----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington, D.C.      20549**

**FORM      10-Q**

**Mobius      Management Systems, Inc.**

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

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

**(914)      921-7200**

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**MOBIUS      MANAGEMENT SYSTEMS, INC.**

**INDEX**

**PART      I.         FINANCIAL      INFORMATION**

**PART      II.         OTHER      INFORMATION**

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**SIGNATURES**

**CERTIFICATIONS      **

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**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,** |    | **                March                  31,** |   |
|                                                                                                                                                                                                                                                |   | **2005**                      |    |                                                                                                                           |   | **2006** |   |
| **ASSETS**                                                                                                                                                                                                                                          |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Current                  assets:                                                                                                                                                                                                                    |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                                                                                                                          |   | $                             | 33,726  |                                                                                                                           |   |   |   | $ | 35,306 |   |
| Accounts                  receivable, net of allowances of $595 and $467,                  respectively                                                                                                                                             |   |                          | 10,519  |                                                                                                                           |   |   |   |   | 13,000 |   |
| Software                  license installments, current portion                                                                                                                                                                                     |   |                          | 12,926  |                                                                                                                           |   |   |   |   | 12,095 |   |
| Other                  current assets                                                                                                                                                                                                               |   |                          | 2,310   |                                                                                                                           |   |   |   |   | 2,821 |   |
| Total                  current assets                                                                                                                                                                                                               |   |                          | 59,481  |                                                                                                                           |   |   |   |   | 63,222 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Software                  license installments, non-current portion, net of allowance for                  doubtful                  accounts of $161 and                    $108, respectively                                           |   |                          | 17,991  |                                                                                                                           |   |   |   |   | 14,016 |   |
| Property                  and equipment, net                                                                                                                                                                                                        |   |                          | 3,663   |                                                                                                                           |   |   |   |   | 4,080 |   |
| Deferred                  income taxes                                                                                                                                                                                                              |   |                          | 5,217   |                                                                                                                           |   |   |   |   | 4,742 |   |
| Other                  assets                                                                                                                                                                                                                       |   |                          | 3,963   |                                                                                                                           |   |   |   |   | 3,512 |   |
| Total                  assets                                                                                                                                                                                                                       |   | $                             | 90,315  |                                                                                                                           |   |   |   | $ | 89,572 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                     |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Current                  liabilities:                                                                                                                                                                                                               |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Accounts                  payable and accrued expenses                                                                                                                                                                                              |   | $                             | 14,363  |                                                                                                                           |   |   |   | $ | 14,046 |   |
| Deferred                  revenues                                                                                                                                                                                                                  |   |                          | 23,344  |                                                                                                                           |   |   |   |   | 21,509 |   |
| Deferred                  income taxes                                                                                                                                                                                                              |   |                          | 5,229   |                                                                                                                           |   |   |   |   | 4,815 |   |
| Total                  current liabilities                                                                                                                                                                                                          |   |                          | 42,936  |                                                                                                                           |   |   |   |   | 40,370 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Deferred                  revenues                                                                                                                                                                                                                  |   |                          | 3,091   |                                                                                                                           |   |   |   |   | 2,194 |   |
| Other                  non-current liabilities                                                                                                                                                                                                      |   |                          | 721     |                                                                                                                           |   |   |   |   | 483 |   |
| Total                  liabilities                                                                                                                                                                                                                  |   |                          | 46,748  |                                                                                                                           |   |   |   |   | 43,047 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Stockholders’                  equity:                                                                                                                                                                                                        |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Common                  stock, $.0001 par value; authorized 40,000,000 shares; issued 23,884,999                  and 24,278,943 shares, respectively; outstanding 18,530,776 and                  18,924,720                  shares, respectively |   |                          | 2       |                                                                                                                           |   |   |   |   | 2 |   |
| Additional                  paid-in capital                                                                                                                                                                                                         |   |                          | 55,753  |                                                                                                                           |   |   |   |   | 57,908 |   |
| Retained                  earnings                                                                                                                                                                                                                  |   |                          | 3,573   |                                                                                                                           |   |   |   |   | 4,497 |   |
| Accumulated                  other comprehensive income                                                                                                                                                                                             |   |                          | 221     |                                                                                                                           |   |   |   |   | 100 |   |
| Treasury                  stock, at cost, 5,354,223 shares                                                                                                                                                                                          |   |                          | (15,982 | )                                                                                                                              |   |   |   |   | (15,982 | ) |
| Total                  stockholders’ equity                                                                                                                                                                                                   |   |                          | 43,567  |                                                                                                                           |   |   |   |   | 46,525 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity                                                                                                                                                                                         |   | $                             | 90,315  |                                                                                                                           |   |   |   | $ | 89,572 |   |
|                                                                                                                                                                                                                                                |   |                          |    |                                                                                                                           |   |   |   |   |   |   |
| See                  accompanying notes to unaudited consolidated financial                  statements.                                                                                                                                            |

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**MOBIUS      MANAGEMENT SYSTEMS, INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

