
                fair
                value based
              method for all awards, net of tax
            
            
            (1,350
            )
            
            (3,360
            )Pro
                forma net income (loss)
            
            $
            3,452
            
            $
            (5,805
            )Basic
                net income (loss) per share- as reported
            
            $
            0.27
            
            $
            (0.15
            )Basic
                net income (loss) per share- pro forma
            
            $
            0.19
            
            $
            (0.32
            )Diluted
                net income (loss) per share-as reported
            
            $
            0.24
            
            $
            (0.15
            )Diluted
                net income (loss) per share- pro forma
            
            $
            0.17
            
            $
            (0.32
            )





For
      purposes of the pro forma stock-based compensation disclosed above and for
      computing stock-based compensation under SFAS No. 123(R) effective July 1,
      2005,
      the Company used the Black Scholes option pricing model for all options granted
      under the 1996 Stock Plan, 2006 Stock Plan and Directors’ Plan. The per share
      weighted average fair value of stock options granted during the years ended
      June 30, 2004, 2005 and 2006, was $5.18, $3.46 and $4.76, respectively, on
      the date of grant. Stock option grants during the years ended June 30, 2004,
      2005 and 2006, assumed volatility of 101%, 88% and 86%, respectively, expected
      dividend yield of 0.0% and an expected life of 4.1 years, 3.5 years and 6.4
      years, respectively. The assumed risk free interest rate on the date of stock
      option grants for the years ended June 30, 2004, 2005 and 2006 was 3.7%, 3.9%
      and 4.7%, respectively.





The
      fair
      value of an employee stock purchase grant under the ESPP is estimated as the
      sum
      of 15% of the grant date market price of Mobius common stock and 85% of the
      fair
      value of a stock option, as determined using the Black Scholes option pricing
      model. Employee stock purchase grants under the ESPP are made on the first
      day
      of the plan-year, which runs from November 1 through October 31. Since
      the ESPP fiscal year varies from the Company’s financial reporting fiscal year
      (which runs from July 1 through June 30), the following assumptions have been
      used with respect to the ESPP plan years. The per share weighted average fair
      value of employee stock purchase options granted during the years ended June
      30,
      2004, 2005 and 2006 ranged between $0.95 and $5.26, $2.72 and $5.26 and $1.85
      and $2.72, respectively, on the date of grant. Employee stock purchase option
      grants during the years ended June 30, 2004, 2005 and 2006 assumed volatility
      of
      a range between 77% and 79%, 69% and 77% and 39% and 69%, respectively, expected
      dividend yield of 0.0% and an expected life of one year. The assumed risk free
      interest rate on the date of employee stock purchase option grants for the
      years
      ended June 30, 2004, 2005 and 2006 ranged between 1.3% and 1.8%, 1.3% and 2.3%
      and 2.3% and 4.3%, respectively.





Our
      estimates of expected volatility and expected option life are based on
      historical data. The risk free interest rate coincides with the U.S. treasury
      rate at date of grant with a maturity equal to the expected life of the
      option.







71




Total
      stock option activity during the periods indicated was as follows:




**Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**OptionsOutstanding
                at June 30, 2003
              
              
              4,080,550
              
              $
              4.04Granted
              
              
              842,700
              
              
              7.75Exercised
              
              
              (602,977
              )
              
              3.31Forfeited
              
              
              (231,200
              )
              
              4.47Expired
              
              
              --
              
              
              --Outstanding
                at June 30, 2004
              
              
              4,089,073
              
              
              4.89Granted
              
              
              321,000
              
              
              6.13Exercised
              
              
              (203,112
              )
              
              2.38Forfeited
              
              
              (306,838
              )
              
              5.57Expired
              
              
              --
              
              
              --Outstanding
                at June 30, 2005
              
              
              3,900,123
              
              
              5.07Granted
              
              
              100,000
              
              
              6.48Exercised
              
              
              (317,062
              )
              
              2.20Forfeited
              
              
              (87,400)
              )
              
