**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**





**FORM
      10-Q**


(Mark
      one)


[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Quarter ended September 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)





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 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|





Number
      of
      shares outstanding of the issuer's common stock as of November 2,
      2006





Class        Number
      of Shares
      Outstanding




Common
      Stock, par value $0.0001 per share       19,449,045










**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**INDEX**





**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements (unaudited)Consolidated Balance Sheets - June 30, 2006 and September 30,
                2006
            3Consolidated Statements of Operations - Three months ended September
                30,
                2005 and 2006
            4Consolidated Statement of Stockholders’ Equity - Three months ended
                September 30, 2006
            5Consolidated Statements of Cash Flows - Three months ended September
                30,
                2005 and 2006
            6Notes to Unaudited Consolidated Financial Statements
            7Item 2. Management’s Discussion and Analysis of Financial Condition and
                Results of Operations
            11Item 3. Quantitative and Qualitative Disclosures About Market
                Risk
            23Item 4. Controls and Procedures
            23**PART
                II. OTHER INFORMATION**Item 1. Legal Proceedings
            24Item 1A. Risk Factors
            24Item 2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            24Item 3. Defaults Upon Senior Securities
            24Item 4. Submission of Matters to a Vote of Security
                Holders
            24Item 5. Other Information
            24Item 6. Exhibits
            25**SIGNATURES**
            26**CERTIFICATIONS**
            27





2





**PART
      I. - FINANCIAL INFORMATION**





**Item
      1. - Financial Statements**





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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




**June
                  30,**
              
              
              
              **September
                  30,****2006**
              
              
              
              **2006****ASSETS**Current
                  assets:Cash and cash equivalents
              
              $
              39,967
              
              
              
              
              $
              45,893Accounts receivable, net of allowances of $559 and $648,
                  respectively
              
              
              19,654
              
              
              
              
              
              13,025Software license installments, current portion
              
              
              12,054
              
              
              
              
              
              12,070Other current assets
              
              
              2,480
              
              
              
              
              
              2,877Total current assets
              
              
              74,155
              
              
              
              
              
              73,865Software
                  license installments, non-current portion, net of allowance for
                  doubtful
                accounts of $99 and $157, respectively
              
              
              9,416
              
              
              
              
              
              8,942Property
                  and equipment, net
              
              
              3,912
              
              
              
              
              
              3,708Deferred
                  income taxes
              
              
              2,478
              
              
              
              
              
              1,686Other
                  assets
              
              
              3,379
              
              
              
              
              
              3,276Total assets
              
              $
              93,340
              
              
              
              
              $
              91,477**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts payable and accrued expenses
              
              $
              15,994
              
              
              
              
              $
              12,135Deferred revenue
              
              
              22,765
              
              
              
              
              
              23,254Deferred income taxes
              
              
              2,480
              
              
              
              
              
              2,894Total current liabilities
              
              
              41,239
              
              
              
              
              
              38,283Deferred
                  revenue
              
              
              2,092
              
              
              
              
              
              1,851Other
                  non-current liabilities
              
              
              509
              
              
              
              
              
              505Total liabilities
              
              
              43,840
              
              
              
              
              
              40,639Commitments
                  and Contingencies (Note 8)Stockholders’
                  equity:Common
                  stock, $.0001 par value; authorized 40,000,000 shares; issued
                  24,303,853
                and 24,513,496 shares, respectively; outstanding 18,949,630 and
                  19,159,273
                  shares,
                respectively
              
              
              2
              
              
              
              
              
              2Additional
                  paid-in capital
              
              
              58,193
              
              
              
              
              
              58,991Retained
                  earnings
              
              
              5,653
              
              
              
              
              
              6,403Accumulated
                  other comprehensive income
              
              
              1,634
              
              
              
              
              
              1,424Treasury
                stock, at
                cost, 5,354,223shares
              
              
              (15,982)
              
              
              
              
              
              (15,982
              )Total stockholders’ equity
              
              
              49,500
              
              
              
              
              
              50,838Total
                  liabilities and stockholders' equity
              
              $
              93,340
              
              
              
              
              $
              91,477The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.








3


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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





**Three
                Months Ended**
              **September
                30,********2005**
            
            ******2006**Revenues:Software license
            
            $
            8,995
            
            $
            9,941Maintenance
            
            
            10,679
            
            
            10,907Professional service and other
            
            
            1,747
            
            
            1,843Total revenues
            
            
            21,421
            
            
            22,691Cost
                of revenues:Software license
            
            
            285
            
            
            145Maintenance
            
            
            1,865
            
            
            1,905Professional service and other
            
            
            1,386
            
            
            1,389Total cost of revenues
            
            
            3,536
            
            
            3,439Gross
                profit
            
            
            17,885
            
            
            19,252Operating
                expenses:Sales and marketing
            
            
            9,210
            
            
            9,162Research and development
            
            
            5,521
            
            
            5,739General and administrative
            
            
            3,257
            
            
            3,604Total operating expenses
            
            
            17,988
            
            
            18,505Income
                (loss) from operations
            
            
            (103
            )
            
            747Interest
                income, net
            
            
            594
            
            
            648Other
                income (expense)
            
            
            1
            
            
            (4
            )Income
                before income taxes
            
            
            492
            
            
            1,391Provision
                for income taxes
            
            
            177
            
            
            641Net
                income
            
            $
            315
            
            $
            750Basic
                earnings per share
            
            $
            0.02
            
            $
            0.04Basic
                weighted average shares outstanding
            
            
            18,555
            
            
            19,050Diluted
                earnings per share
            
            $
            0.02
            
            $
            0.04Diluted
                weighted average shares outstanding
            
            
            19,660
            
            
            19,942







The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.