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

|                                                         |   | **Three                  Months Ended****March                  31,** |   | **Nine                  Months Ended****March                  31,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                         |   | **2005**                                                              |   | **2006**                                                             |   | **2005** |   | **2006** |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |
| Revenues:                                                    |   |                                                                  |   |                                                                 |   |   |   |   |   |
| Software                  license                            |   | $                                                                     | 6,751  |                                                                 | $      | 9,126 |   | $ | 19,830 |   | $ | 27,628 |   |
| Maintenance                                                  |   |                                                                  | 10,586 |                                                                 |   | 10,435 |   |   | 30,805 |   |   | 31,491 |   |
| Professional                  service and other              |   |                                                                  | 1,946  |                                                                 |   | 2,070 |   |   | 3,948 |   |   | 5,691 |   |
| Total                  revenues                              |   |                                                                  | 19,283 |                                                                 |   | 21,631 |   |   | 54,583 |   |   | 64,810 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Cost                  of revenues:                           |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Software                  license                            |   |                                                                  | 1,050  |                                                                 |   | 183 |   |   | 1,506 |   |   | 838 |   |
| Maintenance                                                  |   |                                                                  | 2,095  |                                                                 |   | 1,930 |   |   | 6,082 |   |   | 5,648 |   |
| Professional                  service and other              |   |                                                                  | 1,470  |                                                                 |   | 1,566 |   |   | 3,351 |   |   | 4,405 |   |
| Total                  cost of revenues                      |   |                                                                  | 4,615  |                                                                 |   | 3,679 |   |   | 10,939 |   |   | 10,891 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Gross                  profit                                |   |                                                                  | 14,668 |                                                                 |   | 17,952 |   |   | 43,644 |   |   | 53,919 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Operating                  expenses:                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Sales                  and marketing                         |   |                                                                  | 8,617  |                                                                 |   | 9,085 |   |   | 25,873 |   |   | 27,314 |   |
| Research                  and development                    |   |                                                                  | 5,679  |                                                                 |   | 6,002 |   |   | 17,175 |   |   | 17,316 |   |
| General                  and administrative                  |   |                                                                  | 3,140  |                                                                 |   | 3,319 |   |   | 8,865 |   |   | 9,966 |   |
| Total                  operating expenses                    |   |                                                                  | 17,436 |                                                                 |   | 18,406 |   |   | 51,913 |   |   | 54,596 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Loss                  from operations                        |   |                                                                  | (2,768 | )                                                                    |   | (454 | ) |   | (8,269 | ) |   | (677 | ) |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Interest                  income, net                        |   |                                                                  | 531    |                                                                 |   | 577 |   |   | 1,614 |   |   | 1,759 |   |
| Other                  income (expense)                      |   |                                                                  | (3     | )                                                                    |   | 20 |   |   | 19 |   |   | 45 |   |
| Income                  (loss) before income taxes           |   |                                                                  | (2,240 | )                                                                    |   | 143 |   |   | (6,636 | ) |   | 1,127 |   |
|                                                         |   |                                                                  |        |                                                                 |   |   |   |   |   |   |   |   |   |
| Provision                  for (benefit from) income taxes   |   |                                                                  | (1,304 | )                                                                    |   | (149 | ) |   | (3,326 | ) |   | 203 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                           |   | $                                                                     | (936   | )                                                                    | $      | 292 |   | $ | (3,310 | ) | $ | 924 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic                  earnings (loss) per share             |   | $                                                                     | (0.05  | )                                                                    | $      | 0.02 |   | $ | (0.18 | ) | $ | 0.05 |   |
| Basic                  weighted average shares outstanding   |   |                                                                  | 18,444 |                                                                 |   | 18,870 |   |   | 18,375 |   |   | 18,709 |   |
| Diluted                  earnings (loss) per share           |   | $                                                                     | (0.05  | )                                                                    | $      | 0.01 |   | $ | (0.18 | ) | $ | 0.05 |   |
| Diluted                  weighted average shares outstanding |   |                                                                  | 18,444 |                                                                 |   | 19,942 |   |   | 18,375 |   |   | 19,804 |   |

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**MOBIUS      MANAGEMENT SYSTEMS, INC.**

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

**NINE      MONTHS ENDED MARCH 31, 2006**

**(Unaudited,      in thousands)**

|                                                              |   | Common                  StockShares                             Amount |   | Additional                  Paid-in                  Capital |   |   | Retained                  Earnings |   |   | Accumulated                  Other Comprehensive                  Income |   | Treasury                  Stock Shares      Amount |   | TotalStockholders’Equity |   |
|-------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------|------------------------------------|--------|--------|--------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|--------------------------------|--------|
| Balance                  at June 30, 2005                         |   |                                                                                                                          | 18,531 |                                                         | $      | 2      |                               | $      | 55,753 |                                                                     | $      | 3,573                                                                                 |   | $                              | 221    |   |   | 5,354 |   | $ | (15,982 | ) | $ | 43,567 |   |
| Net                  income                                       |   |                                                                                                                          | -      |                                                         |   | -      |                               |   | -      |                                                                     |   | 924                                                                                   |   |                           | -      |   |   | - |   |   | - |   |   | 924 |   |
| Change                  in other comprehensive income, net of tax |   |                                                                                                                          | -      |                                                         |   | -      |                               |   | -      |                                                                     |   | -                                                                                     |   |                           | (121   | ) |   | - |   |   | - |   |   | (121 | ) |
| Comprehensive                  income                             |   |                                                                                                                          |   |                                                         |   |   |                               |   |   |                                                                     |   |                                                                                  |   |                           |   |   |   |   |   |   |   |   |   | 803 |   |
|                                                              |   |                                                                                                                          |   |                                                         |   |   |                               |   |   |                                                                     |   |                                                                                  |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Stock                  options exercised, including tax benefit   |   |                                                                                                                          | 292    |                                                         |   | -      |                               |   | 958    |                                                                     |   | -                                                                                     |   |                           | -      |   |   | - |   |   | - |   |   | 958 |   |
| Stock                  purchase plan, including tax benefit       |   |                                                                                                                          | 102    |                                                         |   | -      |                               |   | 584    |                                                                     |   | -                                                                                     |   |                           | -      |   |   |   |   |   |   |   |   | 584 |   |
| Stock                  based compensation expense                 |   |                                                                                                                          | -      |                                                         |   | -      |                               |   | 613    |                                                                     |   | -                                                                                     |   |                           | -      |   |   | - |   |   | - |   |   | 613 |   |
| Balance                  at March 31, 2006                        |   |                                                                                                                          | 18,925 |                                                         | $      | 2      |                               | $      | 57,908 |                                                                     | $      | 4,497                                                                                 |   | $                              | 100    |   |   | 5,354 |   | $ | (15,982 | ) | $ | 46,525 |   |