              7.80Expired
              
              
              --
              
              
              --Outstanding
                at June 30, 2006
              
              
              3,595,661
              
              $
              5.30Vested
                and exercisable at June 30, 2006
              
              
              3,233,711
              
              $
              5.10




The
      following table summarizes information about the stock option
      plans:




****  ****


**OPTIONS
              OUTSTANDING**
            **OPTIONS
                EXERCISABLE**Range
                ofExercise
                Prices
            
            Number
                Outstanding as of
              June
                30,2006
            
            Weighted
                Average ContractualLife
            
            Weighted
                Average ExercisePrice
            
            Number
                Exercisable as of
              June
                30, 2006
            
            Weighted
                Average ExercisePrice$1.25
                - $1.81
            
            
            367,388
            
            
            1.49
            
            $
            1.36
            
            
            367,388
            
            $
            1.36$1.87
                - $2.41
            
            
            390,490
            
            
            6.25
            
            $
            2.29
            
            
            367,490
            
            $
            2.29$2.48
                - $2.89
            
            
            382,483
            
            
            5.67
            
            $
            2.77
            
            
            377,983
            
            $
            2.77$2.91
                - $3.75
            
            
            372,000
            
            
            4.74
            
            $
            3.08
            
            
            372,000
            
            $
            3.08$3.88
                - $5.40
            
            
            368,000
            
            
            2.46
            
            $
            4.65
            
            
            368,000
            
            $
            4.65$5.80
                - $6.33
            
            
            228,000
            
            
            8.50
            
            $
            6.07
            
            
            131,750
            
            $
            6.11$6.49
                - $6.49
            
            
            384,800
            
            
            7.93
            
            $
            6.49
            
            
            359,600
            
            $
            6.49$6.50
                - $7.01
            
            
            363,500
            
            
            5.04
            
            $
            6.77
            
            
            235,500
            
            $
            6.89$7.40
                - $10.46
            
            
            570,000
            
            
            4.57
            
            $
            9.64
            
            
            485,000
            
            $
            9.50$11.00
                - $15.00
            
            
            169,000
            
            
            1.73
            
            $
            11.21
            
            
            169,000
            
            $
            11.21$1.25
                - $15.00
            
            
            3,595,661
            
            
            4.88
            
            $
            5.30
            
            
            3,233,711
            
            $
            5.10





As
      of
      June 30, 2006, there were 3,595,661 options outstanding with an aggregate
      intrinsic value of approximately $5.6 million. As of June 30, 2006, there were
      3,233,711 options vested and exercisable with a weighted average contractual
      life of approximately 4.48 years and an aggregate intrinsic value of
      approximately $5.5 million.





The
      intrinsic value of options exercised during the years ended June 30, 2004,
      2005
      and 2006 was approximately $5.3 million, $836,000 and $1.2 million,
      respectively. Cash received from option exercises under all share-based
      payment







72


arrangements
      for the years ended June 30, 2004, 2005 and 2006 was approximately $2.0 million,
      $482,000 and $698,000, respectively. The actual tax benefit realized for the
      tax
      deductions from option exercise of the share-based payment arrangements for
      the
      year ended June 30, 2006 totaled $301,000 relating to the 1996 Stock Plan and
      $11,000 relating to the ESPP. There was no tax benefit realized for the year
      ended June 30, 2005. The actual tax benefit realized for the tax deductions
      from
      option exercise of the share-based payment arrangements for the year ended
      June
      30, 2004 totaled approximately $1.2 million relating to the 1996 Stock Plan
      and
      approximately $138,000 relating to the ESPP. When assessing whether a tax
      benefit relating to share-based compensation has been realized, the Company
      follows the tax law ordering method, under which current year share-based
      compensation deductions are assumed to be utilized before net operating loss
      carryforwards. The Company will calculate its July 1, 2005, SFAS No. 123(R)
      adoption date pool of windfall tax benefits using the SFAS No. 123(R) shortcut
      method.