4





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


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


**THREE
      MONTHS ENDED SEPTEMBER 30, 2006**


**(Unaudited,
      in thousands)**


Common
                  Stock
              
              Additional
                  Paid-in
              
              Retained
              
              Accumulated
                  Other Comprehensive
              
              Treasury
                  Stock
              
              Total
                Stockholders’Shares
              
              Amount
              
              Capital
              
              Earnings
              
              Income
              
              Shares
              
              Amount
              
              EquityBalance
                  at June 30, 2006
              
              
              18,950
              
              $
              2
              
              $
              58,193
              
              $
              5,653
              
              $
              1,634
              
              
              5,354
              
              $
              (15,982
              )
              $
              49,500Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              750
              
              
              -
              
              
              -
              
              
              -
              
              
              750Change
                in other comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (210
              )
              
              -
              
              
              -
              
              
              (210
              )Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              540Stock
                  options exercised
              
              
              209
              
              
              -
              
              
              368
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              368Tax
                  benefit from employee stock plans
              
              
              -
              
              
              -
              
              
              164
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              164Stock-based
                  compensation expense
              
              
              -
              
              
              -
              
              
              266
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              266Balance
                  at September 30, 2006
              
              
              19,159
              
              $
              2
              
              $
              58,991
              
              $
              6,403
              
              $
              1,424
              
              
              5,354
              
              $
              (15,982
              )
              $
              50,838









The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.







5





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited,
      in thousands)**


**Three
                  Months Ended****September
                  30,****2005**
              
              **2006**Cash
                  provided by operating activities:Net
                  income
              
              $
              315
              
              $
              750Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Deferred income taxes
              
              
              140
              
              
              431Depreciation and amortization
              
              
              498
              
              
              429Stock-based compensation expense
              
              
              227
              
              
              266Change
                  in operating assets and liabilities:Accounts receivable, net
              
              
              (193
              )
              
              6,629Software license installments
              
              
              1,033
              
              
              458Other assets
              
              
              (434
              )
              
              (240
              )Accounts payable and accrued expenses
              
              
              (914
              )
              
              (3,241
              )Deferred revenue
              
              
              (108
              )
              
              248Total adjustments
              
              
              249
              
              
              4,980Net
                  cash provided by operating activities
              
              
              564
              
              
              5,730Cash
                  used in investing activities:Capital expenditures
              
              
              (637
              )
              
              (129
              )Net
                  cash used in investing activities
              
              
              (637
              )
              
              (129
              )Cash
                  provided by financing activities:Cash received from exercise of stock options
              
              
              161
              
              
              368Excess tax benefit attributable to stock options
              
              
              51
              
              
              164Net
                  cash provided by financing activities
              
              
              212
              
              
              532Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (26
              )
              
              (207
              )Net
                  change in cash and cash equivalents
              
              
              113
              
              
              5,926Cash
                  and cash equivalents at beginning of period
              
              
              33,726
              
              
              39,967Cash
                  and cash equivalents at end of period
              
              $
              33,839
              
              $
              45,893The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.








6


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**(1)
      Basis of Presentation**





The
      accompanying unaudited consolidated financial statements at June 30, 2006 and
      September 30, 2006 and for the three month periods ended September 30, 2005
      and
      2006 have been prepared in accordance with the requirements of the U.S.
      Securities and Exchange Commission (“SEC”) for interim reporting. Under those
      rules, certain footnotes or other financial information that is normally
      required by generally accepted accounting principles (“GAAP”) may be condensed
      or omitted.





GAAP
      requires the management of Mobius Management Systems, Inc. (“Mobius” or the
“Company”) to make estimates and assumptions in preparing the interim financial
      statements. Mobius’s management has used its best efforts in establishing good
      faith estimates and assumptions. Interim results of operations are not
      necessarily indicative of full year results.





The
      Company’s management is responsible for the financial statements included in
      this Form 10-Q. These financial statements include all normal and recurring
      adjustments that management believes are necessary for a fair statement of
      the
      Company’s financial position, results of operations, stockholders’ equity and
      cash flows. These statements should be read in conjunction with the consolidated
      financial statements and notes in Mobius's latest Form 10-K.





*Recent
      Accounting Pronouncements*





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in a company’s financial statements
      under Statement of Financial Accounting Standards (“SFAS”) 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” that the
      position would 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.





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 we have not yet determined the impact, if any,
      on
      our consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
      108”), “Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 was issued in order
      to eliminate the diversity of practice surrounding how companies quantify
      financial statement misstatements. This SAB provides guidance on how to consider
      the effects of prior year misstatements when quantifying current year
      misstatements in connection with a materiality assessment. SAB No. 108 states
      that companies should use both a balance sheet approach and an income statement
      approach when quantifying and evaluating the materiality of a misstatement
      (the
“dual approach”). The interpretations of SAB No. 108 contain guidance on
      correcting errors under the dual approach, and provide transition guidance
      for
      correcting errors. SAB No. 108 is effective for annual financial statements
      covering the first fiscal year ending after November 15, 2006. The Company
      adopted the provisions of SAB No. 108 effective







7


with
      the
      first quarter of fiscal 2007, and there was no impact on our unaudited
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with GAAP and expands disclosure about fair value measurements.
      The
      provisions of SFAS No. 157 are effective for fiscal years beginning after
      November 15, 2007. As such, the Company will be required to adopt SFAS No.
      157
      at the beginning of its fiscal year 2009. At this time, the Company is unable
      to
      assess the financial statement impact, if any, of SFAS No. 157.