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**MOBIUS      MANAGEMENT SYSTEMS, INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(Unaudited,      in thousands)**

|                                                                                                                                                  |   | **Nine                  Months Ended** |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|----------|
|                                                                                                                                                  |   | **March                  31,**         |     |
|                                                                                                                                                  |   |                                   | **2005** |   |   | **2006** |   |
| Cash                  provided by (used in) operating activities:                                                                                     |   |                                   |     |   |   |   |   |
| Net                  income (loss)                                                                                                                    |   | $                                      | (3,310   | ) | $ | 924 |   |
| Adjustments                  to reconcile net income (loss) to net cash provided by (used in)                  operating                  activities: |   |                                   |     |   |   |   |   |
| Deferred                  income taxes                                                                                                                |   |                                   | (2,973   | ) |   | 61 |   |
| Depreciation                  and amortization                                                                                                        |   |                                   | 1,621    |   |   | 1,520 |   |
| Stock-based                  compensation expense                                                                                                     |   |                                   | -        |   |   | 613 |   |
| Change                  in operating assets and liabilities:                                                                                          |   |                                   |     |   |   |   |   |
| Accounts                  receivable, net                                                                                                             |   |                                   | (988     | ) |   | (2,481 | ) |
| Software                  license installments                                                                                                        |   |                                   | 1,387    |   |   | 4,806 |   |
| Other                  assets                                                                                                                         |   |                                   | (237     | ) |   | (527 | ) |
| Accounts                  payable and accrued expenses                                                                                                |   |                                   | (720     | ) |   | (317 | ) |
| Deferred                  revenue                                                                                                                     |   |                                   | (1,091   | ) |   | (2,732 | ) |
| Other                  non-current liabilities                                                                                                        |   |                                   | -        |   |   | (238 | ) |
| Total                  adjustments                                                                                                                    |   |                                   | (3,001   | ) |   | 705 |   |
| Net                  cash provided by (used in) operating activities                                                                                  |   |                                   | (6,311   | ) |   | 1,629 |   |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |
| Cash                  used in investing activities:                                                                                                   |   |                                   |     |   |   |   |   |
| Capital                  expenditures                                                                                                                 |   |                                   | (760     | ) |   | (1,465 | ) |
| Net                  cash used in investing activities                                                                                                |   |                                   | (760     | ) |   | (1,465 | ) |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |
| Cash                  provided by financing activities:                                                                                               |   |                                   |     |   |   |   |   |
| Cash                  received from exercise of stock options                                                                                         |   |                                   | 364      |   |   | 661 |   |
| Cash                  received from employee stock purchase plan                                                                                      |   |                                   | 282      |   |   | 575 |   |
| Net                  tax benefit attributable to stock options                                                                                        |   |                                   | -        |   |   | 306 |   |
| Net                  cash provided by financing activities                                                                                            |   |                                   | 646      |   |   | 1,542 |   |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |
| Effect                  of exchange rate changes on cash and cash equivalents                                                                         |   |                                   | 451      |   |   | (126 | ) |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |
| Net                  change in cash and cash equivalents                                                                                              |   |                                   | (5,974   | ) |   | 1,580 |   |
| Cash                  and cash equivalents at beginning of period                                                                                     |   |                                   | 33,592   |   |   | 33,726 |   |
| Cash                  and cash equivalents at end of period                                                                                           |   | $                                      | 27,618   |   | $ | 35,306 |   |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |
| Supplemental                  disclosure of cash flow information:                                                                                    |   |                                   |     |   |   |   |   |
| Cash                  paid during the period for:                                                                                                     |   |                                   |     |   |   |   |   |
| Interest                  paid                                                                                                                        |   | $                                      | 34       |   | $ | 10 |   |
| Income                  taxes, net of refunds                                                                                                         |   | $                                      | 248      |   | $ | 292 |   |
|                                                                                                                                                  |   |                                   |     |   |   |   |   |

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**MOBIUS      MANAGEMENT SYSTEMS, INC.**