As
      of
      June 30, 2006, there was approximately $907,000 of unrecognized compensation
      expense related to unvested share-based awards under the 1996 Stock Plan, 2006
      Stock Plan and Directors’ Plan. This amount is expected to be recognized over a
      weighted-average period of approximately 1.47 years. For awards granted prior
      to
      July 1, 2005, compensation cost is amortized over the vesting period using
      the
      tranche method proscribed in FIN 28. Compensation cost for awards granted after
      the adoption date of SFAS No. 123(R) is amortized on a straight line basis
      over
      the vesting period. The total fair value of shares vested during the years
      ended
      June 30, 2004, 2005 and 2006, was approximately $1.2 million, $4.2 million
      and
      $615,000, respectively. As of June 30, 2006, unamortized compensation expense
      of
      approximately $46,000 relating to the ESPP will be recognized on a straight
      line
      basis by the end of the plan year, October 31, 2006.





Mobius
      has a policy of issuing new shares to satisfy share option exercises and expects
      to continue that practice for the foreseeable future.





**(10)
      Employee Savings Plan**





In
      fiscal
      1995, the Company established a savings plan that qualifies under
      Section 401(k) of the Internal Revenue Code. Under the plan,
      participating U.S. employees may defer a percentage of their pre-tax
      compensation, but not more than Internal Revenue Code limitations. The Company,
      at the discretion of the Board of Directors, may match the employee
      contributions. No matching contributions were made in the years ended
      June 30, 2004, 2005 and 2006.





**(11)
      Comprehensive Income (Loss)**





Comprehensive
      income (loss) for the years ended June 30, 2004, 2005 and 2006 is as
      follows:





**Year
                ended June 30,****2004**
            
            **2005**
            
            **2006**Net
                income (loss)
            
            $
            4,802
            
            $
            (2,695
            )
            $
            2,080Unrealized
                translation gain (loss)
            
            
            332
            
            
            (329
            )
            
            1,413Comprehensive
                income (loss)
            
            $
            5,134
            
            $
            (3,024
            )
            $
            3,493





**(12)
      Related Party Transactions**





Since
      1981 the Company has engaged, and plans to continue to engage, the law firm
      of
      Kramer Levin Naftalis & Frankel LLP to provide the Company with legal
      counsel. Kenneth P. Kopelman, a member of Mobius’s Board of Directors, is a
      partner of Kramer Levin. Fees paid to Kramer Levin during the years ended June
      30, 2004, 2005 and 2006 were approximately $1.0 million, $675,000 and $700,000,
      respectively.







73





**(13)
      Lease Commitments**





The
      Company has operating leases for its office facilities which expire on various
      dates through fiscal 2011 and provide for additional payments relating to
      utility costs.





The
      following is a schedule of future minimum lease payments for operating leases
      as
      of June 30, 2006 (in thousands):




**Operating**
              **Leases****Year
              Ended:**June
              30, 2007
            
            $
            2,833June
              30, 2008
            
            
            2,621June
              30, 2009
            
            
            2,212June
              30, 2010
            
            
            1,701June
              30, 2011
            
            
            129Total
              minimum lease payments
            
            $
            9,496





Rental
      expense for all operating leases was approximately $2.8 million, $2.9 million
      and $2.7 million for the years ended June 30, 2004, 2005 and 2006,
      respectively.





In
      compliance with the lease of the Company’s corporate headquarters in Rye, NY,
      the landlord holds a letter of credit issued by a bank totaling $275,000,
      collateralized by a certificate of deposit.





**(14)
      Segment and Geographic Information**





The
      Company operates in one principal business segment across domestic and
      international markets. No foreign country accounted for more than 10% of revenue
      or 10% of identifiable assets in any of the periods presented.