**(2)** **Earnings
      Per Share (“EPS”)**





Basic
      EPS
      is computed by dividing net income 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.





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


Three
                  Months Ended Spetember 30,2005
              
              2006Net
                  Income
              Shares
              Per
                  Share
              
              Net
                  Income
              Shares
              Per
                  Share(Numerator)
              (Denominator)
              Amount
              
              (Numerator)
              (Denominator)
              AmountBasic
                  EPS:Net
                  income
              
              $315
              
              
              
              $750Weighted
                  average sharesoutstanding
              
              
              18,555
              
              
              
              19,050Basic
                  earnings per share
              
              
              
              $0.02
              
              
              
              $0.04Diluted
                  EPS:Net
                  income
              
              $315
              
              
              
              $750Dilutive
                  effect ofstock
                  options
              
              
              1,105
              
              
              
              892Weighted
                  average shares outstanding
              
              
              19,660
              
              
              
              19,942Diluted
                  earnings per share
              
              
              
              $0.02
              
              
              
              $0.04


Stock
      options for the three months ended September 30, 2005 and 2006, representing
      an
      aggregate of 1,689,095 and 1,670,316 shares of common stock, respectively,
      were
      excluded from the calculation of diluted earnings per share because the effect
      would be antidilutive. Stock options were the only dilutive instruments
      outstanding for the three months ended September 30, 2005 and 2006.





**(3)
      Software License Installments Receivable**





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 years to five years. Software license
      installments are discounted at a market rate of interest. The discount is
      amortized over the term of the financing to interest income using the interest
      method.





**(4)
      Sale of Software License Installments Receivable**





In
      the
      first quarter of fiscal 2005, t he
      Company entered
      into an
      arrangement with General Electric Capital Corporation (“GECC”) under which
      eligible installments receivable can
      be sold
      without recourse to GECC at an
      amount equal to the discounted value of the underlying  future
      payment streams . The
      rate
      used to discount the receivables is negotiated with GECC and is based primarily
      on GECC’s credit evaluation. Any difference between the carrying value of an
      installments receivable







8


and
      the
      sale price to GECC is recorded as a gain or loss in “Other income (expense)”
i n
      the
      Consolidated Statements of Operations in the
      period of sale. For the three months ended September 30, 2005 and 2006, there
      were no material gains or losses on the sale of such installments receivable.




This
        arrangement gives the Company enhanced flexibility in offering financing
        alternatives to our customers and to manage our cash flow. The agreement
        does
        not provide for a termination date, although the agreement can be terminated
        by
        either party with 90 days advance notice. Additionally, there is no maximum
        threshold as to the amount of installments receivable that can be sold to
        GECC. Once
        sold
        to GECC, these installments receivable are not
        included in the Consolidated Balance Sheet s as the
        criteria for sale treatment established by SFAS No. 140, “Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
have been met. Under SFAS No. 140, after a transfer of financial assets,
        an
        entity stops recognizing the financial assets when the control has been
        surrendered. The
        sale
        of installments receivable under t h e
        agreement m e et s the
        criteria of a true sale ,  which
        includes the transfer of title and all collection risk to GECC. During
        the three months ended September 30, 2005 and 2006, the Company sold
        approximately $425,000 and $691,000, respectively, of installments receivable
        under this arrangement.


**(5)
      Property and Equipment**





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


Useful
                Life
              
              June
                  30,
                2006
              
              September
                  30,
                2006Computer
                  equipment
              
              
              2-5
                  years
              
              $
              9,883
              
              $
              9,987Furniture,
                  fixtures and office equipment
              
              
              5
                  years
              
              
              1,547
              
              
              1,545Leasehold
                  improvements
              
              
              5-15
                  years
              
              
              4,095
              
              
              4,09915,525
              
              
              15,631Less
                  accumulated depreciation and amortization
              
              
              
              
              
              (11,613
              )
              
              (11,923
              )Property
                  and equipment, net
              
              
              
              
              $
              3,912
              
              $
              3,708




Depreciation
      and amortization expense on property and equipment was $342,000 and $333,000
      for
      the three months ended September 30, 2005 and 2006, respectively.





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





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


****   June
                  30,
                2006
              
              
              September
                  30,
                2006Accounts
                  payable
              
              $
              2,183
              
              $
              1,769Compensation
                  and related benefits
              
              
              7,424
              
              
              6,794Royalties
                  payable
              
              
              912
              
              
              737Other
              
              
              5,475
              
              
              2,835$
              15,994
              
              $
              12,135


**(7)
      Stock-Based Compensation**





As
      of
      September 30, 2006, Mobius 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”). For a further description of these compensation plans, please refer to
      Note 9, Stock-Based Compensation, in our Annual Report on Form 10-K for the
      fiscal year ended June 30, 2006, filed with the SEC on September 11,
      2006.