**NOTES      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**(1)     Basis      of      Presentation**

**(2)    **
**Earnings      Per Share**

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|                                                                                                 |   | **Three                  Months Ended March 31,**      |                            |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------------------------------|
|                                                                                                 |   |                                                   |                            | **2005** |   |   |   |   |   | **2006** |   |   |   |
|                                                                                                 |   | Net                  Loss                              |                            | Shares |   | Per                  Share |   | Net                  Income |   | Shares |   | Per                  Share |   |
|                                                                                                 |   | (Numerator)                                            |                            | (Denominator) |   | Amount |   | (Numerator) |   | (Denominator) |   | Amount |   |
| Basic                  EPS:                                                                          |   |                                                   |                            |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                   |   | $                                                      | (936                            | ) |   |   |   |   |   |   | $ | 292 |   |   |   |   |   |   |   |
| Weighted                  average shares                    outstanding                         |   |                                                   |                            |   |   | 18,444 |   |   |   |   |   |   |   |   | 18,870 |   |   |   |   |
| Basic                  earnings (loss) per share                                                     |   |                                                   |                            |   |   |   |   | $ | (0.05 | ) |   |   |   |   |   |   | $ | 0.02 |   |
| Diluted                  EPS:                                                                        |   |                                                   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                   |   | $                                                      | (936                            | ) |   |   |   |   |   |   | $ | 292 |   |   |   |   |   |   |   |
| Dilutive                  effect of  stock                  options                        |   |                                                   |                            |   |   | - |   |   |   |   |   |   |   |   | 1,072 |   |   |   |   |
| Weighted                  average shares                        outstanding |   |                                                   |                            |   |   | 18,444 |   |   |   |   |   |   |   |   | 19,942 |   |   |   |   |
| Diluted                  earnings (loss) per share                                                   |   |                                                   |                            |   |   |   |   | $ | (0.05 | ) |   |   |   |   |   |   | $ | 0.01 |   |
|                                                                                                 |   |                                                   |
|                                                                                                 |   | **Nine                  Months Ended March 31,**  |
|                                                                                                 |   |                                                   |                            |   |   | **2005** |   |   |   |   |   |   |   |   | **2006** |   |   |   |   |
|                                                                                                 |   |                                                   | Net                  Loss  |   |   | Shares |   |   | Per                  Share |   |   | Net                  Income |   |   | Shares |   |   | Per                  Share |   |
|                                                                                                 |   |                                                   | (Numerator)                     |   |   | (Denominator) |   |   | Amount |   |   | (Numerator) |   |   | (Denominator) |   |   | Amount |   |
| Basic                  EPS:                                                                          |   |                                                   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                   |   | $                                                      | (3,310                          | ) |   |   |   |   |   |   | $ | 924 |   |   |   |   |   |   |   |
| Weighted                  average shares                    outstanding                         |   |                                                   |                            |   |   | 18,375 |   |   |   |   |   |   |   |   | 18,709 |   |   |   |   |
| Basic                  earnings (loss) per share                                                     |   |                                                   |                            |   |   |   |   | $ | (0.18 | ) |   |   |   |   |   |   | $ | 0.05 |   |
| Diluted                  EPS:                                                                        |   |                                                   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                   |   | $                                                      | (3,310                          | ) |   |   |   |   |   |   | $ | 924 |   |   |   |   |   |   |   |
| Dilutive                  effect of stock                  options          |   |                                                   |                            |   |   | - |   |   |   |   |   |   |   |   | 1,095 |   |   |   |   |
| Weighted                  average shares                    outstanding                         |   |                                                   |                            |   |   | 18,375 |   |   |   |   |   |   |   |   | 19,804 |   |   |   |   |
| Diluted                  earnings (loss) per share                                                   |   |                                                   |                            |   |   |   |   | $ | (0.18 | ) |   |   |   |   |   |   | $ | 0.05 |   |

**(3)      Software License Installments Receivable**

----

**(4)      Property and Equipment**

|                                                                   |  **Useful                  Life** |  **June                  30,                  2005** |  **March                  31,                  2006** |
|------------------------------------------------------------------------|----------------------------------------|-----------------------------------------------------------|------------------------------------------------------------|
|                                                                   |                                   |                                                      |                                                       |
| Computer software                and                equipment          |  2-5                  years       |  $8,711                                              |   $9,730                                         |
| Furniture, fixtures                and office                equipment |  5                  years         |  1,438                                               |  1,528                                                |
| Leasehold                improvements                                  | 5-15                  years            |  3,917                                               |  4,082                                                |
|                                                                   |                                   | 14,066                                                    | 15,340                                                     |
| Less                  accumulated depreciation and amortization   |                                   | (10,403)                                                  | (11,260)                                                   |
| Property                and equipment, net                             |                                   | $                  3,663                                  | $                  4,080                                   |

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

|                                             |  **June                  30,                  2005** | **March                  31,                  2006** |
|--------------------------------------------------|-----------------------------------------------------------|------------------------------------------------------|
|                                             |                                                      |                                                 |
| Accounts payable                                 | $ 2,903                                              | $                  2,411                             |
| Compensation and related                benefits | 6,030                                                     | 6,983                                           |
| Royalties payable                                | 974                                                  | 981                                             |
| Other                                            |  4,456                                               | 3,671                                                |
|                                             |                                                      |                                                 |
|                                             | $14,363                                                   | $                  14,046                       |

**(6)      Stock-Based Compensation**

***2006      Stock Incentive Plan***

----

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

***1998      Employee Stock Purchase Plan***

----

----

----

|                                                                                                                                                                   |   |                              | **Three                Months** |   |   | **Nine                Months** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------------------------------|--------|--------|--------------------------------|--------|
|                                                                                                                                                                   |   |                              | **Ended**                       |   |   | **Ended**                      |   |
|                                                                                                                                                                   |   | **March                31, 2005** |
|                                                                                                                                                                   |   |                              |                            |   |   |                           |   |
| Net                loss, as reported                                                                                                                                   |   | $                                 | (936                            | )      | $      | (3,310                         | )      |
| Less:                Total stock-based employee compensation expense determined under                fair                value based method for all awards, net of tax |   |                              | (504                            | )      |   | (1,623                         | )      |
| Pro                forma net loss                                                                                                                                      |   | $                                 | (1,440                          | )      | $      | (4,933                         | )      |
|                                                                                                                                                                   |   |                              |                            |   |   |                           |   |
| Basic                net loss per share- as reported                                                                                                                   |   | $                                 | (0.05                           | )      | $      | (0.18                          | )      |
| Basic                net loss per share- pro forma                                                                                                                     |   | $                                 | (0.08                           | )      | $      | (0.27                          | )      |
| Diluted                net loss per share-as reported                                                                                                                  |   | $                                 | (0.05                           | )      | $      | (0.18                          | )      |
| Diluted                net loss per share- pro forma                                                                                                                   |   | $                                 | (0.08                           | )      | $      | (0.27                          | )      |