****
            
            **United**
              **States**
            
            **Intl.
                (a)**
            
            **Eliminations**
            
            **Total****Year
              Ended June 30, 2004:**Revenue:From external
                customers (b)
            
            $
            69,661
            
            $
            18,427
            
            $
            -
            
            $
            88,088Between geographic areas (c)
            
            
            5,241
            
            
            --
            
            
            (5,241
            )
            
            --Total
              revenue
            
            $
            74,902
            
            $
            18,427
            
            $
            (5,241
            )
            $
            88,088Long-lived
              assets
            
            $
            28,880
            
            $
            4,723
            
            $
            --
            
            $
            33,603**Year
              Ended June 30, 2005:**Revenue:From external customers (b)
            
            $
            58,505
            
            $
            19,168
            
            $
            -
            
            $
            77,673Between geographic areas (c)
            
            
            4,361
            
            
            --
            
            
            (4,361
            )
            
            --Total
              revenue
            
            $
            62,866
            
            $
            19,168
            
            $
            (4,361
            )
            $
            77,673Long-lived
              assets
            
            $
            24,626
            
            $
            6,987
            
            $
            --
            
            $
            31,613**Year
              Ended June 30, 2006:**Revenue:From external customers(b)
            
            $
            67,134
            
            $
            22,097
            
            $
            -
            
            $
            89,231Between geographic areas(c)
            
            
            5,331
            
            
            --
            
            
            (5,331
            )
            
            --Total
              revenue
            
            $
            72,465
            
            $
            22,097
            
            $
            (5,331
            )
            $
            89,231Long-lived
              assets
            
            $
            14,111
            
            $
            5,049
            
            $
            --
            
            $
            19,160




(a)
      The
      Company operates wholly-owned subsidiaries in the United Kingdom, Canada,
      France, Germany, Italy, Sweden, the Netherlands, Switzerland, Australia and
      Japan. Includes international net agent sales (agent sales less agent
      commissions).





(b)
      Includes royalties paid to the Company and to its subsidiaries by agents.
      Royalties from agents are a percentage of the license and maintenance fees
      paid
      by customers to such agents.





(c)
      Represents transfer fees from international subsidiaries to Mobius Management
      Systems, Inc.





**(15)
      Litigation**





**Sale
      of INFOPAC-TapeSaver:** In
      January 1999, the Company sold the INFOPAC-TapeSaver product to a third party
      for approximately $3.0 million payable over a five-year period. As a result
      of
      this arrangement, the Company was going to recognize $3.0 million of license
      revenues as the buyer made payments over a five-year period ended December
      31,
      2003. The buyer has been delinquent on these payments since June 2001 and,
      as
      such, no license revenue relating to this agreement was recognized in fiscal
      2004, 2005 and 2006.





Mobius
      commenced arbitration proceedings against the buyer to enforce the payment
      terms
      in the sales agreement. On March
      26, 2002, the arbitrator issued an award in Mobius’s favor against the buyer and
      its president in the amount of $381,750, which represented the amount past
      due
      under such agreement. The arbitrator also directed the buyer and its president
      to pay Mobius $37,500 per month from March 31, 2002 through December 31, 2003
      and to pay Mobius’s share of the arbitration expenses. In April 2002, Mobius
      commenced an action against the buyer and its president in the United States
      District Court for the Southern District of New York to confirm the arbitration
      award. The
      Court entered an order confirming the award on September 23, 2002. The Company
      has docketed the judgment in California for the full amount of the debt due
      of
      approximately $1.2 million. During January 2005, the buyer’s president filed for
      personal bankruptcy protection. In April 2005, the Company filed a complaint
      in
      the bankruptcy proceeding alleging that the buyer’s president’s debt to Mobius
      is not dischargeable in the bankruptcy proceeding. The buyer’s president
      answered the complaint, denying those allegations. On May 17, 2006, the parties
      settled the action, with the buyer’s president agreeing to pay certain sums to
      be realized from the sale of his residence after settlement of an existing
      mortgage on the property. At this time, the Company can not estimate the amount,
      if any, that will be received from this sale. To date, the Company has not
      recorded any amounts due in connection with the arbitration. As a result of
      the
      uncertainty of collection, any amounts ultimately recorded will be accounted
      for
      on the cash basis.