During
      the fiscal first quarter of 2007, the Company issued stock options to purchase
      11,550 shares of common stock and 7,725 shares of restricted stock under the
      2006 Stock Plan. Awards issued during the fiscal first quarter of 2007 will
      be


9







eligible
      for vesting in equal tranches over five years subject to the achievement of
      certain corporate financial goals which will be determined and communicated
      to
      participants annually, and the value of each year’s tranche will be measured at
      that time. During the fiscal first quarter of 2007, no options were granted
      under the Directors’ Plan and there were no employee stock purchase grants under
      the ESPP. During the fiscal first quarter of 2006, there were no grants under
      any of the Company’s stock-based compensation plans. Equity-based compensation
      expense for the three months ended September 30, 2005 was approximately
      $227,000, and for the three months ended September 30, 2006 was approximately
      $266,000, of which $2,000 of such expense related to awards granted during
      the
      fiscal first quarter of 2007.





**(8)
      Comprehensive Income**





SFAS
      No.
      130, “Reporting Comprehensive Income” requires the disclosure of comprehensive
      income, which includes net income and foreign currency translation adjustments.
      Comprehensive income for the three months ended September 30, 2005 and 2006
      is
      as follows (in thousands):


Three
                  Months EndedSeptember
                  30,**2005**
              
              **2006**Net
                  income
              
              $
              315
              
              $
              750Unrealized
                  translation loss
              
              
              (31
              )
              
              (210
              )Comprehensive
                  income
              
              $
              284
              
              $
              540




**(9)
      Commitments and Contingencies**





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.





**(10)
      Goodwill and Other Intangible Assets**





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





**June
                30, 2006**
            
            **September
                30, 2006**Accumulated
            
            
            
            
            
            AccumulatedGross
            
            Amortization
            
            Net
            
            Gross
            
            Amortization
            
            NetCompleted
                technology
            
            $
            1,780
            
            $
            1,537
            
            $
            243
            
            $
            1,780
            
            $
            1,610
            
            $
            170Customer
                relationships
            
            
            277
            
            
            199
            
            
            78
            
            
            277
            
            
            222
            
            
            55Total
            
            $
            2,057
            
            $
            1,736
            
            $
            321
            
            $
            2,057
            
            $
            1,832
            
            $
            225





Aggregate
      amortization expense for intangible assets for the quarter ended September
      30,
      2005 and 2006 was $156,000 and $96,000, respectively. Amortization expense
      for
      the remainder of the fiscal year ended June 30, 2007, for acquisitions completed
      through September 30, 2006, is estimated to be $225,000.





Changes
      in the carrying amount of goodwill for the quarter ended September 30, 2006
      were
      as follows (in thousands):





**Total**Balance
                as of June 30, 2006
            
            $
            2,756Effect
                of exchange rate changes and other
            
            
            (3
            )Balance
                as of September 30, 2006
            
            $
            2,753







10


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





In
      this
      section, we give readers a more detailed assessment of our operating results
      and
      changes in financial position. This
      section should be read in conjunction with our Unaudited Consolidated Financial
      Statements and Notes included in Item 1 in this Quarterly Report. Please note
      that references in this section to “last year’s quarter” and “this quarter”
refer to our fiscal quarters ended September 30, 2005 and 2006, respectively.
      Our quarterly
      revenues and operating results have varied substantially from quarter to quarter
      in the past, and are likely to continue to do so in the future.





Statements
      contained in this quarterly report, other than historical financial results,
      may
      be forward-looking 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 include, among other things,
      market acceptance of Mobius's products, ability to manage expenses, fluctuations
      in period to period results, seasonality, uncertainty of future operating
      results, long and unpredictable sales cycles, technological change, product
      concentration, competition, international sales and operations, protection
      of
      intellectual property, extended payment risk, sufficient revenues from
      professional services, dependence on licensed technology, risk of product
      defects, product liability, expansion of indirect channels, management of
      growth, dependence on executive management, other key employees and
      subcontractors, consolidation in the industries we market and sell, concerns
      about transaction security on the Internet, factors affecting valuation of
      stock
      option expense, changes in prevailing equity-based compensation practices,
      general conditions in the economy and the impact of recently enacted or proposed
      regulations. These risks and uncertainties are described in detail from time
      to
      time in our filings with the U.S. Securities and Exchange Commission (“SEC”),
      including our Annual Report on Form 10-K, filed on September 11, 2006.
      Forward-looking statements included in this quarterly report are based on
      information known to us as of the date of this quarterly report and we accept
      no
      obligation (and expressly disclaim any obligations) to update these
      forward-looking statements and we do not intend to do so.





**Overview**





We
      are a
      leading provider of integrated solutions for enterprise archiving and records
      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.







11


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.





**Critical
      Accounting Policies and Estimates**





The
      following 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
      persuasive evidence of an arrangement exists, pricing is fixed or determinable,
      and collectibility is reasonably assured. If an acceptance period is required,
      revenues are recognized upon the earlier of customer acceptance or the
      expiration of the acceptance period. Fees from licenses sold together with
      fee
      based professional services are generally recognized on the delivery of the
      software, providing that the payment of the license fees is not dependent upon
      the performance of the services, and the services are not essential to the
      functionality of the software. If the services are essential to the
      functionality of the software, or payment of the license fees are dependent
      upon
      the performance of the services, both the software license and service fees
      are
      recognized in accordance with SOP 81-1, “Accounting for Performance of
      Construction-Type and Certain Production-Type Contracts.” The percentage of
      completion method is used for those arrangements in which reasonably dependable
      estimates are available. If reasonably dependable estimates are not available
      due to the complexity of the services to be performed, we will defer recognition
      of any revenues for the project until the project is completed, delivered and
      accepted by the customer, provided all other revenue recognition criteria were
      met and no further significant obligations exist.