----

|     Options                                                               |   |   | Shares    |   |   | Weighted                Average Exercise Price |   |   | Weighted                Average Remaining Contractual Term |   |   | Aggregate                Intrinsic Value |   |
|-----------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|------------------------------------------------|--------|--------|------------------------------------------------------------|--------|--------|------------------------------------------|--------|
| Outstanding                at June 30, 2005                                                   |   |   | 3,900,648 |   | $      | 5.07                                           |   |   |                                                       |   |   |                                     |   |
| Granted                                                                                       |   |   | 60,000    |   | $      | 6.63                                           |   |   |                                                       |   |   |                                     |   |
| Exercised                                                                                     |   |   | (292,152  | )      | $      | 2.26                                           |   |   |                                                       |   |   |                                     |   |
| Forfeited                                                                                     |   |   | (62,225   | )      | $      | 8.32                                           |   |   |                                                       |   |   |                                     |   |
| Expired                                                                                       |   |   | --        |   |   | --                                             |   |   |                                                       |   |   |                                     |   |
| Outstanding                at March 31, 2006                                                  |   |   | 3,606,271 |   | $      | 5.27                                           |   |   | 4.22                                                       |   | $      | 6,614                                    |   |
| Vested                and exercisable at    March                31, 2006 |   |   | 3,228,971 |   | $      | 5.06                                           |   |   | 3.76                                                       |   | $      | 6,459                                    |   |

----

**(7)      Comprehensive Income (Loss)**

|  **                                                Three                  Months Ended****                                                March                  31,** |   |  **            Nine                  Months Ended****            March                  31,** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                                                                                                       | **2005** |   |   | **2006** |   |   |   |   |   | **2005** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                                                                                                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $                                                                                                                                                                                                                          | (936     | ) | $ | 292 |   |   |   |   | $ | (3,310 | ) | $ | 924 |   |
| Unrealized                  translation gain (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                                                                       | (411     | ) |   | 252 |   |   |   |   |   | 493 |   |   | (121 | ) |
| Comprehensive                  income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | $                                                                                                                                                                                                                          | (1,347   | ) | $ | 544 |   |   |   |   | $ | (2,817 | ) | $ | 803 |   |

**(8)      Commitments and Contingencies**

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

|                                  |   |   |   |   |   | **June                30, 2005**  |   |   |   |   |   |   |   |   | **March                31, 2006** |   |   |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|-----------------------------------|--------|--------|--------|--------|
|                                  |   |   |   |   |   | Accumulated                            |   |   |   |   |   |   |   |   | Accumulated                       |   |   |   |   |
|                                  |   |   | Gross  |   |   | Amortization                           |   |   | Net    |   |   | Gross  |   |   | Amortization                      |   |   | Net    |   |
| Completed                technology   |   | $      | 1,780  |   | $      | 1,003                                  |   | $      | 777    |   | $      | 1,780  |   | $      | 1,403                             |   | $      | 377    |   |
| Customer                relationships |   |   | 277    |   |   | 107                                    |   |   | 170    |   |   | 277    |   |   | 176                               |   |   | 101    |   |
| Total                                 |   | $      | 2,057  |   | $      | 1,110                                  |   | $      | 947    |   | $      | 2,057  |   | $      | 1,579                             |   | $      | 478    |   |

|                                           |   | **Total** |   |   |   |
|------------------------------------------------|--------|-----------|--------|--------|--------|
|                                           |   |      |   |   |   |   |   |
| Balance                as of June 30, 2005     |   | $         | 2,733  |   |   |   |   |
| Effect                of exchange rate changes |   |      | 2      |   |
| Balance                as of March 31, 2006    |   | $         | 2,735  |   |   |   |   |

----

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

**Overview**

----

| ·   | content                integration; |
|--------------------|-------------------------------------|

| ·   | records                management; |
|--------------------|------------------------------------|

| ·   | e-mail                management; |
|--------------------|-----------------------------------|

| ·   | Web                content management; |
|--------------------|----------------------------------------|

| ·   | business                process management; |
|--------------------|---------------------------------------------|

| ·   | high-volume                imaging; |
|--------------------|-------------------------------------|

| ·   | enterprise                report distribution; |
|--------------------|------------------------------------------------|

| ·   | an                audit and balancing facility that monitors the accuracy and consistency                of                enterprise data, including an option that manages electronic spreadsheets;                and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a                suite of content-centric applications that address industry-specific                and                cross-industry business requirements, such as e-presentment, automated                loan and policy processing, and automated accounts payable and                receivable. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Critical      Accounting Policies and Estimates**