**Acartus
      Litigation:** On
      May
      31, 2005, Mobius filed an action in the U.S. District Court for the District
      of
      Delaware against Acartus, Inc. The complaint pleaded claims for trademark
      infringement, false representation/designation of origin and false advertising
      in violation of the Lanham Act (the “Lanham Claims”), and for violations of
      state statutory and common law. The complaint sought injunctive relief,
      compensatory damages in an amount no less than $500,000, plus costs and
      attorneys’ fees. On July 5, 2005, the Company moved for preliminary injunction
      with respect to the Lanham Act Claims, seeking to enjoin Acartus from improperly
      using the Mobius mark in violation of the Company’s trademark and other rights,
      and from making false statements in advertising about Mobius’s products.
      The


74


Company
      also sought expedited discovery. By Order dated July 6, 2005, the Court granted
      Mobius’s request for expedited discovery and scheduled a hearing on the
      Company’s preliminary injunction motion for August 1, 2005. On July 22, 2005,
      Acartus agreed to a stipulated order entering a preliminary injunction with
      respect to the Lanham Act Claims, thereby mooting the August 1, 2005 hearing.
      Because Acartus has since declined to convert the preliminary injunction to
      a
      permanent injunction, the Company continues to prosecute all of its claims.
      On
      September 20, 2005, the Company amended its complaint to add a claim for
      violation of the Delaware Uniform Trade Secrets Act (the “Amended Complaint”).
      On October 4, 2005, Acartus moved to strike, dismiss or stay the Amended
      Complaint. Acartus also declined to provide discovery while its motion was
      pending, notwithstanding the July 6, 2005 Order, necessitating a motion by
      the
      Company on November 2, 2005 to compel discovery. On June 28, 2006, the Court
      denied Acartus’s motion to strike, dismiss or stay the Amended Complaint and
      granted Mobius’s motion to compel discovery. On July 13, 2006, Acartus answered
      the Amended Complaint. Mobius then again amended the complaint in August 2006,
      to add new claims and allegations based on documents obtained thus far from
      Acartus in discovery, and to add EMC Corporation, which acquired Acartus, as
      a
      defendant. Mobius also increased its request for damages to not less than $10
      million. The parties are now engaged in ongoing discovery. Pursuant to the
      Scheduling Order, fact discovery must be completed by December 1, 2006, expert
      discovery must be completed by January 24, 2007, summary judgment motions must
      be filed no later than January 31, 2007, and the case is scheduled for a
      two-week jury trial beginning on August 6, 2007. A mediation is also scheduled
      before a Magistrate Judge on October 26, 2006. At this time, the Company cannot
      predict the outcome or estimate the amount, if any, that will be received in
      the
      event the Company prevails in this matter.





**(16)
      eManage Asset Acquisition**





On
      April
      26, 2004 (the “eManage Closing Date”), the Company, through a wholly-owned
      subsidiary, acquired technology and certain other assets of eManage Inc.
      (“eManage”), a privately held company, for an aggregate of approximately $2.4
      million in cash, which was paid from the Company’s existing cash balances. In
      addition, the Company assumed liabilities of $111,000 and incurred
      acquisition-related expenses of $250,000, for an aggregate purchase price of
      approximately $2.7 million. eManage develops software solutions for e-mail
      archiving, records management and lifecycle management that enable organizations
      to manage corporate records at an enterprise level. In addition, under the
      terms
      of the agreement, Mobius may be obligated to pay eManage up to an additional
      $1.2 million if certain revenue and other operating targets are achieved as
      of
      the end of each quarter through June 30, 2005. During the fourth quarter of
      fiscal 2004, certain targets were met, and, accordingly, the Company recorded
      incremental goodwill and a payable to eManage of $340,000. During the fiscal
      second and fourth quarters of 2005, certain additional targets were met, and
      accordingly, the Company recorded incremental goodwill of $85,000 and $93,000,
      respectively, which was paid in the fiscal second quarter of 2005 and the fiscal
      first quarter of 2006, respectively.