For
      arrangements involving multiple elements, we defer revenue for the undelivered
      elements based on their vendor specific objective evidence (“VSOE”) and
      recognize the difference between the total arrangement fee and the amount
      deferred for the undelivered elements as revenue. The determination of fair
      value of each undelivered element in multiple element arrangements is based
      on
      the price charged when the same element is sold separately or renewal rates
      for
      maintenance. The vast







12


majority
      of our software license contracts provide for optional maintenance which is
      billed separately from the software license arrangement and is renewable on
      an
      annual basis over the license term. 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.





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 first quarter of fiscal 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. Please refer to Note 4, Sale of Software License Installments
      Receivable, to the accompanying unaudited consolidated financial statements
      for
      additional information regarding this arrangement.





Fee-based
      professional services accounted for separately from license fees are performed
      on a fixed-fee or time-and-materials basis. Revenues for fixed-fee arrangements
      are recognized over the pattern of performance in accordance with the provisions
      of SAB No. 104. The pattern of performance for fixed-fee service arrangements
      is
      measured by the percentage of costs incurred and accrued to date for each
      contract, which primarily consist of direct labor costs, cost of outsourcing,
      and overhead, to the estimated total cost for each contract at
      completion.





***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, in accordance with SFAS No. 123(R), “Share-Based Payment (revised
      2004)” (“SFAS No. 123(R)”), we record windfall tax benefits associated with the
      exercise of stock options directly to stockholders’ equity when







13


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
      of an equity-based award exceeds the deferred tax asset, if any, associated
      with
      the award that we had recorded.





***Stock-Based
      Compensation***





Beginning
      July 1, 2005, we account for share-based compensation in accordance with SFAS
      No. 123(R), which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No.
      25, “Accounting for Stock Issued to Employees.” 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), please refer to Note 9, Stock-Based Compensation, in our Annual
      Report on Form 10-K for the fiscal year ended June 30, 2006, filed with the
      SEC
      on September 11, 2006.





During
      the fiscal first quarter of 2007, we granted stock options and restricted stock.
      Please refer to Note 7, Stock-Based Compensation, to the accompanying unaudited
      consolidated financial statements for additional information regarding these
      grants. Under our current equity-based compensation program, awards will be
      eligible for vesting in equal tranches over five years subject to the
      achievement of certain corporate financial goals which will be determined and
      communicated to participants annually. The value of any awards eligible to
      vest
      if such goals are achieved will also be measured at the date the terms are
      communicated and understood. As a result, changes in the share price of our
      common stock as listed on the NASDAQ National Market from the date the awards
      are issued to the date that the terms are communicated and understood will
      impact the value of the award, and thus, the amount to be recorded as an expense
      if the corporate goals are achieved and the awards vest.










14





**Results
      of Operations**





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


**Three
                  Months Ended**
              ********
              ****
              ****
              **September
                  30,****2005**
              
              
              **2006**Revenues:Software license
              
              
              42.0
              %
              
              43.8
              %Maintenance
              
              
              49.8
              
              
              48.1Professional service and other
              
              
              8.2
              
              
              8.1Total revenues
              
              
              100.0
              
              
              100.0Cost
                  of revenues:Software license
              
              
              1.3
              
              
              0.7Maintenance
              
              
              8.7
              
              
              8.4Professional service and other
              
              
              6.5
              
              
              6.1Total costs of revenues
              
              
              16.5
              
              
              15.2Gross
                  profit
              
              
              83.5
              
              
              84.8Operating
                  expenses:Sales and marketing
              
              
              43.0
              
              
              40.3Research and development
              
              
              25.8
              
              
              25.3General and administrative
              
              
              15.2
              
              
              15.9Total operating expenses
              
              
              84.0
              
              
              81.5Income
                  (loss) from operations
              
              
              (0.5
              )
              
              3.3Interest
                  income, net
              
              
              2.8
              
              
              2.8Income
                  before income taxes
              
              
              2.3
              
              
              6.1Provision
                  for income taxes
              
              
              0.8
              
              
              2.8Net
                  income
              
              
              1.5
              %
              
              3.3
              %








15





***Executive
      Overview***





Total
      revenues of $22.7 million in the fiscal first quarter of 2007 were 5.9% higher
      than revenues of $21.4 million in the same period last year. The increase in
      revenues was primarily due to increased license revenue reflecting the continued
      improvement in sales execution, which contributed to several large renewals,
      each ranging from $1.2 million to $1.5 million. Operating income in the fiscal
      first quarter of 2007 was $747,000, or 3.3% of revenues, as compared with an
      operating loss of $103,000, or (0.5)% of revenues, in the same period last
      year.
      Net income for the fiscal first quarter of 2007 was $750,000, or $0.04 per
      diluted share, as compared with net income of $315,000, or $0.02 per diluted
      share, in the same period last year. Our earnings in the fiscal first quarter
      of
      2007 and 2006 were reduced by a pre-tax expense of approximately $266,000,
      or
      $0.01 per share, and approximately $227,000, or $0.01 per share, respectively,
      related to stock-based compensation recorded pursuant to SFAS No. 123(R). For
      additional information regarding the adoption of SFAS No. 123(R), see Note
      7 to
      the accompanying unaudited consolidated financial statements.