***Revenue      Recognition***

----

***Software      Development Costs***

***Income      Taxes***

***Stock-Based      Compensation***

----

----

**Results        of Operations**

|                                                                                                        |   | **Three                  Months Ended****March                  31,** |   | **Nine                  Months Ended****March                  31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                        |   | ** ****2005**                                                    |   | ** ****2006**                                                   |   | ** ****2005** |   | ** ****2006** |   |
|                  Revenues:                                                                             |   |                                                             |   |                                                                 |   |    |   |    |   |
| Software                  license                                                                           |   |                                                                  | 35.0   | %                                                                    |   | 42.2 | % |   | 36.3 | % |   | 42.6 | % |
| Maintenance                                                                                                 |   |                                                                  | 54.9   |                                                                 |   | 48.2 |   |   | 56.5 |   |   | 48.6 |   |
| Professional                  service and other                                                             |   |                                                                  | 10.1   |                                                                 |   | 9.6 |   |   | 7.2 |   |   | 8.8 |   |
| Total                  revenues                                                                             |   |                                                                  | 100.0  |                                                                 |   | 100.0 |   |   | 100.0 |   |   | 100.0 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Cost                  of revenues:                                                                          |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Software                  license                                                                           |   |                                                                  | 5.4    |                                                                 |   | 0.9 |   |   | 2.8 |   |   | 1.3 |   |
| Maintenance                                                                                                 |   |                                                                  | 10.9   |                                                                 |   | 9.0 |   |   | 11.1 |   |   | 8.7 |   |
| Professional                  service and other                                                             |   |                                                                  | 7.6    |                                                                 |   | 7.2 |   |   | 6.1 |   |   | 6.8 |   |
| Total                  costs of revenues                                                                    |   |                                                                  | 23.9   |                                                                 |   | 17.1 |   |   | 20.0 |   |   | 16.8 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Gross                  profit                                                                               |   |                                                                  | 76.1   |                                                                 |   | 82.9 |   |   | 80.0 |   |   | 83.2 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Operating                  expenses:                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Sales                  and marketing                                                                        |   |                                                                  | 44.7   |                                                                 |   | 42.0 |   |   | 47.4 |   |   | 42.1 |   |
| Research                  and development                                                                   |   |                                                                  | 29.5   |                                                                 |   | 27.8 |   |   | 31.5 |   |   | 26.7 |   |
| General                  and administrative                                                                 |   |                                                                  | 16.3   |                                                                 |   | 15.3 |   |   | 16.2 |   |   | 15.4 |   |
| Total                  operating expenses                                                                   |   |                                                                  | 90.5   |                                                                 |   | 85.1 |   |   | 95.1 |   |   | 84.2 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
|                  Loss                  from operations                                                 |   |                                                                  | (14.4  | )                                                                    |   | (2.2 | ) |   | (15.1 | ) |   | (1.0 | ) |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Interest                  income, net                                                                       |   |                                                                  | 2.7    |                                                                 |   | 2.7 |   |   | 2.9 |   |   | 2.7 |   |
| Other                income                (expense)                                                        |   |                                                                  | -      |                                                                 |   | 0.1 |   |   | - |   |   | 0.0 |   |
| Income                (loss)                before income                taxes                    |   |                                                                  | (11.7  | )                                                                    |   | 0.6 |   |   | (12.2 | ) |   | 1.7 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Provision                for                (benefit                from) income                taxes  |   |                                                                  | 6.8    |                                                                 |   | (0.7 | ) |   | (6.1 | ) |   | 0.3 |   |
|                                                                                                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net                income                (loss)                                                        |   |                                                                  | 4.9    | %                                                                    |   | 1.3 | % |   | (6.1 | )% |   | 1.4 | % |

----

***Executive      Overview***

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

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

| ·   | new                enterprise records and email management capabilities available as                part of                our ViewDirect suite. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Three      Months Ended March 31, 2005 Compared to Three Months Ended March 31,      2006***

***Revenues:***

| ·   | **Total                revenues** increased                12.2% from $19.3 million in last year’s quarter to $21.6 million                this quarter. Domestic revenues increased                11.1% from $15.7 million in last year’s quarter to $17.5 million this                quarter. International revenues increased                16.9% from $3.6 million in last year’s quarter to $4.1 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. The following                provides a discussion of the changes in software license revenues,                maintenance revenues and professional service and other revenues                for the                quarter ended March 31, 2006, as compared with the quarter ended                March 31,                2005. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Software                license revenues** increased                35.2% from $6.8 million in last year’s quarter to $9.1 million                this quarter. The increase in software license revenues primarily                reflects                improvements in sales and marketing management and                effectiveness. Also contributing to the increase in software license                revenues was an increase in revenues from new customers and, to a                lesser                extent, licenses of new products. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Maintenance                revenues**                decreased from $10.6 million in last year’s quarter to $10.4 million                this quarter. Maintenance revenue is slightly lower primarily due                to                non-renewal of existing maintenance contracts and lower maintenance                rates                on Solution Packs relative to other licenses, which were substantially                offset by an increase in new licensed software covered by maintenance                agreements and increased maintenance fees on                renewals. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Professional                service and other revenues**                increased 6.4% from $1.9 million in last year’s quarter to $2.1 million                this quarter. 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  |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Cost      of Revenues:***

| ·   | **Cost                of software license revenues**                consists primarily of the cost of royalties and sublicense fees.                The cost                of software license revenues decreased 82.6% from $1.1 million in                last                year’s quarter to $183,000 this quarter, representing 15.6% and 2.0%,                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 decrease in such costs was primarily due to a lower mix                of                third-party software in this quarter. Last year’s quarter included costs                for a significant imaging solution licensed to a customer that included                third-party software. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Cost                of maintenance revenues**                consists primarily of personnel costs related to our Customer Support                group. The cost of maintenance revenues decreased 7.9% from $2.1                million in last year’s quarter to $1.9 million this quarter, representing                19.8% and 18.5%, respectively, of maintenance revenues in those quarters.                This decrease was primarily due to decreased utilization of Professional                Services personnel in Customer Support projects, resulting in lower                allocation of these costs to cost of maintenance revenues, as well                as an                increased use of Customer Support personnel in development projects                and                related allocation of costs to the Research and Development department.                These reductions were partially offset by higher royalty costs for                maintenance charged to customers using third-party                software. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **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 increased 6.5% from $1.5                million                in last year’s quarter to $1.6 million this quarter. These costs as a                percentage of professional service and other revenues totaled 75.7%                in the                current quarter, which is substantially the same as last year’s                quarter. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Operating      Expenses:***