**(17)
      Goodwill and Other Intangible Assets**





Intangible
      assets as of June 30, 2005 and 2006 were as follows (in thousands):





June
                30,**2005**
            
            **2006**Accumulated
            
            
            
            
            
            AccumulatedGross
            
            Amortization
            
            Net
            
            Gross
            
            Amortization
            
            NetCompleted
                technology
            
            $
            1,780
            
            $
            1,003
            
            $
            777
            
            $
            1,780
            
            $
            1,537
            
            $
            243Customer
                relationships
            
            
            277
            
            
            107
            
            
            170
            
            
            277
            
            
            199
            
            
            78Total
            
            $
            2,057
            
            $
            1,110
            
            $
            947
            
            $
            2,057
            
            $
            1,736
            
            $
            321





Aggregate
      amortization expense for intangible assets for the years ended June 30, 2004,
      2005 and 2006 was $304,000, $626,000 and $626,000, respectively.







75







Amortization
      expense for the year ending June 30, 2007, for acquisitions completed through
      June 30, 2006, is estimated to be $321,000.





Changes
      in the carrying amount of goodwill for the years ended June 30, 2005 and 2006
      were as follows (in thousands):





**Total**Balance
                as of June 30, 2004
            
            $
            2,566Goodwill acquired during the year
            
            
            170Effect of exchange rate changes and other
            
            
            (3
            )Balance as of June 30, 2005
            
            
            2,733Effect of exchange rate changes and other
            
            
            23Balance
                as of June 30, 2006
            
            $
            2,756














76











**SCHEDULE II**





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**Valuation
      and Qualifying Accounts**


**(In
      thousands)**





Years
                Ended June 30,**2004**
            
            **2005**
            
            **2006****Allowance
                for Doubtful Accounts**Balance
                at July 1
            
            
            
            
            $
            1,490
            
            $
            1,094
            
            $
            756Additions
                charged (reductions credited) to expense
            
            
            
            
            
            103
            
            
            (309
            )
            
            59Additions
                deducted from maintenance revenues
            
            
            
            
            
            175
            
            
            235
            
            
            88Write-offs
            
            
            
            
            
            (674
            )
            
            (264
            )
            
            (245
            )Balance
                at June 30
            
            
            
            
            $
            1,094
            
            $
            756
            
            $
            658











All
      other
      schedules are omitted because they are not applicable or the required
      information is shown in the consolidated financial statements or the notes
      thereto.