Our
      positive first quarter performance reflects a continuation of the execution
      improvements demonstrated over the last six quarters. In a seasonally difficult
      summer quarter, we posted more than 10% growth in license revenue, controlled
      expenses, delivered positive operating earnings and doubled the prior year’s
      earnings per share. In addition, our earnings and working capital management
      helped us increase cash and cash equivalents by approximately $6.0 million
      in
      the quarter.





We
      believe that market conditions are favorable for us. Our core competency is
      developing and marketing integrated information archiving and records management
      software that also complements Enterprise Content Management (“ECM”) solutions.
      As infrastructure vendors continue to commoditize traditional ECM software,
      customers are using our products to expand their capability to capture, index,
      store, deliver and dispose of all the critical information created by both
      their
      ECM and production systems. As a result of the commoditizing of ECM, we believe
      that our customers and prospects now have the need, as well as the time and
      budget resources, to devote attention to enterprise archiving, integration
      and
      records management initiatives that will help them manage massive volumes of
      digital information, while minimizing IT and operational costs.





Our
      go-to-market strategy will attempt to take advantage of these market conditions
      by continuing to focus on expanding customer relationships with our new and
      existing product offerings and developing new sales channel
      opportunities.





While
      we
      believe that market conditions are favorable for us, there may be factors that
      drive customers to cautiously spend on enterprise software. 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. There are
      no
      assurances that the market opportunity associated with the commoditization
      of
      ECM software or the success of our newer products, such as ViewDirect Records
      Manager, TCI and Audit and Balancing System, will develop as anticipated, that
      the improvements in sales execution will continue or that we will be successful
      building our channel sales program.




16





***Three
      Months Ended September 30, 2005 Compared to Three Months Ended September 30,
      2006***





***Revenues:***





·
            **Total
                revenues**increased
                5.9% from $21.4 million in last year’s quarter to $22.7million
                this quarter. Software license revenues, maintenance revenues and
                professional services revenues during the fiscal first quarter of
                2007 all
                showed improvements from the same period last year. Domestic revenuesincreased
                16.5% from $14.6 million in last year’s quarter to $17.0 million this
                quarter. International revenuesdecreased
                16.7% from $6.8 million in last year’s quarter to $5.7 million this
                quarter. 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. Thefollowing
                provides a discussion of the changes in software license revenues,
                maintenance revenues and professional service and other revenues
                for the
                quarter ended September 30, 2006, as compared with the quarter ended
                September 30, 2005.





·
            **Software
                license revenues**increased
                10.5% from $9.0 million in last year’s quarter to $9.9 million
                this quarter. The increase in software license revenues reflects
                the
                continued improvement in sales execution, which contributed to several
                large renewals in the current quarter, each ranging from $1.2 million
                to
                $1.5 million.








·
            **Maintenance
                revenues**increased 2.1% from $10.7 million in last year’s quarter to $10.9
                million this quarter. The increase in maintenance revenues was primarily
                due to new software licenses covered by maintenance agreements, 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, changes in the product mix
      of
      license renewals, 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 39% and 16%
      of
      total software license revenues during the fiscal first quarter of 2006 and
      2007, 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 5.5% from $1.7 million in last year’s quarter to $1.8 million
                this quarter, reflecting higher service revenue in Europe.





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
      both periods were not significant.





***Cost
      of Revenues:***







17




·
            **Cost
                of software license revenues**consists primarily of the cost of royalties and sublicense fees.
                The cost
                of software license revenues decreased 49.1% from $285,000 in last
                year’s
                quarter to $145,000 this quarter, representing 3.2% and 1.5%,
                respectively, of software license revenues in those quarters. 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 decrease in such costs was primarily due
                to a
                lower mix of third-party software included in software license revenues
                in
                the current quarter.




·
            **Cost
                of maintenance revenues**consists primarily of personnel costs related to our Customer Support
                group. The cost of maintenance revenues totaled $1.9 million in last
                year’s quarter and this quarter, representing 17.5% of maintenance
                revenues in both quarters.





·
            **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 totaled $1.4 million in last
                year’s quarter and this quarter. These costs as a percentage of
                professional service and other revenues decreased from 79.3% in last
                year's quarter to 75.4% in this quarter. This was primarily due to
                a
                decrease in the use of third-party
                subcontractors.





***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 totaled $9.2 million in last year’s quarter and this quarter,
                representing 43.0% and 40.3%, respectively, of total revenues in
                those
                quarters. Sales and marketing expenses increased due to higher personnel
                costs, reflecting the timing of incentive payments to new sales people,
                increased medical costs and merit increases, as well as higher travel
                expenses. These increases were substantially offset by lower marketing
                campaign and advertising expenses, due primarily to the timing of
                various
                projects, and lower subcontractor
                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 3.9% from
                $5.5 million in last year’s quarter to $5.7 million this quarter,
                representing 25.8% and 25.3%, respectively, of total revenues in
                those
                quarters. The increase in research and development expenses was primarily
                due to higher subcontractor costs relating to the timing of third-party
                development work on certain
                products.





·
            **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 10.7% from $3.3 million in last
                year’s
                quarter to $3.6 million in this quarter, representing 15.2% and 15.9%,
                respectively, of total revenues in those quarters. The increase in
                general
                and administrative expenses was due to increases in legal fees associated
                with legal proceedings initiated by us related to intellectual property
                matters (see Part II, Item 1. below) and equity-based compensation
                expense, due primarily to a change in the vesting period of Director
                option grants from immediate vesting on the date of grant to quarterly
                vesting over a one-year period from date of
                grant.