| ·   | **Sales                and marketing**                expenses consist primarily of the cost of personnel associated with                the                selling and marketing of our products, including incentive compensation                costs associated with revenues. Sales and marketing costs also include                the                cost of branch sales offices, marketing, promotional materials,                advertising, food, travel and lodging expenses and bad debt expense.                These                expenses increased 5.4% from $8.6 million in last year’s quarter to $9.1                million this quarter, representing 44.7% and 42.0%, respectively,                of total                revenues in those quarters. The increase in sales and marketing expenses                was primarily attributable to increased incentive compensation costs,                as a                result of higher software license and professional service revenues                and a                new compensation plan for marketing, increased food, travel and lodging                expenses and increased subcontractor fees, primarily related to higher                campaign costs. These increases were partially offset by lower costs                due                to decreased headcount and lower professional fees, primarily related                to                recruiting fees in last year’s                quarter. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **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 5.7% from                $5.7 million in last year’s quarter to $6.0 million this quarter,                representing 29.5% and 27.8%, respectively, of total revenues in                those                quarters. The increase in research and development expenses was primarily                due to increased utilization of Customer Support personnel on development                projects, resulting in higher allocation of these costs to research                and                development expenses and smaller increases in costs in a number of                categories, |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **·  ** | **General                and administrative**                expenses consist primarily of personnel costs related to management,                accounting, human resources, information technology services,                administration and associated overhead costs, as well as fees for                professional services, primarily legal and accounting. General and                administrative expenses increased 5.7% from $3.1 million in last                year’s                quarter to $3.3 million this quarter, representing 16.3% and 15.3%,                respectively, of total revenues in those quarters. The increase in                general                and administrative expenses was due to an increase in personnel costs,                primarily salaries and bonus compensation costs and compensation                expense                on stock options relating to SFAS No. 123(R). These increases were                partially offset by lower professional fees, primarily related to                recruiting fees. |
|------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

***Nine      Months Ended March 31, 2005 Compared to Nine Months Ended March 31,      2006***

***Revenues:***

| ·   | **Total                revenues** increased                18.7% from $54.6 million in the first nine months of fiscal 2005                to $64.8                million in the first nine months of fiscal 2006. Domestic revenues                increased                12.7% from $44.3 million in the first nine months of fiscal 2005                to $49.9                million in the first nine months of fiscal 2006. International revenues                increased                44.8% from $10.3 million in the first nine months of fiscal 2005                to $14.9                million in the first nine months of fiscal 2006. The nature, size                and                timing of any individual license contract from time to time impacts                the                relative growth rates in the domestic and international markets.                The                following                provides a discussion of the changes in software license revenues,                maintenance revenues and professional service and other revenues                for the                first nine months of fiscal 2005, as compared with the first nine                months                of fiscal 2006. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | **Software                license revenues**                increased 39.3% from $19.8 million in the first nine months of fiscal                2005 to $27.6 million in the first nine months of fiscal 2006. The                increase in software license revenues primarily reflects improvements                in                sales and marketing management and effectiveness. Also contributing                to the increase in software license revenues was an increase in revenues                from new customers and, to a lesser extent, licenses of new                products. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Maintenance                revenues**                increased 2.2% from $30.8 million in the first nine months of fiscal                2005 to $31.5 million in the first nine months of fiscal 2006. The                increase in maintenance revenues was primarily due to an increase                in new                licensed software covered by maintenance agreements and increased                maintenance fees on renewals, which were substantially offset by                non-renewal of existing maintenance contracts and lower maintenance                rates                on Solution Packs relative to other                licenses. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Professional                service and other revenues**                increased 44.1% from $3.9 million in the first nine months of fiscal                2005                to $5.7 million in the first nine months of fiscal 2006, reflecting                work                on several large contracts during the first nine months of fiscal                2006.                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:***

| ·   | **Cost                of software license revenues**                decreased 44.4% from $1.5 million in the first nine months of fiscal                2005                to $838,000 in the first nine months of fiscal 2006, representing                7.6% and                3.0%, respectively, of software license revenues in those periods.                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 decrease in such costs was primarily due to                a lower                mix of third-party software in the first nine months of fiscal 2006.                The                first nine months of fiscal 2005 included costs for a significant                imaging                solution licensed to a customer that included third-party                software. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Cost                of maintenance revenues**                decreased 7.1% from $6.1 million in the first nine months of fiscal                2005                to $5.6 million in the first nine months of fiscal 2006, representing                19.7% and 17.9%, respectively, of maintenance revenues in those periods.                This decrease was primarily due to decreased utilization of Professional                Services personnel in Customer Support projects, resulting in lower                allocation of these costs to cost of maintenance revenues, as well                as an                increased use of Customer Support personnel in development projects                and                related allocation of costs |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | **Cost                of professional service and other revenues**                increased 31.5% from $3.4 million in the first nine months of fiscal                2005                to $4.4 million in the first nine months of fiscal 2006. These costs                as a                percentage of professional service and other revenues decreased from                84.9%                in the first nine months of fiscal 2005 to 77.4% in the first nine                months                of fiscal 2006. This was primarily due to the leverage of personnel                costs                over higher revenues. Partially offsetting this improvement was a                decrease                in the allocation of Professional Services personnel costs to other                departments and an increase in third-party subcontractor                costs. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Operating      Expenses:***