77





**15(a)(3)
      Exhibits**




**Exhibit
                No.**
              
              **Description**3.1(1)
              --
              Form
                  of Second Amended and Restated Certificate of Incorporation of
                  the
                  Registrant.3.2(1)
              --
              Form
                  of Restated By-Laws of the Registrant.4.1(1)
              --
              Specimen
                  certificate representing the Common Stock.10.1(1)
              --
              Mobius
                  Management Systems, Inc. 1996 Stock Incentive Plan.*10.2(1)
              --
              Amendment
                  No. 1 to Mobius Management Systems, Inc. 1996 Stock Incentive
                  Plan.*10.2A(8)
              --
              Amendment
                  No. 2 to Mobius Management Systems, Inc. 1996 Stock Incentive
                  Plan.*10.2B(9)
              --
              Amendment
                  No. 3 to Mobius Management Systems, Inc. 1996 Stock Incentive
                  Plan.*10.3(1)
              --
              Mobius
                  Management Systems, Inc. 1998 Employee Stock Purchase
                  Plan.*10.4(1)
              --
              Mobius
                  Management Systems, Inc. Non-Employee Directors’ 1998 Stock Option
                  Plan.*10.4A(2)
              --
              Amendment
                  No. 1 to Mobius Management Systems, Inc. Non-Employee Directors’ 1998
                  Stock Option Plan.*10.4B(6)
              --
              Amendment
                  No. 2 to Mobius Management Systems, Inc. Non-Employee Directors’ 1998
                  Stock Option Plan.*10.5(1)
              --
              Mobius
                  Management System, Inc. 1998 Executive Incentive Plan.*10.6(1)
              --
              Form
                  of Grantee Option Agreement.*10.7(1)
              --
              Lease
                  dated December 4, 1997 by and between Old Boston Post Road Associates
                  LLC and the Registrant.10.8(1)
              --
              Stock
                  Purchase Agreement dated as of May 12, 1997 by and among the
                  Registrant and the other parties listed on the signature pages
                  thereto.10.9(1)
              --
              Stockholders'
                  Agreement dated as of May 12, 1997 by and among the Registrant and
                  the other parties listed on the signature pages
                  thereto.10.10(1)
              --
              Registration
                  Rights Agreement dated May 12, 1997 by and among the Registrant and
                  the other parties listed on the signature pages
                  thereto.10.11(1)
              --
              Severance
                  Agreement dated as of September 30, 1997 between the Registrant and
                  Joseph Tinnerello.*10.12(1)
              --
              Option
                  Agreement dated as of September 30, 1997 between the Registrant and
                  Joseph Tinnerello.*10.13(1)
              --
              Letter
                  Agreement, dated as of December 28, 1997 between the Registrant and
                  Joseph Tinnerello.*10.14(1)
              --
              Stockholder
                  Agreement, dated as of December 30, 1997 between the Registrant and
                  Joseph Tinnerello.*10.15(1)
              --
              Software
                  Assets Purchase Agreement dated as of December 10, 1990 among the
                  Registrant, Compucept of Nevada and Software Assist
                  Corporation.10.16(1)
              --
              OEM
                  Agreement between the Registrant and CDP Communications, Inc. dated
                  as of
                  October 15, 1993.10.17(1)
              --
              Source
                  Code License and Amendment to OEM Agreement between the Registrant
                  and CDP
                  Communications Inc. dated as of August 12, 1997.10.18(1)
              --
              Amendment
                  No. 1 to License and Amendment to OEM Agreement between the Registrant
                  and
                  CDP Communications, Inc. dated November 21, 1997.10.19(3)
              --
              Lease
                  Modification Agreement dated July 12, 1999 by and between Old Boston
                  Post
                  Road Associates LLC and the Registrant.10.20(4)
              --
              Amendment
                  No. 1 to Mobius Management Systems, Inc. 1998 Employee Stock Purchase
                  Plan.*10.21(5)
              --
              Amendment
                  No. 2 to Mobius Management Systems, Inc. 1998 Employee Stock Purchase
                  Plan.*10.22(7)
              --
              Asset
                  Purchase and Sale Agreement, dated as of October 11, 2002, by and
                  between
                  Cytura Corp. and certain shareholders of Cytura Corp., on the one
                  hand,
                  and MMS Acquisition I LLC, on the other
                  hand.
   78
   10.23(9)
              --
              Amendment
                  No. 3 to Mobius Management Systems, Inc. 1998 Employee Stock Purchase
                  Plan.*10.24(10)
              --
              Description
                  of Raymond F. Kunzmann’s Compensation, dated as of December 16,
                  2003.*10.25(11)
              --
              Vendor
                  Program Agreement, dated as of July 21, 2004, by and between General
                  Electric Capital Corporation and the Registrant.10.26(12)
              --
              Description
                  of Mauricio Barberi’s Compensation, dated as of February 28,
                  2005.*10.27(13)
              --
              Description
                  of David B. Barton’s Compensation, dated as of June 22,
                  2005.*10.28(14)
              
              Mobius
                  Management Systems, Inc. 2006 Stock Incentive Plan.*10.29(15)
              
              Amendment
                  No. 3 to Mobius Management Systems, Inc. Non-Employee Directors’ 1998
                  Stock Option Plan.*21.1
              --
              Subsidiaries
                  of the Registrant.23.1
              --
              Consent
                  of Independent Registered Public Accounting Firm.31.1
              --
              CEO
                  Certification pursuant to Section 302(a) of the Sarbanes-Oxley
                  Act of
                  2002.31.2
              --
              CFO
                  Certification pursuant to Section 302(a) of the Sarbanes-Oxley
                  Act of
                  2002.32.1
              --
              CEO
                  Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002.32.2
              --
              CFO
                  Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002.







*
            Management
                contract or compensatory plan or
                arrangement.





(1)
            Filed
                as an exhibit to Mobius’s Registration Statement on Form S-1 (Registration
                Number 333-47117) or an amendment thereto, and incorporated herein
                by
                reference.