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







18





Interest
      income, net of interest expense, was $594,000 in last year’s quarter and
      $648,000 in this quarter. The increase in interest income was primarily
      attributable to higher cash balances and higher interest rates on invested
      cash
      balances and installments receivable, partially offset by lower installments
      receivable balances, due to a decrease in financed licenses.





***Provision
      for income taxes:***





The
      tax
      provision for income taxes was $177,000 (effective tax provision rate of 36.0%)
      in last year’s quarter and $641,000 (effective tax provision rate of 46.1%) in
      this quarter. The increase in the effective tax provision rate is primarily
      due
      to the expiration of the U.S. research and development tax credit effective
      December 31, 2005. 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.





**Liquidity
      and Capital Resources**





***Executive
      Overview***





Since
      our
      inception, we have funded our operations principally through cash flows from
      operating activities. As of September 30, 2006, we had cash and cash equivalents
      of $45.9 million, a 14.8% increase from the $40.0 million held at
      June 30, 2006. The increase was primarily due to a reduction in accounts
      receivable and net income adjusted for depreciation and amortization, deferred
      income taxes and other non-cash charges, partially offset by a decrease in
      accounts payable and accrued expenses. As of September 30, 2006 and June 30,
      2006, 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 the
      end
      of our first quarter of fiscal 2008. 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 first
      quarter of fiscal 2005 that provides us with the option of selling certain
      installments receivable to GECC. This arrangement gives us enhanced flexibility
      in offering financing alternatives to our customers and in managing our cash
      flows. During the fiscal first quarter of 2007, we sold approximately $691,000
      of installments receivable under this arrangement, bringing total sales of
      installments receivable to GECC through September 30, 2006 to approximately
      $6.5
      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
      provided by operating activities was $564,000 and $5.7 million during the fiscal
      first quarter of 2006 and 2007, respectively. Our primary sources of cash during
      the first three months of fiscal 2006 were from net income adjusted for
      depreciation and amortization, deferred income taxes and other non-cash charges
      and a reduction in software license installments receivable, offset by a
      reduction in accounts payable and accrued expenses, as well as capital
      expenditures. Our primary sources of cash during the first three months of
      fiscal 2007 were from a reduction in accounts receivable and net income adjusted
      for depreciation and amortization, deferred income taxes and other non-cash
      charges, partially offset by a decrease in accounts payable and accrued
      expenses. The decrease in accounts receivable of approximately $6.6 million
      was
      due to collections in the fiscal first quarter of 2007 of a substantial amount
      of the increase in receivables outstanding as of June 30, 2006, which resulted
      from the shift during fiscal 2006 from licenses sold on an installment basis
      to
      licenses with one-time payment terms.







19





Net
      cash
      used in investing activities was $637,000 and $129,000 in the first three months
      of fiscal 2006 and 2007, respectively. Net cash used in investing activities
      during both periods represented the purchase of computer equipment, furniture
      and fixtures and leasehold improvements. Expenditures during the first three
      months of fiscal 2006 included almost $200,000 relating to the upgrades of
      our
      communications and customer relationship management systems, and approximately
      $100,000 relating to renovations of our offices in Ottawa, Canada.





Net
      cash
      provided by financing activities was $212,000 and $532,000 in the first three
      months of fiscal 2006 and 2007, respectively. Net cash provided by financing
      activities for the fiscal first quarter of 2006 and 2007 was due to the exercise
      of stock options by employees of $161,000 and $368,000, respectively, and the
      excess tax benefit attributable to stock options of $51,000 and $164,000,
      respectively.





Our
      material obligations and commitments to make future payments under contracts
      consist of 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 September 30, 2006, the future minimum lease payments
      for these operating leases are as follows (in thousands):


Year
                ended
              
              
              Operating
                LeasesSeptember
                  30, 2007
              
              $
              2,823September
                  30, 2008
              
              
              2,572September
                  30, 2009
              
              
              2,075September
                  30, 2010
              
              
              1,366Total
                  minimum lease payments
              
              $
              8,836




In
      addition to the commitments shown above, we have commitments at September 30,
      2006 for future purchases of goods and services of approximately
      $215,000.





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.





**Accounts
      Receivable Reserves**





Accounts
      receivable reserves are provided for potential problem accounts. 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. 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. We also reserve for the
      potential that some customers may 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
      maintenance billings from being recognized. These adjustments to the reserve
      are
      reflected as a reduction of maintenance revenues. Accounts receivable reserves
      were $559,000 and $648,000 at June 30, 2006 and September 30, 2006,
      respectively.





**Software
      License Installments Receivable**





As
      of
      September 30, 2006, software license installments amounted to $21.0 million,
      a
      decrease of 2.1% compared with the June 30, 2006 balance of $21.5 million.
      This
      decrease was
      primarily due to collections and the sale of approximately $691,000 of
      installments receivable to GECC. We
      entered into an arrangement during our first quarter of fiscal 2005 that
      provides us with the option of selling certain







20


installments
      receivable to GECC, which gives us enhanced flexibility in offering financing
      alternatives to our customers and in managing our cash flows. Through September
      30, 2006, we have sold approximately $6.5 million of installments receivable
      to
      GECC. Please
      refer to Note 4, Sale of Software License Installments Receivable, in the
      accompanying unaudited consolidated financial statements for additional
      information regarding this arrangement. 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
      September 30, 2006, one customer had a balance equal to 15.9% of total software
      license installments. No other customer had a balance in excess of 5.1% of
      total
      software license installments. As of September 30, 2006, total software license
      installments receivable have an average age of approximately one and one-quarter
      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,
      to a lesser extent, license contracts where the revenue has been deferred due
      to
      credit issues or specific contract clauses which preclude revenue recognition
      at
      that time. Current and non-current deferred revenues totaled $24.9 million
      at
      June 30, 2006 and $25.1 million at September 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 September 30,
      2006, current deferred revenues totaled $23.3 million and non-current deferred
      revenues totaled $1.8 million. It is anticipated that current deferred revenues
      of $23.3 million will be recognized as revenues within the next twelve
      months.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in a company’s financial statements
      under SFAS 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” that the position would 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.