| ·   | **Sales                and marketing**                expenses increased 5.6% from $25.9 million in the first nine months                of fiscal 2005 to $27.3 million in the first nine months of fiscal                2006, representing 47.4% and 42.1%, respectively, of total revenues                in                those periods. Sales and marketing expenses increased due to higher                incentive compensation costs as a result of higher software license                revenue and professional service revenues, a new compensation plan                for                marketing and an increase in compensation expense on stock options                relating to SFAS No. 123(R). These increases were partially offset                by                lower costs relating to decreased                headcount. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **Research                and development**                expenses totaled $17.2 million in the first nine months of fiscal                2005 and $17.3 million in the first nine months of fiscal 2006,                representing 31.5% and 26.7%, respectively, of total revenues in                those                periods. The increase in research and development expenses was primarily                due to increased utilization of Customer Support personnel in development                projects and resulting higher allocation of these costs to research                and                development expenses and increased personnel costs, primarily salaries                and                overtime. These increases were partially offset by lower subcontractor                fees relating to a decrease in third-party development work on certain                projects. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | **General                and administrative**                expenses increased 12.4% from $8.9 million in the first nine months                of                fiscal 2005 to $10.0 million in the first nine months of fiscal 2006,                representing 16.2% and 15.4%, respectively, of total revenues in                those                periods. The increase in general and administrative expenses was                due to                increases in a number of items including: personnel costs, primarily                as a                result of salary increases and bonus compensation costs; compensation                expense on stock options relating to SFAS No. 123(R); and, professional                fees, primarily as a result of increased legal                fees. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

**Liquidity      and Capital Resources**

***Executive      Overview***

----

| **Year                Ended:**                    | **Operating** **Leases** |
|---------------------------------------------------|-------------------------------|
|                                              |                          |
| March 31, 2007                               | $ 2,846        |
| March 31, 2008                               | 2,631                    |
| March 31, 2009                               | 2,280                    |
| March 31, 2010                               | 1,832                    |
| March                31, 2011                |   515               |
| Total                minimum lease payments  | $10,104                  |

**Accounts      Receivable Reserves**

**Software      License Installments Receivable**

----

**Deferred      Revenues**

**Stock-Based      Compensation**

----

|                                                   |   |                                     |                                    |
|--------------------------------------------------------|--------|------------------------------------------|-----------------------------------------|
|                                                   |   | **Three                Months****Ended** | **Nine                Months****Ended** |
|                                                   |   |  **March                31, 2005**  |
|                                                   |   |                                     |                                    |
| Loss                before income taxes- as reported   |   | $(2,240)                                 | $(6,636)                                |
| Loss                before income taxes- pro forma     |   | $(2,862)                                 | $(8,591)                                |
| Net                loss- as reported                   |   | $                (936)                   | $(3,310)                                |
| Net                loss- pro forma                     |   | $(1,440)                                 | $(4,933)                                |
| Basic                net loss per share- as reported   |   | $                (0.05)                  | $                (0.18)                 |
| Basic                net loss per share- pro forma     |   | $                (0.08)                  | $                (0.27)                 |
| Diluted                net loss per share- as reported |   | $                (0.05)                  | $                (0.18)                 |
| Diluted                net loss per share- pro forma   |   | $                (0.08)                  | $                (0.27)                 |

----

**Item      3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

**Item      4. - CONTROLS AND PROCEDURES**

*Evaluation      of Disclosure Controls and Procedures.*

*Changes      in Internal Control Over Financial Reporting.*

----

**PART      II. - OTHER INFORMATION**

**Item      1. - Legal Proceedings**

**Item      1A. - Risk Factors**

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

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

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

----

| Voted              for  | 10,239,586                               |
|------------------------------|-----------------------------------------------|
| Against                 |                  4,219,760          |
| Abstained          |                   113,679 |

| Voted                for   | 17,444,134                                                             |
|--------------------------------------|-----------------------------------------------------------------------------|
| Against                         |                       64,648                  |
| Abstained                       |                         5,950  |

**Item      5. - Other Information**

**Item      6. - Exhibits**

|   | 3.1(1) | Form                of Second Amended and Restated Certificate of Incorporation of the                Registrant. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | 3.2(1) | Form                of Restated By-Laws of the                Registrant. |
|--------|--------|---------------------------------------------------------------------------|

|   | 4.1(1) | Specimen                certificate representing the Common                Stock. |
|--------|--------|-----------------------------------------------------------------------------------|

|   | 10.1(2) | 2006                Stock Incentive Plan. |
|--------|---------|-------------------------------------------|

|   | 10.2(3) | Amendment                No. 3 to Non-Employee Directors’ 1998 Stock Option                Plan. |
|--------|---------|--------------------------------------------------------------------------------------------------------|

|   | 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. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Filed                as Exhibit No. 10.1 to Mobius Management Systems, Inc.’s Form 10-Q for the                quarter ended December 31, 2005, and incorporated herein by                reference. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Filed                as Exhibit No. 10.2 to Mobius Management Systems, Inc.’s Form 10-Q for the                quarter ended December 31, 2005, and incorporated herein by                reference. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**SIGNATURES**