(2)
            Filed
                as Exhibit No. 10.4A to Mobius Management Systems, Inc.’s Form 10-Q for
                the quarter ended September 30, 2001, and incorporated herein by
                reference.





(3)
            Filed
                as Exhibit No. 10.1 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended December 31, 1999, and incorporated herein by
                reference.





(4)
            Filed
                as Exhibit No. 10.24 to Mobius Management Systems, Inc.’s Annual Report
                filed on Form 10-K for the year ended June 30, 2000, and incorporated
                herein by reference.





(5)
            Filed
                as Exhibit No. 10.25 to Mobius Management Systems, Inc.’s Form 10-Q for
                the quarter ended December 31, 2001, and incorporated herein by
                reference.





(6)
            Filed
                as Exhibit No. 10.4B to Mobius Management Systems, Inc.’s Form 10-Q for
                the quarter ended March 31, 2003, and incorporated herein by
                reference.





(7)
            Filed
                as Exhibit No. 10.26 to Mobius Management Systems, Inc.’s Current Report
                on Form 8-K filed on October 17, 2002, and incorporated herein by
                reference.





(8)
            Filed
                as Exhibit No. 10.1 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended September 30, 2003, and incorporated herein by
                reference.





(9)
            Filed
                as an exhibit to Mobius Management Systems, Inc.’s Registration Statement
                on Form S-8 (Registration Number 333-112553) filed on February 6,
                2004,
                and incorporated herein by
                reference.





(10)
            Filed
                as Exhibit No. 10.4 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended December 31, 2003, and incorporated herein by
                reference.





(11)
            Filed
                as Exhibit No. 10.27 to Mobius Management Systems, Inc.’s Annual Report on
                Form 10-K for the year ended June 30, 2004, and incorporated herein
                by
                reference.


79







(12)
            Filed
                as Exhibit No. 10.1 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended March 31, 2005, and incorporated herein by
                reference.





(13)
            Filed
                as Exhibit No. 10.27 to Mobius Management Systems, Inc.’s Form 10-K for
                the year ended June 30, 2005, and incorporated herein by
                reference.





(14)
            Filed
                as Exhibit No. 10.1 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended December 31, 2005, and incorporated herein by
                reference.





(15)
            Filed
                as Exhibit No. 10.2 to Mobius Management Systems, Inc.’s Form 10-Q for the
                quarter ended December 31, 2005, and incorporated herein by
                reference.










80







**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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.





MOBIUS
      MANAGEMENT
      SYSTEMS, INC.








By: /s/
      Mitchell
      Gross


Mitchell
      Gross


Chairman
      of the Board, Chief


Executive Officer and President


(Principal Executive Officer)





Date:  September
      11, 2006




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signatures**
            **Title(s)**
            **Date**/s/
                Mitchell Gross
              Mitchell
                Gross
            Chairman
                of the Board,
              Chief
                Executive Officer,
              President
                and Director
              (Principal
                ExecutiveOfficer)
            September
                11, 2006/s/
                Raymond F. Kunzmann
              Raymond
                F. Kunzmann
            Chief
                Financial Officer
              (Principal
                Financial and
              Accounting
                Officer)
            September
                11, 2006/s/
                Joseph J. Albracht
              Joseph
                J. Albracht
            Director
            September
                11, 2006/s/
                Mark P. Cattini
              Mark
                P. Cattini
            Director
            September
                11, 2006/s/
                Gary G. Greenfield
              Gary
                G. Greenfield
            Director
            September
                11, 2006/s/
                Patrick W. Gross
              Patrick
                W. Gross
            Director
            September
                11, 2006/s/
                Louis Hernandez, Jr.
              Louis
                Hernandez, Jr.
            Director
            September
                11, 2006/s/
                Kenneth P. Kopelman
              Kenneth
                P. Kopelman
            Director
            September
                11, 2006/s/
                Robert H. Levitan
              Robert
                H. Levitan
            Director
            September
                11, 2006/s/
                James A. Perakis
              James
                A. Perakis
            Director
            September
                11, 2006









81