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 have not yet determined the impact, if any, on our consolidated
      financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
      108”), “Considering the Effects of Prior Year Misstatements when
      Quantifying







21







Misstatements
      in Current Year Financial Statements.” SAB 108 was issued in order to eliminate
      the diversity of practice surrounding how companies quantify financial statement
      misstatements. This SAB provides guidance on how to consider the effects of
      prior year misstatements when quantifying current year misstatements in
      connection with a materiality assessment. SAB No. 108 states that companies
      should use both a balance sheet approach and an income statement approach when
      quantifying and evaluating the materiality of a misstatement (the “dual
      approach”). The interpretations of SAB No. 108 contain guidance on correcting
      errors under the dual approach, and provide transition guidance for correcting
      errors. SAB No. 108 is effective for annual financial statements covering the
      first fiscal year ending after November 15, 2006. We adopted the provisions
      of
      SAB No. 108 effective with the first quarter of fiscal 2007, and there was
      no
      impact on our unaudited consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with generally accepted accounting principles and expands disclosure
      about fair value measurements. The provisions of SFAS No. 157 are effective
      for
      fiscal years beginning after November 15, 2007. As such, we will be required
      to
      adopt SFAS No. 157 at the beginning of our fiscal year 2009. At this time,
      we
      are unable to assess the financial statement impact, if any, of SFAS No.
      157.









22





**Item
      3. - 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
      September 30, 2006, we held no marketable securities.





We
      are
      exposed to market risk arising from changes in foreign currency exchange rates
      as a result of selling our products and services outside the United States
      (principally Europe). Sales generated from our non-U.S. operations are
      denominated in currencies other than the U.S. dollar. Consequently, the
      translated U.S. dollar value of our non-U.S. sales and operating results are
      subject to currency exchange rate fluctuations which may favorably or
      unfavorably impact reported earnings and may affect comparability of
      period-to-period operating results. For the three months ended September 30,
      2006, approximately 11.0% and 5.0% of our revenues were denominated in Swedish
      kroners and Euros, respectively. For the three months ended September 30, 2005,
      approximately 12.0% and 8.0% of our revenues were denominated in British pounds
      and Euros, respectively.





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.





**Item
      4. - 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 our 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 (the “Exchange Act”)). Based on that evaluation, our Chief
      Executive Officer and our Chief Financial Officer have concluded that our
      disclosure controls and procedures were effective as of September 30, 2006
      to
      ensure that information required to be disclosed by us in reports that we file
      or submit under the Exchange Act was recorded, processed, summarized and
      reported within the time periods specified in Securities and Exchange Commission
      rules and forms, and that such information is accumulated and communicated
      to
      management to allow timely decisions regarding required disclosure.





*Changes
      in Internal Control Over Financial Reporting.* There
      were no changes in our internal control over financial reporting during our
      fiscal quarter ended September 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.










23


**PART
      II. - OTHER INFORMATION**





**Item
      1. - Legal Proceedings**





From
      time
      to time, Mobius is involved in litigation relating to claims arising from its
      operations in the normal course of business. Mobius is not a party to any legal
      proceedings, the adverse outcome of which, individually or in the aggregate,
      would have a material adverse effect on its 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,” as included in Mobius’s Annual Report on Form 10-K for the
      fiscal year ended June 30, 2006, filed with the U.S. Securities and Exchange
      Commission (“SEC”) on September 11, 2006. There have been no material changes
      from the disclosure included in the above-referenced Form 10-K, except for
      the
      following: We previously disclosed with respect to the Acartus Litigation that
      a
      mediation was scheduled before a Magistrate Judge on October 26, 2006. This
      mediation was cancelled and has not been rescheduled. 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.





**Item
      1A. - Risk Factors**





There
      are
      no material changes to the Risk Factors previously disclosed under Item 1A,
      Risk
      Factors, in our Annual Report on Form 10-K for our fiscal year ended June 30,
      2006 filed with the SEC on September 11, 2006.





**Item
      2. - Unregistered Sales of Equity Securities and Use of
      Proceeds**





(a)
      Not
      applicable.





(b)
      Not
      applicable.





(c)
      Not
      applicable.





**Item
      3. - Defaults Upon Senior Securities**





None.





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





None.





**Item
      5. - Other Information**





None.







24





**Item
      6. - 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.


31.1
            CEO
                Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.


31.2
            CFO
                Certification pursuant to Section 302 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.





(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 to the same exhibit
                      number.









25





**SIGNATURES**





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





Date:
      November 8, 2006


MOBIUS
      MANAGEMENT
      SYSTEMS, INC.





By: /s/
      Raymond F.
      Kunzmann


Raymond
      F. Kunzmann


Chief
      Financial Officer


(Principal
      Financial and
      Accounting Officer)

























26